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Interior Opens Conversation on Possible Onshore Royalty Regulation Changes

Prompted by the escalation of production out of shale plays in recent years, the Department of Interior's (DOI) Bureau of Land Management (BLM) is issuing an advance notice of proposed rulemaking (ANPR) seeking public comment on potential updates to rules governing oil and natural gas royalty rates, rental payments, lease sale minimum bids, civil penalty caps and financial assurances on federal lands.

"It's time to have a candid conversation about whether the American taxpayer is getting the right return for the development of oil and gas resources on public lands," said DOI Secretary Sally Jewell. "The BLM's regulations have not kept pace with technological advances and market conditions, so this is an important information-gathering step as we seek to improve the way the federal government does business."

Royalty rates for federal onshore acreage is currently set at 12.5% of the value of production, while federal offshore drillers pay 18.75%. The ANPR seeks comment on potential changes that would provide the BLM with the procedural flexibility to change the royalty rate in response to market conditions consistent with the procedure for offshore oil and gas leases. Tribal lands would not be affected.

"As part of this process, the BLM and the Department will conduct a thorough analysis of the cost of doing business on federal lands, and we welcome input from all parties on how taxpayers can be better assured adequate compensation from oil and gas production on public lands," said Janice Schneider, assistant secretary for land and minerals management. "We also want to ensure those resources are developed diligently and responsibly and that financial assurances and penalties reflect the true costs of modern day oil and gas development and reclamation."

In 2013, a report released by the Government Accountability Office (GAO) concluded that DOI had taken action, particularly in the offshore, to ensure that taxpayers receive a fair return on oil and natural gas produced on federal lands, but it had not taken similar steps onshore (see Daily GPI, Dec. 18, 2013). GAO called on DOI to establish documented procedures for periodically assessing the federal oil and gas fiscal system; and to determine whether and how to change new offshore lease terms. In May 2007, GAO concluded, based on several studies, that the government received one of the lowest percentages of value of oil and gas produced in the world (see Daily GPI, June 5, 2007). A year later, the agency said Interior had not evaluated its federal oil and gas fiscal system for more than 25 years and said a periodic assessment was needed (see Daily GPI, Sept. 15, 2008).

The ANPR also seeks comment on the adequacy of bonding requirements and civil penalty assessments. Minimum bond amounts are currently set at $10,000 for a lease-wide bond, $25,000 for a statewide bond, and $150,000 for a nationwide bond. And the ANPR seeks comment on how BLM might update rules regarding the minimum acceptable bid that must be paid by parties seeking a lease at auction, and the annual rental payments that are due after a lease is obtained. The current minimum acceptable auction bid is $2 per acre.

Oil production on public and tribal lands has increased in each of the past six years, and combined production was up 81% in 2014 compared with 2008, DOI said.

Earlier this year, DOI's Bureau of Safety and Environmental Enforcement and the Bureau of Ocean Energy Management proposed revising guidelines for Arctic Outer Continental Shelf (OCS) oil and natural gas drilling activities (see Daily GPI, Feb. 20). The proposed rule focuses solely on the OCS within the Beaufort Sea and Chukchi Planning Areas. And last year, DOI proposed amending its regulations over how it determines the value, for royalty purposes, of oil produced on American Indian leases (see Daily GPI, June 19, 2014).

The ANPR will be the subject of a 45-day comment period beginning after it is published in the Federal Register.

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