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GAO Urges Review of Interior's Oil, Gas Fiscal System

Noting that the U.S. government's "take" of revenues from oil and natural gas production is one of the lowest in the world, the Government Accountability Office (GAO) in a new report has recommended that Congress direct the Interior Department to undertake a broad review of its federal oil and gas fiscal system to determine whether it is collecting an appropriate share of royalties from producers.

"Recent large increases in oil and gas prices and industry profits raise obvious questions about whether the public share of oil and gas revenues is appropriate. The fact that the recent studies show that the government take in the deepwater U.S. Gulf of Mexico is relatively low and U.S. federal oil and gas regions are attractive places to invest also indicates that the federal oil and gas fiscal system may not strike a proper balance between maintaining competitive investment conditions and providing an appropriate share of revenues to the public from oil and gas sold on public lands and waters," said the 44-page GAO report, which was released Friday.

"Because Interior has not comprehensively re-evaluated the federal oil and gas fiscal systems for over 25 years, such a comprehensive evaluation of the systems, both on and offshore, is overdue," said GAO, the investigative arm of Congress.

"Therefore, we believe that Congress may wish to consider directing the secretary of Interior to convene an independent panel to perform a comprehensive review of the federal oil and gas fiscal system," comparing its revenue "take" to those of other countries.

For fiscal year 2007, Interior reported that domestic and foreign companies received more than $75 billion from the sale of oil and natural gas produced from federal lands and waters, the GAO report said. The department estimated that these companies paid the federal government about $9 billion in royalties for the oil and gas development.

"In May 2007, we reported that, based on studies by industry experts, the amount of money that the U.S. government receives from production of oil and gas on federal lands and water -- the so-called 'government take' -- was among the lowest in the world," the agency said.

"Multiple studies completed as early as 1994 and as recently as June 2007 indicate that the U.S. government take in the Gulf of Mexico is lower than that of most other [countries] oil and gas fiscal systems. For example, data we evaluated from a June 2007 Wood Mackenzie report indicate that the government take in the deepwater U.S. Gulf of Mexico ranked 93rd lowest of 104 oil and gas fiscal systems evaluated."

Further citing Wood Mackenzie, an energy consulting firm, the GAO noted that "the most prominent trend in changing oil and gas fiscal systems has been the imposition of windfall profits or other mechanisms to increase the resource owners' shares of oil and gas revenues from existing projects."

Wood Mackenzie "estimates that these changes will ultimately result in these countries collecting additional oil and gas revenues of between $118 billion and $400 billion, depending on future oil and gas prices," the report said. It noted that Alaska recently increased its government take and changed the terms of contracts to give the state larger shares of revenues as oil and gas prices rise.

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