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Draft Bill Would Revamp Federal Oil, Gas Leasing

June 1, 2009
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Democrats on the House Committee on Natural Resources are circulating a discussion draft bill that would almost entirely revamp the way the Department of Interior (DOI) operates, as well as raise onshore royalties for oil and gas by 50%, cut onshore lease terms from 10 years to five, raise minimum onshore bonus rates, eliminate all royalty-in-kind programs and set up planning for the leasing of federal lands on a state-by-state basis.

Legislators made clear throughout the draft bill that the changes were addressing complaints and in some cases "serious ethical improprieties" in the current system. Earlier this year newly appointed Interior Secretary Ken Salazar asked officials to review potentially criminal conduct of a group of Minerals Management Service (MMS) employees who were involved in a sweeping scandal last year and to take a close look at restructuring the agency's oil and natural gas royalty program, as well as examine Interior's ethics regulations and policies (see NGI, Feb. 2). It was also clear the bill, if passed would considerably increase federal revenues from the industry.

The draft brought an immediate response from the Natural Gas Supply Association (NGSA), which noted the natural gas industry paid more than $7.2 billion nontax dollars to the federal government in royalties, rents and other payments in 2008.

"Those numbers don't even include the taxes we pay," said Skip Horvath, NGSA president. In 2007, according to the Energy Information Administration, the effective federal income tax rate of the major producers of natural gas was 40.3%, significantly higher than the statutory U.S. tax rate of 35% and the 26.6% effective rate of all U.S.manufacturing.

Ethics rules included in the draft would restrict the gifts that employees within the newly created in the DOI office could accept. Those employees would be subject to financial disclosure requirements and prohibited from owning stock or other interest in an entity conducting business with the agency.

Violation of any of the ethics rules would be a felony.

The proposed bill would establish the Office of Federal Energy and Minerals Leasing within DOI, combining the oil and gas, wind, wave and solar programs currently located in the Minerals Management Service (MMS) and the Bureau of Land Management (BLM). The new agency would act as leasing agent, inspector and auditor for all energy and mineral leasing under federal jurisdiction on and offshore. Auditing practices and penalties would be stepped up.

As proposed the legislation would establish regional ocean councils and onshore state-wide teams, building on the accomplishments of existing voluntary collaborative efforts, such as the Northeast Regional Ocean Council (NROC) and the Western Governors Association's Renewable Energy Zones project. These federal-state collaborations would develop regional plans for balanced use of energy resources, taking into consideration other uses for the land. Federal-state-stakeholder teams also would develop comprehensive energy development plans for each public lands state.

Outer Continental Shelf (OCS) Regional Planning Councils would be established for the Atlantic, Pacific, Gulf of Mexico and Alaska regions. These councils would prepare marine spatial strategic plans to guide OCS energy development within the context of other activities occurring in the Exclusive Economic Zone. The councils would include representatives of federal agencies, coastal state governors, affected Indian tribes and stakeholder groups covering alternative energy and environmental interests, fisheries, tourism, shipping and the oil and gas industry, among others. The strategic plans would then be incorporated into the five-year OCS leasing plans.

"Unnecessary" deepwater royalty relief provisions would be repealed and all new leases in the OCS would have to meet "no discharge" requirements similar to those used by officials in Norway. Existing nonproducing leases on- and off shore would pay a $4 per acre fee in years four and five of the lease, going up to $10 per acre in years six and beyond.

The bill would also create federal leasing programs for wind, solar and uranium on public domain lands to bring the various forms of energy development into one basic framework.

It would raise onshore rental and royalty rates for the first time since the 1980s. Royalty rates for onshore leases sales would go from 12.5% to 18.75%, since it was noted that the United States takes one of the smallest shares of oil and gas revenues of any oil producing nation. The minimum bonus bid would go from $2.00 to $2.50 or higher at the DOI secretary's discretion. Onshore lease rental rates would be increased from $2.50 to at least $3.00.

DOI would be instructed to set "best management practices" for oil and gas development on federal lands.

As to elimination of the royalty-in-kind program, the bill notes almost universal criticism of the program, including a series of Government Accountability Office and Inspector General reports, citing "serious ethical improprieties" and questioning its financial benefits.

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