The Interior Department, which last spring allowed oil and natural gas producers to sharply reduce royalty payments because of Covid-19, failed to evaluate the policy to determine how much relief was needed or how much it would cost, according to the federal government watchdog.

The Government Accountability Office (GAO) in a report issued to Congress on Tuesday said Interior’s Bureau of Land Management (BLM) needed a better analysis of costs and benefits to ensure there were uniform decisions in exploration and production (E&P) requests.

BLM’s temporary policy came in reaction to falling domestic oil prices related in part to the pandemic, noted GAO’s Frank Rusco, director of Natural Resources and Environment. He discussed the findings before the House Subcommittee on Energy and Mineral Resources, Committee on Natural Resources.

“In spring 2020, oil and gas producers faced financial challenges stemming from drops in commodity prices during the early days of the pandemic,” Rusco said. “The price drops stemmed from a precipitous decline in demand for crude oil — estimated by analysts to be about a 30% reduction in global crude oil consumption — because of the pandemic. 

“Moreover, these price drops came when the industry was already facing low prices because of a pre-pandemic oil glut in the world market. Industry representatives said these conditions put companies at risk of going bankrupt or shutting down their oil and gas wells, many of which operate on federal lands.”

In response, BLM’s policy was issued to assist and ensure oil and gas wells would not be shut down, leading to permanent losses in recoverable resources. 

“Royalty payments are an important source of revenues for the federal and state governments,” Rusco noted. “In 2019, the federal government collected over $8 billion in royalty revenues for oil and gas. About half of all such federal revenues are shared with the states in which the oil and gas is produced.

“However, companies would not pay such royalties if low prices caused them to shut down their oil and gas wells or to go bankrupt.”

E&Ps were allowed to apply for royalty relief beginning in mid-March through June 11. When approved, they would receive relief for 60 days from the date that BLM approved their applications.

Operators would apply for reductions on total revenue for the oil and gas sold to an average of under 1%, versus the usual royalty rate of 12.5%. The reductions approved, however, were not uniform or consistent, GAO found. 

GAO reviewed BLM royalty data. It also interviewed BLM officials from headquarters and from five state offices with jurisdiction over lands that account for 94% of royalties collected from oil and gas production on federal lands.

According to the GAO, BLM “did not establish in advance that royalty relief was needed to keep applicants’ wells operating…BLM also did not assess the extent to which the temporary policy kept oil and gas companies from shutting down their wells or the amount of royalty revenues forgone by the federal government. 

“By evaluating the extent to which the policy met BLM’s objective of preventing unrecoverable loss of oil and gas resources — and likely costs, such as forgone revenues — BLM could better inform its decisions about granting royalty relief that provides a fair return to the government, should the agency decide to consider such relief in the future.”

BLM officials told GAO that state officials implementing the temporary policy “made inconsistent decisions about approving applications for relief because the temporary policy did not supply sufficient detail to facilitate uniform decision-making. The officials added that their state offices did not have recent experience in processing applications for oil and gas royalty relief.”

Several of the BLM officials “had never received or processed royalty relief applications,” GAO noted. In addition, ongoing guidance for processing royalty relief decisions, which was last revised in 1995, does not provide enough instruction on approving the relief.

“For example, the handbook does not address whether to approve applications in cases where the lease would continue to be uneconomic, even after royalty relief,” GAO noted. “As a result, some companies that applied for royalty relief were treated differently, depending on how BLM officials in their state interpreted the policy and guidance.”

Two BLM state officials told GAO that they denied relief to applicants because they could not prove it would enable leases to operate profitably. However, two other state offices approved royalty relief in similar cases. Still, another state office denied applications for other reasons.

Until the royalty relief guidance is updated, GAO said, “BLM cannot ensure that future relief decisions will be made efficiently and equitably across the states and provide a fair return to the federal government.”

Moving forward, GAO recommended that BLM evaluate the relief policy to inform its program and update the guidance to ensure consistency.