Some states and private landowners are doing a better job than the Interior Department at spurring swifter development of oil and natural gas leases, according to a report issued by the Government Accountability Office (GAO) last Tuesday. While part of this is due to the fact that states and private landowners face fewer restrictions (particularly on the environmental front) than Interior, the agency said states also are more actively providing producers with incentives to encourage rapid development.

Interior officials said federal leases contain one provision — escalating rental rates — to encourage quicker development of federal leases, but eight states reported that they employ additional steps, “including shorter primary lease terms and escalating royalty rates,” said the GAO, the investigative arm of Congress, in the 28-page report.

“To provide a greater financial incentive, the state of Texas allows lessees to pay a 20% royalty rate for the life of the lease if production occurs in the first two years of the lease, as compared to 25% if production occurs after the fourth year.”

Moreover, five states reviewed by the GAO — Alaska, Louisiana, Montana, New Mexico and Texas — vary their lease lengths or royalty rates to explicitly reflect the state’s view of the likelihood of discovery of economic oil and gas resources. “For example, officials in New Mexico can issue shorter leases and can require lessees to pay higher royalties for properties that are in or near known producing areas, and allow longer leases and lower royalty rates in areas believed to be more speculative. We also found that private landowners can do more than Interior to encourage development on oil and gas leases.”

In reviewing Interior data, the GAO said it found that competitively issued leases with five-year primary terms were associated with faster development than competitively issued leases with 10-year primary terms. But the agency noted that shorter leases had different overall development rates for offshore and onshore leases.

“In particular, for offshore leases, we found that shorter leases — issued for shallow waters, which are considered to be easier to explore — were developed faster and more frequently. In contrast, competitively issued onshore leases with five-year terms — which were issued from 1987 through 1992 — were generally developed faster but less often than competitively issued leases with 10-year terms,” the report said.

“We are recommending that the secretary of the Interior develop a strategy to evaluate options to encourage faster development of oil and gas leases on federal lands, including determining whether methods to differentiate between leases according to the likelihood of finding economic quantities of oil or gas and whether some of the other methods states use could effectively be employed, either across all federal leases or in a targeted fashion.”

The GAO called on Interior to identify any statutory obstacles to using the states’ methods and report the findings to Congress.

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