A report disputes General Accountability Office (GAO) claims that the Interior Department has been falling down on the job in its collection of revenues from oil and natural gas producers and that those revenues are among the lowest in the world. It also casts some doubt on the Bureau of Land Management’s (BLM) proposal to raise the onshore royalty rate to 18.75%.

Interior commissioned energy consultant IHS Cambridge Energy Research Associates (CERA) to do the report in response to a GAO study in September 2008, which concluded that the U.S. government’s “take” of revenues from oil and natural gas production is one of the lowest in the world. It recommended that Interior Department 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 (see Daily GPI, Sept. 15, 2008).

A government “take” is the percentage of the cash flow that the government receives from oil or natural gas production, including royalties, bonus bids and taxes. A government percentage take declines as a project’s profitability increases and increases as profitability declines, (i.e. government takes eat up more of the profits of smaller wells). “Such systems increase the marginal cost of development and often deter the development of marginal wells,” the report said.

The CERA report disputed the GAO finding, saying it “appears to be based on a ranking of government take rather than an analysis of the bid adequacy procedures or an accounting of the amounts received via signature bonuses and income tax. Based on the ranges of the GOM government take [primarily royalties] reported by the GAO, we have concluded that the specific GOM takes did not include signature bonuses or account for exploration risk.

“Studies that factored in risk and present value in the mid-1980s and late 1990s report the U.S. OCS [Outer Continental Shelf] government take closer to 77% [of the cash flow from an oil and gas field]. If not accounted for in the government take statistic, a significant source of revenue accruing to the U.S. government is being overlooked,” said IHS CERA, which presented the 318-page study to Interior last fall. Questions about the report were raised at a recent Senate Energy and Natural Resources hearing.

“On a global perspective, the North American jurisdictions in general, and the federal fiscal systems in particular, reap most of the rewards [from producers] and share very little revenue risk compared with the majority of the [foreign and some state] jurisdictions included in the study,” IHS CERA said.

The average government take in the U.S. GOM shelf (79%) is higher than the worldwide average of 72% and the offshore average of 74%. It ranks at the top of the fiscal terms index for the offshore based on several factors, including government take, internal rate of return (IRR), profit to investment ratio, revenue risk, fiscal stability and progressivity/regressivity.

The IHS CERA study compared 29 oil and gas upstream fiscal systems with respect to government share of profits, rates of return and other measures of profitability, revenue risk and fiscal system stability.

The IHS CERA report ranks the U.S. GOM shelf second in terms of the fiscal terms index behind Venezuela heavy oil, while the Texas onshore is sixth; U.S. Alaska onshore, eighth; GOM deepwater, 11th; Wyoming gas, 16th; and Louisiana onshore, 21st. This means the U.S.government gets more onshore and offshore revenue from producers than many other countries.

In ranking of the fiscal terms index of offshore systems alone, the U.S. GOM shelf was first. The “combination of low IRR and high government take and a highly regressive fiscal system is likely to result in loss of competitive edge for the GOM.”

And “compared with all onshore jurisdictions covered in this study, the North American jurisdictions, including Wyoming federal lands, allocate the least degree of risk to the government. As with onshore fiscal systems, under the GOM fiscal systems the risk is allocated to the investor; however the impact is not as harsh as in onshore U.S. jurisdictions because of the lack of severance and property taxes offshore,” the report said.

On Wednesday the head of the BLM told a Senate subcommittee that the agency has not made a final decision on whether to hike the onshore royalty rate to 18.75% from its existing 12.50%. It’s unclear whether the agency’s inaction is connected to the conclusions reached in the IHS CERA report.

“Let me just reassure the members of this committee that that decision has not been reached. We’re continuing to look at the full range of statistics that we have been able to compile,” said BLM Director Bob Abbey during a hearing of the Senate Appropriations Committee’s Subcommittee on Interior and Environment (see Daily GPI, March 15).

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