States are being shortchanged hundreds of millions of dollars by low-ball royalties for oil and natural gas development on federal lands, a report released Thursday by a Denver-based nonpartisan think tank says, based on an analysis of five western states, plus North Dakota and Texas.

In comparing federal onshore royalty rates they came up much lower than state royalty rates in Colorado, Montana, New Mexico, North Dakota, Texas, Utah and Wyoming, according to the report by the Center for Western Priorities (CWP), which bills itself as an “engagement center” providing information on policies and practices covering energy, land and water use.

“Most oil and gas producing states in the western United States charge a significantly higher royalty rate than the federal government — typically a rate of 16.67% or 18.75% — to produce oil and gas on state-owned lands. Texas collects twice the federal rate in royalties,” said CWP’s report, “A Fair Share: A Case for Updating Federal Royalties.”

Energy-rich western states could be losing up to $600 million in annual revenues, the report estimated.

While suggesting various policy options, CWP concluded that taxpayers are “losing out on significant revenue” that could be used to reduce the national deficit and/or alleviate impacts from oil/gas drilling. It wants the federal government to raise is decades-old royalty rates. It cites a 2008 General Accounting Office (GAO) report that raised the issue for Congress (see Daily GPI, Sept. 15, 2008).

In response to the GAO report, the Interior Department hired IHS Cambridge Energy Research Associates (CERA) to do a report that concluded that the U.S.government gets more onshore and offshore revenue from producers than many other countries (see Daily GPI, March 19, 2012). CERA disputed the GAO report, alleging it left out important parts of oil/gas revenues from its analysis.

“Given the country’s current fiscal situation, it is imperative that the federal government examine all potential sources of revenue,” said the CWP report, adding that former Interior Secretary Ken Salazar, the Obama administration’s fiscal 2013 budget and the federal Bureau of Land Management (BLM) fiscal 2014 budget all call for changing the federal royalties.

“Ensuring that taxpayers are capturing their share of the booming oil and natural gas sector is a reasonable starting point.”

CWP’s report said the current federal onshore royalty rate for oil and gas is 12.5%. Most oil- and gas-producing western states charge between 16.67 and 18.75%, with Texas charging 25%, double the federal rate, according to the report.

“The proceeds from federal revenues are split between the U.S. Treasury and the originating states. The report shows that energy-rich states in the Rocky Mountain West are losing between $400 million and $600 million annually because of the antiquated federal rate.”

The report said higher royalty rates do not “significantly slow” oil/gas drilling, and it cited Wyoming as an example.

“Wyoming has the highest effective tax rate in the West but still remains a national leader in production,” the report said. “At the same time, Montana has among the lowest effective tax rates in an attempt to attract the industry, yet drillers are much more interested in drilling in North Dakota despite the state’s relatively higher rates.”

One of the policy options for BLM, according to the report, is to “mirror” federal onshore rates to the majority of the state rates, which fall in the 16.67-18.75% range. This would produce “significant new revenues” for the U.S. treasury and for oil/gas producing states, the report said.

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