Budget office estimates GOP leasing proposals would cost $462 million

The Congressional Budget Office estimates that key leasing and royalty portions of the Republican energy bill pending before the House of Representatives will cost the US more than $400 million and states about $350 million over the next 10 years.

Jul 30th, 2001

Maureen Lorenzetti
OGJ Online

WASHINGTON, DC, July 30 -- The non-partisan Congressional Budget Office estimates that key leasing and royalty portions of the Republican energy bill pending before the House of Representatives will cost the US Treasury $462 million.

The estimates were in CBO documents that OGJ Online obtained Monday. CBO analyzed the public lands access bill, HR 2436, sponsored by Rep. James Hansen (R-Utah), chairman of the House Committee on Resources.

CBO estimates that enacting HR 2436 would increase net direct spending by $326 million over the 2002-11 period. Another $136 million would need to be budgeted over 2002-06 as well to reflect new administrative costs.

The state of Alaska, however, would see a large increase in federal mineral receipts, CBO said. The Hansen proposal, which seeks to expand and simplify drilling on public lands, would open the coastal plain of the Arctic National Wildlife Refuge to exploration. Other western states would lose money, however, the CBO said.

Besides opening ANWR, Hansen's bill would extend royalty relief for some Gulf of Mexico leases and expand the authority of the Interior Secretary on royalty in-kind matters. Interior would also be allowed to help make decisions over how to administer US Forest Service lands under the so-called "roadless" rule.

Hansen's proposal was approved by his committee earlier this month and was combined with three other energy bills that touch on downstream, tax, and conservation issues. A combined 510-page bill, HR 4, was being prepared for a floor debate that could begin as early as Tuesday. Leaders of the Republican-led House say they want a final bill passed before the month-long congressional recess, which starts next week.

In the Senate, Committee on Energy and Natural Resources Chairman Jeff Bingaman (D-NM) plans to mark up a comprehensive bill beginning this week. But a final draft is not expected to be ready for the full Senate until early fall.

ANWR assumptions
The July 27 CBO analysis of the House bill assumed production from ANWR would not begin for at least 10 years after the decision to lease the reserves was made. (CBO assumed the bill would become law by the end of the year.)

Still, bonus bid payments, ongoing rental payments, and royalties would eventually give the US income, although the state of Alaska would do appreciably better because it is allowed to keep 90% of the gross proceeds generated from the leasing program.

CBO assumed that the Department of Interior would hold its first lease sale during fiscal year 2004 and another in 2006. Using Interior's most recent assessment of the economically recoverable undiscovered petroleum resources in the coastal plain, CBO estimates that the proposed leasing program would generate gross receipts (in 2004 and 2006) of about $3.3 billion. However, those receipts would be largely offset by payments to Alaska totaling $2.97 billion over the same period, CBO said.

"Hence, we estimate that net receipts to the federal government would total $330 million over the next 10 years," CBO said.

"Based on the Energy Information Administration's price forecast for 2020 and other price projections, CBO used an average price of $20/bbl (in 2000 dollars) during the 2012-40 period to prepare this estimate of bonus bids for the rights to explore for oil land gas in ANWR. Assuming a sales price of $20/bbl (delivered to the West Coast), Interior estimates that there is a 50% probability that at least 2.4 billion bbl of oil would be produced from ANWR."

Royalty relief
CBO estimated that continuing royalty relief for some low-producing oil wells as specified in the Hansen bill would reduce gross federal royalties by about $491 million over the next 10 years. But this is less than 1% of anticipated royalty receipts during that time, CBO stressed. Of the estimated $491 million total, $242 million would be for onshore leases, and $249 million would be for offshore leases.

With regard to deepwater drilling royalty relief, CBO said that based on Interior estimates, the provision would make leases more attractive, boosting bonus bids.

But since industry discounts the value of future profits, an overall loss of receipts would occur over the life of the lease as higher initial bonus bids would not fully offset forgone royalty receipts. CBO estimates that the provision would increase receipts from bonus bids by about $30 million for the four lease sales expected over the 2002-03 period, but would reduce offsetting receipts from royalty relief by about $91 million over the 2002-11 period.

Royalty in-kind
Under the Hansen proposal, Interior's authority would be expanded to use receipts from the sale of royalty in-kind oil to cover additional sales of royalty production.

CBO said that it estimated that allowing the federal government to accept royalty payments in the form of product rather than cash could result in a net cost of about $5 million over the next 5 years. That assumes, however, that Interior only moderately expands the RIK program, and does not rely on it for all royalty transactions.

Interior officials have indicated they see some use for RIK in very specific circumstances, such as in the Gulf of Mexico where there is a very competitive marketplace, but that it is not a cure-all for collection.

"Based on information from [Interior] regarding currents pending of receipts from the sale of royalties-in-kind, we estimate that expanding the agency's authority to use receipts to cover additional sales of royalty production would increase gross direct spending by $10 million in 2002, and that the agency would increase the amount of royalties taken in kind each year over the life of the program such that gross direct spending for eligible costs would increase to $25 million by 2006."

State impact
CBO noted that Alaska would get almost $3 billion over the next 10 years if the ANWR leasing were allowed, because the state is titled to 90% of the gross proceeds of oil and gas leases from ANWR. All other states with oil or gas production split royalties from federal land 50-50.

As a result, CBO estimates that other western states would receive smaller payments from the federal government due to provisions in the bill that would result in reduced receipts.

"These provisions would reduce royalties for geothermal energy production on federal lands, allow federal reimbursement of certain costs associated with oil, natural gas, and geothermal leases, and provide royalty relief for marginally producing oil and gas wells. Total state losses would be about $350 million over the next 10 years," CBO said.

Contact Maureen Lorenzetti at maureenl@ogjonline.com

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