GAO: US receives low oil, gas revenue share

The US receives one of the world's lowest government takes from oil and gas produced from its lands, the US Government Accountability Office said in a report issued June 1.

Jun 4th, 2007

Nick Snow
Washington Correspondent

WASHINGTON, DC, June 4 -- The US government receives one of the world's lowest government takes—revenue as a percentage of the value of production—from oil and gas produced from its lands, the US Government Accountability Office (GAO) said in a report issued June 1.

Although increasing oil and gas royalties on future leases would increase the US government's take, the congressional watchdog agency said, it might also reduce some taxes and other fees and could discourage some development and production.

GAO issued the report a few days before Congress was due to return from its Memorial Day recess to consider a broad range of oil and gas-related measures. These include provisions repealing parts of the 2005 Energy Policy Act, restricting uses of produced water, limiting federal oil royalty in-kind payments to Strategic Petroleum Reserve purchases, making oil product price manipulation a federal crime, mandating more-efficient government offices and motor fleets, increasing biofuel supplies, and bringing other alternative fuels to market more quickly (OGJ, May 28, 2007, p. 28; June 4, p. 21, 26, and 28). Majority Leader Harry Reid (D-Nev.) and other Senate Democrats said May 23 that additional energy legislation could be considered during 2007.

GAO prepared its report in response to requests in January from Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-NM), and three other US lawmakers. Its analysis from January through March examined studies conducted in 2006 that were completed before the US Minerals Management Service increased the royalty rate for future Gulf of Mexico deepwater leases.

Among the lowest
According to the report, five studies by various private sector entities collectively showed that the US received a lower take from production in the Gulf of Mexico than many foreign governments and states such as Colorado, Wyoming, Texas, Oklahoma, California, and Louisiana receive from oil and gas production on their acreage.

Other 2006 and prior year studies similarly show that the US consistently ranked low in government take compared with other governments. A study completed in 2006 for MMS showed that, of 31 fiscal systems analyzed, the US government's take in the Gulf of Mexico deepwater and shallow water "was lower than 29 and 26, respectively," GAO said.

In considering where and when to invest development dollars, oil and gas producers consider the government take, the size and availability of resources in the ground, labor and other costs of finding and developing those resources, costs of complying with environmental restrictions, and the stability of the fiscal system and the country in general.

"All else held equal, investment dollars will flow to regions in which the government take is relatively low, where there are large oil and gas deposits that can be developed at relatively low cost, and where the fiscal system and government are deemed to be relatively more stable," it continued.

On this basis, and with their relatively close proximity to domestic markets, US government deepwater tracts in the Gulf of Mexico are a favorable investment region for oil and gas producers, although high operating costs may deter some companies, the report said.

Lower overall gain
GAO said MMS expects that its recently announced increase in future deepwater Gulf lease royalty rates to 16.67% from 12.5% will increase revenue by $4.5 billion over 20 years but that this would be partially offset by $820 million of revenue lost from lower taxes and other fees and 5% less production.

"A lower royalty rate can encourage oil companies to pursue oil exploration and production and thereby provide an economic stimulus to oil-producing regions. For example, according to an MMS study issued in 2006, as the industry expands output in the Gulf of Mexico, employment levels in all Gulf Coast states—including Alabama, Louisiana, Mississippi, and Texas—tend to rise to meet industry needs," GAO said in the report.

A healthy oil and gas industry is an essential part of a strategy to meet US energy needs while balancing environmental and climatic impacts, the agency maintains. This means the US market must be competitive in attracting oil and gas investment capital.

"Such development, however, should not mean that the American people forgo a competitive and fair rate of return from the extraction and sale of these natural resources, especially in light of the current and long-range fiscal challenges facing our nation. The potential trade-offs between higher revenue collections and higher oil production highlight the broader challenge of striking a balance between meeting the nation's energy needs and ensuring a fair rate of return for the American people from oil production on federally-leased lands and waters," it concluded.

The full report can be read online at www.gao.gov/new.items/d07676r.pdf.

Contact Nick Snow at nsnow@cox.net.

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