Around the agreement between Mexico and the US allowing drilling near the maritime border, a question quietly nags: Would the administration of Barack Obama have pursued the deal if Petroleos Mexicanos were not already drilling deepwater wells and arousing concern about its ability to prevent and contain a spill? The administration's record, including its latest attempt to pick oil industry pockets, suggests not.
But that record didn't keep administration officials at signing festivities Feb. 20 in Los Cabos from offering domestic production of oil and gas an air hug, lavishly qualified. "The Obama administration is committed to the responsible expansion of domestic energy production," said Interior Sec. Ken Salazar.
Sec. of State Hillary Rodham Clinton hedged far more when she welcomed "safe, efficient, responsible exploration of the oil and gas reservoirs in the Gulf of Mexico." The agreement, she promptly added, comes "when we are working hard to both secure energy supplies and shift to more environmentally appropriate means of extracting fossil fuels but also adding immeasurably to our search for renewable energy."
Embrace without touching
With their contortions to embrace oil and gas without touching, Salazar and Clinton were following their leader. Obama sustained his well-established pattern by feinting toward fluid hydrocarbons in his State of the Union speech then repeating his call for punitive taxation of oil and gas in his budget proposal.
No one should be fooled. Expressions of support from the Obama administration for production of oil and gas—however "responsible," "safe," "efficient," and "environmentally appropriate" it may be—are hollow attempts to sweeten an energy-policy lemon.
Only days before Salazar and Clinton clenched their teeth and smiled about oil and gas in Los Cabos, the Interior secretary informed the House Interior Appropriations Subcommittee of plans to raise the federal onshore oil and gas royalty to 18.5% from 12.5%. "It is an appropriate fair market value rate," he said. "We are mandated by statute, mandated by fairness, to make sure the American taxpayer is getting a fair return for the oil and gas that the American people own."
In fact, a one-eighth royalty, except in booming lease plays, is neither below market nor unfair. It's the standard royalty, the accepted landowner's share.
A study last year conducted by IHS-CERA for federal land agencies offered no basis for a royalty hike. It constructed a "fiscal terms index" accounting for government take, profit-to-investment ratio, internal rate of return, and degree of progressivity. By that metric, the category representing federal onshore leases, Wyoming gas, ranked fifth among seven North American onshore systems on a scale where the No. 1 position, held by Texas onshore, most favored government over the investor.
The study pointed out that Wyoming gas must compete with Alberta, British Columbia, and US shale gas and that its competitiveness will decline as conventional gas gives way to lower-cost shale gas. In a composite index analyzing revenue risk and fiscal stability along with fiscal terms, Wyoming gas again ranked fifth out of seven systems, a position sure to be worsened, from the investor's point of view, by a royalty hike.
Why the increase?
Federal lease terms by the Wyoming gas proxy thus fall at neither extreme in favorability to government versus the investor. Nothing here cries out for an onshore US royalty hike based on fairness or return to taxpayers. In fact, a royalty increase in already burdensome federal leases will discourage drilling and limit oil and gas supply.
The consequent economic harm and foreclosure of government receipts can't be defended except against the loopy standards of reflexive, extremist opposition to anything related to oil and gas.
The royalty hike fits a consistent series of administration initiatives aimed not only at taking money from oil and gas to fund costlier energy sources but also at bridling fossil energy supply and use to make room in the market for officially preferred substitutes.
The increase is senseless. The broader program that bred it is delusional.
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