Zinke decides not to reduce royalty rates for future offshore leasing

The US Department of the Interior will not lower royalty rates for future offshore oil and gas sales at this time due to the success of President Donald Trump’s energy strategy, Interior Sec. Ryan Zinke said.

The US Department of the Interior will not lower royalty rates for future offshore oil and gas sales at this time due to the success of President Donald Trump’s energy strategy, Interior Sec. Ryan Zinke said.

His Apr. 17 announcement came more than 6 weeks after the Royalty Policy Committee (RPC), which he reconstituted in 2017, made its initial recommendations on Feb. 28 that included one to set a 12.5% royalty rate on federal OCS lease sales at all water depths through 2024.

Since that time, an improving economy, federal tax reforms, higher energy prices, and greater regulatory certainty have led to positive market conditions, prompting Zinke’s determination to keep the royalty rate in 200 m or deeper of water at 18.75%, he said.

“The pilot light of American energy has been relit by President Trump, and the president’s energy dominance strategy is paying off,” Zinke said. “Right now, we can maintain higher royalties from our offshore waters without compromising the record production and record exports our nation is experiencing.”

But a National Ocean Industries Association official warned that results of recent sales on Mexico’s side of the Gulf of Mexico indicated that the US cannot continue offering the same acreage on the same terms on its side and expect offshore producers to find it appealing enough to be the automatic revenue generator it always has been.

“NOIA continues to believe that adjusting royalty rates, including for the deepwater Gulf of Mexico, can encourage new investment in the exploration and development of offshore oil and gas resources,” said Nicolette Nye, the association’s vice-president of communications and industry affairs.

In addition to its recommendation for lower royalty rates, the RPC recommended that the department update its studies on international onshore and offshore data that guide its decision-making, as well as study the comparable offshore producing nations of Guyana and Mexico, their royalty rates, total revenue, lease block sizes, and recent sales in particular.

Reflects improving conditions

“Today’s decision reflects the oil and gas industry’s improving market conditions for safe and responsible development of our abundant energy resources,” said RPC Chair Vincent DeVito, who also is counselor to the secretary for energy policy. “The committee will continue to study ways to improve our programs, including recommendations to improve market conditions for other forms of energy like coal and offshore wind.”

Interior announced current fiscal terms for future offshore lease sales last fall, considering market conditions and the need to ensure taxpayers receive fair market value for use of the OCS, officials said. These terms include a 12.5% royalty rate for leases in less than 200 m of water, and an 18.75% royalty rate for all other leases issued, beginning with the August 2017 lease sale.

Analogous to the Federal Reserve System—when the market or other conditions dictate, the department has statutory authority to adjust royalty rates for upcoming sales in accordance with federal law, it noted.

Nye said NOIA appreciated Zinke’s announcement that he will continue to review and study the RPC’s recent recommendations. “Frankly, the study cited in those recommendations was based on data that is several years old, and some factors may have changed, such as increased competition from other offshore basins, including Canada, Mexico, and Brazil,” she said.

“NOIA has little doubt that increased study will show that continued competition and a challenging economic environment may further reinforce the notion that the US needs to revisit the royalty issue in the months and years to come,” Nye said.

Contact Nick Snow at nicks@pennwell.com.

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