EDITORIAL Royalties and land access

The U.S. oil and gas industry has made impressive progress in an important ideological battle. But it remains stymied in another.

In welcome recognition that hydrocarbon production generates economic benefits other than oil company profits, the federal government recently took two laudable steps. At the end of last year Congress passed and President Clinton signed into law a bill granting royalty relief to economically marginal oil and gas production from deep waters of the Gulf of Mexico. And last month, the Bureau of Land Management reduced royalties on production of heavy oil from federal lands.

Incentive effects

Producers, of course, will gratefully accept production incentives whenever they're offered, which at the federal level in the U.S. is almost never. But economic reasoning behind the royalty-relief initiatives is as important as the incentives themselves.

Crucial to congressional acceptance of deepwater royalty relief were official estimates that the move would not cost the U.S. Treasury any money for 5 years. This type of thinking has been rare in Washington, D.C. But it accurately reflects the self-evident: From the perspective of federal fiscal interests, work conducted at reduced royalty levels is better than no work at all.

In the decision on heavy oil production, BLM concluded that reducing the federal royalty rate would not only cost the government nothing but, by making production happen that wouldn't have otherwise, raise federal revenues overall.

Until now, the federal government has not been sympathetic to arguments such as these. They represent the supply-side assertion-anathema in many quarters-that the government can sometimes raise revenues by cutting tax rates. For the government to now recognize the incentive effects of tax policy is a very healthy development for the industry. The national and regional benefits of oil and gas production-namely, tax revenues and jobs-make up the most persuasive case producers can make in any of their political fights.

Unfortunately, the economic case seems not to work in the ideological battle where industry interests remain stymied: access to offshore prospects outside the central and western Gulf of Mexico.

The Minerals Management Service is preparing a 5-year lease sale schedule for the Outer Continental Shelf that will set records for lack of ambition. Essentially, MMS will offer leases where it knows it will encounter little opposition from environmental groups and coastal communities.

The battle-weary industry raises no objections. It knows that, even if MMS managed to hold a sale of tracts off California or Massachusetts or Florida, the leases would be subject to eternal challenge and costly delay. A proscribed lease sale schedule beats no schedule, which might well be the result of a more aggressive program from MMS. For capital not invested in the central and western gulf or in the increasingly challenging U.S. onshore, the industry has plenty of prospects elsewhere in the world.

Growing industry indifference toward prospects in touchy areas should worry U.S. policy makers. Does the U.S. government want U.S. companies to spend their money in the U.S. or abroad?

Who wants work?

This is not to suggest that companies will ever quit investing abroad or that cajoling them to do so would be a proper aim of government. It is simply to point out that oil companies of all size assess opportunities on a global basis and that access to the hydrocarbon resource is among the first decision hurdles. When federal and state governments decide how much of the resources they control to submit to this competition, they essentially tell voters how much work they hope to see performed within their borders-and taxing jurisdictions.

The industry has made progress in relating oil and gas production to tax revenues and jobs. It should apply the same logic to its work on public lands.