Did Big Oil really need relief from royalties?
Pay, Baby, Pay
Who should get the value of oil in the ground? Just a few who’re more grasping or is industry’s lifeblood the inheritance of all of us? This 2009 article was posted on Miller-McCune, Jun 17. One writer was on the Minerals Management Service's Scientific Advisory Committee and the other was on the committee that the National Academy of Sciences established in response to a request from the first President Bush to examine offshore leasing issues in Florida and California.
by Bob Gramling & Bill FreudenburgThe US has always required a lower rate than most offshore producing countries. In Norway, the total federal take is 76%. The state of Alaska -- where oil extraction is scarcely cheap or easy -- receives 22.5% on state leases.
Before 1983, offshore leases specified that the federal government receive one-sixth of the value of offshore resources extracted (16.66%). When area-wide leasing started in 1983, a number of leases were sold with royalties on one-eighth of the resource value, or 12.5%. In 1995 Congress provided "relief" to the oil companies, passing the Outer Continental Shelf Deep Water Royalty Relief Act, which allowed the companies to produce millions of barrels of oil and billions of cubic feet of gas without paying a nickel's worth of royalties.
The US federal government gets revenue from offshore lands primarily in two ways: competitive "bonus bids" from companies to lease the right to search for oil or gas; and royalties, a percentage of the value of oil or gas actually extracted.
Before area-wide leasing, the record number of acres offered (Gulf sale 37, February 1975) was 2,870,344. In 1983, the first area-wide sale offered up 37,867,762 acres, or more than 13 times as much ocean floor. The federal government does not conduct independent offshore surveys and does not know the potential value of a given tract.
With entire areas being put up for sale every year, smaller companies couldn't keep up, only the multinational oil companies had the economic resources to contract seismic surveys on most of those areas. Area-wide leasing suppressed competition, allowing those in the know to offer minimal bids on promising blocks.
More tracts were sold, but they were sold with fewer bids per tract and at bargain-basement prices. Now, more than 400 companies own all or part of a federal offshore lease. But more than half of these holdings belong to just 20 companies.
In its 25 years, per-acre lease rates plunged from an average of $2,224.71 for all federal leases identified as being sold from 1954 through 1982 to an average of $263.33 since. Before area-wide leasing in 1983, 3,520 leases were sold at the $2,224 average rate, while 21,179 were sold from 1983 to 2008 at the $263 rate. Despite a roughly sixfold increase in the number of leases sold -- to say nothing of the fact that the dollar since 1983 has lost lots of its value -- the oil companies have actually paid the US Treasury less royalty since 1983.
Today, there are more than 4,000 offshore production facilities in the federal waters of the central and western Gulf of Mexico, about three-quarters of them off Louisiana. They are served by more than 25,000 miles of buried pipelines. There is no production in the eastern Gulf (off Florida). The evolution of this massive industrial process over the six decades since Kerr-McGee's first successful well began production in 1947, on a lease from the state of Louisiana, has radically transformed coastal Louisiana and, to a lesser extent, Texas.
Whatever the additional resources discovered offshore from the United States, they are extremely unlikely to significantly change world supply and, hence, world oil prices. The US produces less than 7% of the world's oil. Even if this could be raised to 10% -- an almost impossibly optimistic hope, given that US production has been declining since 1970 -- this additional supply would probably produce an imperceptible result on world market prices, the price Americans, too, pay.
And given the time period needed to bring undiscovered resources on line and the continued decline in US production, it is doubtful that the full exploitation of the Gulf, Alaska, the Atlantic, and the Pacific could even stop the continued decline in total US production, let alone turn it around.
As oil prices climbed in 2008 to $147 per barrel, “conservatives” chanted "drill, baby, drill” (not to conserve anything). If the US does decide to exploit its remaining offshore reserves more quickly, its Interior Department should improve its management strategy three ways:
• Become actively involved in the assessment of the potential for offshore areas, probably through the US Geological Survey. This will mean the government actually funds offshore seismic surveys, interprets their results and makes the analysis public. Without such surveys, Interior is "selling blind."
• Return to offering a much more limited selection of tracts for offshore sales. This reduction in the areas put out to bid will spark competitive bidding again.
• Examine royalty rates for other global offshore areas and increase US rates to mirror those paid in the rest of the world.
Editor’s Note: For the other 6/7ths of this informative article, click here.
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