As oil prices crashed to stunning lows earlier this year, the Interior Department offered temporary royalty relief to some oil and natural gas producers operating on federal lands in the hope of helping small businesses survive. Now that program is coming under scrutiny from Democrats in Congress, who call the move a give-away for industry that hurt taxpayers.
Under the terms of the program, operators were given a short period of time to apply for royalty relief in May and June. Decisions were made on an individual basis by the Bureau of Land Management and relief was granted for no more than 60 days.
As an emergency action, the Department of the Interior allowed companies to petition for a temporary reduction of royalties they pay on oil and natural gas produced on land leased from the federal government. These lease reductions helped companies continue to operate wells during the oil price crash earlier this year, helping to keep them solvent and preventing wells from being shut in.
BLM offered relief on around 600 leases covering some 480,00 acres of land, much of it in Wyoming. Rates were cut from 12.5 percent to .5 percent for a limited period of time.
“The logic is that during a temporary price drop it in the taxpayers’ long-term interest to receive smaller royalty payments if it means a well keeps producing rather than being shut down permanently. But for royalty relief to benefit the public a lower royalty rate must take an uneconomic well and make it profitable. Otherwise it’s just a giveaway,” said Rep. Alan Lowenthal (D, Calif.), who chaired a special meeting of the House Energy and Mineral Resources Committee discussing the issue.
Defenders of the program pointed out that total amount of $4.5 million offered in relief by the federal government through reduced royalties cost far less than was spent on the Paycheck Protection Program and other economic relief efforts passed by Congress. They also claim it was necessary to save hundreds of companies and many jobs.
“When over $1 trillion has been granted to virtually all industries across all sectors I’m not sure why the royalty relief granted to oil and natural gas companies, which is several orders of magnitude less, is such a particular focus,” said Kathleen Sgamma, president of the Western Energy Alliance. (Western Wire is a project of the Western Energy Alliance.)
“Many small family-owned oil and natural gas companies were pushed to financial ruin, with several forced into bankruptcy [because of the price crash]. Jobs been lost in the sector today leaving workers and their families uncertain as to whether their jobs were restored even as the economy improves,” said Utah Rep. Rob Bishop (R), who defended the decision to support the industry in the wake of a global price war that sent oil prices to 17-year lows. “To help stabilize the domestic oil and gas industry the Department of Interior used existing legal authorities to provide narrow temporary royalty relief to some operators.”
A government watchdog group criticized the program for its lack of transparency.
“Implementation of the temporary policy was poorly designed and executed and as a result likely did not serve BLM’s stated purpose of conserving oil and gas resources,” said Frank Rusco, director of natural resources and environment for the Government Accountability Office (GAO).
He explained that revenue relief had been used by the BLM and state governments in the past to help so-called “stripper” wells continue to operate. These are generally aging wells with decline returns that have higher operating costs. Reducing royalty rates to allow production to continue at these sites prevents operators from shutting down wells before the resource is exhausted.
“BLM’s implementation of its temporary royalty relief policy failed to identify wells that were in danger of shutting down and also created confusing guidance that led to inconsistent implementation of the policy across BLM state offices and inconsistent applications from lease owners,” he continued. “These problems were caused primarily by BLM not following its regulations for granting warranty relief.”
That sort of thinking is penny-wise and pound-foolish, says Sgamma, who explained that royalty rate reductions are a small price to pay to support American small businesses and energy security.
“The economy cannot recover without the energy we provide so we’re proud to be an integral part of that solution, but we should not be singled out for exclusion. We’re talking about royalty relief that lasted two months,” she said. “Two months, $4.5 million and what do we get in exchange? We enabled some small producers to maintain the solvency of their wells into the future. So for two months of royalty relief that enables them to produce for two years, ten years, thirty years into the future.”
But not all witnesses testifying to the committee supported long-term production. In fact, some hoped the price crash would shutter the industry for good.
“Royalty relief policy sends exactly the wrong message to the oil and gas industry,” said Professor Mark Squillace, who teaches mineral rights law at the University of Colorado-Boulder law school. “Moreover it suggests that the agency is not serious about responding to the existential threat posed by climate change.”
He argued that even the 12.5 percent royalty rate was too low, urging the BLM to adopt rates on par with those charged by Colorado (20 percent), Texas (25 percent) or North Dakota (18.75 percent). Federal royalty rates are often set lower to accommodate the higher regulatory burden imposed on operators.
