Interior Secretary James G. Watt has expressed interest in a new leasing system for federal oil and gas lands that could require energy companies to pay substantially higher royalties to the federal government.
Watt has made it clear that he intends to open up more federally owned lands for energy exploration, but western land commissioners told him last week that current federal policy amounts to giving away public resources at bargain-basement prices.
As a result, Watt asked Texas Land Commissioner Bob Armstrong for a detailed report on the leasing practices in Texas, which requires higher royalties for oil and gas produced on state acreage than the federal government gets on its land.
Armstrong, an advocate of a more aggressive federal leasing policy, was pleased with Watt's reaction. "Watt was highly interested," Armstrong said. "He asked good, penetrating questions. He immediately asked his staff to get a memorandum from me and to get it to him. Something I thought would be a one-minute item became a 15-minute discussion."
Asked yesterday in Washington whether he planned to change the government's leasing policy, Watt appeared noncommittal. He said he was "experimenting, but we haven't got enough information yet to make any decisions."
The federal government leases most off-shore acreage on what is known as a bobus-bid basis, charging a fixed royalty of 16 2/3 percent on all production. The company offering the largest up-front bonus, which amounts to a payment for the right to drill, gets the exploration and and production rights. Both Texas and the federal government use the bonus method for determining who gets to drill.
Texas, however, charges a far higher fixed royalty than does Washington. The state has increased its royalties systematically during the last 15 years from a standard 12.5 percent to the current 25 percent. The changes were made because of the sharp increases in world oil prices.
Studies done for the General Land Office in Texas showed that even with higher royalties, the oil companies would make more money from production on state-owned land than with lower prices and lower royalties.
"Our position is very simple," said Armstrong, who has been land commissioner for 10 years. "These prices ought to justify the public receiving a higher amount of money for their oil and gas. To use the vernacular of the industry, the deals will stand the higher royalty."
The Texas program calls for a 25 percent royalty, plus bonus, on all offshore or river-bottom acreage. For uncharted areas where the chances of finding oil or gas are less, the royalty is 20 percent. And for acreage where the state believes there is a likelihood of oil or gas, the state fixes the bonus and awards exploration rights to the company offering the highest royalty.
The federal government also has experimented in recent years with leasing schemes, and sometimes has required companies to determine royalty rates through bidding. But standard practice still calls for a royalty of 16 2/3 percent, an Interior official said.
The federal system produces significantly higher bonuses than does the program in Texas, and one argument against raising royalties is that the change will reduce the bonuses. Armstrong said that experience in Texas does not support that contention. "Our indications are that you'll get the bonuses as well," he said.
Armstrong said that each time the state has proposed raising royalties, the energy companies have testified against it. h