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Interior Dept. panel weighs lower royalty payments for offshore oil and gas drilling

A federal advisory panel suggests cutting the federal royalty rate for deepwater drilling operations from 18.75 percent to 12.5 percent, the lowest rate the government can charge for such leases.
A federal advisory panel suggests cutting the federal royalty rate for deepwater drilling operations from 18.75 percent to 12.5 percent, the lowest rate the government can charge for such leases. (Lucy Nicholson/Reuters)

An Interior Department advisory panel is considering whether the federal government should sharply cut the royalty rate that oil and gas firms pay for deepwater drilling while expediting energy development on federal land in Alaska and elsewhere.

The recommendations by members of the Royalty Policy Committee, who hail from the energy industry or from states with significant drilling or mining activity, will be taken up Wednesday when the panel formally meets in Houston. The group had lapsed during President Barack Obama’s second term, but Interior Secretary Ryan Zinke revived it in October as a way to promote energy exploration in the United States.

Earlier iterations of the committee, which was established during the Clinton administration, focused largely on technical questions, such as how to maximize the federal government’s royalty collection process. By contrast, the current panel’s subcommittees and working groups have drafted more sweeping policy proposals, posted online, that aim to make leasing federal resources more attractive.

James Schindler, the committee’s executive director, said in an email that members began working in October “largely on highest-priority, highest-level policy goals. As time goes on, the public can expect more and more technical recommendations.”

The Planning, Analysis and Competitiveness Subcommittee, for example, suggests cutting the federal royalty rate for deepwater drilling operations from 18.75 percent to 12.5 percent, the lowest possible rate the government can charge for such leases. Interior officials lowered the rate for shallow-water drilling to 12.5 percent during a Gulf of Mexico lease sale last summer.

The panel also calls for conducting a lease sale for the Arctic National Wildlife Refuge’s coastal plain within two to three years, rather than the four years dictated by the budget resolution Congress adopted last year.

The Fair Return and Value Subcommittee, meanwhile, has proposed changing the calculation of how much firms owe when they sell coal extracted from federal land to subsidiaries — a practice that federal officials estimated cost taxpayers $75 million a year. The Obama administration enacted a new system pegging the value to the price of the first arm’s-length sale. But Zinke suspended the rule, which coal firms called burdensome, and reverted to the old accounting system.

The subcommittee is now proposing that a coal company leasing from the government use “its own arm’s-length sales” as the base price, without specifying whether the coal sold must come from the same lease.

S. Elizabeth Birnbaum, who headed the Minerals Management Service from July 2009 to May 2010, said that because companies produce varying qualities of coal on federal land, “it would be pretty simple to game the system by engaging in a couple arm’s-length deals on your worst-quality production and then use that price for all your coal royalties.”

Schindler said both the full advisory panel and Zinke would have to approve any rate changes and would do so on the basis of a fair-market rate analysis.

“Once a recommendation is voted out of the committee, it will be formally submitted to the secretary, and he may implement at his discretion,” Schindler said. “However, any changes must still go through the normal legal and public process.”

Western Energy Alliance President Kathleen Sgamma, a member of the Planning, Analysis and Competitiveness Subcommittee, said in an interview Friday that because the group had not met in years, members decided to be proactive. “We’ve got some things we think need to be done, and let’s go ahead and issue some recommendations,” she said.

Her working group came to the same conclusion as those focused on offshore drilling.

“This is not the time to raise royalty rates,” said Sgamma, who represents onshore exploration and production companies. “This is the time to get federal lands back competitive with nonfederal lands.”

Although the group is not proposing changing the royalty rate for onshore leasing — it stands at the statutory minimum of 12.75 percent — some experts question why the federal government would cut the rate for deepwater drilling leases in the Gulf of Mexico.

Amy Myers Jaffe, who directs the energy security and climate change program at the Council on Foreign Relations, said it made sense to reduce royalty levels when the price of oil was lower or falling, to spur bidding interest. But she said that “there’s high interest” in the gulf right now.

“In the last few years, companies have had fantastic finds in deep water,” Jaffe said. She added that when it comes to cutting the royalty rate, “you want to have the flexibility to do it later.”

Democrats and conservation groups question the process the Interior Department has established to solicit input on its royalties system and the changes the administration is weighing.

“This isn’t about increasing taxpayer returns, it’s about looting public resources, opening up more of everything for drilling, charging the industry less and pretending it’s all coming from outside experts,” Rep. Raúl M. Grijalva (Ariz.), the ranking Democrat on the House Natural Resources Committee, said in a statement.

The advisory panel’s charter states that it “will provide advice” on “the fair market value” of energy and mineral development on public land. The overall group has an equal number of representatives from industry and states, with a smaller number of tribal, academic and public interest members. Of the 14 industry representatives serving in some capacity, all but one hail from the fossil fuel sector.

That composition “reflects people who actually have experience with oil and gas,” Sgamma said.

Schindler noted that the charter requires that 22 percent of panel members hail from industry. “Environmental issues are very important but outside of the scope and jurisdiction of this committee,” he said, adding that the committee is not a substitute for the federal environmental review process.

Matthew Adams is vice president of taxation at Cloud Peak Energy, one of the biggest federal coal lessees in the Powder River Basin in Montana and Wyoming. He will present the proposal on coal valuation at Wednesday’s meeting, according to an official schedule.

The subcommittees and working groups have met at least 20 times since October, with nearly 40 Interior Department officials participating in those sessions, said Pam Eaton, senior adviser on conservation at the Wilderness Society.

“The department has invited the oil and gas industry and coal industry to sit with them and help write the rules,” she said.

Birnbaum said the panel’s makeup does not fully reflect the myriad interests that should weigh in on royalty decisions. Having Alabama, Alaska, North Dakota, Utah and Wyoming represented is helpful, but it cannot substitute for designated public interest members, she said.

“The states’ interest is not the same as the general public’s interest,” Birnbaum said. “While they will work to maximize the state share of royalties, they will not look out for the federal environmental interests in other locations or the royalty interests of the federal taxpayer.”

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