Royalty Revenues: Total Revenues Have Not Increased at the Same Pace as Rising Oil and Natural Gas Prices due to Decreasing Production Sold

In fiscal year 2005, federal and Native American lands supplied about 35 percent of the oil and 26 percent of the natural gas produced in the United States. Companies that lease these lands to produce oil and natural gas pay royalties to the Department of the Interior's Minerals Management Service (MMS) based on a percentage (the royalty rate) of the cash value of the oil and natural gas produced and sold. As an alternative to collecting cash royalty payments, MMS has the option to take a percentage of the actual oil and natural gas produced (referred to as "taking royalties in kind") and selling it themselves or using it for other purposes, such as filling the nation's Strategic Petroleum Reserve (SPR). MMS reported collecting $7.4 billion in fiscal year 2001 and $8 billion in fiscal year 2005 in cash royalty payments and in revenue from its own royalty-in-kind sales of oil and natural gas. While these total royalty revenues increased by about 8 percent from 2001 to 2005, oil and natural gas prices rose substantially more--about 90 percent for oil and 30 percent for natural gas. Consequently, Congress asked us why oil and natural gas royalty revenues did not increase at the same pace as the increase in oil and natural gas prices.