Interior has taken steps to encourage diligent development of federal oil and gas leases, as GAO suggested in March 2011, but does not employ the full range of policies usedby nonfederal oil and gas resource owners to encourage diligent development, including increasing rental rates, offering shorter lease terms, and escalating royalty rates. Insome of Interior's prior fiscal year budget requests, it sought legislation to encourage diligent development of federal oil and gas leases, both onshore and offshore, byrequiring a $4 per acre annual fee on nonproducing federal oil and gas leases, which would become effective upon congressional action. Interior estimated that the fee wouldresult in an additional $783 million in revenues over 10 years in its fiscal year 2013 budget request. However, Congress has not enacted such legislation. Interior requested alegislative increase of the proposed per-acre fee to $6 in its fiscal year 2015 budget request and included similar requests as part of its fiscal year 2016 and 2017 budgetrequests. The fiscal year 2018, 2019, 2020 and 2021 budget request did not include such a request. However, even in the absence of congressional action, Interior could takeother steps under its existing authority to promote diligent development. For example, it could increase rental rates through regulatory action. In addition, Interior couldissue offshore and competitive onshore leases with escalating royalty rates—royalty rates that rise during the period of the lease before commercial production begins. Onestate GAO reviewed used escalating royalty rates to encourage quicker development of leases it issues. This lease provision allowed the lessee to "earn" a lower fixed royaltyrate for the life of the lease by more rapidly developing it. In November 2016, Interior issued a new rule that addressed onshore royalty rate flexibility, among other issues,but not rental rates.1 According to Interior officials, Interior had considered increasing annual rental payments to incentivize oil and gas companies to develop their leasespromptly or relinquish them, but it decided not to because of the economic climate for oil and gas operators. By taking action to encourage diligent development—such asallowing for increasing rental rates—Interior could potentially increase the rate of development of federal oil and gas resources and obtain royalty revenue sooner, whilealso potentially increasing overall revenues.
As of March 2020, Congress had not enacted legislation requiring Interior to charge lease owners a per-acre fee for nonproducing leases, which GAO suggested in March 2011. GAOrecommended that Interior consider this policy in October 2008, as well as identifying statutory obstacles and reporting them to Congress. Current onshore lease owners now paya flat rental rate of not less than $1.50 per acre per year for the first through fifth years of the lease and not less than $2 per acre per year for each year thereafter. InOctober 2008, GAO reported that other resource owners, including state and private owners, employ a range of incentives to encourage faster development of leases, includingescalating rental rates for nonproducing leases. In 2015, during the 114th Congress, S.1280 and S. 2089 were introduced in the Senate, each of which would have established anannual production incentive fee for onshore and offshore leases. The bills did not pass. By taking action on this issue, Congress could potentially increase the rate ofdevelopment of federal oil and gas resources while also increasing revenues.
Interior completed its study in 2011 examining how other oil and gas owners select fiscal parameters. The study provided information on the components of the fiscal systems,such as royalty rates and taxes, of specific areas within the United States and other countries. In December 2013, GAO reported that Interior officials stated that the studyprovided some useful information about the fiscal system, such as how fiscal terms in the United States compared with those of other resource owners, but it had not directlyled to any changes to the fiscal system or lease terms for new federal oil and gas leases. While Interior has not yet changed its rates or royalties based on the study'sresults, Interior has taken steps in response to recommendations GAO made in 2013 to help better ensure a fair return on oil and gas resources. For the offshore fiscal system,in September 2015, Interior provided GAO with documentation indicating that it had (1) developed documented procedures for determining when to conduct periodic assessments ofthe fiscal system and (2) established documented procedures related to examining and adjusting fiscal terms for lease sales, as GAO recommended. As a result of Bureau of OceanEnergy Management (BOEM) following its documented procedures for examining fiscal terms of lease sales, it reduced royalty rates from 18.75 percent to 12.5 percent for leasesissued in water depths of 200 meters or less for the first time in its August 2017 lease sale. The same royalty rate will be applicable to leases sold through subsequent leasesales, up to the pending March 2020 lease sale. BOEM reduced the royalty rates for these leases to encourage competition and make the leases economically viable. Additionally,Interior officials stated in February 2020 that it had begun analysis for future lease sales and is currently evaluating a priced-based royalty system for potential use infuture lease sales. For the onshore fiscal system, in August 2016, Interior provided additional documentation that it similarly developed documented procedures for conductingperiodic assessments of the fiscal system and for examining fiscal terms of lease sales. Additionally, in November 2016, the Bureau of Land Management (BLM) issued the Methaneand Waste Prevention Rule, which incorporated flexibility for BLM to make changes to onshore royalty rates—similar to that which was already available for offshoreleases—and to enhance Interior's ability to make timely adjustments to the terms for federal onshore leases. While BLM officials stated that they have not announced anyplans to adjust onshore royalty rates, they do envision a public process when considering adjusting oil and gas royalty rates. In January 2020, Interior officials stated thatthey had no further updates to this process. This action is an additional step that should help Interior better ensure that the public receives a fair return from oil and gasproduced from onshore federal leases.
As of March 2020, Congress had not enacted any legislation providing additional authority to Interior related to its management of oil and gas production on federal lands andwaters. Interior continues to address the results of its study comparing the federal oil and gas fiscal system with the fiscal systems of other resource owners and examinewhether this information points to any measures, for example through royalty rate adjustments or other mechanisms, that could help Interior more effectively ensure a fairreturn. Until Interior acts on the results of its study, it is unclear whether additional congressional action is warranted.
Interior has implemented a number of GAO's prior recommendations addressing a variety of oil and gas measurement factors, as GAO suggested in March 2010. As January 2020,Interior has addressed 18 of the19 recommendations GAO made in its March 2010 report to improve oversight of oil and gas measurement.
In an April 2015 report, GAO found that Interior had made considerable progress in improving its oil and gas measurement policies and practices and made an additional seven recommendations, including those directing Interior to meet its time frame for updating its oil and gas measurement regulations that were outdated and had not been revised for 25 years. In November 2016, Interior issued updated onshore oil and gas measurement regulations.
However, as of February 2020, Interior is developing a proposed rulemaking to modify these regulations. These actions raise questions about Interior's requirements for measuring oil and gas for royalty purposes. As of January 2020, Interior had implemented 24 of the 26 recommendations made in this area. Interior's anticipated regulatory action on oil and gas measurement creates uncertainty about Interior's policy direction. GAO's recommendations on oil and gas measurement were important for ensuring the government collects the royalties it is due. Interior may hinder its demonstrated progress if its recent regulatory actions jeopardize its prior efforts to implement our recommendations.