Key Issues > Duplication & Cost Savings > GAO's Action Tracker > Oil and Gas Resources (2011-45)
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Energy: Oil and Gas Resources (2011-45)

Improved management of federal oil and gas resources could result in more than $1.7 billion in additional revenue over 10 years.

Action:

The Department of the Interior (Interior) should take steps to increase the diligent development of federal lands and waters leased for oil and gas exploration and production.

Progress:

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 used by nonfederal oil and gas resource owners to encourage diligent development, including increasing rental rates, offering shorter lease terms, and escalating royalty rates.

In some 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, by requiring 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 would result 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 a legislative 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 budget requests. 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 take other steps under its existing authority to promote diligent development. For example, it could increase rental rates through regulatory action. In addition, Interior could issue offshore and competitive onshore leases with escalating royalty rates—royalty rates that rise during the period of the lease before commercial production begins. One state 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 royalty rate 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 leases promptly 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 as allowing for increasing rental rates—Interior could potentially increase the rate of development of federal oil and gas resources and obtain royalty revenue sooner, while also potentially increasing overall revenues.

Implementing Entity:

Department of the Interior

Action:

Congress may need to take action to require the Department of the Interior (Interior) to establish an annual production incentive fee or similar fee for nonproducing leases.

Progress:

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. GAO recommended that Interior consider this policy in October 2008, as well as identifying statutory obstacles and reporting them to Congress. Current onshore lease owners now pay a 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.

In October 2008, GAO reported that other resource owners, including state and private owners, employ a range of incentives to encourage faster development of leases, including escalating 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 an annual 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 of development of federal oil and gas resources while also increasing revenues.

Implementing Entity:

Congress

Action:

The Department of the Interior (Interior) should complete its study examining how other oil and gas resource owners select fiscal parameters for leasing and adjusting oil and gas royalty rates and use that information to adjust, as appropriate, its royalty rates to a level that ensures the government a fair return. In doing so, it should ensure opportunities for substantive, two-way communication with program stakeholders.

Progress:

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 study provided 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 directly led 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's results, 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 of the 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 Ocean Energy 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 leases issued 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 lease sales, 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 in future lease sales.

For the onshore fiscal system, in August 2016, Interior provided additional documentation that it similarly developed documented procedures for conducting periodic 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 Methane and Waste Prevention Rule, which incorporated flexibility for BLM to make changes to onshore royalty rates—similar to that which was already available for offshore leases—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 any plans 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 that they 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 gas produced from onshore federal leases.

Implementing Entity:

Department of the Interior

Action:

If the Department of the Interior (Interior) chooses not to take any action based on its study, Congress may wish to provide additional guidance or take additional actions to direct Interior to improve its oversight of federal lands and waters and the revenues derived from production of oil and gas.

Progress:

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 and waters. 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 examine whether this information points to any measures, for example through royalty rate adjustments or other mechanisms, that could help Interior more effectively ensure a fair return. Until Interior acts on the results of its study, it is unclear whether additional congressional action is warranted.

Implementing Entity:

Congress

Action:

The Department of the Interior (Interior) should implement GAO's recommendations from prior reports addressing a variety of oil and gas measurement factors.

Progress:

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.

Implementing Entity:

Department of the Interior

Action:

The Director of the Department of the Interior’s (Interior) Bureau of Ocean Energy Management should enlist an independent third party to examine the extent to which the bureau's use of delayed valuations assures the receipt of fair market value, and make changes—such as terminating the use of delayed valuations or amending its model's assumptions—as appropriate.

Progress:

Pending

Implementing Entity:

Bureau of Ocean Energy Management

Action:

The Director of the Department of the Interior’s (Interior) Bureau of Ocean Energy Management should take steps to ensure that the bureau’s bid valuation process is not biased toward adjusting valuations downward based on their proximity to bids.

Progress:

Pending

Implementing Entity:

Bureau of Ocean Energy Management
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    • Frank Rusco
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