Selectively Reducing Offshore Royalty Rates in the Gulf of Mexico Could Increase Oil Production and Federal Government Revenue

RCED-85-6: Published: May 10, 1985. Publicly Released: May 17, 1985.

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Pursuant to a congressional request, GAO examined steps the federal government could take to encourage environmentally sound enhanced oil recoveries (EOR) in the Outer Continental Shelf OCS of the Gulf of Mexico.

GAO found that the federal government leases large areas in the Gulf of Mexico for the development of oil resources and receives financial royalties on the oil produced. It was estimated that conventional methods could only recover about half of the 16 billion barrels of oil in the area, but EOR methods could recover an additional 1 billion barrels although it may be less economically feasible. GAO found that the government could lose revenue if it provided incentives for all companies across-the-board; however, royalty reductions used as incentives could increase government revenue, if timely evaluated on a project-by-project basis, because the oil would not have otherwise been produced. GAO noted that the environmental impacts associated with EOR appeared to be minimal.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: MMS established royalty reduction guidelines in the fall of 1986.

    Recommendation: The Secretary of the Interior should instruct the Director of the Minerals Management Service (MMS) to initiate action that would allow for royalty reduction on EOR projects in OCS of the Gulf of Mexico where it would result in both increased production and increased federal government revenue. In doing this, the Director should: (1) establish guidelines that facilitate industry preparation of royalty reduction proposals and government's evaluation of these applications; (2) permit timely evaluation of royalty reduction proposals that is early enough in the productive life of a well or reservoir to permit industry to implement EOR effectively, but late enough for the government to have sufficient data to evaluate the need for royalty reduction, usually during the last few years of conventional production; and (3) allow royalty reductions on a project-by-project basis while maintaining the existing royalty for the remainder of the lease data.

    Agency Affected: Department of the Interior


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