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Oil and Gas Royalties: The Federal System for Collecting Oil and Gas Revenues Needs Comprehensive Reassessment

GAO-08-691 Published: Sep 03, 2008. Publicly Released: Sep 12, 2008.
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In fiscal year 2007, domestic and foreign companies received over $75 billion from the sale of oil and gas produced from federal lands and waters, according to the Department of the Interior (Interior), and these companies paid the federal government about $9 billion in royalties for this oil and gas production. The government also collects other revenues in rents, taxes, and other fees, and the sum of all revenues received is referred to as the "government take." The terms and conditions under which the government collects these revenues are referred to as the "oil and gas fiscal system." This report (1) evaluates government take and the attractiveness for investors of the federal oil and gas fiscal system, (2) evaluates how the absence of flexibility in this system has led to large foregone revenues from oil and gas production on federal lands and waters, and (3) assesses what Interior has done to monitor the performance and appropriateness of the federal oil and gas fiscal system. To address these issues, we reviewed expert studies and interviewed government and industry officials.


Matter for Congressional Consideration

Matter Status Comments
Congress may wish to consider directing the Secretary of the Interior to convene an independent panel to perform a comprehensive review of the federal oil and gas fiscal system. Further, in order to keep abreast of potentially changing market conditions going forward, the Congress may wish to consider directing the Secretary of the Interior to direct the Minerals Management Service and other relevant agencies within Interior to establish procedures for periodically collecting data and information and conducting analyses to determine how the federal government take and the attractiveness for oil and gas investors in each federal oil and gas region compare to those of other resource owners and report this information to the Congress.
Closed – Implemented
Interior disagreed with our recommendation during the Bush administration, which led us to change the recommendation to a Matter for Congressional Consideration. However, with the change in administration and the change in the Secretary of the Interior, Interior announced a study consistent with our recommendation. Interior stated in its fiscal year 2011 budget justification that it would complete a comprehensive study of oil and gas fiscal systems and adjust its royalty rates on the basis of the report's findings, in accordance with our 2008 recommendation. In 2010, Interior contracted out a study called "Comparative Assessment of the Federal Oil and Gas Fiscal System" with the goal to inform decisions about federal lease terms, such as royalties, by consistently comparing the federal oil and gas fiscal systems with those of other countries. Interior completed this study in October 2011. Among other things, the report compared the oil and gas federal fiscal systems against a selected peer group of jurisdictions that compete for investment in the upstream oil and gas industry.

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Evaluation methodsFederal legislationFinancial analysisFinancial managementForeign investments in USGas leasesGas resourcesIntergovernmental fiscal relationsLand resourcesMonitoringNatural resource managementNatural resourcesOil leasesOil resourcesPerformance measuresPetroleum industryPolicy evaluationProgram evaluationRatesRevenue sharingRoyalty paymentsSystems evaluation