Convinced that there is more money to be extracted from the oil and natural gas industry, liberals and environmentalists are urging the Obama administration to increase the royalties and fees energy production companies must pay when drilling on federal lands.
Two House Democrats, Raul M. Grijalva of Arizona and Alan Lowenthal of California, have asked the Bureau of Land Management (BLM), which regulates oil and gas drilling on federal lands, to increase the royalty from 12.5 percent to 18.75 percent, which is the rate for drilling offshore.
Democratic presidential candidate Hillary Clinton agrees, calling for “additional fees and royalties from fossil fuel extraction [to be used] to protect the environment.”
The 12.5 percent royalty for onshore oil and natural gas production has remained constant since the 1920s.
However, many states impose much higher royalties for drilling on state-owned land. For example, Wyoming, Utah, Colorado and Montana all impose a 16.67 percent royalty fee. New Mexico and North Dakota have set theirs at 18.75 percent, and Texas charges 25 percent.
Royalties paid for drilling on private lands are subject to contract agreements with the mineral rights owners.
So, the argument goes, if many of the states are imposing higher royalties, why shouldn’t the federal government increase its rates and reap billions of dollars in extra revenue — revenue that the oil and gas companies are otherwise pocketing?
But the question overlooks the most obvious problem: If drilling on federal lands is such a financial windfall for oil and gas producers, then why has that drilling declined since Barack Obama became president?
According to the Congressional Research Service (CRS), crude oil drilling on federal land extracted 1.77 million barrels per day in 2009. After declining for several years, it returned to 1.78 million barrels per day in 2014. However, as a percentage of total U.S. crude oil production, oil from federal land declined from 33.8 percent of the total in 2009 to 21.4 percent in 2014.
On the other hand, crude oil production on nonfederal land increased from 3.47 million barrels per day in 2009 to 6.55 million barrels per day by 2014, an 88.8 percent increase.
For natural gas, production on federal land fell from 5.38 trillion cubic feet in 2009 (24.9 percent of total U.S. production) to 3.52 trillion cubic feet in 2014 (13 percent of the total).
But on nonfederal land, gas production increased from 16.2 trillion cubic feet in 2009 to 23.13 trillion cubic feet in 2014.
If federal royalties are such a bargain, why don’t drillers — who we are constantly told are only interested in profits — not realize they could be pocketing billions of additional dollars if only they put more effort in drilling on federal lands?
The short answer is the challenges of dealing with the federal government, especially an administration that would like to see the fossil fuel industry disappear.
In 2006 the BLM received 10,492 applications for permits to drill (APDs) for oil and gas, and it processed 8,854. But in 2009, Obama’s first year in office, BLM only received 5,257. Over the next six years, the APDs varied from a low of 4,251 (2010) to 5,316 (2014).
One reason for the decline in APDs is it took an average of 307 days for BLM to approve or deny an application in 2011, though the agency was able to shorten that to 194 days in 2013. But that’s still 194 days.
Compare that to applications to drill on state land. As the Congressional Research Service points out, “crude oil and gas development on federal lands takes place in a wholly different regulatory framework than that of development on private lands.” That’s an understatement.
The CRS continues, “State agencies permit drilling activity on private lands within their states, with some approving permits within 10 business days of submission.”
That’s 10 days for some states versus 194 days for the federal government. In an industry where time is money, 184 extra days is a lot of time — and money.
So if environmentalists and liberals, including a “President Clinton,” were successful in raising the federal royalty rate on oil and gas production, it almost certainly would not result in a financial windfall for the federal government. It would simply drive more drilling operations to state and private lands.
Instead of the industry getting an unfair break, the current discounted federal royalty rate many be the only inducement to lure drillers into putting up with all the hassles and regulations Washington imposes.
Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas.