On June 30, the Office of Natural Resources Revenue (ONRR), which oversees the revenue generated from resource production on federal lands and waters, proposed a rule to modify how federal oil, gas, and coal is valued and charged a royalty. The proposed rule is expected to decrease revenue by $331 million annually — $305 million for federal taxpayers and $25.7 million for states.

ONRR is responsible for collecting, verifying, and disbursing royalties and other revenue generated from the development of federally owned energy and mineral resources, including oil, gas, coal, and other energy resources. Over the last decade, FY2016-2025, ONRR reported collecting $112.5 billion from development on federal lands and waters. 77% of this revenue came from royalties on oil and gas production and 4% from royalties on coal.

ONRR has long been plagued by issues with oversight and accountability. The management of federal oil and gas resources has remained on the Government Accountability Office (GAO) high-risk list—which highlights federal programs that are "vulnerable to waste, fraud, abuse, and mismanagement or in need of transformation"—for years. GAO has detailed how the office lacks complete data on royalty violations; a "single, consistent, and complete dataset" within its compliance data systems, which prevents ONRR from accurately assessing historical compliance trends and refining the models used to select what companies to audit; an updated estimate of the royalty gap—the difference between the payments collected and what should have been collected; and adequate time to verify adjustments to royalty payments from oil and gas development. The Office of Inspector General has similarly faulted ONRR for not appropriately managing penalties related to mineral and energy leases and not enforcing timely reporting and collection of revenues.

ONRR last amended its criteria for how oil, gas, and coal are valued to determine royalty payments in 2016. By closing some loopholes and implementing new methods, the 2016 Rule was expected to increase royalty revenues by $78 million annually. Under the first Trump Administration, ONRR postponed when the 2016 Rule would take effect and then repealed it altogether in August 2017. Federal courts later ruled that both moves were illegal under the Administrative Procedures Act, and ONRR was forced to re-issue the original 2016 Rule with one small exception in October 2020. While other rules have since been proposed, the provisions adopted in the 2016 Rule remain in effect and serve as the baseline regulatory requirements.

The proposed rule would implement the following changes: 

Expand Offshore Oil and Gas Transportation Allowances 

Operators developing federal oil, gas, or coal must pay a royalty—a set percentage of the market value of the resource produced. Before a royalty is charged, operators may deduct certain "reasonable, actual costs" of production—mainly, transportation and processing costs. Over the last decade, 2015-2024, companies have claimed $5.9 billion in transportation and processing allowances on the development of oil, gas, and natural gas liquids. The proposed rule would expand eligibility for the transportation allowance—a change that would cost taxpayers an estimated $329.5 million annually.

Transportation costs and gathering costs are different. Gathering costs cover the moving of oil and gas from different wells to a collection point where oil and gas volumes are measured to determine how much royalty is owed. Transportation cost cover the moving of oil and gas from the measuring point to market. The proposed rule would redefine the term "gathering" to allow more costs to instead be considered "transporting", and thus eligible to be deducted as a transportation allowance. These increased deductions lower the perceived value of federal resources when the royalty rate is applied, decreasing royalty collections.

The proposed rule would also add the following as eligible transportation costs: 

• The movement of offshore oil from the wellhead to the first platform, which is explicitly disallowed under current regulations. 

• Flow assurance for oil and gas pipelines, which are physical or chemical processes related to ensuring production can flow through a pipeline without blockages forming. 

• Repairing, replacing, or restoring operability of a plugged or damaged pipeline. 

• Offshore platform costs related to flow assurance, including:   

• • Pumps used to deliver oil into the export pipeline leaving the platform 

• • Directly allocable costs of the space needed to house the allowed equipment 

• • Directly allocable costs of electricity to run the equipment 

• • Directly allocable costs of buoyancy needed to support the additional weight of the equipment 

Expand Options for Index Evaluations

By statute, the federal government must receive fair market value for the use of federal resources, including oil, gas, and coal.  Ensuring the royalties are applied on the fair, market value of extracted resources is an important part of that process.

ONRR generally relies on arm's-length sales, transactions between unrelated parties, to determine the market value of federal. Determining market value becomes more difficult when resources are sold between affiliated companies through non-arm's-length sales. To address this, ONRR allows operators to use a set, ONRR-approved index price to determine the market value of gas.

The proposed rule would: 

• Give operators the choice to use index price in arm's-length sales as well. As operators are unlikely to choose a method where they pay substantially more, this proposal is advantageous for operators.  

• Change the federal gas index-based valuation option from the highest bidweek price to the average bidweek index price. The average bidweek price would, by definition, be lower than the highest bidweek price, allowing operators to use a lower valuation and pay less royalties.   

• Increase the transportation deductions for federal gas under the index-based valuation option, from the current 5-10% (maximum of 30 cents/MMBtu) to 13-20% (maximum of 45-74 cents/MMBtu), depending on the location.  

The proposed rule would also clarify that lessees cannot report royalty values of less than zero and that ONRR can require a variety of records from lessees who elect to report under the index-based valuation option.

These amendments would decrease royalty revenues by an estimated $1.6 million annually.

Expand Eligibility for Non-Arm's-Length Allowances

Similar to how operators have non-arm's-length sales, they may also have non-arm's-length contracts for services that are eligible for allowances—transportation, processing, or washing assets. And, as with non-arm's-length sales, this makes determining the market cost of the service difficult. In these situations, ONRR allows a lessee to deduct capital costs through a non-arm's-length allowance.

Currently, an operator may be denied the opportunity to include the cost of acquired assets in an allowance if the operator does not have access to the depreciation schedule prepared and used by the original owner. To address this, the proposed rule would allow operators to propose a depreciation schedule acquired assets to ONRR. This would make costs eligible to be included as allowances, reducing the total royalties paid.

The proposed rule would also allow leases to select an alternative in-service date when a fixed asset has not previously been included in a depreciation expense or a return on initial investment. According to ONRR, "the alternative in-service date does not change the total amount of depreciation or return that may be claimed in an allowance, but rather shifts the applicable depreciation window forward, thus providing a lessee the opportunity to claim the full royalty share of the capital cost in a non-arm's-length allowance."

Eliminate the Default Provision

The default provision specifies when and how ONRR will exercise its discretion to determine the value of production for royalty computation purposes when other valuation methods are inapplicable or unworkable, including in cases of misconduct. ONRR proposes to remove this provision, citing a lack of clarity. ONRR would still retain the ability to exercise this discretion but no longer be triggered by the specified conditions.

Clarify the Term "Marketable Condition"

The proposed rule would specify the standards a lessee should use to evaluate its marketable condition requirements. Marketable condition is the quality standard that residue gas and gas plant products must meet to be accepted by the purchaser, which includes factors like the amount of acid gases or water vapor. This proposal seeks to resolve uncertainty of interpreting where gas is in marketable condition.

Establish a Standard of Review and Timeliness for Appeals

The proposed rule would codify ONRR's current practice for rendering a formal decision and add language indicating a decision will be rendered within a timely manner and not unreasonably withheld.