Oil & Gas Royalty Relief – Data & Analysis

O&G BailoutOil & Gas Royalty Relief – Data & AnalysisRoyalty relief for oil and gas companies operating on federal lands is the latest in a series of bailouts for the industry

Energy & Natural Resources,  | Analysis
Jul 7, 2020  | 16 min read | Print Article

Current Tally of Oil & Gas Leases Awarded Royalty Relief:

State Leases* Acres*
Wyoming 242 135,387
Utah 77 88,309
North Dakota 54 35,123
Colorado 5 4,378
Montana 4 2,469
TOTAL 382 265,665
*To avoid double-counting, the totals for leases and acres have been adjusted to exclude relief granted to six producing units.
Source: BLM LR2000 database; data through 07/09/2020

In response to a downturn in the international oil and gas market, the Trump Administration has been quick to offer a host of handouts to the U.S. oil and natural gas sector. In addition to loans and Strategic Petroleum Reserve machinations, the Department of the Interior led by Secretary David Bernhardt has promised to grant a reduction in the amount of royalties owed to federal and state taxpayers for companies operating on federal lands and waters that apply. This analysis is dedicated to tracking all royalty relief actions.

Click below to skip down to the most recent updates:

Background

In March, a group of countries led by Russia and the OPEC cartel led by Saudi Arabia failed to reach a deal to cut oil production and mitigate the impact of a long-term supply and demand mismatch in the international market. This impasse, and growing awareness of the economic toll of the coronavirus pandemic, sent oil prices plunging. Soon after, corners of the U.S. oil and gas sector and their backers in Congress began calling for widespread royalty relief for production on federal lands and waters. President Trump seemed to publicly reject blanket relief after a White House meeting with industry representatives on April 4. But in subsequent weeks, Secretary of the Interior David Bernhardt  promised to grant royalty relief to oil and gas companies that applied.

The federal royalty rate is a set percentage of the sales value of oil and gas produced from federal lands or waters that companies agree to pay the Department of the Interior in exchange for the rights to develop the publicly-owned natural resources. For onshore federal leases, the royalty rate of 12.5% has not changed since it was set in 1920 and now lags rates on most state and private lands as well as the 18.75% rate generally set for offshore federal leases. Reducing the rate further, known as “royalty relief,” would incentivize more production from federal lands and waters which would worsen the global supply glut driving the historically low oil prices.

In April, the Bureau of Land Management (BLM), which controls oil and gas development on federal lands, published guidance on how federal lessees could apply for a royalty rate reduction or a lease suspension. The guidance prioritizes oil and gas companies’ financial interest over the BLM’s statutory responsibility to get federal taxpayers a fair return for federally-owned oil and gas by cutting the review process and suggesting rates as low as 0.5 percent. (See our comments on the guidance.) Widespread royalty relief granted by the BLM could significantly reduce royalty revenue, roughly half of which is shared with state governments.

In response to the guidance, hundreds if not thousands of oil and gas companies have applied to the BLM for royalty relief. The exact number of applicants is unknown to both the public and Congress because of BLM’s resistance to transparency. But limited information is starting to trickle out. Below is a running analysis of requests for royalty reductions made to the BLM as information becomes available.

Relief Tracking

May 20:

According to initial data from the BLM’s LR2000 database, operators of 76 leases in Utah have requested royalty relief since the beginning of April. The leases span nearly 90,000 acres, including some near the Canyonlands National Park, the Ouray National Wildlife Refuge, and the Uintah and Ouray Reservation. A quick breakdown:

  • Royalty relief was approved for all 76 applicants, fueling concerns that the BLM’s guidance amounts to little more than rubber-stamping industry rate cutting requests.
  • The royalty rate was reduced to 5% for 56 leases, and to 2.5% for the remaining 20 leases. In all cases, the reduced rate will be have an initial term 60 days between May 1 and June 30, though operators can apply for unlimited extensions.
  • More than two-thirds of the applications (54) were filed in mid-April before the BLM issued its guidance on April 21. These applications were all granted rate reduction down to 5% after two weeks of evaluation. Of the 22 applications filed after the guidance, the BLM granted all but two a temporary 2.5% rate after a review of only five days. This indicates that the BLM is reducing rates more with less review since the guidance was published.
  • The royalty reductions for the 76 leases were requested by just 11 different operators, broken down as follows:
Operator Leases Acres
Nerd Gas Co. with Kirkwood Oil & Gas 47 63,525
Lonesome Oil & Gas 11 6,261
Finley Resources (some with CH4 Energy) 10 13,161
QEP Energy 1 160
Cross Timbers Energy 1 1,920
EOG Resources 1 1,630
Prentice, Napier & Green 1 314
Cockrell Oil & Gas 1 302
McCormick Resources 1 160
Kerr McGee Onshore 1 880
Robert L Bayless Producer 1 1,494
TOTAL 76 89,806
  • Royalty relief applications have not been limited to Utah. That the above data is limited only to Utah leases indicates that BLM’s Utah state office has been the only one to properly record the applications and its decisions on them.

June 1:

In the last few days, BLM has updated its records to reflect royalty relief granted to nine more leases. Of the nine leases, eight are in Wyoming, and the last is in Colorado. Together they cover an additional 12,200 acres of federal lands, raising the overall royalty relief total to 85 leases covering 102,000 acres. Below are a few more findings from the newest leases with royalty relief:

  • Wyoming operators are getting even lower rates. All eight leases in the state were granted a reduced rate of just 0.5% – the amount BLM had suggested in its April 21 guidance. This will allow operators to extract and sell federal oil while paying taxpayers next to nothing. The BLM in Colorado granted the one lease there a reduced rate of 4.6%.
  • BLM updates are significantly delayed, particularly for Wyoming leases. Of the eight federal oil and gas leases in Wyoming with royalty relief, seven applied for relief in April, which was granted in all cases by May 13. Yet records weren’t updated for roughly two weeks. In contrast, BLM staff in the Colorado office updated records for the one lease in question almost immediately.
  • Operators get retroactive relief in some cases. For four of the newest leases with reduced royalties, the BLM applied relief retroactively starting on April 1, even though no lease applied until April 30. As a result, the initial 60-day term for relief was exhausted by the time the BLM updated its public records. Operators for these leases may have applied for extensions by now, but we’re unlikely to know for weeks to come. In addition, the retroactive relief may require the Office of Natural Resources Revenue to request money back from state governments if it had already disbursed royalty revenue for April.
  • Here are the companies with leases receiving the latest royalty relief:
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Operator State Leases Acres
Vermillion Energy USA LLC WY 4 6,447
Oil Mountain Energy Inc. WY 2 320
Inexco Oil Co. WY 1 4,125
Ballard Petroleum Holdings LLC WY 1 706
Caerus Piceance LLC CO 1 614

June 8:

Last week, the BLM Wyoming office updated their records to reflect an additional 64 applications for royalty relief for federal leases or producing units – groups of leases whose production is tallied together. BLM Wyoming staff granted relief to 32 of the requests, but denied rate reductions to the other half, marking the first denial of royalty relief to date. Here’s a quick breakdown of the numbers:

  • Reporting is (selectively) delayed. For the 32 new cases of reduced royalty rates, the BLM granted relief on May 19, but records weren’t updated for more than two weeks. For the applications that were denied, however, BLM Wyoming updated records on the very next business day. The discrepancy raises questions about whether BLM is trying to publicize certain records and keep others hidden longer.
  • The first denials are recorded. In total, the BLM denied applications for royalty relief for 32 leases covering 36,060 acres in Wyoming. The denials, however, may reflect circumstances specific to a select few companies rather than heightened scrutiny from BLM. Of the 32 applications, 26 were filed for leases owned in part or in whole by just one company, Crowheart Energy LLC.
  • Wyoming leases all receive lowest possible rate. The 32 new grants of royalty relief for Wyoming leasing agreements bring the total to 40 agreements covering 46,500 acres in the state. In every single case, the BLM agreed to reduce the portion of resource value owed to taxpayers from 12.5% (or higher) to just 0.5%. The consistent and extremely low rate deepens concerns that the BLM is not granting relief only to the extent demanded by the individual circumstances of each operator.
  • Some majors get in on the action. Among the latest tranche of royalty relief in Wyoming are leases owned by some of the industry’s biggest names, including BP, EOG, and subsidiaries of ExxonMobil.
  • Current tally of royalty relief:
State Leases Acres
Wyoming 40 46,546
Colorado 1 614
Utah 76 89,806
TOTAL 117 136,966

June 22:

Over the last two weeks, the BLM has updated their records to reveal several dozen new leases with royalty relief. The vast majority of these leases are concentrated in Wyoming, where the BLM state office continues to approve the lowest possible royalty rate for all leases. Meanwhile, data from the BLM office in Colorado show that more leases have been denied relief than have received it – some welcome news for taxpayers.

  • Relief and delayed reporting in Wyoming. Trends of extreme royalty relief and limited reporting out of BLM’s WY office have continued in BLM data releases over the last two weeks. Of the 87 leases/agreements with royalty relief revealed since June 8, 79 have been in Wyoming, and each has been granted the minimum allowable rate of 0.5%. That brings the total to 115 leases and four producing units on federal land in Wyoming that will only have to pay 0.5% of the sale value of oil and gas developed during (primarily) May and June, instead of the usual 12.5% royalty rate.
  • But the number of leases will grow. Each of the last 47 Wyoming leases with royalty relief uploaded to BLM’s lease-tracking database originally filed for relief in April, some as far back as April 16. That those applications for relief were reported up to two months late suggests there are plenty more leases with relief yet unknown to the public.
  • A different story in Colorado. Since the last update to this tracker, the BLM CO office reported approving royalty relief for four more cases, and denying relief for 32 leases. All but one of the current total of 37 leases applying for royalty rate reductions in the state are leased by producer Caerus Piceance LLC, alone or together with others. Despite sharing a common lessee, just five of the requests for relief were approved, one with a new rate of 4.6% and the others with a reduced rate of 6.5%.
  • Emerging role of producing units among relief leases. When separate leases in the same area of land recognize that developing a common formation or pool of resources would be improved through coordinated drilling, they can commit their leases to a combined unit. Oil and natural gas production from any lease within the unit, and the costs incurred to generate that production, are allocated among all parties with a working interest in the leases in the unit.
  • According to BLM data, more than three-quarters of all leases with royalty relief to date are part of an approved oil and gas unit. In some cases, the BLM seems to have granted relief to the unit, and then catalogued which leases to ascribe the relief to later. The result is that the BLM is able to grant relief to a broad swath of federal land and federal leases all at once. The mismatch between leases and their associated units in the latest data release suggests more leases will be added to the total in coming weeks.