Federal Royalty Relief – Data & Analysis

O&G BailoutFederal 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
May 21, 2020  | 9 min read | Print Article

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

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:
RELATED ARTICLE
Utah Oil and Gas Lease Sale: End of Year Disappointment
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:
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