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Utah missed out on millions in royalties from oil and gas, group argues. The industry disagrees.

Taxpayers and the state stand to benefit from increased royalties for oil and gas companies, but the industry claims that American energy will suffer from making the process more expensive.

Energy & Natural Resources, In The News, | In The News

Oct 4, 2023 | 10 min read | Print Article

This article by Anastasia Hufham first appeared in The Salt Lake Tribune on October 4, 2023

Utah made $1.4 billion in royalty revenue from gas and oil production on public lands over the last decade. But a nonpartisan watchdog group reports that taxpayers missed out on millions because of the below-market royalty rate that the federal government charges oil and gas companies while also footing the bill for cleaning up wells after they close.

The Bureau of Land Management in Utah — and Utah’s taxpayers — would have received an additional $721 million between 2013 and 2022 had the agency charged the same royalty rate it does in federal waters, according to a report released this week by Taxpayers for Common Sense.

The watchdog group’s mission, according to its website, is to “ensure that taxpayer dollars are spent responsibly and that government operates within its means.” Taxpayers for Common Sense has long argued that these royalties should be updated and that the federal government should avoid oil and gas leasing that may disturb recreation, wildlife or cultural resources on public lands.

Half of the royalty revenue generated from oil and gas leases on Utah public lands goes back to the state. The state can use that money at its discretion.

Last Wednesday, the BLM held a lease sale that resulted in the sale of three parcels covering 6,810 acres in Utah for $89,085. Up until last year, the federal royalty rate used was just 12.5%, but the agency used a royalty rate of $16.67% for the new leases. Congress passed this increased royalty rate as part of the Inflation Reduction Act, which passed in 2022.

In July, the Department of the Interior proposed increased bonding requirements, royalties and minimum bids for oil and gas leasing on public lands, many of which had not been updated in decades. Interior hopes that these changes will dissuade oil and gas companies from entering leases speculatively, ensure fair returns for taxpayers and protect natural resources.

“These are the resources that we own and the federal government is stewarding them for us,” Autumn Hanna, vice president of Taxpayers for Common Sense, told The Salt Lake Tribune. “They should be representing our interests and making sure these systems do not lag behind states and private landowners. We are the landowner in this case and we should be getting a fair return.”

Ideally, these changes will mean that oil and gas companies do their due diligence before entering leases on Utah’s public lands. Developers will produce oil and gas responsibly on the best land for production, and taxpayers won’t have to shoulder cleanup costs or other liabilities.

But the oil and gas industry worries that these more expensive updates will negatively impact American energy.

“It’s a very superficial look at raising costs on federal lands — as if you can just raise the cost, and nothing else changes, that there’s never any pricing out based on those increased costs,” Kathleen Sgamma, president of the Western Energy Alliance, told The Tribune.

How oil and gas leasing works on Utah’s public lands

American citizens own vast mineral resources on public lands across the United States. The Bureau of Land Management oversees the use of those resources, including the lease of federal land to oil and gas companies for production.

Utah has leased 2.4 million acres of public land for oil and gas production as of the end of the 2022 fiscal year, according to the BLM. The report by Taxpayers for Common Sense argues that Utah should have seen more revenue from oil and gas production on this land, but below-market rent rates and royalties stood in the way.

Federal leasing terms, the report continues, also leave taxpayers — rather than oil and gas operators — to cover the cost of cleaning up well sites.

In line with the Mineral Leasing Act, the BLM Utah State Office organizes quarterly oil and gas lease sales for eligible parcels. These parcels undergo the BLM’s land use planning process before they are leased.

The federal government awards parcels to the highest bidder through a live auction. Lease winners are required to send proposals for their work so the BLM can mitigate potential environmental effects before production begins.

The federal government charges leaseholders in several ways. First, the federal government charges rent for owning the lease before production begins. Also before production, producers must post a bond that will cover cleanup and well-plugging expenses after production ends.

After production starts, leaseholders are charged a royalty: a fixed percentage of the value of the oil or gas that the parcel generates. Half of this revenue goes to the U.S. Treasury Department and the other half goes to the state of Utah.

Recent and proposed changes to oil and gas leasing

The Inflation Reduction Act increased the federal onshore royalty rate (from 12.5% to 16.67) and minimum per-acre bid amounts (from $2 per acre to $10 per acre). The Department of the Interior, which the BLM is housed under, has proposed a rule that would codify these changes for the agency.

These bonds, rents and royalties haven’t been updated in decades. The department hopes that these increases will promote responsible oil and gas production.

“There are important reforms that need to happen to make sure that we are getting that fair return for taxpayers for the resources we all own,” said Hanna. “It’s revenue for states, it’s valuable revenue for the federal treasury, and we shouldn’t be leaving it on the table.

The Inflation Reduction Act mandates that the royalty rate remain at 16.67% for oil and gas production on public lands until Aug. 16, 2032. The BLM’s proposed rule states that after that date, the 16.67% rate will become the minimum royalty rate.

Taxpayers for Common Sense wants the BLM to start charging an 18.75% royalty rate after Aug. 16, 2032, instead. This is closer to the rate charged by some states, like Texas, which charges a royalty between 20 and 25% on oil and gas produced on state lands.

“That’s a ridiculous proposition,” Sgamma said. “They got increased royalty and fee rates in the Inflation Reduction Act, and they’re still not satisfied.”

The oil and gas industry can’t change what was passed in the Inflation Reduction Act, but it staunchly opposes the increase that Taxpayers for Common Sense supports. And the BLM’s proposed rule would go further than what Congress has already passed.

The agency also proposes raising the minimum lease bond amount to $150,000 and the minimum statewide bond amount to $500,000. Congress did not pass bonding increases, so the lease bond amount today is just $10,000. The BLM says that this increase will reduce the risk of oil and gas companies abandoning wells on public lands.

“This is a huge increase,” Sgamma said. “They’re going to price out small producers.”

“No orphaned well is a good thing,” Sgamma continued. “However, in context, with how well the system works today, the increases are out of proportion. The vast, vast majority of wells are mediated by responsible companies. It is only a very few bad actors that saddle the BLM with any orphan wells.”

Last December, The Tribune reported that 642 unplugged oil and gas wells remain on Utah’s public lands that haven’t seen production in four or more years. There are 400 more unplugged and unproductive wells sitting on state land.

The public comment period for the proposed rule ended Friday, Sept. 22. In the coming months, Interior will review the public comments and publish the final rule.