Green Scissors 2001
AboutIssuesNews RoomPublicationsTake Action


Issues > Energy >

Drilling a Hole in the Treasury

Oil Royalty Exemptions

$802 million

"The incentives [royalty relief] contained in this section are far too generous. They are not in the public interest. They will not provide for our energy security. Further, none of these provisions was contained in President Bush's report on Energy Policy. Indeed, this title is an oil and gas producer's dream, but it is a taxpayer's nightmare."

Thomas Petri (R-Wis.) in opposing the royalty relief provisions in H.R. 4., Congressional Record, August 1, 2001
When oil and gas companies drill on federal land or outer continental shelf waters, they pay a royalty to the federal government for use of the land and extraction of the public resource. These proceeds go to the federal Land and Water Conservation Fund and state public education budgets, as well as to the general treasury. States received more than $3.7 billion from oil royalty payments in the last five years. Oil royalty exemptions will only place more pressure on states already facing budget deficits in the range of $70 billion to $85 billion for fiscal year 2004.

In recent years, oil and gas companies have spearheaded two proposals that would dramatically reduce what these companies are paying to drill on public lands and the outer continental shelf. The first industry proposal, otherwise known as royalty in kind, would allow oil and gas companies to pay royalties to the federal government in the form of oil or gas, instead of cash. The other proposal grants exemptions from paying royalties on wells drilled in the Gulf of Mexico below 400 meters, as well as onshore marginal wells that produce less than 30 barrels per day.

Green Scissors Proposal

Reject proposals that authorize royalty in kind payments and royalty exemption for marginal wells and wells drilled on the outer continental shelf. Rejecting these proposals would save taxpayers $700 million and $102 million, respectively.

Current Status

In April 2003, the House of Representatives passed the Energy Policy Act of 2003 (H.R. 6) that authorized the federal government to take royalty in kind. The bill also exempts marginal well operators and operators of certain wells drilled in the Gulf of Mexico from paying royalties.

After two and a half years, the Department of the Interior is reopening rules that required oil companies to pay royalties based on the fair-market price of oil. The department's Minerals Management Service (MMS) claims that "technical issues" need refinement. In 2000, the Green Scissors Campaign successfully defended the proposal to force the oil industry to pay royalties based on market prices.

Program Hurts Taxpayers

Oil on federal land is a taxpayer asset that should be managed in a way that provides a fair return to taxpayers.

Royalty in kind payments lose taxpayers money. A 1998 General Accounting Office (GAO) report notes that mandating a royalty in kind would cost taxpayers between $140 million to $367 million annually. The Congressional Budget Office determined that the marginal wells and off-shore drilling royalty exemption provisions in H.R. 6 will cost $102 million over the next five.

Two royalty in kind pilot projects have failed, both losing significant revenue compared to traditional royalty programs. A January 2003 GAO report concluded, "MMS [Mineral Management Service] will be unable to determine whether royalty in kind sales generate more or less revenue than traditional cash royalty payments."

Royalty exemptions for drilling in the Gulf of Mexico are not a primary driver for offshore drilling. According to John O'Keefe of Oryx Energy Company, the "genesis of deep-water exploration is that it is under explored" the discoveries you are likely to make are much larger than in shallower waters. That's the real attraction. The royalty holiday is an enhancement, but it's not the reason for deepwater drilling." Many oil companies already explore deepwater reserves for the potential revenue they will receive; as such, federal funds are not needed to encourage further exploration.

Program Hurts the Environment

Royalty exemptions reinforce existing programs that subsidize an inefficient and environmentally damaging oil industry. Oil drilling often leads to the release of oil and other toxic materials that contribute to the destruction of sensitive ecosystems. Oil refining is a major source of chemical releases reported through the U.S. Toxics Release Inventory. According to Union for Concerned Scientists, the oil industry spills 31,000 gallons of oil into U.S. waterways every day.

Oil royalty exemption and royalty in kind place cleaner fuel sources at a market disadvantage, discouraging the development of new alternatives to fossil fuel energy. The burning of fossil fuels contributes to air pollution, smog, and global warming. Subsidizing the oil industry only encourages the development and misuse of the dirty fuels that promote these problems.

Royalty exemptions can shortchange the Land and Water Conservation Fund. A portion of revenues from oil royalties is dedicated to this special fund for acquisition and conservation of natural places and habitat. Without these oil royalty revenues, state environmental protection efforts will suffer.

Contacts

Erich Pica, Friends of the Earth, (202) 783-7400 x229
Danielle Brian, Project on Government Oversight, (202) 347-1122
Aileen Roder, Taxpayers for Common Sense, (202) 546-8500 x130
Navin Nayak, U.S. Public Interest Research Group, (202) 546-9707

Home | About | Issues | News Room | Publications | Take Action