A Power Line reader left me a curious telephone tip yesterday to check out a couple of obscure government reports, and indeed this looks like an interesting story, albeit one that is very complicated and hard to summarize briefly. But on to the question: who makes the most money from oil and gas leases on public land—the oil and gas companies, or the federal government? Most good Power Line readers will immediately default to the counter-intuitive position, and answer that the government makes the most. And it looks like this is right.
There’s a lot of deep background to this. The Government Accountability Office roiled the waters of the oil and gas world back in 2008 with a report that concluded that the U.S. government was not collecting as much in royalties from oil and gas production on public lands and waters as it should. The implication was that the government was being a patsy to the oil industry, as several studies have found the industry to enjoy a rate of profitability higher than the average for other industries (at least in good times). When oil prices spiked to $147 a barrel in 2008, many nations rushed to grab a share of the windfall by raising royalties or nationalizing leases. The U.S. was an outlier in not joining the stampede. Hence there have been frequent calls for the U.S. to increase its royalty rates.
The GAO calculated that the U.S. government ranked 93rd lowest out of 104 fiscal systems surveyed around the world, losing between $21 and $53 billion in potential revenue, depending on oil and gas prices. In 2007, for example, oil and gas companies received $75 billion in revenue from production in the Gulf of Mexico; the U.S. government received $9 billion in royalties—about 12 percent of revenues. The nominal royalty rate for Gulf of Mexico production is 18.75 percent of revenues, but in the mid-1990s, when oil prices were low, Congress enacted a royalty relief system, as the 18.75 percent rate rendered some leases unprofitable in periods of low oil and gas prices.
The “lack of flexibility” in the U.S. royalty system results in a low “government take” (the phrase actually used) from oil and gas. The “flexibility” the GAO recommended was thought necessary because of the high volatility of oil prices over the last decade. When the price swings up, oil companies tend to enjoy surging profits, but the government’s “take” from royalties don’t rise commensurately. However, the government does increase its “take” from higher corporate income taxes, which are separate and on top of lease royalties. And here’s where the story starts to get even more complicated: if the government raises the royalty rate, its take from corporate income taxes will go down, especially from marginally profitable leases.
The Department of the Interior vigorously disagreed with the GAO’s 40-page analysis, and has just recently released a 300-page study of the subject it commissioned from IHS-CERA. It becomes quickly apparent from the IHS-CERA report that the GAO’s analysis of this extremely complicated arena was superficial and inadequate, and that the government makes out quite well, no matter how you define “fair share” that is supposed to be the guide of oil royalty and tax policy. In fact, if you consider the government take as a proportion of the cash flow from oil and gas projects, the government typically nets more than the oil or gas-producing company does. The IHS-CERA study finds that on average the federal government captures 64 percent of the cash flow from Gulf of Mexico deepwater oil leases. There are large differences from field to field, both onshore and offshore, that produce a wide variance, but in no case does the government receive less than half of the cash flow. The report’s Figure 2 below shows how it works with gas leases in Wyoming, with the “government take” ranging from a low of 50 percent to a high of 73 percent.
Moreover, when oil prices do spike as they did in 2008, the government typically sees a huge spike in “signature bonuses,” in which companies buy the rights to a lease in advance. Figure 3 from the IHS-CERA report shows how federal government revenue soared in 2008.
IHS-CERA’s conclusion is that when compared properly with the royalty and tax systems of 29 other nations, only Venezuela extracts a higher take from oil and gas production than the United States. Nice company we’re in.
This study ought to be a blockbuster, but surely won’t on account of its complexity, and because it runs counter to the preferred narrative of perfidious “big oil.” There’s been no media mention of it at all. To the contrary, about the only news story that bears on the subject at all is from Bloomberg: “Oil Royalty Raise on U.S. Lands ‘Not Imminent,’ Agency Says.”