Improved Economy and Energy Prices Call for Continuing Existing Approach
Date: April 17, 2018
WASHINGTON - Due to the success of President Donald J. Trump’s America-First energy strategy, U.S. Secretary of the Interior Ryan Zinke today announced that the Department of the Interior will not lower royalty rates for future offshore oil and gas lease sales at this time.
On February 28, the Royalty Policy Committee (RPC), re-chartered by Secretary Zinke in 2017, made its initial recommendations, including one to set a royalty rate of 12.5 percent on all Outer Continental Shelf (OCS) lease sales at all water depths through 2024.
Since then, an improving economy, federal tax reforms, higher energy prices, and greater regulatory certainty have led to positive market conditions, prompting Secretary Zinke’s determination to keep the royalty rate in 200 meters of water and deeper at 18.75 percent.
“The pilot light of American energy has been re-lit by President Trump, and the President’s energy dominance strategy is paying off,” said Secretary Zinke. “Right now, we can maintain higher royalties from our offshore waters without compromising the record production and record exports our nation is experiencing. The Administration is grateful for the Committee’s hard work on these significant energy issues.”
In addition to the recommendation for lower royalty rates, the RPC recommended that the Department update its studies on international onshore and offshore data that guide its decision-making, as well as study the comparable offshore producing nations of Guyana and Mexico, their royalty rates, total revenue, lease block sizes, and recent sales in particular.
“Today’s decision reflects the oil and gas industry’s improving market conditions for safe and responsible development of our abundant energy resources,” said Vincent DeVito, Royalty Policy Committee Chair. “The Committee will continue to study ways to improve our programs, including recommendations to improve market conditions for other forms of energy like coal and offshore wind.”
Last fall, the Department announced the current fiscal terms used for future offshore lease sales, taking into account market conditions and the need to ensure taxpayers receive fair market value for use of the OCS. These terms include a 12.5 percent royalty rate for leases in less than 200 meters of water depth, and a royalty rate of 18.75 percent for all other leases issued, beginning with the August 2017 lease sale. Analogous to the Federal Reserve System – when the market or other conditions dictate, the Department has the statutory authority to adjust royalty rates for upcoming sales in accordance with federal law.
The Outer Continental Shelf Lands Act grants the Secretary the authority to conduct lease sales on the OCS that “assure receipt of fair market value for the lands leased and the rights conveyed by the Federal Government.” Lessees pay bonuses, rentals, and royalties reflecting the value of the rights to explore and potentially develop and produce OCS oil and gas resources. These revenues are distributed to the Federal Treasury, state governments, Land and Water Conservation Fund, and the Historic Preservation Fund. The Department, through the Bureau of Ocean Energy Management, sets minimum bid levels, rental rates, and royalty rates by individual lease sale based on its assessment of market and resource conditions as the sale approaches.