Congress should raise the royalty rates on federal lands.
By Senators Charles Grassley and Tom Udall
One hundred years ago, Congress passed the Mineral Leasing Act of 1920, setting up a system in which companies lease public lands to wrest valuable oil and gas from the ground. In the century since, the royalties and rent that those corporations pay to the American people for access have remained essentially unchanged even as the scale of development and profits has grown hugely.
As senators from different parties, we have our share of policy differences. But we both believe in sticking up for the public interest and the taxpayer. In this case, we agree that oil and gas companies should pay fair market value for the public resources they extract and sell. They aren’t doing that now — not even close — and the American public is the big loser.
That’s why we introduced the Fair Returns for Public Lands Act this year to reform the antiquated law that governs royalties and the leasing of public land.
The country’s economy and the oil and gas industries have changed significantly since 1920. Automobiles had just started to replace the horse and buggy, and the oil industry was a relatively new enterprise dominated by the successors of John D. Rockefeller’s Standard Oil. Yet, since then, the federal royalty rate for oil and gas on public lands has remained steady, at a bargain-basement 12.5 percent of the value of what’s extracted.
States in the West, meanwhile, lease their land with higher royalty rates. Montana, Utah, and Wyoming charge 16.67 percent; in Texas, the rate is 25 percent. The 12.5 percent federal rate amounts to an unnecessary subsidy to the oil and gas industries. Worse, the Interior Department agreed to lower even that paltry rate temporarily during the pandemic to an average of less than 1 percent for companies that sought a reduction.
The federal royalty rate for drilling in federal waters, at 18.75 percent, is 50 percent higher than it is on land. According to a 2015 study by the Center for Western Priorities, if the onshore federal royalty rate were the same as the 18.75 percent offshore rate, the U.S. government and the affected states would have collected up to $730 million annually in additional revenue.
In the 2019 fiscal year, the United States received $2.931 billion in royalties from onshore oil and gas production on federal lands. The overall value of those resources computes to $23.4 billion at a 12.5 percent royalty rate.
Our bill would set a uniform federal royalty at 18.75 percent, applied to new leases. The Congressional Budget Office estimated that royalty would raise $200 million in federal revenue over the next 10 years as it is phased in, with an equivalent amount going to the states where the oil or gas is being extracted.
And it isn’t just the royalty rate that needs an update. The minimum bid for oil and gas companies that want to lease federal land for exploration and extraction has not increased in over 30 years. Today, they can lease federal land for a minimum of just $2 per acre — cheaper than a cup of coffee in many places. Over the past four years, over one million acres have been leased at this minimum rate, meaning that nearly 20 percent of the 5.4 million acres leased since 2016 has produced only $2 million in rental revenue to taxpayers.
That might have made sense in 1920 — but in 2020, it’s an outrageous giveaway.
Setting the minimum bid at auction at $10 per acre is one way to encourage oil and gas developers to more selectively purchase leases and clarify their intentions for the lands they lease. In addition, enacting a $15 per acre minimum fee for submitting an expression of interest to lease will also deter speculation. Such fees are already required on many state lands, including in Colorado, North Dakota, and Texas.
It should be noted that the low rents and royalty rate represent only taxpayers’ initial losses. When a company has finished extracting all the oil and gas it can get from the land, pocketing millions in profits, this broken federal system allows them to close up shop without setting aside sufficient funds for cleaning up the mess they created. This leaves taxpayers on the hook for cleanup costs.
Updating our oil and gas leasing laws is just the first step that the federal government should take to make sure taxpayers get a fair deal while protecting our public lands. We hope our colleagues in Congress agree and move expeditiously to pass our bill before this legislative session ends in January.
Senator Tom Udall is a Democrat of New Mexico. Senator Charles Grassley is a Republican of Iowa and chairman of the Senate Finance Committee.