Interior considers lowering US federal royalty rates for next Gulf lease sale: sources

Washington — The Trump administration is considering lowering royalty rates for new offshore oil and natural gas leases in order to spur interest in production in federal water after its Gulf of Mexico lease sale this week drew limited interest, sources familiar with the plans said.

For its next Gulf lease sale, the US Interior Department is considering offering deepwater drilling leases with royalty rates as low as 12.5%, down from the current 18.75% rate and the lowest allowed without a change by Congress, sources said. The Democrat-led House of Representatives is unlikely to approve any plan aimed at incentivizing offshore drilling, sources said.

On Wednesday, the Trump administration's latest auction for Gulf of Mexico leases took in $93 million in high bids, down more than 40% from August's sale and the lowest amount in three-and-a-half years.

Interior had been discussing a plan to lower offshore royalty rates for weeks, but Wednesday's "disappointing" lease sale and the historic collapse in oil prices have moved those discussions along, one source said.

Interior officials declined to comment on the record this week.

Rene Santos, an analyst with S&P Global Platts Analytics, said it remains unclear if lowering royalty rates would increase bidding in the next Gulf sale, planned for August.

"Reducing royalties on deep water tracks would be welcome by operators," Santos said. "However, I doubt it would have much impact on the upcoming sale given the turmoil in the markets."

Gulf of Mexico oil output is forecast to average 2.02 million b/d this month and climb to about 2.17 million b/d by the end of next year, according to the latest US Energy Information Administration data.

Previous efforts

In February 2018, the Royalty Policy Committee, a federal advisory panel, recommended lowering royalty rates on all US offshore lease sales to 12.5% through 2024. Then-Interior Secretary Ryan Zinke in April 2018 announced he would keep the royalty rate for leases in water depths of 200 meters or deeper at 18.75%. His decision at the time was largely based on the positive impact US energy production was having on the US economy.

"The pilot light of American energy has been re-lit by President Trump, and the President's energy dominance strategy is paying off," Zinke said in a statement. "Right now, we can maintain higher royalties from our offshore waters without compromising the record production and record exports our nation is experiencing."

The National Ocean Industries Association, the offshore oil and gas industry's chief lobbying group, supports "more competitive" offshore royalty rates, Justin Williams, a NOIA spokesman, said.

"We think it is important that the Federal government continually analyze what fiscal terms should be included in leases to maximize American energy competitiveness against countries like Saudi Arabia and Russia while still bringing a fair return to taxpayers," Williams said.

In July 2017, in response to waning interest in shallow water leases, the US Bureau of Ocean Energy Management announced it was lowering the federal royalty rate for leases in water depths of less than 200 meters from 18.75% to 12.5%.

"The purpose of this change is to adjust the royalty rate to reflect recent market conditions, thereby encouraging competition and continuing to receive a fair and equitable return on oil and gas resources," the agency announced at the time.

But results of this change have been mixed.

For its sale Wednesday, only six shallow blocks, totaling about 30,000 acres, received bids

In a March 2018 sale, however, 43 shallow blocks, totaling more than 211,000 acres were bid on. Shallow acreage bids accounted for 29% of all bids in that sale, the highest percentage in any Gulf sale since March 2014, the data shows.

Under federal law, BOEM sets royalty rates and other fiscal terms for new leases ahead of each sales. The agency regularly evaluates its royalty rates which are included in the final notice of sale, which is released at least 30 days before each auction. BOEM cannot change the royalty rate once the fiscal terms are set.

The royalty plan is just one option the Trump administration is considering as it looks to blunt the impact of low oil prices on US oil and gas production. On Thursday, the US Department of Energy detailed its plans to buy up to 30 million barrels of US crude for the Strategic Petroleum Reserve for deliveries beginning as soon as April. The department plans to eventually purchase a total of 77 million barrels of US crude to fill the SPR's four storage sites along the US Gulf Coast.