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Loophole has cost US government $18B in offshore royalties, study finds

U.S. taxpayers have missed out on tens of billions of dollars in revenue from offshore federal leases due to a decades-old law on royalty payment exemptions and due to faulty methods of determining minimum acceptable bids, a government report showed.

The Government Accountability Office study released Oct. 24 found nearly $20 billion in offshore oil and gas revenues has been lost since the signing of the Deepwater Royalty Relief Act of 1995, which was enacted to encourage drilling of leases in the Gulf of Mexico. At the time, oil companies were offered a temporary break from paying royalties on oil produced from leases that were uneconomical at crude oil prices below a certain threshold, but the temporary reprieve was made permanent when the industry won a suit claiming that the law was written to guarantee royalty reductions regardless of the price of oil.

"[The result is an approximate] $18 billion in foregone royalty payments between 2000 and 2018, a number that will continue to rise," U.S. Reps. Raúl M. Grijalva, D-Ariz., and Alan S. Lowenthal, D-Calif., said in a joint statement. Grijalva is the chair of the subcommittee on Energy and Mineral Resources.

The GAO also found the method for determining minimum acceptable bids for offshore oil and gas leases does not ensure a fair return, which has cost U.S. taxpayers another $1 billion or more since 2000.

The Bureau of Ocean Energy Management, or BOEM, evaluates the adequacy of lease bids using an economic and geologic model to guarantee they represent at least fair market value for underlying resources. However the GAO said the depreciation rate the BOEM uses when evaluating offshore oil and gas resources is unreasonably high, and it often lowers its own threshold in reaction to industry bids. GAO found these policies resulted in the loss of more than $1 billion of taxpayer revenue between 2000 and 2018.

"This is not a fair or free market," Grijalva said. "Our laws and standards need to reflect the fact that public resources are there for the benefit of the public."

Lowenthal said many of the unfair practices can be addressed through the improvement of the Interior Department's policies and practices, including updating the current royalty structure and the bid valuation process to ensure the government provides a fair return to the public for the use of public lands and waters.

Production of oil and natural gas from leases on federal waters accounts for more than 50% of the oil and gas production on federal lands and waters. From 2006 through 2018, the U.S. government collected almost $90 billion in revenue from the management of offshore oil and gas resources generated primarily through upfront cash payments, or bonus bids, for leasing rights to explore, develop and sell oil and gas resources, and royalty payments as a percent of the value of oil and gas produced.