Possible Effects of Increased Royalty Rate for Federal Onshore Oil and Gas Leases

Pursuant to a congressional request, GAO reviewed the royalty rates for oil and gas produced from Federal and Indian lands. As part of the review, GAO was asked to provide the following information: (1) the basis for a recommendation by the Commission on Fiscal Accountability for the Nation's Energy Resources that oil and gas royalty rates be increased, (2) the estimated revenue increase that would result from a higher royalty rate, and (3) an analysis of the reasonableness of royalty rates currently applied to Federal and Indian lands.

GAO found that the Commission: (1) saw no reason for the differences between onshore and offshore royalty rates, (2) believed that private sector royalty rates were rising, and (3) wanted a source of revenue to pay the costs of tighter royalty collection controls. GAO also found that the higher royalty rates will increase royalty receipts over the long run, but that they will be partially offset by reductions in other revenue sources. GAO stated that, by the year 2000, the increased royalty rate could be generating revenue of up to $1.2 billion more than would be achieved under present royalty rates. Finally, GAO stated that a conclusive comparison of royalties is difficult. Many factors combine to represent the total cost of a lessee's acquiring, holding, and developing a lease. Ideally, the total amount paid by lessees to lessors and the State and Federal Governments should be considered.