Outdated oil and gas royalty rates are costing taxpayers billions each year
On the 100th anniversary of the Mineral Leasing Act, analysis shows reform is desperately needed
One hundred years ago today, President Woodrow Wilson signed the Mineral Leasing Act of 1920 into law, providing a framework for oil and gas companies to lease public lands and compensate taxpayers for the extraction of publicly-owned resources. Through massive lobbying efforts from oil and gas trade associations and corporations to keep the status quo, the law has largely remained intact since then; the latest significant update was in 1987.
The result? Oil and gas companies have taken advantage of a wildly outdated system, snapping up leases on public lands at bargain rates, paying virtually nothing to sit on idle leases, and depriving U.S. taxpayers of billions in royalties thanks to low royalty rates. A comparison of royalty rates by the Center for Western Priorities shows that taxpayers could have received more than $10 billion in royalties over the last five years if higher royalty rates had been in place, highlighting the pressing need to reform the laws regulating the production of oil and gas on public lands.
Since 1920, companies have been paying the same royalty rate for oil and gas extracted from public lands, 12.5 percent, the lowest rate allowed by law. This royalty is a payment made by drillers to taxpayers, calculated as a percentage of the value of the oil and gas extracted, with minor deductions allowed. With the exception of Alaska, roughly half of the royalty revenue goes to the federal treasury and half goes to the state where drilling occured.
The 12.5 percent federal onshore royalty rate is markedly lower than rates charged by leading oil and gas producing states in the West — royalties in Texas can go as high as 25 percent, Colorado has a 20 percent royalty rate, and New Mexico can similarly charge royalties of up to 20 percent. The royalty rate for producing oil and gas on public lands is also vastly lower than the rate charged for producing oil and gas through offshore drilling, which stands at 18.75 percent.
Using revenue data released by the Interior Department for Fiscal Years 2015–2019, a comparison of royalty rates shows that, had higher royalty rates been in place, taxpayers would have received billions more for oil and gas extracted from public lands.
While raising oil and gas royalty rates may not be supported by drilling corporations and trade associations, it is popular with the general public. A recently released poll by the State of the Rockies Project at Colorado College found that 69 percent of voters in eight Western states support raising royalty rates to 25 percent, the same as Texas.
Legislators and researchers have long acknowledged the need to raise outdated royalty rates. Last year, bipartisan legislation updating key elements of the oil and gas program, including royalty rates, was introduced in the U.S. House of Representatives. Similar legislation has been introduced in the Senate in years past. One thing is clear — on the 100th anniversary of the Mineral Leasing Act, the laws governing oil and gas production on our public lands are in desperate need of reform.
Methodology
Using the U.S. Department of the Interior’s Natural Resources Revenue Database, the analysis considered reported royalty revenue for federally-owned onshore oil, gas, and natural gas liquids for Fiscal Years 2015–2019, calculating what the revenue totals would have been at the same production levels, but with a range of different royalty rates. The analysis assumed that deductions for transportation costs were included in the original reported royalties, and did not need to be replicated.
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