Government loophole gave oil companies $18 billion windfall.
Watchdog says rule waived royalties on wells
The U.S. government has lost billions of dollars of oil and gas revenue to fossilfuel companies because of a loophole in a decades-old law, a federal watchdog agency said Thursday, offering the first detailed accounting of the consequences of a misstep by lawmakers that is expected to continue costing taxpayers for decades to come.
The loophole dates from an effort in 1995 to encourage drilling in the Gulf of Mexico by offering oil companies a temporary break from paying royalties on the oil produced. However, the rule was poorly written — and the temporary reprieve was accidentally made permanent on some wells.
As a result, some of the biggest oil companies in the world, including Chevron, Shell, BP, Exxon Mobil and others, have avoided paying at least $18 billion in royalties on oil and gas drilled since 1996, according to a new report from the Government Accountability Office, a nonpartisan agency that works for Congress. The companies, which hold government leases to drill in the
Gulf, continue to extract oil and gas from those wells while not being required to pay royalties, a right the industry has gone to court to defend.
A spokesman for the industry group the American Petroleum Institute, which represents many of the companies affected, said courts had “ruled there was nothing ambiguous about the 1995 act.” The companies “took Congress at its word,” said the spokesman, Ben Marter, and any attempts to revisit the issue would be “engaging in a dangerous game of bait-and-switch.”
The mistake cuts into federal coffers. Royalties from offshore oil and gas are a significant source of revenue, bringing in almost $90 billion from 2006 through 2018, according to the agency.
Frank Rusco, a director of the GAO’s Natural Resources and Environment team and the report’s author, said the findings are an extreme example of the Interior Department failing to ensure that American taxpayers received a fair market value for the oil and gas extracted from public property.
“These leases sold 20 years ago might keep producing for decades. The amount of forgone royalties is going to continue to increase,” Rusco said. “It’s a strong case for Interior to review how it collects revenues on oil and gas.”
The Interior Department said it “takes seriously” its responsibility to ensure that the American public receives a fair value for public resources. Still, some parts of the report “do not paint a representative picture” of the agency’s efforts, Casey Hammond, acting assistant secretary for land and minerals, said in the agency’s response, which was also released Thursday.
Department data shows that Chevron holds the most royalty-free leases in the Gulf, followed by Anadarko (now a part of Occidental Petroleum), Norway’s Equinor and Shell. Exxon Mobil, BP and CNOOC, China’s staterun offshore oil and gas company, also own royaltyfree leases, the data shows.
Chevron declined to comment. Shell, Occidental, BP, Exxon and Equinor referred queries to the American Petroleum Institute. Calls to CNOOC’s Houston offices went unanswered.
The report of the windfall to oil companies comes as the Trump administration has moved to further reduce the cost of offshore drilling for the industry, proposing to significantly weaken safety rules put in place after the deadly 2010 Deepwater Horizon explosion in the Gulf of Mexico. President Donald Trump also earlier pushed to expand new offshore oil and gas drilling, though that plan was put on hold after being challenged in court.
The oil industry revenues detailed in Thursday’s report are a product of a very different era in America.
Today, thanks to the fracking boom, the United States is the largest oil producer in the world. But back in the late 1990s — when the country was heavily reliant on oil imports — the federal government wanted to boost American energy independence by encouraging more exploration in the Gulf. And since oil prices were low, Washington tried to make it worthwhile for oil companies by offering a brief reprieve on the royalties.
In 1995, Congress, working with oil executives, passed a law allowing companies that bid for new offshore leases to avoid paying the standard 12 percent, or share of sales, on the oil and gas those leases eventually produced. The Interior Department leases tens of millions of acres of ocean territory to oil producers in exchange for an upfront bid for the lease, followed by royalties.
Supporters of the law argued that not only would the incentive reduce America’s dependence on foreign oil, but that it would in fact generate money for the government by prompting producers to bid higher prices for new leases.
But in what officials at the time said was an error, the law omitted a crucial clause that had been supported by both Republicans and Democrats: that if average prices for oil and gas climbed above a certain threshold, companies would be responsible for paying the royalties. In 2006, when the federal government tried to impose royalties, an oil producer sued and won.