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Reforming the Federal Royalty Program For Oil and Gas

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The federal government collects royalties from businesses that hold leases to produce oil and gas on public lands. The petroleum industry has proposed several changes to the way the government manages the collection of those royalties. In addition, the government recently revised its rule for how some of the royalties are valued. Even if implemented fully, those various reforms would be unlikely to have much effect on the volume of oil and gas produced from federal leases both because the scope of the changes is small and because the level of U.S. oil and gas production is not particularly responsive to changes in prices and costs. As a result, it is likely that any gain to the petroleum industry from such reforms would simply reflect a loss of the same amount to the federal budget, and vice versa. Businesses that lease the rights to develop petroleum resources commonly pay their federal royalties as a share of the market value of the oil and gas one-eighth for production from most onshore federal lands and one-sixth from most offshore lands. In 1998, leaseholders paid a total of 3.3 billion in royalties for the right to remove federal oil and gas valued at 22.6 billion. Federal oil and gas account for 26 percent and 34 percent, respectively, of national production. For royalty purposes, the value of such oil or gas is measured as if the product were sold at the lease site the property described in the lease contract, even though the actual sale may call for delivery away from the lease site and for enhancements to the quality of the product. Those actions add to the products value, but they also entail costs to the producers. Disputes often arise between lessees and the government about who should shoulder which costs and what the true value of the oil or gas is back at the lease site.

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  • Economics and Cost Analysis

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