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Royalty rates for drilling on public lands still too low, new report says

When it comes to getting top dollar for the taxpayer from energy and mineral resources on public lands, the federal government's approach is a lot like that of the morbidly obese relative you see scarfing down a third helping of pumpkin pie at Christmas. Every year there's a promise to do better, New Year's resolutions are made, and by the first of February the new diet's blown all to hell. A recent report from the U.S. Government Accountablity Office is the latest version of a familiar story: The feds are trying to do better, but royalty rates for oil and gas drilling still aren't what they should be.

That means it's the oil and gas companies that are doing the gorging, boosting profits while shelling out one of the lowest royalty rates in the world for the privilege of exploiting public resources. In fiscal 2012 the energy industry received more than $66 billion from oil and gas produced from federal lands and waters, while the Department of the Interior collected $10 billion in royalties from those activities. According to the GAO, Interior's current (and antiquated) royalty rates, which range from 12 to 18 percent, are depriving the treasury of billions of dollars it should be collecting.

Problems with Interior's royalty program date back more than thirty years -- during which there's been an avalanche of studies and recommendations from GAO, urging a hike in the royalty rates and other changes. But significant change has been slow in coming. A Bush-era "reform" effort, the "royalty-in-kind" program, was supposed to simplify revenue collection from energy production but instead generated scandal and corruption, and provided energy companies with more ways to cheat the taxpayer, as detailed in my 2012 feature "Drilled, Baby, Drilled."

In recent years Interior has made progress in hiking rates for offshore drilling leases, the new report notes. But the royalty percentage for onshore drilling, most of it on Bureau of Land Management leases, remains stuck at 12.5 percent -- a third lower than the current offshore rate, even though critics have been carping about that bargain price for decades. You can chalk up the lack of progress to bureaucratic inertia, the enormous spending power of the oil and gas lobby, or both; the report notes that Interior has no procedures in place for conducting periodic assessments of its royalty arrangements and only recently got around to doing such an assessment for the first time in 25 years.

Ross Lane, director of the Bozeman- and Denver-based Western Values Project, reacted to the latest GAO nudge with one of his own: "I'm sure the oil and gas industry appreciates the lax oversight, but today's report shows it's time for serious reform to ensure a fair return from companies making record profits by selling the people's resources. We can't afford the status quo."

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