U.S. Secretary of Interior Sally Jewell. Image courtesy of the U.S. Department of Interior/Flickr.

The U.S. Interior Department has proposed changes to federal oil and gas royalty rules that could force upstreams to hand over more money to the government and boost insurance costs for projects on public lands.

The Interior Department said Friday its exploring changes that could allow the Bureau of Land Management (BLM) to charge a higher royalty rate for competitive leases and also change the rate in response to market conditions.

The DOI said the proposal responds to concerns voiced by the Government Accountability Office (GAO) that existing royalty rules “lack flexibility” and may be forcing the government to give up “significant” revenue “to the detriment of taxpayers.”

“The GAO has repeatedly concluded that the BLM’s regulations do not provide a reasonable assurance that the public is getting appropriate fair share of the revenue from these resources….[and] lack the flexibility to offer new competitive leases at higher royalty rates,” the DOI said.

The current royalty rate for competitive oil and gas leases on U.S. public lands is set at 12.5 percent of the value of production.

The DOI has not disclosed how high a new royalty rate may be or details about its proposed flexible pricing scheme.

The new rules would only apply to onshore and offshore oil and gas leases on public lands.

Projects on tribal lands would not be affected.

“We also want to ensure those resources are developed diligently and responsibly and that financial assurances and penalties reflect the true costs of modern day oil and gas development and reclamation,” Assistant Secretary for Land and Minerals Management Janice Schneider said.

The BLM has also proposed increasing bond requirements for upstreams working on federal lands and boosting its civil penalties caps to “provide sufficient deterrence for potential violations.”

Current minimum bond requirements are set at $10,000 for a lease-wide bond, $25,000 for a statewide bond and $150,000 for a nationwide bond.

“The current lease-wide amount reflects a small fraction – one-fifth of one percent – of the average cost of drilling a modern well and may not adequately reflect the potential cost to taxpayers should a company fail to comply with lease terms,” the DOI said.

The DOI and the BLM will conduct an analysis of the cost of doing business on federal lands and are seeking comments on the proposed changes.

American Petroleum Institute’s director of upstream and industry operations Erik Milito told Reuters that increasing royalty rates will drive upstreams away from developing federal lands and hurt job growth.

“Yet another set of costly changes to federal rules could drive more economic development and job creation off public lands,” Milito said.


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