Currently Interior has the legal authority to change most aspects of the oil  and gas fiscal system. The Gulf of Mexico Has a Relatively Low U.S. Government Take and the United States Is an Attractive Place to Invest in Oil and Gas Development

Multiple studies completed as early as 1994 and as recently as June 2007  all indicate that the U.S. government take in the Gulf of Mexico is lower  than most other oil and gas fiscal systems. For example, data we evaluated from  a June 2007 report by Wood Mackenzie reported that the government take  in the deep water U.S. Gulf of Mexico ranked as the 93rd lowest out of 104  oil and gas fiscal systems evaluated in the study. When other factors are taken into consideration, the U.S. Gulf of Mexico is  an attractive target for investment because it has large remaining oil and  gas reserves and the United States is generally a good place to do business  compared to many other countries with comparable oil and gas resources. The Inflexibility of Royalty Rates to Changing Oil and Gas Prices Has Cost the Federal Government Billions of Dollars in Foregone Revenues

The lack of price flexibility in royalty rates and the inability to change  fiscal terms for existing leases have put pressure on Interior and the  Congress to change royalty rates in the past on future leases on an ad hoc  basis. Assuming that  the District Court’s ruling is upheld, future foregone royalties from all the  DWRRA leases issued from 1996 through 2000 could range widely—from a  low of about $21 billion to a high of $53 billion, depending on the outcome of  ongoing litigation concerning the authority of Interior to place price  thresholds that would remove the royalty relief offered on certain leases. These royalty rate  increases appear to be a response by Interior to the high prices of oil and  gas that have led to record industry profits and raised questions about  whether the existing federal oil and gas fiscal system gives the public an  appropriate share of revenues from oil and gas produced on federal lands  and waters. In addition, in choosing to increase royalty rates,  Interior did not evaluate the entire oil and gas fiscal system to determine  whether or not these increases were sufficient to balance investment  attractiveness and appropriate returns to the federal government for oil  and gas resources. Interior Does Not Have a System in Place to Evaluate Whether the Federal Fiscal System Is in Need of Reassessment

Interior does not routinely evaluate the federal oil and gas fiscal system as  a whole, monitor what other resource owners worldwide are receiving for  their energy resources, or evaluate and compare the attractiveness of the  United States for oil and gas investment with that of other oil and gas  regions. As a result, Interior cannot assess whether or not there is a proper  balance between the attractiveness of federal lands and waters for oil and  gas investment and a reasonable assurance that the public is getting an  appropriate share of revenues from this investment. Interior does not have procedures in place for routinely evaluating the  ranking of (1) the federal oil and gas fiscal system against other resource  owners or (2) industry rates of return on federal leases compared to other  U.S. industries which could factor into any decisions about whether or  how to alter the fiscal systems in response to changing market conditions. Our work indicates that federal oil  and gas leases in the deep water U.S. Gulf of Mexico and other U.S.  regions are attractive investments and that the government take in the U.S.  Gulf of Mexico ranks among the lowest across a large number of other oil  and gas fiscal systems. However, we  cannot infer from our review of the Gulf of Mexico federal oil and gas leases  how the data on federal government take or industry returns to investment  are applicable to federal onshore leases. We  also collected and analyzed various studies generated by MMS, the agency  responsible for collecting oil and gas royalties from federal lands and  waters and interviewed private consulting firm officials. 2. This  lack of flexibility explains, in part, why the Congress enacted the Deep  Water Royalty Relief Act in 1995, a time when oil and gas prices were  much lower than they are today. 3. 9.
Why GAO Did This Study

In fiscal year 2007, domestic and foreign companies received over $75 billion from the sale of oil and gas produced from federal lands and waters, according to the Department of the Interior (Interior), and these companies paid the federal government about $9 billion in royalties for this oil and gas production. The government also collects other revenues in rents, taxes, and other fees, and the sum of all revenues received is referred to as the "government take." The terms and conditions under which the government collects these revenues are referred to as the "oil and gas fiscal system." This report (1) evaluates government take and the attractiveness for investors of the federal oil and gas fiscal system, (2) evaluates how the absence of flexibility in this system has led to large foregone revenues from oil and gas production on federal lands and waters, and (3) assesses what Interior has done to monitor the performance and appropriateness of the federal oil and gas fiscal system. To address these issues, we reviewed expert studies and interviewed government and industry officials.

What GAO Found

In addition to having a low government take, the deep water Gulf of Mexico and other U.S. regions are attractive targets for investment because they have large remaining oil and gas reserves and the U.S. is generally a good place to do business compared to many other countries with comparable oil and gas resources. Multiple studies completed as early as 1994 and as recently as June 2007 indicate that the U.S. government take in the Gulf of Mexico is lower than that of most other fiscal systems. For example, data GAO evaluated from a June 2007 industry consulting firm report indicated that the government take in the deep water U.S. Gulf of Mexico ranked 93rd lowest of 104 oil and gas fiscal systems evaluated. Generally, other measures indicate that the United States is an attractive target for oil and gas investment. The lack of price flexibility in royalty rates--automatic adjustment of these rates to changes in oil and gas prices or other market conditions--and the inability to change fiscal terms on existing leases have put pressure on Interior and the Congress to change royalty rates in the past on an ad hoc basis with consequences that could amount to billions of dollars of foregone revenue. For example, royalty relief granted on leases issued in the deep water areas of the Gulf of Mexico between 1996 and 2000--a period when oil and gas prices and industry profits were much lower than they are today--could cost the federal government between $21 billion and $53 billion, depending on the outcome of ongoing litigation challenging the authority of Interior to place price thresholds that would remove the royalty relief offered on certain leases. Further, royalty rate increases in 2007 are expected to generate modest increases in federal revenues from future leases offered in the Gulf of Mexico. However, in choosing to increase royalty rates, Interior did not evaluate the entire oil and gas fiscal system to determine whether or not these increases strike the proper balance between the attractiveness of federal leases for investment and appropriate returns to the federal government for oil and gas resources. Interior does not routinely evaluate the federal oil and gas fiscal system, monitor what other governments or resource owners are receiving for their energy resources, or evaluate and compare the attractiveness of federal lands and waters for oil and gas investment with that of other oil and gas regions. As a result, Interior cannot assess whether or not there is a proper balance between the attractiveness of federal leases for investment and appropriate returns to the federal government for oil and gas resources. Specifically, Interior does not have procedures in place for evaluating the ranking of (1) the federal oil and gas fiscal system or (2) industry rates of return on federal leases against other resource owners. Interior also does not have the authority to alter tax components of the oil and gas fiscal system. All these factors are essential to inform decisions about whether or how to alter the federal oil and gas fiscal system in response to changing market conditions.