Onshore, Interior’s Bureau of Land Management is responsible  for leasing federal oil and natural gas resources, whereas offshore, MMS  has leasing authority. After the lease is awarded and production begins, the  companies must also pay royalties to MMS based on a percentage of the  cash value of the oil and natural gas produced and sold. The Deep Water Royalty Relief Act Will Likely Cost the Federal Government Billions of Dollars in Forgone Royalty Revenues, but Precise Estimates Remain Elusive

Based on our work to date, the Deep Water Royalty Relief Act (DWRRA)  will likely cost the federal government billions of dollars in forgone  royalties, but precise estimates of the costs are not possible at this time for  several reasons. Finally, assessing the ultimate fiscal impact of royalty relief is an  inherently complex task, involving uncertainty about future production  and prices. In October 2004, MMS preliminarily estimated that the total  costs of royalty relief for deep water leases issued under the act could be  as high as $80 billion, depending on which leases ultimately received relief. However, oil and gas  companies paying royalties under the act interpreted the royalty  suspension volumes as applying to individual leases within a field. Given the degree of uncertainty in predicting future royalty revenues from  deepwater oil and gas leases, we are using current data to carefully  examine MMS’s 2004 estimate that up to $80 billion in future royalty  revenues could be lost. We are also examining the  impact of several variables, including changing oil and gas prices, revised  estimates of the amount of oil and gas that these leases were originally  expected to produce, the availability of deep water rigs to drill untested  leases, and the present value of royalty payments. Additional Programs and Legislation Authorize Royalty Relief, Potentially Affecting Future Federal Royalty Collection

Although leases are no longer issued under the Deep Water Royalty Relief  Act of 1995, royalty relief can be provided under two existing authorities:  (1) the Secretary of the Interior’s discretionary authority and (2) the  Energy Policy Act of 2005. The Outer Continental Shelf Lands Act of 1953,  as amended, granted the Secretary of the Interior the discretionary  authority to reduce or eliminate royalties for leases issued in the Gulf of  Mexico in order to promote increased production. MMS intends for  these discretionary programs to provide royalty relief for leases in deep  waters that were issued after 2000, deep gas wells located in shallow  waters, wells nearing the end of their productive lives, and special cases  not covered by other programs. The Congress also authorized additional  royalty relief under the Energy Policy Act of 2005, which mandates relief  for leases issued in the Gulf of Mexico during the five years following the  act’s passage, provides relief for some wells that would not have  previously qualified for royalty relief, and addresses relief in certain areas  of Alaska. Finally, the Energy Policy Act of 2005 contains provisions addressing  royalty relief in Alaska that MMS is already providing.
Why GAO Did This Study

Oil and gas production from federal lands and waters is vital to meeting the nation's energy needs. As such, oil and gas companies lease federal lands and waters and pay royalties to the federal government based on a percentage of the oil and gas that they produce. The Minerals Management Service (MMS), an agency in the Department of the Interior, is responsible for collecting royalties from these leases. In order to promote oil and gas production, the federal government at times and in specific cases has provided "royalty relief," waiving or reducing the royalties that companies must pay. However, as production from these leases grows and oil and gas prices have risen since a major 1995 royalty relief act, questions have emerged about the financial impacts of royalty relief. Based on our work to date, GAO's statement addresses (1) the likely fiscal impacts of royalty relief on leases issued under the Outer Continental Shelf Deep Water Royalty Relief Act of 1995 and (2) other authority for granting royalty relief that could further impact future royalty revenue. To address these issues our ongoing work has included, among other things, analyses of key production data maintained by MMS; and reviews of appropriate portions of the Outer Continental Shelf Deep Water Royalty Relief Act of 1995, the Energy Policy Act of 2005, and Interior's regulations on royalty relief.

What GAO Found

While precise estimates remain elusive at this time, our work to date shows that royalty relief under the Outer Continental Shelf Deep Water Royalty Relief Act of 1995 will likely cost billions of dollars in forgone royalty revenue--at least $1 billion of which has already been lost. In October 2004, MMS estimated that forgone royalties on deep water leases issued under the act from 1996 through 2000 could be as high as $80 billion. However, there is much uncertainty in these estimates. This uncertainty stems from ongoing legal challenges and other factors that make it unclear how many leases will ultimately receive royalty relief and the inherent complexity in forecasting future royalties. We are currently assessing MMS's estimate in light of changing oil and gas prices, revised estimates of future oil and gas production, and other factors. Additional royalty relief that can further impact future royalty revenues is currently provided under the Secretary of the Interior's discretionary authority and the Energy Policy Act of 2005. Discretionary programs include royalty relief for certain deep water leases issued after 2000, certain deep gas wells drilled in shallow waters, and wells nearing the end of their productive lives. The Energy Policy Act of 2005 mandates relief for leases issued in the Gulf of Mexico during the five years following the act's passage, provides relief for some gas wells that would not have previously qualified for royalty relief, and addresses relief in certain areas of Alaska.