The royalty rate paid by the  coal company after such allowable deductions have been factored in,  along with any royalty rate reductions, is called the effective royalty rate. Table 1 shows federal royalty rates and rates  for six states that represented more than 90 percent of federal oil, gas,  and coal production in fiscal year 2015. According to state officials, as of  March 2017, royalty rates for oil and gas production charged by these  states vary but tend to be higher than federal royalty rates, while royalty  rates for coal production charged by these states are generally the same  as federal rates. Less is known about the royalty rates for production on  private lands because of the proprietary nature of lease contracts, but a  few published reports suggest that private royalty rates range from 12.5  percent to 25 percent for oil and gas production and from 3 percent to 10  percent for coal production. The federal government collected  approximately $2.5 billion in gross revenue from the production of these  resources on federal lands in fiscal year 2016. The majority of this  revenue generally has come from royalties—about $2 billion, or 80  percent of total revenues in fiscal year 2016. Studies and Stakeholders Suggest Raising Federal Royalty Rates Could Decrease Production on Federal Lands

Raising federal royalty rates for onshore oil, gas, and coal could decrease  production on federal lands, according to studies we reviewed and  stakeholders we interviewed. However, stakeholders disagreed about the extent to which  production could decrease because they said other factors may influence  energy companies’ development decisions. We identified two studies—one by the CBO and one by  Enegis, LLC—that modeled the effects of different policy scenarios on oil  and gas production on federal lands. The CBO study concluded that raising the  royalty rate to 18.75 percent would lead to “reductions in production   would be small or even negligible” over 10 years, particularly if the  increased federal royalty rate remained equal to or below the royalty rates  for production on state or private lands. The first study, by  the CEA, examined how raising the federal royalty rate could affect coal  production on federal lands after 2025 using a series of scenarios. The study found that the modeled increase in the  effective royalty rate led to a decrease in federal coal production of less  than 1 percent per year. Stakeholders we interviewed suggested that several factors could  influence the extent to which oil, gas, and coal production might be  affected if federal royalty rates were increased, including the following. Market conditions and prices. Cost advantages of different resources. Some stakeholders we  spoke with stated that there is already a higher regulatory burden for  oil and gas companies to develop resources on federal lands than on  nonfederal lands, and one stakeholder noted that an increase in  federal royalty rates would decrease the competitiveness of federal  lands versus state or private lands. Studies and Stakeholders Suggest Raising Federal Royalty Rates Could Increase Federal Revenues

Raising federal royalty rates for onshore oil, gas, and coal could increase  overall federal revenues, according to studies we reviewed and  stakeholders we interviewed. The studies we reviewed for oil and gas estimate that  raising the federal royalty rate could increase net federal revenue  between $5 million and $38 million per year (equivalent to around 0.7  percent to around 5.2 percent of net oil and gas royalties in fiscal year  2016). Similarly, according to the Enegis study, net federal  revenues would increase under the scenarios that modeled raising the  royalty rate to 16.67 percent, 18.75 percent, or 22.5 percent. For example, the modeling  scenarios in the CEA study that raised the royalty rate to the equivalent of  17 percent or 29 percent predicted a range of increases in government  revenues from $0 to $730 million annually after 2025, with approximately  half of that revenue going to the federal government. The study by Haggerty,  Lawson, and Pearcy suggested that total average royalty revenues could  increase by $141 million per year if the effective royalty rate were raised. Stakeholders we interviewed also suggested that the effect on bonus bid  revenue could influence the extent to which raising federal royalty rates  would increase revenues from oil, gas, and coal production. For example,  some stakeholders stated that companies would be more likely to offer  lower bonus bids if they had to pay higher royalty payments, but a few  stakeholders believed that the net impact on federal revenue would be  minimal because royalties are a more significant portion of total revenues  than bonus bids. The  agency provided technical comments, which we incorporated as  appropriate.
Why GAO Did This Study

In fiscal year 2016, the federal government collected about $2.5 billion in revenue associated with onshore oil, gas, and coal production on federal lands, including about $2 billion from royalties. Federal royalty rates sometimes differ from the rates states charge for production on state lands. For example, state oil and gas rates tend to be higher than federal royalty rates and state coal rates are generally the same as federal rates in the six states representing more than 90 percent of federal oil, gas, and coal production in fiscal year 2015.
The explanatory statement accompanying the Consolidated Appropriations Act for fiscal year 2016 includes a provision for GAO to review issues related to royalty rates. This report describes what is known about how raising federal royalty rates would affect (1) oil, gas, and coal production on federal lands and (2) the federal revenue associated with such production. GAO reviewed an extensive list of studies and selected for more in-depth review four that modeled the effects of raising federal royalty rates—one study conducted by the Congressional Budget Office, one by the Council of Economic Advisers in the Executive Office of the President, one prepared for the Bureau of Land Management, and one by researchers. GAO also interviewed officials from federal and state agencies, industry groups, non-governmental organizations, academia, and other knowledgeable stakeholders.
GAO is not making recommendations in this report. Interior reviewed a draft of this report and provided technical comments that GAO incorporated as appropriate.

What GAO Found

Raising federal royalty rates—a percentage of the value of production paid to the federal government—for onshore oil, gas, and coal resources could decrease oil, gas, and coal production on federal lands but increase overall federal revenue, according to studies GAO reviewed and stakeholders interviewed. However, the extent of these effects is uncertain and depends, according to stakeholders, on several other factors, such as market conditions and prices.
Production . One study GAO reviewed found that oil and gas production could decrease by less than 2 percent per year if royalty rates increased from their current 12.5 percent to 22.5 percent, based on fiscal year 2016 production data. Another study stated the effect on production could be “negligible” over 10 years if royalty rates increased to 18.75 percent, particularly if the increased federal royalty rate remained equal to or below the royalty rates for production on state or private lands. Regarding coal, one study suggested that raising the federal royalty rate for coal to 17 percent would decrease production on federal lands by up to 3 percent after changes were fully implemented after 2025, while a second study said that increasing the effective rate—the rate actually paid by companies after processing and transportation allowances have been factored in, along with any royalty rate reductions—might decrease production on federal lands by less than 1 percent per year. Some stakeholders said that several other factors could influence the extent to which oil, gas, and coal production might decline. For example, some stakeholders said current market conditions, the cost advantages of different resources, and the regulatory burden associated with production on federal lands could influence the extent to which production might decline.
Revenue . The oil and gas studies that GAO reviewed estimated that raising the federal royalty rate could increase net federal revenue between $5 million and $38 million per year. One of the studies stated that net federal revenue would increase under three scenarios that modeled raising the royalty rate from the current 12.5 percent to 16.67 percent, 18.75 percent, or 22.5 percent, while the other study noted that the effect on federal revenue would initially be small but would increase over time. Both coal studies suggested that a higher royalty rate could lead to an increase in federal revenues. One of the studies suggested that raising the royalty rate to 17 percent or 29 percent might increase federal revenue by up to $365 million per year after 2025. The other study suggested that increasing the effective rate could bring in an additional $141 million per year in royalty revenue. Stakeholders GAO interviewed cited other factors that could influence the extent to which raising federal royalty rates could increase revenues—in particular, how bonus bids, another revenue source, could be affected. Some of the stakeholders stated that companies would be more likely to offer lower bids to obtain a lease for the rights to extract resources if they had to pay higher royalties.