Does the government receive revenue from oil and gas development on public lands?
Yes. In order to obtain federal leases, companies agree to pay a royalty to the government based on the value of the oil and gas produced. For onshore leases, the Minerals Land Leasing Act prescribes that a royalty share of one-eighth of the value of production be paid to the government. For offshore leases, the Outer Continental Shelf Lands Act sets forth a royalty rate of not less than one-eighth the value of production. The offshore rate for leasing beginning in 2008 is set at 18.75%.
How are royalties calculated?
On government lands, the royalty share of the value produced can be paid in value (dollars) or in kind (barrels of oil and cubic feet of gas) at the election of the Department of the Interior’s Minerals Management Service (MMS).
If the MMS wants its royalties in dollars, the lessee applies the applicable rate to the actual or imputed proceeds it received from sale, less deductions for post-production costs such as transportation away from the lease. For example, if a barrel of crude oil produced from an onshore lease that has a one-eighth royalty rate were sold at the lease for $24, the royalty due would be one-eighth of the selling price or $3. If the MMS wants its royalties in kind (meaning delivery of its share of the actual oil and/or natural gas produced), the producer works out an arrangement for delivery of the one-eighth royalty share of the production volume at a time and place prescribed by the MMS.
Given the huge volumes and the varying physical characteristics of oil and natural gas produced, as well as the diversity of marketing arrangements and other factors, the MMS publishes regulations and other guidance that prescribe the details of royalty compliance. Basically, the MMS requires the producer to pay royalties within 30 days of production, while adhering to prescribed accounting standards, keeping adequate records and filing detailed monthly reports. The MMS also imposes rigorous auditing, compliance and enforcement mechanisms.
How much revenue is generated from development on government lands each year?
According to the MMS, annual revenues from federal onshore and offshore (OCS) mineral leases are one of the federal government’s largest sources of non-tax income. In fiscal year 2007, the most recent year for which a complete annual report is available, MMS collected $9.4 billion in oil and gas royalties. The bulk of this came from offshore production, with natural gas production generating approximately 40 percent of the offshore royalty revenue. For federal onshore lands, gas production generated over 68 percent of the over $2.6 billion in onshore royalties. The MMS also collected over $815 million in bonus bids (for new leases), rental payments (to maintain the right to develop the lease in the future), and other revenues to bring the total federal revenues collected by MMS from oil and gas leasing and production on government lands to over $10.2 billion. See the MMS website and see this page: MMS Commodity and Statistics for more information on royalties paid for oil and gas produced from federal lands.
What happens to the revenues collected from oil and gas activities on government lands?
How royalties (and other revenue) are distributed depends on the classification of the land from which the oil and gas were produced. For example, the royalties from offshore lands are distributed differently than onshore lands. Moreover, the distribution of royalties from onshore lands depends on whether they are public domain lands, acquired lands, Alaska Native Lands, etc.
In general though, MMS distributes the revenues it collects from oil and gas leasing and production on government lands to three main recipients. More than half of the revenue goes to the U.S. Treasury. MMS also distributes about $900 million to the Land and Water Conservation Fund. The fund accumulates funds for distribution to states and federal agencies to acquire and develop public lands. The Interior Department spending bill, passed by Congress yearly, directs how much of the monies in the Fund are spent. Lastly, MMS distributes to states a portion of the revenues that were generated on federal lands within their borders. In 2007, states received about $1.9 billion from oil and gas activities on federal lands; over $1.3 billion of this was from oil and gas royalties. Summaries of revenues from federal leasing received by the states may be found at MMS Minerals Revenue Management.