Oil and Gas Royalties: A Comparison of the Share of Revenue Received from Oil and Gas Production by the Federal Government and Other Resource Owners

Amid rising oil and gas prices and reports of record oil industry profits, a number of governments have taken steps to reevaluate and, in some cases, increase the share of oil and gas revenues they receive for the rights to develop oil and gas on their lands and waters. For example, the State of Alaska has recently passed new oil and gas legislation that will increase the state's share of revenue received from oil and gas companies operating state leases. In January 2007, the Department of the Interior announced an increase in the royalty rate for future leases granted in the deepwater region of the Gulf of Mexico. Companies engaged in exploration and development of oil and gas resources do so under terms of concessions, leases, or contracts granted by governments or other resource owners. The terms and conditions of such arrangements are established by law or negotiated on a case-by-case basis. One important aspect of the arrangements is the applicable payments from the companies to the resource owners--in the United States, these include bonuses, rentals, royalties, corporate income taxes, and special fees or taxes. The precise mix and total amount of these payments, referred to as the "fiscal system" varies widely across different resource owners. The total revenue, as a percentage of the value of the oil and natural gas produced, received by government resource owners, such as U.S. federal or state governments is commonly referred to as the "government take." For example, a government take of 50 percent means that the government receives 50 percent of the cash flow produced from an oil or gas field. In fiscal year 2006, oil and gas companies received over $77 billion from the sale of oil and gas produced from federal lands and waters, and the Department of the Interior's Minerals Management Service (MMS) reported that these companies paid the federal government about $10 billion in oil and gas royalties. Clearly, such large and financially significant resources must be carefully developed and managed so that our nation's rising energy needs are met while at the same time the American people are ensured of receiving a fair rate of return on publicly owned resources, especially in light of the nation's daunting current and long-range fiscal challenges. As requested, this report documents the information provided to Congressional staffs in March 2007 on the U.S. government's take and implications associated with increasing royalty rates. Specifically, this report discusses (1) the United States' government take relative to that of other government resource owners and (2) the potential revenue implications of raising royalty rates on federal oil and gas leases going forward.