Guest explaining to the NYT explanatory reporter by David Middleton
More abject nonsense from Hiroko Tabuchi, New York Times climate reporter and “part of the team awarded the 2013 Pulitzer Prize for Explanatory Reporting”…
Government Loophole Gave Oil Companies $18 Billion Windfall
By Hiroko Tabuchi
Published Oct. 24, 2019
The United States government has lost billions of dollars of oil and gas revenue to fossil-fuel companies because of a loophole in a decades-old law, a federal watchdog agency said Thursday, offering the first detailed accounting of the consequences of a misstep by lawmakers that is expected to continue costing taxpayers for decades to come.
The loophole dates from an effort in 1995 to encourage drilling in the Gulf of Mexico by offering oil companies a temporary break from paying royalties on the oil produced. However, the rule was poorly written, the very politicians who originally championed it have acknowledged, and the temporary reprieve was accidentally made permanent on some wells.
As a result, some of the biggest oil companies in the world, including Chevron, Shell, BP, Exxon Mobil and others, have avoided paying at least $18 billion in royalties on oil and gas drilled since 1996, according to a new report from the Government Accountability Office, a nonpartisan agency that works for Congress.
Roughly 22 percent of oil production from federal leases in the Gulf of Mexico was royalty-free in 2018 because of the loophole, the Interior Department said.
The National Ocean Industries Association, which represents the offshore industry, defended the arrangement. “There was no mistake in the law,” said Nicolette Nye, vice president at the association. If not for the law, she said, “we likely would not be producing U.S. oil offshore in record amounts today.”
Ben Marter, a spokesman for the A.P.I., said companies “took Congress at its word,” and any attempts to revisit the issue would be “engaging in a dangerous game of bait-and-switch.”
But the new regulations omitted a crucial clause that had been supported by both Republicans and Democrats — that if average prices for oil and gas climbed above a certain threshold, companies would be responsible for paying the royalties. In 2006, when the federal government tried to impose royalties, an oil producer sued and won.
Hiroko Tabuchi is a climate reporter. She joined The Times in 2008, and was part of the team awarded the 2013 Pulitzer Prize for Explanatory Reporting. She previously wrote about Japanese economics, business and technology from Tokyo.New York Times
This idiotic article included four paragraphs on climate change, which I did not quote. It also included a lot of Democrat blather about giving money to special interests that don’t need it. And a lot of whining about this not being the intent of the law… Most of which I also didn’t quote.
All that matters:
- The legislation was passed by Congress and signed into law by President Bill Clinton in 1995.
- Its intent was to incentivize deepwater drilling and production in the Gulf of Mexico, and it worked.
- When the government tried to administratively rewrite the law, they were sued and lost.
Crude oil production from Federal leases in the Gulf of Mexico has roughly doubled since 1995.
All of this growth was due to deepwater drilling and production.
Would this have happened without the royalty relief legislation? It’s impossible to re-rack history and see how it would have played out otherwise. In the mid 1990’s, it was still unclear whether or not deepwater oil production was economically viable.
The alleged “loophole” only applies to leases issued in lease sales from 1996-1999. All other lease sales under the Deepwater Royalty Relief Act (DWRRA), included economic thresholds at which royalty payments would kick in.
As of 2007, only 20 leases, issued in 1998 and 1999, lacked price thresholds for royalty payments to kick in. And, while “DWRRA spurred a surge of interest in deepwater oil and gas development, major production directly related to the act’s incentives has yet to be realized.”
Proponents of these royalty relief measures contend that without incentives, little GOM deepwater or shallow-water, deep-gas drilling would have taken place, because these areas would not have been competitive with foreign offshore prospects (e.g., Brazil and West Africa). Increased GOM drilling enhances U.S. energy security, proponents contend. Critics, during the debate on royalty relief that preceded passage of EPACT-05, charged that the government would forfeit millions of dollars through the subsidy and that drilling costs were already coming down as a result of advances in technology, thus making many deepwater lease tracts economical. According to MMS, deepwater drilling in the Gulf of Mexico has benefitted from a combination of improved technology, higher prices, and royalty reductions.(14)
A significant amount of activity is taking place in deepwater GOM. Out of 8,221 active offshore oil and gas leases, 54% are in deep water. Interest surged after enactment of DWRRA, with 3,000 deepwater leases bid between 1996 and 1999.(15) Deepwater oil production rose from 42 million barrels in 1994 to 348 million barrels in 2004. Natural gas production increased from 159 billion cubic feet in 1994 to 1.4 trillion cubic feet in 2004. Within the past two years, there was a 37% increase in the number of producing projects. Deepwater development, however, is facing major challenges. Currently, about 8% of the DWRRA-eligible leases issued between 1996 and 2000 have been drilled, and only a few are in production (because of rig constraints and large lease inventories). In 2004, of the 1,667 leases producing in the GOM, 30 qualified as eligible leases under DWRRA. Since 2004, oil and gas prices rose above the price thresholds, and full payment of royalties became due on 10 of those leases that were issued in 1996, 1997, and 2000. The other 20 were issued in 1998 and 1999 without price thresholds.
MMS maintains that the future of deepwater production looks bright. Proved oil and gas reserve and resource estimates have more than doubled since 2000 (Table 2), discoveries are taking place in much deeper waters since 2000, and development time decreased from 10 years in the mid-1990s to 7 years in 2006. Although DWRRA spurred a surge of interest in deepwater oil and gas development, major production directly related to the act’s incentives has yet to be realized. For leases containing price thresholds, relatively little royalty relief has been granted.Royalty Relief for U.S. Deepwater Oil and Gas Leases, CRS Report for Congress, December 7, 2007
So. it is incredibly unlikely that “roughly 22 percent of oil production from federal leases in the Gulf of Mexico (GOM) was royalty-free in 2018 because of the loophole.” There are several avenues for royalty relief. In some cases BOEM can waive royalties for fields that would otherwise be uneconomic and have to be abandoned. So, it’s certainly possible that 22% of current GOM production is subject to royalty relief. However, if major production directly related to the DWRRA’s “loophole” had yet to be realized in 2007, it’s doubtful that it’s increased since then.
In 2018, the U.S. Treasury received $4,329,043,081 in royalty payments on 641,503,000 barrels (bbl) of crude oil production from Federal leases in the Gulf of Mexico. The West Texas Intermediate (WTI) spot price averaged $65.06/bbl in 2018 and Brent averaged $71.19. Most offshore production receives a slightly higher price than WTI and slightly lower than Brent. Using a simple average of WTI and Brent, $4.3 billion works out to a 10% average royalty rate. While the statutory royalty rate is 12.5%, actual rates vary from 12.5% to 18.5%. Royalties are a cut of the gross production or gross revenue from the production, not a percentage of net profits.
With average deepwater breakeven prices falling from $70 to $40/bbl over the past few years, but oil prices also falling by about $10/bbl since 2018, it’s not too difficult to grasp the fact that a significant percentage of GOM production wouldn’t have happened with the government taking 12.5% to 18.5% of the gross revenue. 10% of 641.5 million bbl (2018) is just a little bit bigger than 12.5% of 344.3 million bbl (1995).
The most hilarious thing is that I have no doubt that Ms. Tabuchi and all of the enviro-nitwits whining about the Fed’s only getting 10% of 641.5 million bbl/yr would prefer to see the Fed’s taking 100% of 0 bbl/yr of GOM crude oil production.