GAO: Value of Offshore Oil and Gas Leases Underestimated

Credit: GAO
Credit: GAO

Published Oct 27, 2019 6:37 PM by The Maritime Executive

The U.S. Government Accountability Office (GAO) has released a report Opportunities Exist to Better Ensure a Fair Return on Federal Resources, claiming that the Bureau of Ocean Energy Management systematically underestimates the value of offshore oil and gas leases.

Production of oil and natural gas in federal waters generated about $90 billion in revenue for the government from 2006 through 2018. The Bureau of Ocean Energy Management (BOEM) leases exploration rights to companies and sets royalty rates on production, and the report indicates that the underestimates resulted the government collecting hundreds of millions of dollars less than it otherwise could.

“Management of federal oil and gas resources is a topic on our High Risk List.”

What GAO Found

GAO's analysis indicates that changes in the price of oil and in royalty rates drive changes in the amount companies bid for leases (the amount paid upfront at auction for the right to explore and develop offshore tracts of land). Specifically, between May 1985 and June 2018, peaks in industry bidding coincided with higher oil prices. Additionally, when the BOEM offered leases at lower royalty rates, industry bid somewhat higher amounts per acre. For example, certain leases were sold from 1996 through 2000 with no royalties on initial volumes of production, which GAO estimates resulted in BOEM collecting, at most, nearly $2 billion in additional bid revenue. However, bureau estimates indicate these leases resulted in about $18 billion in foregone royalties through 2018.

BOEM's valuation process might not fully assure receipt of fair market value, based on GAO's analysis of BOEM data. BOEM's valuations were generally low relative to industry bids because, according to BOEM officials, they conservatively forecast to account for inherent uncertainties in, among other things, the quantity of oil and gas present as well as exploration and development costs. In addition, GAO identified two ways BOEM's valuation process results in lowering its already conservative valuations that might not fully assure receipt of fair market value: unreasonably high depreciation and lowered valuations. 

What GAO Recommends

GAO recommends that BOEM:

1. enlist an independent third party to examine whether the use of delayed valuations assures the receipt of fair market value and

2. take steps to ensure its bid valuation process is not biased toward lowering valuations.

Interior disagreed with the first and partially agreed with the second, disagreeing with GAO's characterization of BOEM's process. GAO maintains the recommendations are valid as discussed in the report.

What NOIA Thinks

NOIA Vice President of Communications and Member Development Nicolette Nye said: “The GAO report centers on the Deep Water Royalty Relief Act of 1995, a Clinton administration action to increase bonus bid revenues to the U.S. Treasury while incentivizing American offshore energy production. There was no mistake in the law.  The 5th Circuit determined that Congress was clear and that Congress intended to provide royalty relief in order to jumpstart American oil and gas production in deepwater.

“If not for the Deep Water Royalty Relief Act (DWRRA), we likely would not be producing U.S. oil offshore in record amounts today. This decades-old decision set the groundwork for an American offshore energy revolution that has generated nearly $90 billion in federal revenue between 2006 and 2018, a fact that the GAO report reinforces. Innovation and technological advances, spurred in part by the DWRRA, have made the American offshore energy industry the engine of economic growth and government revenue that it is today. 

“Rather than raising billions of dollars in offshore royalties, it seems the House Majority would prefer to completely shut off the offshore energy industry, removing a vital source of government revenue and American energy security. The GAO report underscores the importance, and amazing benefits, of a robust offshore energy industry and should encourage policymakers to adopt proactive policies that embrace American offshore leadership.” 

The report is available here.