Mandatory Spending Option 1

Function 300 - Natural Resources and Environment

Change the Terms and Conditions for Oil and Gas Leasing on Federal Lands

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Outlays 0 0 * -1.3 -0.2 -0.2 -0.8 -0.2 -0.2 -0.4 -1.6 -3.4

This option would take effect in October 2017.

* = between –$50 million and zero.

The federal government lets private businesses bid on leases to develop most of the onshore and offshore oil and natural gas resources on federal property. By the Congressional Budget Office’s estimates, the federal government’s gross proceeds from those leases will total $92 billion during the next decade, under current laws and policies; after paying a share of those receipts to states, the federal government is projected to collect net proceeds totaling $79 billion. Those net proceeds are counted in the budget as offsetting receipts—that is, as negative outlays.

This option would change the leasing programs in two ways. First, it would increase the acreage available for leasing by repealing the statutory prohibition on leasing in the Arctic National Wildlife Refuge (ANWR) and by directing the Department of the Interior to lease areas on the Outer Continental Shelf (OCS) that are unavailable under current administrative policies. Second, the option would change the terms of all new leases, imposing a fee that applied during years when oil or gas was not produced. (The latest available data indicate that such nonproducing leases accounted for about 75 percent of offshore leases at the end of fiscal year 2016 and about half of onshore leases at the end of fiscal year 2015.) The fee would be $6 per acre per year.

CBO estimates that those changes would reduce net federal outlays by $3 billion from 2018 through 2026. About three-quarters of that total would result from leasing in ANWR and the increase in leasing on the OCS, and the rest would result from the new fee on nonproducing leases.

One rationale for offering leases in ANWR and additional leases on the OCS is that increasing oil and gas production from federal lands and waters could boost employment and economic output. The leasing also could raise revenues for state and local governments; the amounts would depend on states’ tax policies, the amount of oil and gas produced in each area, and the existing formulas for distributing some federal oil and gas proceeds to states. The primary argument against expanded leasing is that oil and gas production in environmentally sensitive areas, such as the coastal plain in ANWR and other coastal areas, could threaten wildlife, fisheries, and tourism. Moreover, increased development of resources in the near term would reduce the supply of oil and gas available for production in the future, when prices might be higher and households and businesses might value the products more highly.

One rationale for imposing a new fee on nonproducing oil and gas leases is that doing so could slightly increase the efficiency of oil and gas production: Firms would have an additional financial incentive to refrain from acquiring leases that they considered less likely to be worth exploring, and also to invest sooner in exploration and development of the leases that they did acquire. The incentive’s effect would be small, however, because $6 per acre would usually be a small part of a parcel’s potential value and a minor factor in a leaseholder’s decisions about when to begin exploration and production.

An argument against the new fee is that it might lead businesses to reduce some of their bids on leases; furthermore, some parcels might go unleased entirely, generating no receipts for the government either from bids or from production royalties. However, CBO estimates that those effects on receipts would be smaller than the receipts from the new fee itself. The effect on bids would be small because a fee of $6 per acre would significantly affect bids for relatively few parcels—those that would generate low bids even without the fee because of uncertainty about the availability and production cost of oil and gas resources. Similarly, the effect on royalty payments would be small because the unleased parcels would be those with the lowest likelihood of successful development. Moreover, some parcels that went unleased under the option could be acquired later if their value increased; bids then would probably be higher, and royalty payments could be higher as well.