Mandatory Spending Option

Function 270 - Energy

Increase the Royalty Rate for Oil and Gas Production on Onshore 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.

The royalty rate for onshore oil and gas production from federal lands is 12.5 percent, which is the lowest royalty rate allowed under current law. That rate is lower than the 18.75 percent charged for offshore oil and gas production and lower than the rates charged by many key Western states, including Wyoming, New Mexico, Colorado, and Utah. (Many states have increased their royalty rates over the past decade.) Although the Bureau of Land Management (BLM) has the statutory authority to increase the royalty rate, it has not done so.

Raising the royalty rate for onshore parcels to 18.75 percent to match the rate for offshore parcels would generate $200 million in net federal income over the next 10 years, CBO estimates. Income generated in the following decade could be much greater, depending on market conditions: Because the higher rate would apply only to new leases and the affected parcels would not go into production immediately, the effect on federal income would be small initially but increase over time as the number of producing parcels subject to the new rate grew.