No Offshore Oil Royalty Cut, Interior Secretary Says

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By Alan Kovski

Royalty rates for offshore oil and gas leases in U.S. federal waters will not be lowered despite the recommendation of an advisory panel, Interior Secretary Ryan Zinke announced April 17.

The Royalty Policy Committee proposed Feb. 28 to cut the royalty rate from the standard 18.75 percent down to the minimum set by law at 12.5 percent. The rationale was to provide an incentive for more investment and work.

A royalty cut is not needed, Zinke decided. An improving economy, federal tax reforms, higher energy prices, and greater regulatory certainty have led to positive market conditions, his announcement said.

Oil companies haven’t been publicly complaining over the years of U.S. offshore royalties as serious impediments to investment. They have complained of complex regulations and lack of access to some potential resources.

The Trump administration tried cutting the royalty rate to 12.5 percent for shallow-water offshore areas on the assumption that those areas already have been so often explored that they are less promising and need the extra incentive of a rate cut. That appears likely to continue.

The announcement said Zinke had determined “to keep the royalty rate in 200 meters or water and deeper at 18.75 percent,” implicitly leaving the rate lower in shallow water.

Dominant bidders in the latest offshore lease auction, held March 21, included Chevron Corp., Royal Dutch Shell Plc, BP Plc, and Total S.A. Their focus was especially on deepwater areas despite the higher royalty rate.

Competition for Investments

The National Ocean Industries Association, an energy trade group, responded to the announcement with a statement suggesting a rate cut still may be advisable.

The group said it “has little doubt that increased study will show that continued competition and a challenging economic environment may further reinforce the notion that the U.S. needs to revisit the royalty issue in the months and years to come.”

The group was especially referring to competition from other nations—such as Canada, Mexico, and Brazil—offering offshore areas for leasing.

Oil Market Improving

The price slump from late 2014 through early 2017 severely dampened offshore leasing.

West Texas Intermediate prices were about $45 a barrel 10 months ago but are more than $65 a barrel now.

Zinke said during recent congressional testimony that oil companies are not hurting under current market conditions, especially with the access they are being given in U.S. onshore areas now.

“Today’s decision reflects the oil and gas industry’s improving market conditions for safe and responsible development of our abundant energy resources,” Vincent DeVito, chairman of the Royalty Policy Committee, said in a statement issued with Zinke’s announcement.

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