GAO: Government could get higher returns from offshore oil, gas leasing

Opportunities exist for the federal government to get higher returns from offshore oil and gas leasing, the Government Accountability Office concluded in a report it released on Oct. 24. A data analysis suggests that the US Bureau of Ocean Energy Management’s valuation process might not fully assure receipt of fair market value, it said.

The US Department of the Interior agency develops FMV amounts for leases it believes to be economically viable, and awards tracts only if the bid is equal to or greater than BOEM’s valuation, the report explained.

It said BOEM officials indicated valuations were generally below industry bids because they conservatively try to account for uncertainties in the quality of oil and gas present as well as exploration and development among other factors.

BOEM regularly assesses potential changes to fiscal terms in annual and supplementary lease sale-specific analyses, the report noted. It said the agency also has advertised its development of a progressive, priced-based royalty system for 6 years but has made little demonstrable progress toward developing this system.

Bureau officials told GAO that lower future values are generally due to BOEM’s discounting the delayed collection of revenue, the report said. “However, BOEM’s forecast depreciation increased even though tracts are now available twice as frequently as they were prior to August 2017, reducing the time for discounting. Officials said they were unaware of the high rates and the issue warrants further examination,” it said.

One possible step

“Enlisting a third party to examine the extent to which the bureau’s use of delayed valuations assures the receipt of [FMV], and making changes as appropriate, would help BOEM mitigate risks of continuing to accept bids based on poor information on tracts’ future values,” it suggested.

BOEM officials told GAO that they lower some initial valuations that are “slightly above” industry’s bids and which would therefore be rejected under procedures to assure fair market value, the report said. Officials said they prefer to accept bids unless there is high certainty that the bids are inadequate, it said.

“However, GAO identified bias, or statistical anomalies, where BOEM lowered many valuations that were initially higher than industry’s bids. Specifically, from March 2000 through June 2018, BOEM rejected 27 bids for tracts that it ultimately valued at up to double industry’s bid whereas it accepted 359 bids in which industry’s bid was up to double BOEM’s valuation,” the report said.

“Tracts for rejected bids are, on average, subsequently sold for more than twice the initial rejected amount, suggesting that BOEM could be forgoing hundreds of millions of dollars in bid revenue by accepting bids that are too low,” it pointed out.

The report specifically recommended that BOEM’s director:

• Develop a documented plan for determining whether and how to develop a progressive royalty structure that clearly defines what is to be achieved, who is to achieve it, how it will be achieved, and the timeframes for achievement.
• Enlist an independent third party to examine the extent to which the bureau’s use of delayed valuations assures the receipt of [FMV] and make changes—such as terminating the use of delayed valuations or amending its model’s assumptions—as appropriate.
• Take steps to assure that BOEM’s bid valuation process is not biased toward adjusting valuations downward based on their proximity to bids.
• Implement a systematic process for comprehensively evaluating its tract valuations, such as by expanding the scope of the bureau’s “lookback studies” effort and providing remedies for any identified deficiencies.

Democrats on the US House Natural Resources Committee who requested the GAO investigation said the report found that US taxpayers have been deprived of nearly $20 billion in offshore oil and gas revenues due to the 1995 Deep Water Royalty Relief Act (DWRRA), which exempted certain offshore leaseholders from having to pay federal royalties as well as BOEM policies that consistently undervalue resources that the agency manages.

“Corporate welfare at taxpayer expense is everywhere in our economy, and we have to rip it out at the roots,” Committee Chairman Raul M. Grijalva (D-Ariz.) said. “This is not a fair or free market. This is handing out public money to special interests that don’t need them, don’t deserve them and aren’t paying their fair share. Our laws and standards need to reflect the fact that public resources are there for the benefit of the public, not for companies who don’t feel like paying for the privilege of selling them.”

“The GAO report highlights what many of us have been saying for years: The public is being shortchanged billions of dollars due to Department of Interior practices,” added Rep. Alan S. Lowenthal (D-Calif.), who chairs the committee’s Energy and Mineral Resources subcommittee. “The good news is that many of these unfair practices can easily be addressed by having the Interior Department improve [its] policies and practices, including updating the current royalty structure and the bid valuation process.”

Congress enacted the DWWRA to increase offshore bonus bid revenue to the US while providing incentives for more offshore energy production, a National Ocean Industries Association official noted. “There was no mistake in the law. The US 5th Circuit Court determined that Congress was clear and intended to provide royalty relief in order to jumpstart American oil and gas production in deep water,” said Nicolette Nye, NOIA’s vice-president of communications and member development.

“If not for the DWRRA, we likely would not be producing US 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,” Nye said. “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.”