Oil and Gas Politics: Just The Nonpartisan Facts

I’ve been writing a series for Fortune in recent weeks tackling questions like, if the U.S. is now selling more petroleum products than it is buying for the first time in more than six decades, why is most of the country paying around $4 a gallon for gas? And if 30% of U.S. oil is drilled from federally owned lands and territories (read: areas owned by us, the taxpayers) why are we not being paid competitive rates for them by the oil companies? 

With the Senate recently voting down a measure to eliminate billions of subsidies for Big Oil, for those not looking to attack either Republicans or Democrats, the 1% or the 99% – just those operating on common sense – it should raise some questions.

Between 2007 and 2010, more than 70% of the increase in U.S. oil drilling took place on federal territories, representing 3.5 million barrels a day, according to the nonpartisan Congressional Research Service. Since then, oil drilling in the U.S. has climbed higher, topping 6 million barrels a day  this spring for the first time since 1999.

The appeal of drilling in the U.S. has grown in recent years, as oil companies develop new technologies to capture energy resources locked in North America that were previously seen as out of reach. Big Oil also has grown wary of the legal and financial uncertainties that often plague their drilling activities in more exotic and restive regions, such as Venezuela and Nigeria, North Africa and the Persian Gulf.

Bottom line: drillers see America as the promised land compared with the dreary alternatives, because the U.S. is by far a safer and stabler place to do business.

Oil Still Fetches 1987 Rates

Yet Americans might be shocked to learn how much the oil companies are actually paying for the privilege to drill on taxpayer-owned territories. As of this writing, the starting bid for leases on parcels of land that allow an oil company to drill for 10 years is $2 an acre. Yes, the prices can get up into the thousands during the bidding process, but more often the land is sold for next to nothing.

And it’s been that way since 1987.

It is as though oil hasn’t budged from $20, the price per barrel the same year Bon Jovi released “Slippery When Wet” (no pun intended regarding the use of ‘slippery,’ however apropos.)

According to the U.S. agency in charge of land leases, the Bureau of Land Management, there are no plans to revise the lease pricing system anytime soon. If a company succeeds in producing oil from the territory it leases, it pays Uncle Sam an annual royalty rate of 12.5%, based the amount of money it makes selling that oil on the open market. Royalty rates are set by the Secretary of the Interior and remain fixed, even when oil prices soar. (In the past, there were discussions of imposing price collars, which would have fetched more when oil prices were high, but those were swiftly tabled.)

Offshore, the royalty rate for a producing oil well is 18.75%, raised from 12.5% in 2007. The newer, higher offshore rate only applies to leases granted since 2007, which means most of the money flowing back to the U.S. Treasury still reflects the older, lower rate.

U.S. 93rd Lowest Paid In The World For Its Oil

In a study conducted by the nonpartisan Government Accountability Office in 2008 – the year that oil hit record highs near $150 a barrel – the U.S. ranked “93rd lowest of 104 oil and gas fiscal systems evaluated” on a global scale. Meaning, the U.S. excels at lowballing itself when it comes to asking Big Oil to pay for the resources it drills and sells back to us, the taxpayers, at top dollar.

Efforts to renegotiate or adjust royalties based on the past decade of oil price spikes have met with fierce resistance from the Supreme Court and Congress, despite the Government Accountability Office’s strong urging of a wholesale reassessment, noting that failure to do so could result in “billions of dollars of foregone revenue.”

In effect, this loss to Americans is like getting slapped with a third tax on top of the gas tax and subsidies to Big Oil they’re already paying.

Last year, U.S. oil royalties leapt to a record high with the uptick in drilling, but the total monies collected for both onshore and offshore activities came to only $6.3 billion. Meanwhile, ExxonMobil, which counts half its resource base in the Americas, reported 2011 earnings of more than $40 billion.

Our Last Oil Trump Card?

Last month, the Obama administration announced plans to expedite the approvals process for leasing and drilling federally owned lands by introducing an automated permitting system. The move comes as Big Oil pushes for greater access to energy-rich U.S. territories, particularly out West and in the Gulf of Mexico.

What is left unsaid is that oil majors already hold more than 76 million acres of oil and gas leases (about half onshore and half offshore), yet have neglected to explore nearly 50 million acres of it.

Why the rush to lock in still more leases, given how much land remains untouched? Perhaps it has something to do with the Bureau of Land Management’s stated interest in raising its long-depressed royalty rate of 12.5% for the first time since 1987.

Rather than rushing to appease the oil industry, President Obama may want to pull America’s trump card and force Big Oil back to the negotiating table for a rate upgrade. After all, it is no longer the 1980s. With oil companies so eager to claim the bulk of America’s energy wealth, perhaps it is finally time to share it.

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