The Trump administration has decided for now to reject at least one form of reprieve for the reeling oil and gas industry, declining to suspend or reduce royalty payments that companies pay to drill on federal lands and waters.
Oil industry officials familiar with the issue told the Washington Examiner that the Department of the Interior won’t be providing across-the-board relief from royalty payments despite requests from Republican lawmakers in oil-producing states and some companies.
Oil companies that drill in the U.S. Gulf of Mexico had been especially vocal in calling for reducing or temporarily waiving the payments, warning that a historic price crash could force some independent producers to permanently “shut in” their wells, or stop producing.
Producers in the Gulf of Mexico supply about 2 million barrels of oil a day, or 15% of U.S. production.
“Royalty relief would be the quickest way to help ensure that offshore energy companies, especially the service and supply companies that make it all work, are able to weather this storm and keep energy flowing,” said Erik Milito, president of the National Ocean Industries Association, in a statement Wednesday to the Washington Examiner. “There is a severe risk that many companies and thousands of workers along the Gulf Coast will disappear forever.”
The officials said the Trump administration does not want to be seen as doing anything to encourage more oil production ahead of a meeting that OPEC member nations, Russia, and other countries are holding Thursday, seeking a historic agreement to cut crude output in order to lift prices. Saudi-led OPEC and Russia, which had been engaged in a price war, want the United States to contribute to a production cut.
Dan Eberhart, CEO of the oil services firm Canary and a donor to President Trump, said the department is reluctant to undermine revenue that states receive from the federal government from royalty payments.
Nicholas Goodwin, an Interior Department spokesman, said companies could still apply for “discretionary royalty relief” on a case-by-case basis.
“Entities who believe such relief may be appropriate to promote continued energy production and development can submit an application for relief to the appropriate bureau program,” Goodwin told the Washington Examiner. Goodwin said Interior has received one preapplication letter from a company for royalty payment relief since the coronavirus pandemic began.
Oil and gas companies currently pay a royalty rate of 18.75% for drilling in deep waters in the Gulf of Mexico. The U.S. Treasury collected about $3.8 billion in royalty payments and other fees from offshore oil producers in 2019, according to the Interior Department.
The royalty rate for onshore leasing stands at the statutory minimum of 12.5%, but the Interior Department can defer payments on a short-term basis.
But a coalition of House Democrats led by Natural Resources Committee Chairman Raul Grijalva argued in a letter to the Interior Department this week that the agency cannot legally implement an across-the-board royalty payment reductions because of a 1986 decision by Interior’s appellate review body.
That decision found that Interior’s Bureau of Land Management can only cut the royalty rate on a case-by-case basis if a company can demonstrate that the cut is necessary for the site to keep operating.
