Trump Administration Reduces Royalty Rates in First US Oil, Gas Lease Sale

[thackney]

Trump Administration Reduces Royalty Rates in First US Oil, Gas Lease Sale
http://www.rigzone.com/news/oil_gas/a/151030/Trump_Administration_Reduces_Royalty_Rates_in_First_US_Oil_Gas_Lease_Sale
July 14, 2017

The Trump administration announced its first offshore oil and gas lease sale on Thursday, offering 76 million acres in the Gulf of Mexico and reduced royalty rates for shallow water leases to encourage drilling at a time of low oil prices.

U.S. Interior Secretary Ryan Zinke said the sale to take place on August 16 will offer leases offshore Texas, Louisiana, Mississippi, Alabama and Florida for exploration and development. The sale will be the first of the adminstration's 2017-22 National Outer Continental Shelf Oil and Gas Leasing Program.

Zinke signed an order last week to hold more lease sales and speed up approvals of permits to explore for oil and gas, a process he said got bogged down under former president Barack Obama.

Zinke told reporters on Thursday that offshore royalties returned about $18 billion to taxpayers in 2008, before Obama took office, but had dwindled to $2.6 billion last year.

He acknowledged that 2008 was an "abnormal year" because of high oil and gas prices, but he said drilling expanded on private lands where developers saw a better return on their investment and fewer regulatory hurdles.

"Some of it was oil and gas price, some of it was, the signal was clear: that we're not in the business as a government to deliver on oil and gas," Zinke said.

The Interior Department said it would lower royalty rates for shallow-water leases in the August sale to encourage drilling by oil companies, which have faced lower profits during years of sustained low global crude prices....

[Free Vulcan]

[Oceander]

More leases is good, but why lower royalty rates?

[Suppressed]

More leases is good, but why lower royalty rates?

Trump is a fan of crony capitalism.  Propping up businesses.

[Free Vulcan]

More leases is good, but why lower royalty rates?

Lower rates, greater participation, less exclusion in the market.

[Oceander]

Lower rates, greater participation, less exclusion in the market.

And less return to the federal taxpayer.  Are the lease rates above or below the market rates negotiated by private parties?

[thackney]

More leases is good, but why lower royalty rates?

Because at this time, with oil in the $40s, little to nothing is getting invested offshore.

Smaller portion of something beats larger portion of nothing.

[Free Vulcan]

And less return to the federal taxpayer.  Are the lease rates above or below the market rates negotiated by private parties?

Less profit margin so to speak, but a greater overall take.

Are the lease rates above or below the market rates negotiated by private parties?

"Energy companies will pay 12.5 percent royalty rates for leases in less than 200 metres (656 feet) of water, instead of a rate of 18.75 percent that had been proposed earlier.

"The rate change reflects this Administration's willingness to swiftly respond to economic indicators," said Vincent DeVito, counselor to Zinke on energy policy. "The 12.5 percent royalty rate is closer in harmony with the current market and federal onshore lease sales," he said."

Looks like they were brought down to private rates. I speculate producers were avoiding govt leases because they were too high, as they said that take during the Obama years dwindled from $18M to 2.6M.

[Oceander]

Less profit margin so to speak, but a greater overall take.

Looks like they were brought down to private rates. I speculate producers were avoiding govt leases because they were too high, as they said that take during the Obama years dwindled from $18M to 2.6M.

As long as the royalty rate is within spitting distance of the rates private parties would negotiate, that's acceptable. 

[thackney]

As long as the royalty rate is within spitting distance of the rates private parties would negotiate, that's acceptable.

1/8th was the normal rate for a long time.  As the shale first became into play, some of the rates went very high.  I once saw 25% in the Haynesville for Nat Gas, but that was Parish Property and there might have been other games at play.  I got 20% but on property that was never drilled.  Rates have fallen back now that the gold rush is mostly done.

[endicom]

Are the lease rates above or below the market rates negotiated by private parties?

I think the only private parties offshore are on yachts.

[IsailedawayfromFR]

And less return to the federal taxpayer.  Are the lease rates above or below the market rates negotiated by private parties?

Is that satire or are you really saying that with a straight face? 

Exactly what type of private parties do you believe exist in federal waters where the government is the only one that owns minerals?

[Oceander]

Is that satire or are you really saying that with a straight face? 

Exactly what type of private parties do you believe exist in federal waters where the government is the only one that owns minerals?

I know it's hard for people to believe, but you can use one set of transactions as a proxy for pricing another set of transactions.  Multinationals do it all the time for tax purposes.  Simple common sense says the same can be done to price these sorts of leases.

Furthermore, a competitive bidding process can be used as well to obtain a market rate royalty.

Absent some mechanism like these, the only rational conclusion to draw is that Trump is simply engaging in cronyism and giving away the store.

I'm a little shocked this is such news to so many of y'all.

[Suppressed]

I know it's hard for people to believe, but you can use one set of transactions as a proxy for pricing another set of transactions.  Multinationals do it all the time for tax purposes.  Simple common sense says the same can be done to price these sorts of leases.

Furthermore, a competitive bidding process can be used as well to obtain a market rate royalty.

Absent some mechanism like these, the only rational conclusion to draw is that Trump is simply engaging in cronyism and giving away the store.

I'm a little shocked this is such news to so many of y'all.

State and private lease royalty rates are often double this.  Yes, it's giving away the store.

[Suppressed]

@Oceander

https://www.washingtonpost.com/posteverything/wp/2015/06/16/oil-companies-are-drilling-on-public-land-for-the-price-of-a-cup-of-coffee-heres-why-that-should-change/?utm_term=.d860bf064294

http://www.newsweek.com/its-time-set-fair-price-exploiting-federal-lands-346880

[Smokin Joe]

Less profit margin so to speak, but a greater overall take.

Looks like they were brought down to private rates. I speculate producers were avoiding govt leases because they were too high, as they said that take during the Obama years dwindled from $18M to 2.6M.

12.5% (one eighth) was the common royalty rate here before the Bakken Boom, when the desperation drove royalties to 20% (and leases to over $4,000/acre in some areas, when $100 had been considered really good).  The one eighth royalty is a pretty standard onshore rate for conventional reservoirs.

[IsailedawayfromFR]

I know it's hard for people to believe, but you can use one set of transactions as a proxy for pricing another set of transactions.  Multinationals do it all the time for tax purposes.  Simple common sense says the same can be done to price these sorts of leases.

Furthermore, a competitive bidding process can be used as well to obtain a market rate royalty.

Absent some mechanism like these, the only rational conclusion to draw is that Trump is simply engaging in cronyism and giving away the store.

I'm a little shocked this is such news to so many of y'all.

The only thing I am shocked at is such a nutty way to explain the way royalties work.

I have participated in many, many ventures both domestically and internationally as an economist.

One most DEFINITELY does not do in the oil industry what you cavalierly say is "the way royalties work".

The offshore arena is quite different than any other arena of the industry. Capital costs are the largest in industry, the risks are larger, being in deep water primarily and subsea and removed from infrastructure, and the chances of success are more remote for a myriad of reasons including the spacing of wells.

Suffice it to say it is very, very difficult to make money.  And that is even if one makes a discovery that is commercial, which might be one exploration well out of ten or twenty.

The way the large upfront cost structure and delayed income exists, one must have the ability to generate enough profit once production commences, which is normally somewhere between 10 to 20 years after you begin spending money on lease seismic, exploratory drilling, etc.

There is absolutely zero chance anyone would do anything with any offshore tracts if there were high royalties present.  It would NEVER make commercial sense.

There used to be bids on royalty amounts, but from what I understand the BLM stopped that as it knew there was no way they would get bids.  It is now on bonuses and commitments.

Can you please explain your own backgrounds on this so I can compare on what experience you are coming from when you make outlandish statements?  Am assuming it is just one of ignorance.

@Oceander
@Suppressed