Actions Needed to Improve BLM's Royalty Relief Policy (GAO-21-169T)
Summary
GAO testimony, GAO-21-169T, before the Subcommittee on Energy and Mineral Resources of the House Committee on Natural Resources on October 6, 2020. It is the statement of Frank Rusco, Director, Natural Resources and Environment, on federal oil and gas revenue. It describes the temporary royalty relief policy that the Bureau of Land Management (BLM) developed in spring 2020 in reaction to falling domestic oil prices due to the COVID-19 pandemic. The policy aimed to prevent oil and gas wells from being shut down in a way that could lead to permanent losses of recoverable oil and gas. Its title states that actions are needed to improve BLM's royalty relief policy.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
Full text
United States Government Accountability Office
Testimony
Before the Subcommittee on Energy
and Mineral Resources, Committee on
Natural Resources, House of
Representatives
FEDERAL OIL AND GAS
For Release on Delivery
Expected at 2:00 p.m. ET
Tuesday, October 6, 2020
REVENUE
Actions Needed to
Improve BLM’s Royalty
Relief Policy
Statement of Frank Rusco, Director,
Natural Resources and Environment
GAO-21-169T
October 6, 2020
FEDERAL OIL AND GAS REVENUE
Actions Needed to Improve BLM’s Royalty Relief
Policy
Highlights of GAO-21-169T, a testimony
before the Subcommittee on Energy and
Mineral Resources, Committee on Natural
Resources, House of Representatives
Why GAO Did This Study What GAO Found
BLM manages the federal In reaction to falling domestic oil prices due to the COVID-19 pandemic, the
government’s onshore oil and gas Bureau of Land Management (BLM) developed a temporary policy in spring 2020
program with the goals of facilitating for oil and gas royalty relief. The policy aimed to prevent oil and gas wells from
safe and responsible energy being shut down in way that could lead to permanent losses of recoverable oil
development while providing a fair and gas. During March through June 2020, BLM gave companies the opportunity
return for the American taxpayer. to apply for a reduction in the royalty rates for certain oil and gas leases on
In April 2020, oil and gas producers federal lands. BLM approved reductions from 12.5 percent of total revenue on oil
faced financial challenges from a drop and gas sold from those leases to an average of less than 1 percent for a period
in demand for oil during the COVID-19 of 60 days. However, BLM did not establish in advance that royalty relief was
pandemic. If oil and gas prices decline, needed to keep applicants’ wells operating, according to BLM officials. BLM also
it places financial stress on oil and gas did not assess the extent to which the temporary policy kept oil and gas
companies, thereby increasing companies from shutting down their wells or the amount of royalty revenues
bankruptcies and the risk of wells forgone by the federal government. By evaluating the extent to which the policy
being shut down. met BLM’s objective of preventing unrecoverable loss of oil and gas resources–
BLM developed a temporary policy to and likely costs, such as forgone revenues—BLM could better inform its
provide oil and gas companies relief decisions about granting royalty relief that provides a fair return to the
from royalties that they owe to the government, should the agency decide to consider such relief in the future.
federal government when they sell oil BLM officials told GAO that BLM state offices implementing the temporary policy
and gas produced on federal lands. for royalty relief made inconsistent decisions about approving applications for
This testimony discusses (1) BLM’s relief because the temporary policy did not supply sufficient detail to facilitate
development of the temporary policy uniform decision-making. The officials added that their state offices did not have
for royalty relief and what is known recent experience in processing applications for oil and gas royalty relief. Several
about the policy’s effects, and (2) of the officials had never received or processed royalty relief applications. In
BLM’s implementation of this policy addition, GAO found that ongoing guidance for processing royalty relief
across relevant states. To do this work, decisions—within BLM’s Fees, Rentals and Royalties Handbook, last revised in
GAO reviewed BLM documents; 1995—also does not contain sufficient instructions for approving royalty relief.
analyzed royalty data; and interviewed For example, the handbook does not address whether to approve applications in
BLM officials from headquarters and cases where the lease would continue to be uneconomic, even after royalty
the five BLM state offices with relief. As a result, some companies that applied for royalty relief were treated
jurisdiction over states that account for
differently, depending on how BLM officials in their state interpreted the policy
94 percent of royalties from oil and gas
and guidance.
production on federal lands.
In particular, officials from two state offices told GAO they denied royalty relief to
What GAO Recommends applicants because the applicants could not prove that royalty relief would enable
GAO is making two recommendations. their leases to operate profitably. However, two other state offices approved
BLM should (1) evaluate the effects of royalty relief in such cases. The fifth state office denied both of the applications it
its temporary royalty relief policy and received for other reasons. BLM’s existing royalty relief guidance did not address
use the results to inform its ongoing this issue, and BLM’s temporary policy did not supply sufficient detail to facilitate
royalty relief program, and (2) update uniform decision-making in these situations. BLM’s directives manual states that
its guidance to provide consistent BLM should provide BLM employees with authoritative instructions and
policies for royalty relief. information to implement BLM programs and support activities. Until BLM
updates the royalty relief guidance, BLM cannot ensure that future relief
decisions will be made efficiently and equitably across the states and provide a
fair return to the federal government.
View GAO-21-169T. For more information,
contact Frank Rusco at (202) 512-3841 or
ruscof@gao.gov.
United States Government Accountability Office
Letter Letter
Chairman Lowenthal, Ranking Member Gosar, and Members of the
Subcommittee:
I am pleased to be here today to discuss our work related to temporary
royalty relief that the Department of the Interior’s (Interior) Bureau of Land
Management (BLM) provided for oil and natural gas companies operating
on federal lands during the Coronavirus Disease 2019 (COVID-19)
pandemic. In spring 2020, oil and gas producers faced financial
challenges stemming from drops in commodity prices during the early
days of the pandemic. The price drops stemmed from a precipitous
decline in demand for crude oil—estimated by analysts to be about a 30-
percent reduction in global crude oil consumption—because of the
pandemic. Moreover, these price drops came when the industry was
already facing low prices because of a prepandemic oil glut in the world
market. Industry representatives said these conditions put companies at
risk of going bankrupt or shutting down their oil and gas wells, many of
which operate on federal lands.
In response, BLM developed a temporary policy to provide relief from the
royalty payments that oil and natural gas companies must make when
they sell oil and gas produced on federal lands. Royalty payments are an
important source of revenues for the federal and state governments. In
2019, the federal government collected over $8 billion in royalty revenues
for oil and gas. About half of all such federal revenues are shared with the
states in which the oil and gas is produced. 1 However, companies would
not pay such royalties if low prices caused them to shut down their oil and
gas wells or to go bankrupt. Under BLM’s temporary policy, companies
could apply for royalty relief beginning in mid-March through June 11,
2020, and they would receive the relief for 60 days from the date that
BLM approved their applications. The temporary policy, according to
BLM, is to encourage the greatest ultimate recovery of oil and gas and in
the interest of conservation of those resources.
My statement today is based on observations and analyses from our
review of (1) BLM’s development of the temporary policy for royalty relief
and what is known about the policy’s effects, and (2) BLM’s
1Indian tribes also receive royalty payments from lands held in trust and leased by the
federal government; in 2019, these produced $1 billion in revenues for tribal governments.
This testimony focuses on revenues paid to the federal government and state
governments. We did not include the effect of this policy on Indian oil and gas leases
because BLM’s policy did not apply to royalty relief for Indian oil and gas leases.
Page 1 GAO-21-169T
implementation of this policy across relevant states. To do so, we
obtained agency documentation and interviewed BLM officials about
BLM’s process for developing and implementing its temporary royalty
relief policy. We compared BLM’s temporary policy development and
implementation process with relevant laws, regulations, agency guidance,
and federal internal control standards. 2 We determined that the control
activities component of internal control—the actions management
establishes to achieve objectives and respond to risks—was significant to
our review, along with the related principles that management should
design activities to achieve objectives and respond to risks and should
implement control activities through policies. We assessed BLM’s
development and implementation of its temporary royalty relief policy
against these principles.
In addition, to assess what is known about the effects of the royalty relief
BLM granted under the temporary policy, we interviewed knowledgeable
officials from BLM, Interior’s Office of Natural Resources Revenue, an
industry association, and five state government natural resource
management offices that we selected because over 94 percent of federal
oil and gas production occurs in their states—Colorado, New Mexico,
North Dakota, Utah, and Wyoming. 3 We also obtained and analyzed data
on revenues paid by companies receiving royalty relief from the Office of
Natural Resources Revenue to estimate the potential amount of oil and
gas royalties forgone by BLM. We assessed these data for reliability and
determined the data were sufficiently reliable for the purpose of
examining the potential amount of forgone royalty revenue. 4
To further assess BLM’s implementation of its temporary royalty relief
policy, including numbers of leases for which applications were filed,
granted, or denied as a result of the policy, we examined data BLM
officials provided. We assessed these data for reliability and determined
these data were sufficiently reliable for the purpose of reporting on the
2GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
(Washington, D.C.: Sept. 10, 2014).
3The views of the officials from these state natural resource management offices are not
generalizable to those of other state natural resource management offices with whom we
did not speak.
4We determined the reliability of the data from the Office of Natural Resources Revenue
by interviewing knowledgeable officials, reviewing existing documentation about the data,
performing electronic testing on required data elements on these data, and corroborating
the results with other reports and data.
Page 2 GAO-21-169T
number of leases that had been approved for royalty relief, according to
BLM. 5 To understand the basis for BLM’s decisions about the
applications, we requested files associated with a random, non-
generalizable sample of leases from five BLM state offices. We selected
these five offices because over 94 percent of federal oil and gas
production occurs in the states within their jurisdiction—Colorado,
Montana/Dakotas, New Mexico, Utah, and Wyoming. We reviewed 31
applications that were provided in response to that request and used
those files to corroborate statements from BLM officials and make other
observations about individual applications. 6
We conducted our work for this testimony from July to October 2020 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Interior acts on behalf of the American people to manage the federal oil
Background and gas system to ensure a fair return to the federal government for the
development of oil and gas resources. BLM is responsible for overseeing
the federal government’s onshore subsurface mineral estate and
manages approximately 700 million acres of subsurface mineral rights
throughout the country, including the acreage it leases to companies for
oil and gas development. 7 According to BLM data, oil and gas operators
produced oil and gas from about 96,000 wells on about 26 million acres of
leased federal lands in fiscal year 2018.
5We determined the reliability of the data by comparing the data with other data in BLM’s
Legacy Rehost 2000 (LR2000) database and with data available from Office of Natural
Resources Revenue on royalty relief approvals.
6We reviewed the application files to determine whether they were approved or denied,
the rationale for denials, and company-provided documentation demonstrating lease
profitability.
7The Mineral Leasing Act of 1920, as amended (30 U.S.C. §§ 181, et seq.), gives Interior
responsibility for oil and gas leasing on federal and private lands where the federal
government has retained mineral rights. The Mineral Leasing Act for Acquired Lands of
1947, as amended (30 U.S.C. §§ 351, et seq.), extends that authority to lands that the
federal government acquired.
Page 3 GAO-21-169T
Under the Mineral Leasing Act of 1920, as amended, companies that
obtain federal oil and gas leases must typically pay a royalty of at least
12.5 percent of the value of the oil and gas produced under the lease. 8
BLM has recently developed procedures for assessing whether to offer
leases with rates greater than 12.5 percent if it determines the
government would better receive a fair return.
Under its regulations, BLM may also reduce the royalty on a lease to
encourage the greatest ultimate recovery of the resource and in the
interest of conservation of natural resources. The regulations require BLM
to determine that the royalty reduction is necessary to promote
development of the lease or that the lease cannot be successfully
operated under the royalty rate agreed in the terms of the lease. The
regulations also specify the process by which companies must apply for
the royalty reduction and the required contents of the application. 9
Companies owing royalties for the oil and gas produced under federal
leases make their payments to Interior’s Office of Natural Resources
Revenue, which in turn disburses 49 percent of the royalties to the states
with leases on federal land in the state; another 50 percent largely goes
to pay for such federal purposes as infrastructure projects, including
dams and power plants; and the remaining 1 percent pays for
administration. 10 States use their royalty revenue primarily to fund local
government services, such as schools. For example, in 2017, Utah
received about $54 million in federal oil and gas royalties.
From March 24 through June 11, 2020, five BLM state offices received
applications for temporary royalty relief for a total of 1,689 oil and gas
leases, according to BLM officials, and the offices approved applications
830 U.S.C. § 226(b)(1)(A), (c).
943 C.F.R. § 3103.4-1.
10Alaska receives 90 percent of royalties generated from federal lands in Alaska. Oil and
gas produced on tribal lands also generate royalty revenues, which Interior distributes to
the relevant tribes or to Individual Indian Money accounts, which Interior holds on behalf of
an individual Indian who possesses an interest in, among other things, land or mineral
resources that the federal government holds in trust.
Page 4 GAO-21-169T
for 581 of these leases. 11 The royalty rates for the leases were reduced
from the minimum BLM rate of 12.5 percent to an average of less than 1
percent for the 60 days of royalty relief that the temporary policy provided,
according to data from the Office of Natural Resources Revenue. 12 Three
BLM state offices (Montana/Dakotas, Utah, and Wyoming) approved from
28 percent to 95 percent of the royalty relief applications they received. In
contrast, the Colorado state office approved 5 percent of the applications
it received, and the New Mexico state office received two applications and
did not approve either of them. Figure 1 shows, according to the data
provided by BLM, the differences in the percentage of applications that
the five offices approved and denied for temporary royalty relief for leases
under their jurisdictions.
Figure 1: Percentages of Oil and Gas Leases on Federal Lands for Which Five BLM State Offices Approved or Denied Royalty
Relief
11According to BLM officials, the California and Eastern States BLM state offices also
received applications for temporary royalty relief; however, those two offices did not
approve relief for any of the leases under the applications, and we have excluded them
from this discussion because those BLM state offices were not within the scope of this
review.
12From March 24 through June 11, 2020, BLM reviewed and approved applications for
temporary royalty relief. Approved temporary royalty relief was, by policy, to be limited to a
period of 60 days beginning with the date the relief was approved by BLM.
Page 5 GAO-21-169T
According to BLM officials, the variation in approval rates by BLM state
offices was partly explained by the differences in the geologic and
economic conditions that oil and gas companies face in different states.
For example, oil and gas companies in some states face higher costs to
transport their oil and gas to buyers, according to a BLM state official.
Companies in other states face geologic conditions that make the product
they sell more or less expensive to produce. For example, heavier oil in
part of Utah is more costly to produce; thus, more oil and gas companies
there can show a need for royalty relief, according to a BLM official.
Conversely, in states such as New Mexico—that includes the Permian
Basin formation—oil and gas production can be more profitable because
the oil produced there may require less processing, according to BLM
state officials.
The oil and gas industry has often been associated with “boom and bust”
cycles characterized by large swings in the prices of oil and gas that
cause disruption in the industry. Oil and gas price fluctuations have been
attributed to many factors, including severe weather, strength of
economy, and imbalances in the growth of supply and demand. Oil
prices, for example, have ranged from less than $20 a barrel in January
2002 to almost $150 a barrel in July 2008. More recently, oil prices went
briefly negative in April 2020 early in the COVID-19 pandemic, to negative
$36.98 a barrel. 13 As of September 14, 2020, the price of one domestic
crude oil benchmark—West Texas Intermediate—was $37.23 per barrel.
Similarly, natural gas prices have varied widely in recent decades,
ranging from less than $3 per million British thermal units (Btu) in January
1997 to over $18 per million Btu in February 2003. 14 The price
fluctuations of oil and natural gas can pose challenges for the profitability
of oil and gas companies (see fig. 2 for U.S. price fluctuations for oil and
natural gas from 1997 to 2020).
13COVID-19 pandemic-related lockdowns across the world caused demand for oil to drop
precipitously. Negative oil prices resulted because oil companies had to pay to store their
surplus supplies of oil.
14A British thermal unit (Btu) is the amount of heat required to raise the temperature of 1
pound of water by 1 degree Fahrenheit.
Page 6 GAO-21-169T
Figure 2: Price Fluctuations in U.S. Oil and Natural Gas Prices, 1997-2020
Note: Crude oil prices are based on West Texas Intermediate, a light crude oil that is the most
commonly used benchmark in the United States. Natural gas spot prices per million British thermal
units (Btu) are based on the price at the Henry Hub, which is one of the largest gas market centers in
the United States and often serves as a benchmark for wholesale natural gas prices across the
country. A Btu is the amount of heat required to raise the temperature of 1 pound of water by 1
degree Fahrenheit.
Page 7 GAO-21-169T
GAO previously found that a temporary royalty relief program resulted in
billions of dollars in forgone revenue. 15 Specifically, in 1995, Congress
passed the Outer Continental Shelf Deep Water Royalty Relief Act, which
authorized Interior to provide royalty relief on oil and gas produced in the
deep waters of the Gulf of Mexico from certain leases issued from 1996
through 2000. 16 This royalty relief waived or reduced the amount of
royalties that companies would otherwise be obligated to pay on the initial
volumes of production from leases. It also provided royalty relief to
promote oil and gas development or to increase production from leases in
the Gulf of Mexico.
BLM cannot determine the effect of its temporary royalty relief policy
BLM’s Temporary because the agency did not design the policy to establish in advance
Royalty Relief Policy whether royalty relief was needed to keep oil and gas wells operating or
how such relief would affect the wells’ long-term production. It is not
Resulted in Unknown uncommon for companies to keep wells operating during temporary price
Benefits and Forgone drops because the companies may choose to operate at a loss until
prices recover and because there are costs associated with shutting
Revenues down and restarting wells, according to BLM state officials. Also,
companies may avoid shutting down certain oil and gas wells because
shutdowns may damage the wells’ productivity, making remaining oil and
gas resources unrecoverable. Other wells can be temporarily shut down
without damage.
However, neither BLM’s guidance for temporary royalty relief, nor its
ongoing guidance for processing royalty relief decisions—Fees, Rentals
and Royalties Handbook, last revised in 1995—nor the royalty relief
regulation, calls for companies to show evidence that they would shut
down their wells absent receiving royalty relief or that the wells would
ultimately lose recoverable oil and gas if they were shut down. 17
Consequently, BLM could not determine whether the companies that
received royalty relief under the temporary policy would have shut down
their wells without royalty relief. As a result, royalty relief may have gone
to companies that would not have shut down their wells without the relief.
15GAO, Offshore Oil and Gas: Opportunities Exist to Better Ensure a Fair Return on
Federal Resources, GAO-19-531 (Washington, D.C.: Sep 25, 2019).
16These leases are covered under Section 304 of the act, which applies to leases issued
between November 28, 1995, and November 28, 2000. The first leases were issued under
this authority in 1996. Crude oil prices averaged about $18 a barrel, and natural gas prices
averaged about $1.70 per million Btu in 1995.
17BLM, Oil and Gas Adjudication Handbook: Fees, Rentals and Royalty, BLM Manual
Handbook H-3103-1, Revised 1995 (Washington, D.C.: May 12, 1995).
Page 8 GAO-21-169T
In such cases, BLM’s temporary royalty relief cost the federal government
and states in forgone revenues but may not have had the effect of
keeping wells operating and preventing the loss of unrecoverable oil and
gas resources. As a result, the benefits of the temporary royalty relief are
unknown.
Officials we interviewed from state natural resource management
agencies in five states that collect royalties on oil and gas leases on state
lands generally concluded that granting royalty relief would not prevent oil
and gas companies from shutting down their wells. One state out of the
five granted royalty relief, lowering the royalty rate for a single gas
company from 16.7 percent to 12.5 percent. 18 In that state, further royalty
reductions were not necessary, according to the state official. As an
official from one of the states explained, unlike implementing a royalty
relief policy like BLM’s, that state has a separate program allowing
lowered royalties for certain low-producing “stripper” wells. Approving
lower royalties on such wells in particular helps ensure that the state
recovers oil and gas from wells that otherwise would be shut down
because they are not economical for companies to operate in that low-
producing stage. BLM’s temporary royalty rate policy was offered for all
wells, however, not just those with low productivity. This raises questions
about whether BLM’s temporary royalty relief policy was designed to
achieve its intended benefits.
Using data on revenues paid by oil and gas companies from the Office of
Natural Resources Revenue, we estimated forgone revenues of about
$4.5 million for May and June 2020. We consider this estimate of forgone
revenues to be conservative because it does not include forgone
revenues from leases that had not yet reported royalties for May and
June 2020. 19 This estimate also assumes that oil and gas companies
18We interviewed knowledgeable officials from five state governments that we selected
because they receive over 94 percent of shared federal oil and gas royalty payments—
Colorado, New Mexico, North Dakota, Utah, and Wyoming.
19The Office of Natural Resources Revenue provided the data reflecting these time
periods on September 23, 2020. Although operators had reported revenues to the Office
of Natural Resources Revenue for most leases through June 2020, we do not have
revenue data for some leases that may report their revenues at a later date. In addition,
the Office of Natural Resources Revenue data we used include some leases that received
royalty relief but reported revenues based on a 12.5 percent royalty rate, so these leases
may be entitled to request reimbursements in the future to account for lower royalty rates.
Page 9 GAO-21-169T
would not have decreased their leases’ production or total proceeds from
oil and gas sales without royalty relief.
When developing its temporary royalty relief policy, BLM did not follow
guidance for developing new policy contained in its directives manual,
including considering a policy’s savings and costs. 20 BLM’s directives
manual provides guidance for developing policies that are short-term in
nature and are meant to be provided to BLM employees quickly. Among
other things, the directives manual says BLM should consider the effects
of any temporary policy, including budget impact, costs, and savings,
when developing temporary policies such as the temporary royalty relief
policy.
BLM officials told us that they did not use the directives manual to
develop the agency’s temporary policy for royalty relief because of the
limited time that the agency had to develop the policy during the early
months of the agency’s response to the COVID-19 pandemic. However,
BLM’s directives manual states that emergency notifications—in this
case, the temporary royalty relief policy—should not be used to
circumvent the BLM directives system. By evaluating its temporary royalty
relief policy, including the extent to which the policy met BLM’s
objectives—preventing unrecoverable loss of oil and gas resources and
ensuring a fair return to the government—and the likely costs, such as
forgone revenues—BLM could better inform its decisions about granting
royalty relief in the future under the agency’s regulation authorizing
ongoing royalty relief.
According to BLM officials, the BLM state offices made inconsistent
BLM State Offices decisions about approving applications for temporary royalty relief
Implemented the because BLM’s temporary policy on royalty relief did not supply sufficient
detail to facilitate uniform decision-making among the offices. The officials
Temporary Royalty added that their state offices did not have recent experience in processing
Relief Policy applications for oil and gas royalty relief. Several of the officials had never
received or processed royalty relief applications; in one case, an official
Inconsistently recalled a single application 25 years prior. In addition, we found that
20BLM’s directives manual defines different types of policy directives, such as manuals,
handbooks, and instruction memorandums, the last of which can provide short-term,
temporary directions to BLM employees that must reach employees quickly. Among other
things, BLM’s directives manual is intended to ensure that all BLM policies are clear,
concise, and easy to understand. The directives manual states that emergency
notifications, such as email, fax, conference call, or other such communications, will not
be used to circumvent the BLM directives system. See BLM, Manual MS 1221: BLM
Directives (Washington, D.C.: Nov. 1, 2018).
Page 10 GAO-21-169T
BLM’s 1995 handbook for processing royalty relief decisions also does
not contain sufficient instructions for approving royalty relief. For example,
the handbook does not address whether to approve applications in cases
where the lease would continue to be uneconomic, even after royalty
relief. As a result, some companies that applied for royalty relief may
have been treated differently, depending on how BLM officials in their
state interpreted the policy and guidance.
Moreover, BLM state offices were instructed by headquarters to follow
BLM’s regulation regarding royalty relief, but the regulation and the
temporary policy differed in their requirements in some cases. For
example, the regulation requires a table of production in aggregate and
from each well for each month covering a period of not less than 6
months prior to the date of filing the application and a detailed statement
of operating costs, expenses, and income. In contrast, the temporary
policy required that companies provide a simple economic analysis table
for the leases with relevant market price for oil, productivity, operating
costs, and their royalty rate. Neither the temporary policy nor the
regulation was clear about how to meet these requirements. The
temporary policy did not specify the number of months for which this
information should be included. BLM’s 1995 handbook is even less
explicit on the types of information oil and gas companies need to provide
in order to meet the regulation’s requirements for information on
production, costs, and prices needed to approve royalty relief, according
to our analysis.
BLM developed and implemented its temporary policy quickly, to respond
to the pandemic, and changed the policy after it took effect. This posed
challenges for the state offices and sometimes led to inconsistent
application of the policy. For example:
• BLM state officials relied on an April 21 draft policy to review
applications before the temporary policy was made final and publicly
posted. This was necessary because companies started sending
applications in March, and the draft guidance was obtained and
released by the press; however, the official temporary policy was not
made available to the state offices and the public until May 7. The
state offices relied on the draft policy because they were required to
make rapid decisions in order to meet the policy’s requirement that
they approve or deny each complete application within 5 days of
receiving it.
• BLM’s temporary policy as publicly posted May 7 called for applicants
to provide an analysis showing the leases that are uneconomic at the
Page 11 GAO-21-169T
current royalty rate but would be economic with the royalty rate
reduction being requested. However, on June 5, the temporary policy
was modified—BLM headquarters removed this particular language
from the policy posted on its website. According to some BLM
officials, BLM state offices were not made aware of this change until
after it was posted on the website. This made determining whether an
application met the requirements of the policy more difficult. Further,
the officials still needed to determine whether approving the proposed
relief complied with the regulation, which allows royalty relief for
leases that “cannot be successfully operated” under the current
royalty rate.
As a result, the BLM state offices’ royalty reduction decisions were
inconsistent. According to officials from the BLM state offices, two of
the state offices denied applications because the leases would still not
be profitable, even at a lower royalty rate. We identified applications
from these two states that showed some applications were denied on
that basis. In contrast, two other state offices approved applications
showing that leases would continue to be unprofitable, even with
reduced royalties, according to officials from those offices and as
identified in some applications we reviewed. The fifth state office
denied both of the applications it received for other reasons. For
example, one application was denied because it contained outdated
oil prices. With updated prices, the lease was profitable.
• BLM ended the temporary policy on June 11, but headquarters did not
remove the publicly available information from the website until about
3 weeks later, according to BLM officials. State offices continued to
receive applications from oil and gas companies that were submitted
according to the information available on the website. BLM state
officials told us they denied applications received after the temporary
royalty relief period ended and had to explain to applicants the reason
for denials, which was seemingly at odds with the publicly available
information.
BLM’s directives manual states that BLM directives are intended to
provide BLM employees with authoritative instructions and information to
implement BLM programs and support activities. 21 According to the
manual, doing so should help ensure that responsible officials have the
necessary instructions that are sufficiently prescriptive for carrying out
BLM’s programs efficiently and consistently. Without an updated Fees,
Rentals and Royalty Handbook to provide specific, consistent,
21BLM, Manual MS 1221.
Page 12 GAO-21-169T
transparent policies and procedures for royalty relief, BLM cannot ensure
that any future royalty relief applications are processed efficiently and
equitably across states or that BLM is encouraging the greatest ultimate
recovery of oil or gas and achieving a fair return to the federal
government.
BLM initiated its temporary royalty relief policy in an effort to provide
Conclusions support for oil and gas companies in response to the COVID-19
pandemic under its ongoing authority to do so in order to conserve oil and
gas resources for future production and revenues. However, BLM did not
follow its directives manual, which called for the agency to design the
program to evaluate the policy before it went into effect, nor has BLM
determined the benefits and costs of the policy. As a result, BLM does not
know whether the temporary policy accomplished its goals of conserving
oil and gas for future recovery and encouraging the greatest ultimate
recovery of oil and gas, as well as BLM’s additional objective for its oil
and gas program of ensuring the government gets a fair return from
allowing companies to use its resources. Nor does BLM know how much
the temporary royalty relief cost in terms of unnecessarily forgone royalty
revenues. BLM officials had some resources to help inform their decisions
on whether to approve royalty relief—the temporary policy itself, the
royalty relief regulation, and the 1995 handbook. However, these
resources did not have sufficient information to guide the state officials in
providing royalty relief consistently across the states or within the short
time frames called for by BLM’s temporary policy. The agency has an
opportunity to make the handbook’s royalty relief guidance more specific,
using its experiences during the COVID-19 pandemic, and in accordance
with its directive for developing policy that is clear, concise, and easy for
staff to implement consistently. In doing so, BLM could better ensure that
any future applications for oil and gas royalty relief are processed more
efficiently, consistently, and with a better understanding of the expected
benefits and forgone revenues to the federal government and the state
governments with which it shares royalty revenues.
We are making the following two recommendations to BLM:
Recommendations for
Executive Action The Director of BLM should evaluate its temporary royalty relief program,
including the extent to which the policy met BLM’s objectives—conserving
oil and gas resources from becoming unrecoverable—and likely costs,
such as forgone revenues—to inform any royalty relief decisions it may
make in the future under the ongoing regulatory authority.
(Recommendation 1)
Page 13 GAO-21-169T
The Director of BLM should update BLM’s 1995 royalty handbook to
provide specific, consistent, and transparent policies and procedures for
royalty relief. (Recommendation 2)
We requested comments on the contents of this statement, including our
Agency Comments recommendations, from Interior. In comments provided by email, Interior
declined to comment on whether they concurred with our
recommendations. Interior provided technical comments, which we
incorporated as appropriate.
Chairman Lowenthal, Ranking Member Gosar, and Members of the
Subcommittee, this completes my prepared statement. I would be
pleased to respond to any questions that you may have at this time.
If you or your staff members have any questions concerning this
GAO Contact and testimony, please contact Frank Rusco, Director, Natural Resources and
Staff Environment, at (202) 512-3841 or ruscof@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
Acknowledgments on the last page of this statement.
GAO staff who made key contributions to this testimony are Karla
Springer (Assistant Director), Lee Carroll (Analyst-in-Charge), Glenn
Fischer, Wil Gerard, Cindy Gilbert, Michael Kendix, Gwen Kirby, Jessica
Lewis, Joe Maher, Dustin Milne, Susan Murphy, Dan Royer, and Jerry
Sandau. Other significant contributors include Natalie Block, Justin
Fisher, Robert Grace, Jesse Lamarre-Vincent, Zoe Need, Cynthia Norris,
Josie Ostrander, and Maria Stattel.
(104554)
Page 14 GAO-21-169T
This is a work of the U.S. government and is not subject to copyright protection in the
United States. The published product may be reproduced and distributed in its entirety
without further permission from GAO. However, because this work may contain
copyrighted images or other material, permission from the copyright holder may be
necessary if you wish to reproduce this material separately.
The Government Accountability Office, the audit, evaluation, and investigative
GAO’s Mission arm of Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability of the
federal government for the American people. GAO examines the use of public
funds; evaluates federal programs and policies; and provides analyses,
recommendations, and other assistance to help Congress make informed
oversight, policy, and funding decisions. GAO’s commitment to good government
is reflected in its core values of accountability, integrity, and reliability.
The fastest and easiest way to obtain copies of GAO documents at no cost is
Obtaining Copies of through our website. Each weekday afternoon, GAO posts on its website newly
GAO Reports and released reports, testimony, and correspondence. You can also subscribe to
GAO’s email updates to receive notification of newly posted products.
Testimony
Order by Phone The price of each GAO publication reflects GAO’s actual cost of production and
distribution and depends on the number of pages in the publication and whether
the publication is printed in color or black and white. Pricing and ordering
information is posted on GAO’s website, https://www.gao.gov/ordering.htm.
Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537.
Orders may be paid for using American Express, Discover Card, MasterCard,
Visa, check, or money order. Call for additional information.
Connect with GAO on Facebook, Flickr, Twitter, and YouTube.
Connect with GAO Subscribe to our RSS Feeds or Email Updates. Listen to our Podcasts.
Visit GAO on the web at https://www.gao.gov.
Contact FraudNet:
To Report Fraud,
Website: https://www.gao.gov/fraudnet/fraudnet.htm
Waste, and Abuse in
Automated answering system: (800) 424-5454 or (202) 512-7700
Federal Programs
Orice Williams Brown, Managing Director, WilliamsO@gao.gov, (202) 512-4400,
Congressional U.S. Government Accountability Office, 441 G Street NW, Room 7125,
Relations Washington, DC 20548
Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800
Public Affairs U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, DC 20548
James-Christian Blockwood, Managing Director, spel@gao.gov, (202) 512-4707
Strategic Planning and U.S. Government Accountability Office, 441 G Street NW, Room 7814,
External Liaison Washington, DC 20548
Please Print on Recycled Paper.
File and source
- File
- gao-21-169t.pdf
- Size
- 319,134 bytes
- SHA-256
- a9f2cddda118558030a81a20bf1b215aa354b9dbf67064e6825b5d88884b6ede
- Our copy
- gao-21-169t.pdf
- Original
- www.gao.gov