About Oil Subsidies and Royalties

The Big Picture

America can reduce our dependence on oil, protect the environment and create jobs by investing in the clean energy solutions of the future. Unfortunately, federal dollars continue to flow toward the same oil companies who are earning record profits and fueling our oil addiction. According to an analysis produced by Friends of the Earth, oil companies are slated to receive more than $31.6 billion in handouts from taxpayers over the next five years. This figure includes tax benefits, royalty relief, research and development subsidies and accounting gimmicks which benefit the oil industry. It could dramatically increase over the next 25 years if current tax breaks are extended and if an estimated loss of up to $60 billion in royalty revenue from offshore drilling occurs. Congress should act immediately to end these giveaways to the oil and gas industry.

Big oil companies are swimming in a sea of record-breaking profits while American consumers and taxpayers pay the price. In 2005, the world's biggest oil companies reported a combined $111 billion in profits. In the first three quarters of 2006 they reported more than $94 billion¹:

Company	2005 Profits	% increase from 2004	1st 9 months of 2006 Profits	% increase from 2005
ExxonMobil	$36.1 billion	43 %	$29.3 billion	15 %
Royal Dutch Shell	$25.3 billion	37 %	$20.2 billion	-4 %
BP	$22.3 billion	30 %	$19.1 billion	3 %
ConocoPhillips	$13.5 billion	66 %	$12.4 billion	25 %
Chevron Texaco	$14.1 billion	6 %	$13.4 billion	34 %
Total	$111.3 billion		$94.4 billion

Royalty Relief and the Gulf of Mexico "Clerical Error"

Typically, when oil and gas companies drill on public lands or in federally controlled waters such as the Gulf of Mexico, the companies pay a royalty or fee on the oil and gas they extract. For offshore extraction, the royalty rate varies between 12 and 16 percent for the oil. Oil and gas royalty payments are the second largest source of government revenue next to taxes, bringing in approximately $9 billion in annual revenues which historically provided needed funding to the Land and Water Conservation Fund, the Historic Preservation Trust Fund, the oil-producing states and the general treasury.

Royalty relief is the term used to describe when oil and gas companies are allowed to forego royalty payments on the oil they produce from federally controlled lands and waters. Royalty relief is traditionally given when market conditions, such as low prices, are not high enough to stimulate new production, or such as the case of deep-water production in the Gulf of Mexico, new drilling is deemed cost prohibitive and risky.

Big oil and gas companies are cheating Americans out of billions, failing to pay their fair share of royalties for the oil and gas they extract and sell from the deep waters in the Gulf of Mexico. According to the Department of the Interior, oil and gas companies will avoid paying royalties on more than $65 billion worth of revenues over the next five years, costing the federal government approximately $9.5 billion over that period² According to a draft report by the General Accountability Office, losses to the treasury over 25 years could reach a staggering $20 billion. And if the oil industry is successful in a recent legal challenge, these losses could balloon to $80 The billion over the same period.³

Oil and gas companies typically pay a 12 to 16 percent royalty on oil and gas they extract from federally owned waters. The royalties provide needed funding to the Land and Water Conservation Fund, the Historic Preservation Trust Fund, the oil-producing states and the general treasury.

In order to spur domestic production when oil and gas prices were at an all-time low, Congress in 1995 passed the Deep Water Royalty Relief Act of 1995, which granted royalty relief to oil and gas companies drilling in deep waters for leases sold between 1996 and 2000.⁴

The law placed several limits on the royalty relief. First, it limited royalty relief to a set volume of production from a lease: 17.5 million barrels from depths of 200 to 400 meters, 52.5 million barrels from depths of 400-800 meters, and 87.5 million barrels from depths greater than 800 meters. More importantly, it authorized the Interior Department to set price thresholds when awarding offshore drilling leases, to ensure that royalty relief would end when oil and gas prices rose above a certain amount. But In 1998 and 1999, the Interior Department awarded leases for offshore drilling that didn't include price thresholds. Production from these leases is just now coming on line.

With oil and natural gas prices at all-time highs, oil and gas companies drilling in the Gulf are expected to earn more than $65 billion over the next five years, royalty-free. According to the Minerals Management Service budget, these leases will produce 298 million barrels of oil and 7 trillion cubic feet of natural gas.

The Interior Department concluded that taxpayers will lose out on $9.5 billion in royalties that oil companies should be paying over the next five years. More recently, the GAO concluded in a draft report that taxpayers could lose out on at least $20 billion over the next 25 years. Roughly half the cost is attributed to the lack of price thresholds in the 1998 and 1999 leases. The other half is attributed to a 2003 legal victory by oil companies which greatly expanded the amount of royalty-free oil and gas they could produce.

Worse, the oil industry is actually demanding that taxpayers refund billions in already-paid royalties. Not content with the billions in royalty-free profits it stands to make from the 1998 and 1999 leases, the industry is challenging the authority of MMS under the 1995 law to include price thresholds in leases awarded in 1996, 1997 and 2000.

On March 21, 2006 Kerr-McGee filed suit against the Interior Department, arguing that the oil industry should be exempt from paying as much as $28 billion over the next five years—and that the government should refund more than half a billion in royalties that oil companies have already paid. If the legal challenge led by Kerr-McGee is successful, the GAO estimates that taxpayers could lose out on as much as $60 billion over 25 years—bringing total losses from industry's royalty rip-off to $80 billion.

The Clean Energy Act of 2007 (H.R. 6)

On Friday, January 12th, 2007 a bill was introduced in the U.S. House of Representatives that will invest in clean, renewable energy and energy efficiency using funds obtained by repealing billions in subsidies given to big oil companies. Here's a brief summary of the funds the bill will seek to recover and reinvest:

Recover billions in unpaid royalties from offshore oil and gas drilling. Leases issued in 1998 and 1999 mistakenly omitted limits on royalty relief, allowing companies to drill in without paying any royalties—no matter how high the price of oil. By giving companies a choice between voluntarily renegotiating the leases, paying a "conservation fee" on production or being barred from bidding on future drilling leases, the bill provides a strong incentive for these companies to accept the market-based limits on royalty relief that Congress always intended.

Repeal additional royalty relief. The bill would prevent additional future losses to the Treasury by repealing four provisions in EPAct that authorized royalty relief on future production.

Repeal two tax breaks for major oil companies. The bill would prevent major oil companies such as ExxonMobil from claiming a tax break for "geological and geophysical" expenditures enacted in EPAct. It would also remove a tax benefit from the Jobs Act of 2005 that lowers the income tax rate paid by oil companies by reclassifying oil and gas production as a manufactured good.

For more on how these funds should be reinvested read our page on Reinvesting in Clean Energy.

Read the full text of H.R. 6.

1: http://www.exxonmobil.com, http://www.shell.com, http://www.bp.com, http://conocophillips.com, http://www.chevron.com
2: http://www.mms.gov/PDFs/2007Budget/FY2007BudgetJustification.pdf
3: http://www.nytimes.com/packages/pdf/business/29lease.pdf
4: P.L. 104-58