Foreign Policy Blogs

Another day in DC, another battle lost for oil companies.

Today the Senate Energy and Natural Resources Committee voted for an amendment, as part of a comprehensive energy bill, which would give the Secretary of the Interior Department flexibility in suspending mandatory royalty payments to companies for the production of oil and gas. The incentives, originally part of the 2005 Energy Bill, allow oil companies to produce certain amount oil and gas royalty-free from specific offshore areas, including deepwater. They were designed to encourage businesses to invest in expensive technologies to develop areas that might not otherwise be profitable.

The new amendment, which will be voted on as part of a comprehensive energy bill later this year, affords the Secretary discretion in suspending the incentives. Today’s change follows a string of other modifications proposed by both the Hill and the Administration that would increase oil companies’ payments to the government, such as the Administration’s budget plan to reduce tax exemptions.

Proponents of the royalty change believe the incentives cost the government potential foregone revenue. They believe the high price of oil and gas acts as a greater inducement to drill than the royalty-free production allotment. I estimated that the government revenue loss from these mandatory royalty payments to be easily over a billion dollars a year (Note: I used to oversee the budgeting of oil and gas revenue for the federal government.)

Others such as Senator Lisa Murkowski (R-AL), who voted against the provision, believe that the mandatory incentives encourage firms to take greater risks to develop US oil and gas supplies.

Incentives remain a useful tool to encourage risk and investment in marginal producing or new areas, but their value declines as oil prices increase. Recently their use has become more of a political game and lost is the serious analysis to determine when government incentives are necessary. President George W. Bush said in 2005:

I will tell you with $55 oil we don’t need incentives to oil and gas companies to explore. There are plenty of incentives.

 

Author

David Abraham

David S Abraham has expertise in the analysis of geopolitical and economic risk as well in energy issues. At the White House Office of Management and Budget, his work included overseeing natural resource and foreign assistance programs, and serving on the interagency trade policy committee. In his previous role as a sovereign risk analyst with Lehman Brothers, subsequently, Barclays Capital, he advised the firm on geopolitical and economic risks in developing countries. He has also consulted for a variety of organizations including the United Nations Support Facility for Indonesian Recovery, RBS Sempra Commodities, ClearWater Initiative and a small German consultancy. David earned degrees from Boston College and The Fletcher School at Tufts University and proudly served as a Peace Corps Volunteer. His written work has appeared in a variety of publications, most recently in The New York Times, The Providence Journal, and CFR.org. He speaks Lithuanian and is a Term Member at the Council on Foreign Relations.

Area of Focus
Geopolitics; Economic Risk; Energy Issues

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