The Benefits of Royalty Relief

Jane Van Ryan
Posted April 21, 2010

Two new studies commissioned by API illustrate the benefits of the 1995 Deep Water Royalty Relief Act. As we explained on Monday, the act purposefully created financial incentives for drilling in the deep waters of the Gulf of Mexico, and it led to new technologies and huge investments in the production of domestic oil and natural gas.

As API's Erik Milito explains, "While this Act was primarily intended to encourage oil production at a time when the nation was in desperate need of new oil supplies, these studies show that they were also a boon to U.S. taxpayers and great stimulus to the nation's economy."

The study by Advance Resources International (ARI) examined the deep water leases purchased by oil and natural gas companies between 1996 and 2000. It found that 3,391 deep water leases were awarded during that time, producing payments of $3.1 billion to the U.S. government. ARI also determined that companies spent $37.4 billion to develop the wells. The result: more than 400 million barrels of oil and over 3 trillion cubic feet of natural gas were produced, and the companies paid more than $5 billion taxes.

The study by IHS Global Insight found that real gross domestic product (GDP) increased by an average of $4.5 billion per year as a result of royalty relief on the deep water leases, and employment increased by 91,000 jobs in 2005.

Despite the Act's success, some members of Congress are seeking to renege on the royalty-relief lease contracts. They are proposing to block companies with these leases from competing for future leases unless they agree to pay royalties that were waived under the 1995 statute.

The courts have ruled that the Act was clear - the royalties were waived. As Erik puts it, "[T]hose who would require the companies that took Congress at its word to now pay royalties retroactively are engaging in a dangerous game of bait-and-switch--and destroying domestic jobs."