Royalty Revenues: Total Revenues Have Not Increased at the Same Pace as Rising Oil and Natural Gas Prices due to Decreasing Production Sold Page: 3 of 15
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include natural gas or oil production that is subject to royalty relief. Legislation and
regulations exempt some production from certain leases in the Gulf of Mexico from
royalties, and therefore these production volumes do not appear in the royalty
revenue statistics.2 Although the volumes subject to royalty relief were small, they
are expected to grow in the future. We have ongoing work and plan a future report
on royalty-relief policies and MMS efforts to estimate the impact of royalty relief on
future royalty revenues. We coordinated and worked with the Department of the
Interior's Office of Inspector General on this review. A detailed description of our
methodology appears in enclosure I. We conducted our review from February
through April 2006 in accordance with generally accepted government auditing
Falling Natural Gas Production Volumes Have Largely Offset Rising Natural
As summarized in table 1, decreases in the volume of natural gas produced and sold
between 2001 and 2005 have largely offset the impact of increased sales prices on
total royalty revenues. Natural gas production volumes from federal and Native
American lands decreased because of natural declines in older wells. In addition,
hurricanes in 2005 contributed to a decline in natural gas production volumes by
forcing companies to temporarily suspend natural gas production from wells in the
Gulf of Mexico. Finally, the volume of gas upon which royalties are based in a given
year is decreased by the amount of gas that is exempt from paying royalties under
federal royalty-relief provisions. Natural gas volumes subject to royalty relief did
grow between 2001 and 2005. In 2001, MMS reported about 5 billion cubic feet of
natural gas were exempt from royalties under royalty-relief provisions. In 2005, MMS
reported that these volumes increased to over 246 billion cubic feet of natural gas,
with a total estimated royalty value of about $226 million. Volumes of natural gas
subject to royalty relief are expected to grow in the future. We have ongoing work to
examine royalty-relief policies and efforts to estimate the impact of royalty relief on
future royalty revenues.
In addition to reduced production volumes, the average royalty rates on natural gas
production from federal and Native American lands decreased from 2001 to 2005,
contributing to the drop in royalty revenues. Royalty rates can vary depending on
where the natural gas is produced. In general, average royalty rates for natural gas
have decreased as production has declined in areas with higher royalty rates (such as
shallow waters in the Gulf of Mexico where the royalty rate is 16.67 percent) and
increased in areas with lower royalty rates (such as deep waters in the Gulf of Mexico
where the royalty rate is 12.5 percent). Because the comparison of royalty revenues
between years does not include production that is subject to royalty relief, the
average royalty rate is not affected by production that is subject to royalty relief.
From fiscal years 2001 to 2005, total natural gas royalty revenues from federal and
Native American lands increased by about $242 million (see table 1). We estimate
that the rise in natural gas prices between 2001 and 2005 would have increased
2Certain leases issued in 1998 and 1999 did not contain price thresholds, resulting in additional royalty-
free volumes which do not appear in the royalty revenue statistics.
GAO-06-786R Royalty Revenues
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United States. Government Accountability Office. Royalty Revenues: Total Revenues Have Not Increased at the Same Pace as Rising Oil and Natural Gas Prices due to Decreasing Production Sold, text, June 21, 2006; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc298362/m1/3/: accessed November 16, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.