Feds cut oil and gas royalties in a move that could hurt Utah’s local governments

(Brian Maffly | Tribune file photo) To blunt the financial impact of the coronavirus pandemic on the oil and gas industry, the Bureau of Land Management is granting royalty reductions to many Utah producers, including Kirkwood Oil and Gas, which operates this well near Dead Horse Point State Park.

The Bureau of Land Management has begun lowering royalties owed by companies that produce oil and gas on public lands, including tens of thousands of acres in Utah, to ease the financial strains created by the coronavirus pandemic.

Forbearance on royalties may relieve the pain felt by the industry and keep some noneconomic wells in production, but it could drastically reduce a key revenue source for local governments at a time when the services they provide are being stretched in the face of a public health crisis.

After oil prices dipped to historic lows last month, Utah producers were losing money on every barrel they extracted. Many considered closing off wells to slow output, and the Utah Petroleum Association pleaded for relief from some regulations.

In response to the collapse, the BLM issued interim guidelines for lowering the standard 12.5% royalty on the dollar amount for which the oil and gas sell. These proceeds are evenly shared with the host state and are largely used to support local governments in rural counties. The federal agency has also invited companies to seek suspensions on their nonproducing leases, which stops the clock on their 10-year terms, giving the leaseholders more time to develop them.

“Because of the pandemic, operators are not able to maintain sufficient employees at drilling sites to allow for continuing drilling operations,” states an April 21 memo the BLM issued to explain the new royalty reduction guidelines. “As a result of these considerations, many operators are not able to operate wells economically or as a practical matter and may find it necessary to simply plug and abandon a significant number of producing wells unless they receive financial relief.”

Several Utah producers did not hesitate to apply for royalty relief. So far, the BLM has granted royalty reductions on 77 leases covering about 110,270 acres in Utah, according to an agency database. The cuts are in effect for 60 days.

Western Values Project, a Montana-based conservation advocacy group, and other organizations are concerned that the royalty reductions, now covering about 10% of the BLM acreage in production in Utah, are being awarded with little transparency and inadequate consultation with state and local officials.

“Local government is reeling from all these other expenses. It [royalties] funds our first responders; it funds our teachers,” Western Values Project director Jayson O’Neill said. “There’s no promise from the federal government to make them whole.”

Bad timing?

The Trump administration’s royalty cuts also took flak from the other side of the political spectrum.

“Not only does this boneheaded move shortchange American taxpayers and Western states at the worst possible time, it incentivizes oil production during the worst oil glut in history. That is the absolute last thing the market needs right now,” said David Jenkins, president of Conservatives for Responsible Stewardship. “This is just another stark example of this administration’s bumbling pandemic response, one that is fiscally irresponsible and tone deaf to the most basic market principles."

Meanwhile, oil prices rebounded this week as Americans returned to the roads with the easing of some lockdown measures, prompting President Donald Trump to announce on Twitter that “OIL (ENERGY) IS BACK!!!!”

BLM officials say the royalty relief is being offered in accordance with laws and regulations that have been on the books for decades. The state offices are approving suspension of operations and royalty rate reduction applications only when it is in “the best interest of conservation to do so or when it would encourage the greatest ultimate recovery of our natural resources,” according to a statement provided by the BLM’s national press office.

“Numerous organizations, stakeholders and elected officials asked for blanket relief, and we have maintained our position of following current practices and providing guidance in how producers would apply within existing regulations," the statement said. "No special circumstances have been granted. These long-standing processes help ensure America has a stable long-term energy supply and provide long-term value to American taxpayers.”

In 2017, Utah reaped about $54 million in federal oil and gas royalties, according to Headwaters Economics. That yield is expected to plunge this year because of slumping oil prices induced by the pandemic, which in turn has slowed production.

But with royalties getting cut to as low as a fifth the normal rate, those revenues could slow to a trickle for Utah’s rural hydrocarbon-producing counties. State officials are still evaluating the royalty reductions, but Gov. Gary Herbert’s Office of Energy Development suspects the relief could prevent even deeper losses by propping up production.

“We recognize how important those revenues are to local government, but we want to make sure there is a pathway for these industries to be successful,” said Robert Simmons, the office’s executive director. “The only time we would support royalty reductions is if it increases those revenues.”

The BLM's royalty-reduction guidance does not apply to federal leases on tribal lands. Requests for royalty relief for producers operating on the Ute and Navajo reservations are to processed by the Bureau of Indian Affairs, also part of the Interior Department.

State land managers are also granting relief, but they are not going as far as the feds.

In an interim policy adopted last week, the Utah School and Institutional Trust Lands Administration granted a 180-day period retroactive to May 1 in which lessees won’t see penalties for closing off wells, postponing drilling or failing to pay rents or pay royalty minimum royalty obligations on time. The Uinta Basin’s waxy crude saw a 87% drop in its market price last month, according to Wes Adams, who heads SITLA’s oil and gas program.

“That’s not economical for producers. They are going to be really strapped to keep these wells on line,” Adams told the trust lands board at its meeting last week. “We don’t want to put our lessees in a position where they can’t produce oil and then pull the rug out and terminate their lease unduly.”

When the crisis passes, however, the SITLA lessees will be expected to resume production and pay royalties, which are normally set at 16.67%.

“This gives the the lessees the time they need," SITLA Executive Director David Ure said, “to strategize and determine when they are going to sell their oil.”

How to qualify

To qualify for federal royalty relief, a lease operator needs to show the BLM that its production would be profitable were it not for the pandemic; provide a “simple economic analysis table” of the noneconomic leases, showing the relevant oil price, production capability and operating costs; and the requested royalty reduction.

Once the BLM grants the relief, it remains in effect for up to one year before reverting to 12.5%, unless the agency moves to extend it, according to the memo.

The Interior Department, meanwhile, is demonstrating no such largess to the solar and wind industries, which also experiencing their own economic meltdown and massive job losses. In fact, the Trump administration is demanding more than a year’s worth of back rent from companies that have sited turbines and photovoltaics on public lands, Reuters reported.

Nearly all of Utah’s wind and solar installations occur on private or state land, so the rent payments won’t apply to them. Elsewhere in the Southwest, the BLM administers dozens of large projects subject to federal rents.

Near the end of Barack Obama’s presidency, these rents were substantially raised, but under Trump those increases were suspended in 2018 while the Interior Department reviewed whether such hikes were warranted. Then, without warning last month, operators began receiving notifications from the BLM that the rents were being reset to the prior levels and back rent is now due, according to the Reuters report.

This move has observers wondering why the Interior Department would grant relief to one energy industry, while clawing it back from another.

According to an analysis of federal data by the Western Values Project, Utah operators so far winning royalty relief include Kirkwood Oil and Nerd Gas, which jointly own numerous leases around Moab; QEP Energy; Lonesome Oil & Gas; Cross Timbers Energy; Cockrell Oil & Gas; EOG Resources; CH4 Energy; FRI Utah; and Finley Resources.

Not on that list, however, are many of Utah’s top producers such as Newfield Production and EP Energy companies. It’s likely the BLM’s Utah office is still processing many royalty reduction requests that have yet to show up in the database.