Cleaning Up the Royalty Mess

12/26/2006

NY Times Editorial
Published: December 26, 2006


Starting in the Clinton administration, Washington began offering generous incentives in the form of royalty relief to oil companies to encourage deep-water exploration in the Gulf of Mexico. The motives — increasing domestic production, lowering prices, reducing America’s dependence on foreign oil — were all worthy. But judging by recent reports, the whole apparatus needs a thorough review and, more than likely, a thorough overhaul.


Representative Nick Rahall, a Democrat from West Virginia and the new chairman of the House Resources Committee, has promised just such a review. It is important that it be conducted in a nonpartisan spirit, and that the program not be rejected out of hand. But the question has to be asked whether the program is really worth it.


A new report from a private consulting firm suggests that it may not be. Commissioned by the Interior Department’s Minerals Management Service, the report projects that over a 40-year period beginning in 2003, the incentive program would lead to the discovery of only 1.1 percent more oil reserves than would be found with no incentives at all. This is a tiny impact that is far exceeded by swings in market prices, which have much more to do with whether a company is willing to risk millions of dollars on what could turn out to be dry holes.


Meanwhile, the report suggests, the royalty relief program would cost the American taxpayers $48 billion over the same time frame. If all that is true, the country will certainly be getting very little for its money.


Mr. Rahall wants to address other aspects of the program as well. One is a loophole in leases signed in 1998 and 1999 that has allowed companies to escape billions in royalties that they would otherwise have paid. The other is mounting evidence, some of it from the department’s own inspector general, that the program as a whole has been marred by poor recordkeeping, spotty enforcement and other forms of bureaucratic ineptitude.


Dirk Kempthorne, the secretary of the interior, will need to show progress on these matters when he appears before Mr. Rahall’s committee. But the bigger question he has to answer is whether we need a royalty relief program in the first place.