What would a higher federal royalty rate mean for oil and gas leasing?

It’s not an easy question, especially in Wyoming. The answer depends how much higher the rate would be — and, of course, on who you ask.

“Everybody’s got their opinion,” Gov. Mark Gordon told the Star-Tribune during a press event on Friday. “That conversation’s gone on for 30 years.”

Just last week, Gordon said, he urged officials from the Department of the Interior, including Interior Secretary Deb Haaland, not to raise the federal royalty rate.

The oil and gas industry has expected the Biden administration to raise the federal royalty rate from the moment he took office, said Pete Obermueller, president of the Petroleum Association of Wyoming. The administration has said it will hold its first onshore lease sale — Wyoming’s first since late 2020 — in the first quarter of 2022.

Because the Bureau of Land Management (BLM) must issue a public notice and allow a month-long protest period before holding a lease sale, and the end of the first quarter is less than two months away, it’s expected to formally announce the upcoming sale in the next few weeks. The apparently accidental posting of a draft notice on the agency’s website may have given the state a glimpse of what’s to come.

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According to the since-removed notice, the royalty rate at the upcoming lease sale would be 18.75%, a substantial deviation from the 12.5% rate used by the BLM for more than a century. Comparatively, the royalty rate on Wyoming state lands is 16.67%. On private lands, it’s often higher.

Nearly half of the land in Wyoming is owned by the federal government, and the state is the No. 1 producer of natural gas and No. 2 producer of oil on federal lands, where drilling is more difficult to permit than on privately owned lands.

A 2017 analysis by the Government Accountability Office found that raising the federal royalty rate “may slightly decrease production on federal lands,” but that “the effect on production could be ‘negligible’ over 10 years if royalty rates increased to 18.75 percent.”

Obermueller isn’t so sure.

Any increase in the royalty rate “certainly makes it more expensive to do business here,” Obermueller said. “Multiple studies have shown that Wyoming is already the most expensive oil and gas state for taxes and royalties. So this just bumps it up even further, and we become less competitive.”

Gordon, meanwhile, said the prospective royalty change was an attempt to shut down the industry on federal lands.

“What’s happening as a result of these policies is not something that’s addressing climate, it is something that’s addressing energy development on public lands,” he said. “And what it’s doing is it’s moving it out of places where it’s more regulated, and more carefully thought through, to places where it isn’t at all.”

Shannon Anderson, staff attorney for the Powder River Basin Resource Council, said an extreme royalty rate hike — an increase of 30% or 40% or 50% — could have the effect Gordon described. But she said a more moderate increase, to a level more comparable to states’ royalty rates, could generate millions of dollars for the federal treasury and significantly boost Wyoming’s share of royalty revenue without driving away producers.

“The main factors always have been and always will be the price of oil and the geology,” Anderson said. “Wyoming has good geology, so we’re good there. It’s really just about the price.”

But with oil and gas producers already subject to Wyoming’s high property and severance taxes, on top of federal royalties and the complexity of permitting wells on federal lands, Obermueller believes even a moderate increase to the royalty rate will harm industry in the state.

“I think it’s pretty apparent to most business owners,” he said, “that making business more expensive makes it harder to succeed.”

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