In April, the Bureau of Land Management (BLM) issued a direct final rule reducing the minimum royalty rate for oil and gas produced on federal land allowed by regulation to 12.5%. In an economic analysis prepared for the rule (Economic Analysis), BLM speculated that reducing the royalty rate could increase total federal revenue by boosting production on federal land.
Our comment makes the following points:
- Although BLM claims that the Direct Final Rule is nondiscretionary following enactment of the One Big Beautiful Bill Act (OBBB), that Act in fact grants BLM broad discretion to set royalty rates on competitive leasing. Accordingly, BLM is not required to deviate from its preexisting regulatory royalty rate of 16.67%.
- Since BLM has discretion, it must consider all relevant factors for setting the royalty rate. Key factors—such as attaining fair market value and limiting externalities associated with federal production—counsel for royalty rates above 12.5%.
- Although reducing royalties will marginally increase production, evidence shows that this effect will be relatively minor and not make up for the direct decrease in federal royalty revenue from the lowered rate. In fact, our own analysis finds that the Direct Final Rule will decrease royalty revenues by nearly 25%.