The new amendment, which will be voted on as part of a comprehensive energy bill later this year, affords the Secretary discretion in suspending the incentives. Today’s change follows a string of other modifications proposed by both the Hill and the Administration that would increase oil companies’ payments to the government, such as the Administration’s budget plan to reduce tax exemptions.
Proponents of the royalty change believe the incentives cost the government potential foregone revenue. They believe the high price of oil and gas acts as a greater inducement to drill than the royalty-free production allotment. I estimated that the government revenue loss from these mandatory royalty payments to be easily over a billion dollars a year (Note: I used to oversee the budgeting of oil and gas revenue for the federal government.)
Others such as Senator Lisa Murkowski (R-AL), who voted against the provision, believe that the mandatory incentives encourage firms to take greater risks to develop US oil and gas supplies.
Incentives remain a useful tool to encourage risk and investment in marginal producing or new areas, but their value declines as oil prices increase. Recently their use has become more of a political game and lost is the serious analysis to determine when government incentives are necessary. President George W. Bush said in 2005:
I will tell you with $55 oil we don’t need incentives to oil and gas companies to explore. There are plenty of incentives.
