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The Congressional Budget Office (CBO) has prepared this analysis of the economic and budgetary effects of reducing royalties on oil and gas production from the deep waters of the federal offshore region at the request of the House Committee on Natural Resources. Richard Farmer of CBO's Natural Resources and Commerce Division prepared the report under the supervision of Roger Hitchner and Jan Acton. Pete Fontaine of CBO's Budget Analysis Division provided assistance on budgetary issues. The report was edited by Leah Mazade. Christian Spoor provided editorial assistance, and Donna Wood prepared the memorandum for production.  
 

SUMMARY AND INTRODUCTION

BACKGROUND

• Royalties and the Competition for Offshore Resources
• The Resource Potential of Deep Waters
• Some Arguments for Reducing Royalties on Deep Water Production

THE PROMISE OF GREATER PRODUCTION: CAN LOWER ROYALTY RATES REALLY HELP?

• The Cost Structure of the Industry and Production from Existing Leases
• The Competitive Process and Production from New Leases
• Pipeline Economics and the Boost to Shallow Water Development

POTENTIAL BUDGETARY IMPACT

• No Adverse Budgetary Impact in Most Cases
• Possible Budgetary Costs: Waivers That Do Not Add Production
• Legislation Versus Current Law: Does Anything Change?

SELECTIVE ROYALTY WAIVERS AND ECONOMIC EFFICIENCY

• An Economic Rationale for Waivers
• Economic Disincentives to Other Producers
• Efficiency Considerations in Designing Royalty Waivers

EQUITY CONSIDERATIONS
 
 

SUMMARY AND INTRODUCTION

The Congress is considering proposals that would require the Secretary of the Interior to exempt businesses from paying royalties on new production of oil and gas from parts of the federal offshore region. The House of Representatives has yet to consider any specific legislation for reducing royalty levels, but the Senate Committee on Energy and Natural Resources has approved a bill, the Outer Continental Shelf Deep Water Royalty Relief Act (S. 318). That legislation would temporarily suspend the requirement to pay royalties on new production from waters deeper than 200 meters until a business had recouped the capital costs associated with bringing the new production on line.

In this memorandum, the Congressional Budget Office (CBO) investigates the likely economic and budgetary effects of reducing royalties on oil and gas production from deep waters. The memo reviews the data on the resource potential of deep waters and some of the arguments put forth by proponents of government support for deep water development. Without considering any specific proposals for changing royalties, CBO concludes that the likely effect of lower royalty rates on the new production of offshore oil and gas would be very small. The probable budgetary impact would be negligible as well, mainly because of the constraints of the competitive process for issuing leases for offshore drilling and production rights. However, to the extent that any policy establishing different royalty rates for producers working in different regions or using different technologies succeeded in increasing activity by those producers, basic distortions in economic activity could occur that would eventually raise the cost of production for other producers.

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