Government Loophole Gave Oil Companies an $18 Billion Windfall

Today, thanks to the fracking boom, the United States is the largest oil producer in the world. But back in the late 1990s — when the country was heavily reliant on oil imports — the federal government wanted to boost American energy independence by encouraging more exploration in the Gulf. And since oil prices were low, Washington tried to make it worthwhile for oil companies by offering a brief reprieve on the royalties.

In 1995, Congress, working with oil executives, passed a law allowing companies that bid for new offshore leases to avoid paying the standard 12 percent royalty, or share of sales, on the oil and gas those leases eventually produced. The Interior Department leases tens of millions of acres of ocean territory to oil producers in exchange for an upfront bid for the lease, followed by royalties.

Supporters of the law argued that not only would the incentive reduce America’s dependence on foreign oil, but that it would in fact generate money for the government by prompting producers to bid higher prices for new leases.

But in what officials at the time said was an error, the law omitted a crucial clause that had been supported by both Republicans and Democrats: that if average prices for oil and gas climbed above a certain threshold, companies would be responsible for paying the royalties. In 2006, when the federal government tried to impose royalties, an oil producer sued and won.

The G.A.O. report lays out the long-lived consequences.

The report says that waiving royalties between 1996 and 2000, the final year royalty-free leases were offered, likely increased bidding for offshore leases by almost $2 billion. But forgone royalty revenue has been nine times greater, adding up to $18 billion through the end of 2018, the report found.

Because most of the leases are still producing oil, the financial benefits for oil companies will ultimately be higher, the report adds.

“This is handing out public money to special interests that don’t need them, don’t deserve them and aren’t paying their fair share,” said Raúl M. Grijalva, a Democrat from Arizona and chair of the House Natural Resources Committee. “Our laws and standards need to reflect the fact that public resources are there for the benefit of the public.”

The G.A.O. report recommends that Interior Department’s Bureau of Ocean Energy Management, which oversees offshore leases, enlist a third-party expert to assess whether government valuations of oil and gas resources is sound. The Interior Department has pushed back against some of the report’s findings and recommendations, including the need for a third-party examination.

For more news on climate and the environment, follow @NYTClimate on Twitter.