This story has been updated from Dec. 14 to reflect U.S. Interior Secretary Ryan Zinke's intent to review the royalty rates.
Interior Secretary Ryan Zinke is establishing the Royalty Policy Committee to re-evaluate the royalty rates, which could lead to energy companies paying a higher rate for resources extracted from federal land -- a move that would be beneficial to taxpayers.
"We're going to re-evaluate royalty rates across the board ... I want to make sure the taxpayer gets value out of it," Zinke told Bloomberg in an interview. The review will look at rates for traditional fossil fuels as well as renewables.
The committee has an initial charter of two years, said Heather Swift, press secretary for the Department of the Interior, and will be formally authorized Wednesday.
With this committee, Secretary Zinke and President Trump have an opportunity to generate hundreds of millions of dollars for taxpayers through the federal oil and gas royalty, which the Department of the Interior (DOI) regulates through the Bureau of Land Management (BLM) and the Bureau of Ocean Energy Management (BOEM).
"Trump does have an opportunity to get a much better deal for the American public by raising the royalty rate," Nicole Gentile, Deputy Director of Public Lands for the Center for American Progress, said in a phone interview with TheStreet. "It remains to be seen whether he will do that."
Currently, there are 12.76 million producing acres on federal lands, according to the BLM, which marks the most amount of acreage since 2009. Only 810,068 acres were leased during fiscal year 2015, so there is plenty of land open for oil and gas producers to use.
Raising the royalty rate, however, would directly oppose Trump's campaign promise to open "onshore and offshore leasing on federal lands and waters" for the production of fossil fuels.
A way to open up federal lands would be to cut the federal oil and gas royalty rate, which Zinke could propose, although it is unlikely. While corporations would enjoy paying the government a lower rate, it would not be in the best interest for taxpayers, the people who elected Trump. An increase in royalties would likely provide a bigger benefit to Americans -- something that several presidential administrations have unsuccessfully tried to do.
The federal oil and gas onshore royalty rate has remained at 12.5% since it was established in the Mineral Leasing Act of 1920. At that time, Standard Oil had been recently ruled an illegal monopoly and Henry Ford's Model T vehicles were still on the road as the Model A was still several years away. Yet, the rate has stayed the same despite changes in currency inflation and technological advances that make oil and gas production cheaper and more efficient than it was nearly a century ago.
Because the federal oil and gas royalty rate has held steady at 12.5%, even as state royalty rates and offshore royalty rates have increased, American taxpayers are losing out on $490 million to $730 million in revenue annually, according to the Center for Western Priorities' June 2015 report. (Those revenues would be achieved through royalty rates of either 16.67% or 18.75%, the typical royalty rates for oil and gas producing Western U.S. states.)
A review by the U.S. Government Accountability Offices (GAO) in 2007 revealed the U.S. federal government has one of the lowest royalty rates in the world.
"Collectively, the results of five studies presented in 2006 by various private sector entities show that the United States receives a lower government take from the production of oil in the Gulf of Mexico than do states -- such as Colorado, Wyoming, Texas, Oklahoma, California, and Louisiana -- and many foreign governments," the agency said in its report.
In the 2007 report, the GAO outlined the impacts of adjusting the federal royalty rates:
"Increasing royalty rates on future federal oil and gas leases would likely increase the federal government take but by less than the percentage increase in the royalty rate because higher royalty rates would likely reduce some taxes and other fees and may also discourage some development and production," the GAO wrote.
Meanwhile, a lower royalty rate "can encourage oil companies to pursue oil exploration and production and thereby provide an economic stimulus to oil producing regions," the GAO added.
There have been discussions about increasing the royalty rate for a long time, says Jeremy Kennedy, a partner at law firm Baker Botts.
"Talk gets a lot louder when the commodity price is much higher," Kennedy says. "With still a relatively soft commodity price, it's more difficult for the [reform royalty rate] movement to get traction." Kennedy also suggests that increasing the minimum bid amount and rental payments would be other ways to raise revenue.
But the oil industry fights back every time there's talk of raising the rates, says Greg Zimmerman with the Center for Western Priorities. Keeping the onshore royalty rates low "probably speaks to the power of the oil industry's lobby," Zimmerman says.
The Obama administration signaled the need for reformed royalty rates in April 2015. Interior Secretary Sally Jewell issued an Advanced Notice of Proposed Rulemaking so that the BLM could accept ideas on how to amend the royalty rates. Yet, the rate is still the same.
While the onshore royalty rate remains unchanged, the BOEM increased the U.S. offshore royalty rate to 18.75% under President George W. Bush.
Furthermore, even though the GAO suggests lower royalty rates could encourage production, the recent actions of oil and gas companies do not support that claim. Texas, which has a state royalty rate of 25% -- more than double the rate of the federal government -- has seen an influx of producers in its Permian region in recent years.
"The tight oil transformation has propelled the Permian into the world's hottest new hunting ground over the last couple of years," Barclays analyst Paul Cheng wrote in a Dec. 7 note.
Oil production in the lucrative west Texas region has more than doubled in the past decade, up 175% to 2,207,000 barrels a day, according to the U.S. Energy Information Administration. Clearly, producers aren't turning away from these oil-rich lands because of the higher royalty rate.
Employees of TheStreet are restricted from trading individual securities.