US seeks to link flaring to oil royalties

The US Bureau of Land Management (BLM) is considering charging a higher royalty rate for oil producers that routinely flare off large amounts of natural gas from wells drilled on federal lands.

The potential regulatory change, proposed last week, comes two months before BLM is expected to roll out new royalty and leasing policies for federal lands across the US. Drillers on those lands accounted for 11pc of US natural gas production and 5pc of oil production in the fiscal year ending in September 2014, the agency said, representing a production value of $27bn.

BLM outlined its plan to potentially charge higher royalty rates in a proposed rule that aims to limit venting and flaring of natural gas on federal lands. That rule would cap the amount of gas that an oil well operator could flare off, starting with 7.2mn cf/month and tightening to 1.8mn cf/month after three years.

But even oil producers that meet those tighter flaring limits could have to pay higher royalties under the BLM proposal. The agency in the rule asked for feedback on an "illustrative plan" in which it would charge a 16.5pc royalty rate, rather than 12.5pc, on future production if an operator of a newly drilled oil well flared off more than 0.3mn cf/month over a six-month period. The royalty rate would revert back to 12.5pc if the well reduced flaring.

This "royalty adder" could create an incentive for prospective drillers to consider the availability of natural gas infrastructure when bidding on leases, BLM said. It could also give operators of oil wells an additional incentive to capture natural gas rather than flaring it off and increasing greenhouse gas emissions.

The proposal suggests BLM is willing to use royalty rates as a way to meet the environmental objectives of the US administration. President Barack Obama on 12 January in his final State of the Union said he would try to change how the US manages coal and oil resources in an effort to speed up a transition from "dirty energy."

BLM last week said it did not anticipate increasing royalty rates above 12.5pc at this time. But the agency said if it did make that type of change, it would seek public comment and consider factors such as the royalty rate being charged on comparable state and private lands.

Environmentalists and other BLM critics have been pushing the agency to increase royalty rate so it is closer to the 16.7pc royalty rate charged by many western US states. But oil and gas producers have said lower royalty rates are justified because of the higher costs of completing the environmental reviews needed to drill on federal lands.