U.S. looking at "variable" oil, natgas royalties

WASHINGTON Tue Sep 8, 2009 7:14pm EDT

U.S. Interior Secretary Ken Salazar sits for an interview as part of the Reuters Global Climate and Alternative Energy Summit in Washington, September 8, 2009. REUTERS/Stelios Varias

U.S. Interior Secretary Ken Salazar sits for an interview as part of the Reuters Global Climate and Alternative Energy Summit in Washington, September 8, 2009.

Credit: Reuters/Stelios Varias

WASHINGTON (Reuters) - The Obama administration is considering charging oil companies "variable" royalty rates for drilling on federal lands that would reflect the difficulty in finding oil and natural gas supplies, U.S. Interior Secretary Ken Salazar said on Tuesday.

To ensure oil companies pay reasonable rates as oil prices rise, the Interior Department plans to issue proposals to update royalty rates by the end of the year, Salazar said at the Reuters Global Climate and Alternative Energy Summit.

Companies now pay a royalty rate ranging from 12.5 percent for onshore drilling to 18.75 percent of the value of the oil and gas they drill on leased offshore tracts.

Salazar said one of the options the department was looking at was whether to create so-called "variable" royalty rates.

Under that approach, rates would be higher for those oil and gas fields that were easy for companies to find and when companies had information in advance about where reserves were likely to be located, Salazar said.

In contrast, he said royalty rates would be lower for oil and gas exploration that was more similar to "wildcatting," where a company drills in areas where oil and gas is not normally found and a company usually drills a dry hole instead of hitting it big.

"We are taking a look at that to see what makes sense in getting a fair return for taxpayers," he said.

Separately, Salazar said the department is looking at whether to continue with the government's royalty-in-kind program, where companies turn over a portion of the oil or gas they drill on federal leases instead of paying cash royalties.

"We're taking a very hard look at that question," he said.

Salazar said he was also looking at reorganizing the department's Minerals Management Service and Bureau of Land Management, which collects royalties and issues drilling leases.

(Editing by Christian Wiessner)

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