By Michael Phillis

Law360 (October 7, 2020, 7:50 PM EDT) -- A government watchdog criticized the planning and execution of the Bureau of Land Management's coronavirus pandemic royalty relief program for oil and gas operations on federal lands, saying the agency didn't ensure help went only to those who needed it.

BLM's temporary relief program, set up to help the energy industry from mid-March to mid-June, was inconsistently applied, may have benefited operators that would have been fine without it and may have unnecessarily deprived the government of revenue, the U.S. Government Accountability Office said in a report Tuesday.

The temporary relief program was set up to help the industry when it was facing plummeting commodity prices and reduced demand from the pandemic, by cutting the royalties owed to the federal government for up to 60 days. Oil and gas producers that benefited from the program on average saw their royalty rates fall to less than 1%, while the BLM's standard minimum royalty rate is 12.5%, according to the report. 

The government's due diligence fell short in connection with the temporary relief, the GAO said. 

"BLM cannot determine the effect of its temporary royalty relief policy because the agency did not design the policy to establish in advance whether royalty relief was needed to keep oil and gas wells operating or how such relief would affect the wells' long-term production," the GAO said.

Investigators examined the five state BLM offices where the vast bulk of oil and gas production on federal lands occurs. The offices received 1,689 requests for temporary relief, 581 of which were approved. Approvals, however, occurred at vastly different rates depending on the office that administered the program, the watchdog said.

Part of the variation could be attributed to varied economic conditions in the areas of the oil and gas operations, with the office that oversees Montana and the Dakotas approving 95% of requests while the Wyoming office received far more applications and approved 28%, the report said.

But the GAO also blames inconsistent policies.

The department's guidance document didn't call for companies to show they'd have to shut down oil and gas wells if it weren't for the reduced royalties, nor that they'd have to show the wells "would ultimately lose recoverable oil and gas if they were shut down," according to the GAO.

Nor did BLM follow its manual for developing new policies, according to the GAO. Going forward, BLM should look at the impact of the relief it offered to inform ongoing relief efforts and ensure consistent implementation by updating its guidance, according to the report.

The U.S. Department of Interior provided technical comments on the report but "declined to comment on whether they concurred with our recommendations." According to the GAO, Interior must respond within 180 days "about what they intend to do with those recommendations."

In response to the report BLM spokesman Derrick Henry provided a statement that said the GAO "did not work with the department in good faith" and didn't adhere to best practices. Asking for royalty relief is lawful and had been "available to operators for decades," BLM said, adding that "no special circumstances were granted to anyone" as the government responded to COVID-19.

"The BLM state offices only approved suspension of operations and royalty rate reduction applications for up to 60 days when it was legally permissible, in the best interests of the United States, and when it would encourage the greatest ultimate recovery of our natural resources," the statement said.

Franklin Rusco, director in GAO's Natural Resources and Environment team, disagreed with the BLM's criticism. His office followed protocol, he said.

"BLM did not respond to our requests to speak with those in policy making positions. They also took two months to provide answers to simple questions posed [to] them on July 27 and only then after they saw a draft of our testimony statement," Rusco said in an email adding that those answers were incomplete. He said that GAO was still able to gather reliable information "that enabled us to characterize BLM's temporary royalty relief policy accurately and fairly."

At a House Subcommittee on Energy and Mineral Resources hearing Tuesday, Kathleen Sgamma, president of the Western Energy Alliance, provided prepared testimony on the royalty program. She defended the program, calling it minor compared to other relief the government offered to other industries at the start of the pandemic.

"Temporary royalty relief can enable a well to maintain solvency into the future. In exchange for royalty payments for years into the future, royalty relief was granted for only a few months and only by request," Sgamma's Tuesday prepared testimony said.

--Editing by Gemma Horowitz.

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