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First Biden oil and gas auction, to be held in June, shows emphasis on reducing GHG emissions

22 April 2022 Kevin Adler

The US Department of Interior (Interior) announced the details of its first oil and gas lease auction under the Biden administration on 18 April—making almost nobody happy in the process.

Issued under new Interior rules, the plan for the June auction cements the government's intentions of bring GHG emissions into the mainstream of permitting for new oil and gas leases on federal land.

"For too long, the federal oil and gas leasing programs have prioritized the wants of extractive industries above local communities, the natural environment, the impact on our air and water, the needs of Tribal Nations, and, moreover, other uses of our shared public lands," said Interior Secretary Deb Haaland in a statement. "Today, we begin to reset how and what we consider to be the highest and best use of Americans' resources for the benefit of all current and future generations."

From the point of view of oil and gas producers, the acreage is too small and comes with added costs that will discourage bids at a time when the world is facing an energy shortage. From the point of view of environmental groups, any leasing is a step in the wrong direction by an administration that has committed the US to a 50-52% GHG emissions reduction by 2030 under the Paris Agreement.

The leases

As announced by Interior's Bureau of Land Management (BLM), the auction will cover only 20% of the acreage nominated by drillers—144,000 acres instead of a nominated 733,000 acres.

At the same time, BLM raised the royalty rate for oil and gas produced from the new leases to 18.75%, the maximum allowed by Congress. The rate on all prior onshore federal leases, dating back to 1920, was 12.5%.

For the first time, the agency's environmental assessment included calculations of the social cost of carbon (SCC) and GHG emissions from the production and downstream use of oil and gas. BLM's draft environmental assessments for the parcels—which are open for comment through 18 May—reflect what the agency called "an urgent need to reduce greenhouse gas emissions."

In selecting the parcels, the agency said it gave preference to locations near existing infrastructure, such as oil and gas gathering lines, so that venting and flaring will be minimized. When oil and gas are co-produced and gathering lines for gas are not available, drillers have vented it directly into the atmosphere or burned it with flares.

Climate activists displeased

None of those decisions satisfied many environmental groups, which say that for the US to meet its Paris Agreement climate obligations it must phase out the production of oil and gas rapidly.

"The Biden administration's claim that it must hold these lease sales is pure fiction and a reckless failure of climate leadership," said Randi Spivak, public lands director at the Center for Biological Diversity. "It's as if they're ignoring the horror of firestorms, floods, and megadroughts, and accepting climate catastrophes as business as usual."

Friends of the Earth tweeted: "If Biden wants to be a climate leader, he must stop auctioning off our public lands to Big Oil."

BLM in turn reminded the groups that the sale is the result of a ruling in June 2021 by US District Judge Terry Doughty of the Western District of Louisiana. Biden had issued a moratorium on all new onshore and offshore leases in January 2021, citing a need to reform a program that had offered record acreage during the Trump administration, but Doughty voided the moratorium.

Oil industry equally unhappy

The fact that the government met the court order was acknowledged by oil trade groups, though they didn't like the particulars of the plan.

"While we're glad to see BLM is finally going to announce a sale, the extreme reduction of acreage by 80%, after a year and a quarter without a single sale, is unwarranted and does nothing to show that the administration takes high energy prices seriously," said Kathleen Sgamma, CEO of the Western Energy Alliance (WEA).

WEA sued BLM about the moratorium, arguing that the government is required to hold quarterly auctions. It will not withdraw the lawsuit, Sgamma said.

The American Petroleum Institute said in a statement to Net-Zero Business Daily by S&P Global Commodity Insights that it is "reviewing the new leasing plan to better understand the new environmental assessment standards for resource development on federal lands and waters."

Independent Petroleum Association of America (IPAA) Chief Operating Officer Jeff Eshelman called the auction "a mixed message" that indicates the administration "has no coherent energy policy."

Biden "has begged for more oil from foreign nations [and blames] American energy producers for price gouging and sitting on leases," Eshelman tweeted. But his lease program will only "add to uncertainty" that will discourage new drilling, he said.

In a conversation with Net-Zero Business Daily, IPAA Executive Vice President Lee Fuller said that the limited acreage and new GHG analysis are part of a pattern of fossil fuel restrictions seen from the Biden administration since its earliest days in office.

"The administration has professed its interest in eliminating oil and gas as a fuel for the world, and the United States is … going to lead the world," Fuller said. "Their view is that we face an existential threat from climate as a result from fossil energy."

But the administration is ignoring the law of supply and demand, Fuller said. "If you want to eliminate fossil energy, you need to reduce the demand for fossil energy so the consumer has other alternatives they can live with," he said. "Until you get there, you are going to need a substantial amount of oil and gas … [and experts say] that's for 30 years or more."

The same point was made by numerous oil executives in March at CERAWeek 2022 (see here and here).

Government regulators seem to think they can write rules for "stopping production of oil and gas as if the demand would disappear," Fuller said. "But it doesn't work that way. There are 280 million gasoline and diesel cars and trucks in the United States. That reality has to get weaved into the analysis."

The spike in oil and gasoline prices as the world recovered from COVID-19 is an example of what happens when those facts are forgotten, he said.

From Fuller's perspective, the Biden administration has compounded the situation in recent months by asking US producers to increase output in order to serve Europe's needs when Russian oil and gas are under embargo, while imposing new rules that make it harder to produce oil and gas. "This yin and yang are perplexing challenges," he said. "We're being criticized for not drilling enough wells [now] after a year of being told not to drill."

Most US production occurs on private land, observed Kevin Birn, emissions lead of the ENR Upstream team at S&P Global. But additional regulations could make drilling on federal lands less attractive for operators in the future. US policy should "be reflective of the reality that the world today remains fossil powered, and greater US supply can moderate global energy prices, which in turn will support greater policy stability which is required to support any energy transition," Birn said.

Dan Naatz, IPAA's senior vice president, government relations and political affairs, added that the administration should recognize the immense progress the fossil fuel industry has made in reducing its emissions in the last 20 years and build policies to encourage further improvement cost-effectively. Shutting off oil and gas production isn't the only solution, he said. "What we've said all along is that we want to get into the conversation [and not be viewed] as the enemy, but as an integral part of the energy mix."

A few days after the lease parcels were identified, a study was published in the journal Climatic Change that found that between 2005 and 2019, 27% of US oil, gas, and coal production came from federal lands and offshore property. That generated about 1.4 billion metric tons of CO2-equivalent per year (including emissions from eventual fuel use), or 23% of total US annual emissions.

Not only is most oil and gas production in the US on private land, pointed out Birn, but most of the emissions associated with oil and gas come from downstream usage, over which the companies have no control.

Posted 22 April 2022 by Kevin Adler, Chief Editor

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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