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The US Department of the Interior is proposing reforms for the
federal onshore and offshore oil and gas leasing programs that
could impose higher fees and tougher environmental reviews, as it
seeks to produce more revenue for the government and support
President Joe Biden's goal of reducing GHG emissions.
The recommendations from the
Interior Department, released in a report on 26 November, also
could increase financial responsibility for site remediation,
eliminate leases for "low potential" sites, and require greater
consultation with local stakeholders during environmental review of
land for leasing.
While experts say the short-term impact would be minimal even if
recommendations in the report are implemented, the reaction to
Interior's findings indicates the ongoing tensions over how to
balance US policies for climate change and energy production.
"I expected a bigger report with more details. It fell short of
my expectations," said Aliaksandr Chyzh, IHS Markit Petroleum
Sector Risk Team's senior research analyst.
Because any leases already assigned are insulated from any
changes, Chyzh predicted "minimal impact on opportunities" for
companies operating onshore or offshore on federal lands.
Federal onshore and offshore leases accounted for about 23% of
US oil production (3.8 million
barrels/day) and 11% of natural gas (12 billion cubic
feet/day) in 2020, according to the report.
While the short-term impact would be muted, Republicans in
Congress expressed anger that the administration would potentially
reduce available land for oil and gas production and/or impose new
restrictions on drillers.
House Republican Bruce Westerman (Arkansas), who sits on the
Natural Resources Committee that has oversight of the Interior
Department, criticized the recommendations as counterproductive to
US interests and said the administration was trying to "bury" the
news by publishing the report during the Thanksgiving holiday.
"These are simply justifications to make it even harder and more
expensive to produce energy on federal lands," he said in a
statement.
But Interior's report didn't draw reviews from leading climate
groups either, who said that all oil and gas production on federal
lands should be ended. The Interior Department's report is "a
complete failure of the climate leadership that our world
desperately needs,″ said Taylor McKinnon, senior public lands
campaigner for the Center for Biological Diversity (CBD).
And the Democrat who chairs the US Natural Resources Committee,
Raul Grijalva (New Mexico), said the report falls short of what he
expected as well. "The administration needs to manage public lands
and waters consistent with its climate commitments, and today's
report does not offer a plan to do that. Congress needs to end
wasteful subsidies and advance leasing reform bills …" he said.
The Energy and Mineral Resources Committee of the House Natural
Resources Committee will be holding a hearing on 2 December about
oil and gas leasing on federal land and its contribution to US GHG
emissions.
Ending leasing is the ultimate aim of the Biden administration,
said Rep. Westerman. He said the new policies "will bog small
energy companies down in years of regulatory gridlock, place
millions of acres of resources-rich land under lock, and ignore
local input."
The review found the program "fails to provide a fair return to
taxpayers, … fosters speculation by oil and gas companies to the
detriment of competition and American consumers … and leaves
communities out of important conversations about how they want
their public lands and waters managed."
Interior also found that climate-related costs and other
environmental impacts are inadequately represented.
About 53-55% of acreage that has been leased is non-producing,
that is, the holder of the lease has either not applied for a
permit or has applied but has not yet received a permit. The
Interior Department concludes that this means "a sufficient
inventory of leased acreage [exists] to sustain development for
years to come."
Finances
While the leasing program has been in place for more than 60
years, that the report notes that the minimum federal royalty of
12.5% (and up to 18.75% for deep-water offshore) has never been
raised. The rate is lower than every major oil- and gas-producing
state in the nation for leases on state-owned lands.
The Interior Department's report cites a study by Taxpayers for
Common Sense that matching states' average rate would have
generated an additional $12.4 billion for the federal government
from 2010 through 2019.
The Bureau of Land Management (BLM), which oversees leases
onshore, cannot change the minimum rate on its own; that must be
done by Congress. "This wouldn't be likely before the midterms
elections in November 2022," Chyzh said. "And even then, Democrats
would have to improve their position in the Senate and House to
avoid needing to bargain with Republicans."
Democrats have signaled their interest in raising royalty rates,
as both a climate and a revenue matter. The fiscal year 2022 budget passed
by the US House earlier this month would raise the minimum royalty
rate for onshore drilling, as well as shorten the length of leases
from 10 to five years and eliminate a noncompetitive leasing
program. The budget proposes to raise the new onshore royalty rate
to 18.75% and the new offshore rate to 14%.
Alternatively, BLM can raise the rate it charges on new leases
to above the minimum level through an administrative rulemaking
process. This has less staying power than legislation, but it can
be implemented more quickly.
The report also contains criticism of other financial aspects of
leasing, from rental rates that enable developers to keep land at
low rates for decades, to bonding requirements that are
insufficient to ensure proper cleanup of well sites and mines. As
with royalties, the report notes that states typically have higher
bonding requirements.
Process changes
The Interior Department also said that the review process needs
to be improved, with greater stakeholder collaboration and changes
in the "conditions of approval" for permits. It proposes a change
in policy under which "BLM should ensure that oil and gas is not
prioritized over other land uses, consistent with BLM's mandate of
multiple-use and sustained yield." This would be a shift from the
Trump administration's and prior administrations' policies of
favoring energy production over other uses.
As an example of how the policy could be changed, BLM would be
instructed to consider creating a program to discourage companies
from nominating land with low potential for energy development,
especially land that does not have existing oil and gas
infrastructure. This might prevent "rampant" speculative leasing,
in which people without intent to seek permits hold onto the rights
in the hopes of reselling to an actual oil and gas developer in the
future.
The Bureau of Ocean Energy Management (BOEM), also under the
Interior Department, administers offshore leasing. The report says
it could break up leasing parcels into smaller offers, rather than
area-wide leasing of huge parcels. This would incentivize higher
bids on the most attractive sections, as a GAO report found 10
area-wide leases left $7 billion in potential federal government
revenue on the table.
Impacts
If the recommendations of the report are put into action, the
most likely initial impacts would be a higher royalty rate on new
leases and less land available in upcoming auctions. Biden had
already suspended all auctions in his executive order, and only two
have been held during his administration, both thanks to court
orders.
Chyzh said that one possibility is that BLM could propose a new
royalty rate above the federal minimum that is linked to the social
cost of carbon (SCC) and emissions levels from oil and gas
production. This would support BLM's announcement on 29
October that it will be incorporating GHG emissions and SCC into
decisions on which lands will be made available for leasing.
Of course, any cost increases raise concerns in the energy
industry, as oil and gas firms seek to keep their production
aligned with rising demand from a strong economy.
"During one of the busiest travel weeks of the year when rising
costs of energy are even more apparent to Americans, the Biden
Administration is sending mixed signals," said American Petroleum
Institute Senior Vice President of Policy, Economics and Regulatory
Affairs Frank Macchiarola.
In a followup statement to Net-Zero Business Daily on
29 November, an API spokesperson added, "Without a specific
proposal from Interior to evaluate, we believe any changes to
royalty rates should be considered both in relation to other
benefits provided through energy development as well as in relation
to the US fiscal system in its entirety."
API would like to see royalties "appropriately tailored" to the
unique parameters of the production, such as different rates for
gas and oil and conventional vs. unconventional drilling.
The problem with the Interior Department's report, API noted, is
that it would "increase costs on American energy development with
no clear roadmap for the future of federal leasing."
But how that would translate to future activity is hard to
judge. In mid-November, BOEM held an offshore Gulf of Mexico
auction, and the strong results indicate that drillers are
interested in federal acreage, said Chyzh. In that auction, $192
million in high bids was received from 33 companies for tracts
covering 1.7 million acres. It's the second-highest offshore result
ever. "The Gulf lease sale makes me very optimistic," Chyzh
said.
On the other hand, in early November Alaska held an auction of
state-owned offshore acreage, and it drew only six bids. That weak
performance "demonstrates that even though the changes are not
going to apply to existing leases, Alaska remains a challenge due
to environmental regulations and the position of administration on
drilling in the Artic," Chyzh said.
While not commenting on the administration's intentions, Chyzh
agreed that smaller operators would likely have a harder time if
new bonding requirements and other financial reviews are
instituted. The report says that BLM and BOEM will look into ways
of judging the "fitness to operate" of potential bidders—which
translates to whether they can demonstrate the ability to minimize
emissions during operation and have the resources to clean up when
production is finished, he said.
"API supports the goals of the Paris agreement to reduce global
GHG emissions while meeting rising demand with affordable, reliable
American energy," the spokersperson wrote. "The DOI report did not
point to any specific environmental protections under the federal
leasing program as needing improvement."
Posted 01 December 2021 by Kevin Adler, Chief Editor
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