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US Interior Department says federal oil, gas leasing program should be reformed with climate, finances in mind

01 December 2021 Kevin Adler

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."

Driven by executive order

Biden's 27 January Executive Order 14008, which led to the review of the leasing program, was titled, "Tackling the Climate Crisis at Home and Abroad."

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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