Federal oil and natural gas auctions face change as interior offers higher royalty rates

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The US oil and gas industry need not fear a federal drilling ban – for now – but royalty rates could be increased for the first time in a century and lease terms could be tightened on the basis of an analysis by the Ministry of the Interior.

After taking office in January, President Biden issued Executive Order 14008, which called for a review of the federal oil and gas leasing and licensing program for onshore and offshore. The 18-page report released on Friday (November 26) focused on needed reforms to tax conditions, the leasing process and remediation requirements related to oil and gas programs.

The Home Office “has an obligation to responsibly manage our public lands and waters – providing a fair return to the taxpayer and mitigating worsening climate impacts – while remaining steadfast in the pursuit of justice environmental, ”Secretary Deb Haaland said in the release of the report.

Along with the review, the Interior suspended sales of federal leases in the Gulf of Mexico (GOM), the Arctic National Wildlife Refuge in Alaska, and on federal lands in several states. The review is part of President Biden’s goal of putting the United States on the path to a carbon-free energy sector by 2035 and a carbon-neutral economy by 2050.

Following a lawsuit by several Republican-led states, the administration resumed the federal leasing program earlier in November, completing GOM’s first leasing sale in a year.

Unfair return for taxpayers?

Interior has found a number of loopholes in the federal oil and gas leasing program. The auction process “fails to deliver a fair return to taxpayers, even before taking into account the resulting climate-related costs that must be borne by taxpayers.”

The program “inadequately accounts for environmental damage to land, water and other resources” and it “encourages speculation by oil and gas companies to the detriment of competition and American consumers.”

In addition, the rental program was extended “to low potential land that may have competing higher value uses,” the report notes. Further, it “leaves communities out of important conversations about how they want their public lands and waters to be managed”.

The fiscal components of the federal land rental program “are particularly outdated, with royalty rates that have not been increased for 100 years.”

The 12.5% ​​rental rate of inland to develop federal land is lower than that received by most states and private landowners. The most oil and gas producing states charge royalty rates on their lands “considerably higher than those assessed on federal lands.”

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For example, Texas imposes a royalty rate that “can be double the federal rate,” the researchers noted.

“Likewise, binding levels have not been increased for 50 years,” the report notes. “Federal minimum offers and rents have been the same for over 30 years. These archaic approaches hurt not only the federal taxpayer, but state budgets as well, as states receive a significant share of federal oil and gas revenues.

Prioritize the “most appropriate” rental areas

Interior suggested reforms to serve three programmatic goals:

  • Provide a fair return to the American public and to the states in the management of federal public lands and waters, including the development of energy resources;
  • Design more “responsible” rental and development processes to prioritize areas considered “most suitable” for development, while ensuring that tenants and operators have the financial and technical capacity to comply with all laws and regulations; and
  • Create a more transparent and fair approach to leasing and licensing that provides a “meaningful opportunity” for public engagement and tribal consultation.

In response to the review, analysts at ClearView Energy Partners LLC said that the acreage available for rent would likely be reduced as part of the suggested reforms. Permitting conditions and practices could also be tightened so that the area is “less economically attractive to operators”.

Additionally, the Biden administration could use the suggested reforms to set federal environmental standards for oil and gas, while the universe of potential bidders could be small, ClearView analysts said.

“Lower availability at higher prices and stricter standards for a smaller pool of bidders may not meet the hopes of some environmental activists for an outright rental ban,” analysts said. However, “this approach could still significantly reduce future federal oil and gas production activities while remaining compliant with existing laws.”

Is the administration sending mixed signals?

The American Petroleum Institute (API), Western Energy Alliance (WEA) and other industry groups blasted the report, which went under the radar the day after Thanksgiving when many American businesses were shut down. “In one of the busiest travel weeks of the year, when rising energy costs are even more apparent to Americans, the Biden administration is sending mixed signals,” said Frank Macchiarola , Senior Vice President of Political, Economic and Regulatory Affairs of API. “A few days after a public speech in which the White House said the president was” using all the tools at its disposal to work to lower prices and address the lack of supply, “his Home Office proposed to ” raising the costs of US energy development without a clear roadmap for the future of federal leasing.

WEA President Kathleen Sgamma said: “You know there is something wrong with a policy when it is released on a Friday, and even more so when it is a policy. holiday weekend… ”As President Biden urges Russia and the Organization of the Petroleum Exporting Countries to increase production, Interior“ erects roadblocks to American production ”.

Anne Bradbury, CEO of the American Exploration and Production Council, said: “First and foremost, the administration should support the production of oil and natural gas from federal lands and waters, as it represents about 20% of the total. national production, playing an important role in energy security. and affordable energy prices… Arbitrary rental or licensing restrictions only create uncertainty for US businesses and strained budgets for state and federal governments as well as local communities . “

Consumer Energy Alliance Chairman David Holt said that “the deliberative process undertaken by the Home Office… should not turn into ways to further hamper energy production by creating regulatory uncertainty or problems. costly policies, which stifle investments with excessive regulations and policies that restrict reasonable energy development. “

The administration wants to move towards a zero-carbon economy, but at what cost, Holt asked.

“Reaching zero without crushing the economy requires smart environmental and energy policies that recognize the role oil and gas must play in meeting our basic energy needs for decades to come,” he said. “Any other policy is a fantasy, and the cost of that fantasy is sustainably higher energy prices for Americans.”

The Center for Biological Diversity (CBD) and the Natural Resources Defense Council (NRDC), among other environmental groups, said the review did not go far enough.

“Giving the green light to more fossil fuel extraction and then pretending all is well by raising royalty rates is like revamping the lounge chairs on the Titanic,” said Randi Spivak, director of public lands at CBD. “There is no more time for the small steps that leave the fossil fuel industry to wreak even more havoc on Earth.”

Alexandra Adams, senior director of federal affairs for the NRDC, said the Interior was “officially taking responsibility and seeking to resolve something that has long been widely recognized: we have a flawed and outdated rental system. The administration and Congress must seize this opportunity to resolve these issues. Beyond that, it’s time to adopt critical climate and environmental reforms that will support our local communities and protect our incomparable oceans and public lands. “

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