Fed leasing review: raise royalties; ignore climate
Greens attack long-awaited report on oil and gas program
THE NEWS: The Interior Department finally releases its report on the federal oil and gas leasing program, concluding that the program falls short of serving the public interest, “provides insufficient opportunities for public input, shortchanges taxpayers and states, and tilts toward opening up low-potential lands without adequately considering competing multiple use opportunities.” Although the review was conducted under an executive order aimed at “tackling the climate crisis,” it makes scant mention of climate change or greenhouse gas emissions from oil and gas development on public lands.
THE CONTEXT: Prior to 1920, oil and gas development fell under the Oil Placer Act of 1897 and the General Mining Law of 1872: If a driller thought a piece of public land could produce oil, they could stake a claim, develop the land, and eventually patent, or take title, to the land, virtually for free. There were no lease payments, no rents, and no royalties—it was a straight-out giveaway of taxpayers’ land and minerals.
The folly of this system became apparent in the early 1900s, when the U.S. Navy transitioned its coal-fired fleet to oil, and was forced to purchase at a premium the very oil it had given away. The Naval Oil Reserves were withdrawn from the public domain and Sen. Reed Smoot, of Utah, proposed a leasing program. Oil industry leaders and the Western politicians they sponsored balked: “I am absolutely opposed to the leasing system, the paternalism, the bureaucracy, the autocracy, the un-American system that the leasing system entails,” said Sen. William King, a Utah Democrat. Still, the petro-corporations were more frightened of the alternative: full on nationalization of federal natural resources.
So, Sen. Albert Bacon Fall of New Mexico—working on behalf of his oil tycoon buddies like Edward L. Doheny, who inspired the 2007 movie, There Will Be Blood—set out to tilt Smoot’s legislation in the oil industry’s favor. The resulting General Mineral Leasing Act was signed into law in 1920, just months before Fall became Secretary of Interior and the Act’s primary administrator.
Congress has tweaked the Act over the years, but its basic structure remains the same as when it was created. Oil and gas companies nominate parcels of land to be leased, the agency reviews the proposals for potential problems, and ultimately auctions nearly all of the nominated parcels on EnergyNet, a sort of energy-oriented eBay. Industry representatives or speculators then pay as little as $2 per acre for piñon-juniper forest, seas of sagebrush, shale hillsides, sacred lands, fragile ecosystems, or just about any other swath of public land that may or may not contain recoverable hydrocarbons. When the Biden administration implemented its leasing pause earlier this year, more than 26,000 acres of federal land were under lease. Once the well is drilled and producing, the company pays a 12.5% royalty to the feds on the sale price of the oil and gas.
This system is broken and outdated, according to the Interior review, and essentially amounts to a subsidy program for the oil and gas industry. The report’s authors say the following provisions are in need of reform:
Federal onshore oil and gas royalty rates—which, at 12.5%, are the same today as in 1920—are consistently lower than on state-issued leases and offshore leases, shortchanging the federal government, i.e, the American taxpayers, as well as oil and gas producing communities, since almost half of the royalty receipts are returned to the states where the minerals were extracted.
Bonding levels, intended to ensure the producer cleans up its mess when it’s finished profiting off of it, have not been raised in 60 years and don’t get close to covering the costs of reclamation, which incentivizes companies to abandon unprofitable wells and leave the cleanup tab for the taxpayers to pay.
Minimum bids and rents, the price paid to keep the lease before it is producing, are far too low: a $2 minimum bid to purchase the lease, then $1.50 per acre per year for the first five years, rising to $2 per acre per year for the next five years. If a parcel does not receive any bids at auction, it can be “sold” non-competitively for a modest administrative fee. These low prices—and the fact that buyers are not screened—encourage speculation: Anyone can acquire leases under this system, sit on them for years at virtually no cost (thereby precluding other uses for the lands, such as renewable energy leasing or recreation) until oil and gas prices increase, then turn around and “flip” them for a far greater price. None of the resale revenues go back to the federal government and details of resales are often kept secret, shielding the identity of the ultimate leaseholder.
The industry drives decisions on what areas will be nominated for oil and gas leasing. Since there is no cost to nominate parcels of land for leasing, there is little disincentive for companies to identify large amounts of acreage regardless of the resource potential of that land or how seriously the nominator is considering bidding for the nominated parcels. The BLM then must foot the cost of evaluating the land and running the lease sale.
From the review: “Practices such as allowing anonymous lease nominations and recent efforts to restrict or eliminate public notice and comment periods can leave local community voices—including, in particular, Tribal voices—out of leasing and permitting processes. The DOI should undertake meaningful Tribal consultations and solicit public input more generally regarding its leasing and permitting processes.”
In other words, the Interior Department agrees with what taxpayer advocates and environmentalists have been saying for years: The oil and gas leasing system is flawed and favors industry profit over conservation, multiple use, and a fair return for the taxpayer. It recommends raising fees, rates, and minimum bids to modernize and rebalance the program, but makes no concrete plan for doing so, aside from mentioning legislation (The Build Back Better Act would enact these reforms if passed by the Senate in its current form).
The report opens by saying oil and gas development’s impacts on the environment and human health “merit a fundamental rebalancing of the Federal oil and gas program.” And yet nothing in the report directly addresses these impacts, nor does it mention the billions of tons of greenhouse gases emitted during the production, transportation, and combustion of fossil fuels exhumed from public lands. Raising royalties could discourage drilling by making it more costly, but when states have raised royalty rates there has been no corresponding downtick in production on state lands. Levying high royalties on methane and other pollutants emitted but not sold might bring down emissions, but that’s not mentioned either.
These glaring omissions have earned the report a scolding from environmental groups, who were hoping for a comprehensive overhaul of the system rather than mere recommendations for “rebalancing.” “This report does little but rearrange the deck chairs of the federal public lands oil and gas program, treating these lands as nothing more than a commodity to be exploited by oil and gas CEOs and Wall Street investors,” said Erik Schlenker-Goodrich, executive director of the Western Environmental Law Center. “Changing royalty rates, minimum bids, and bonding levels are all good things to help the public get a fair return on drilling, but they neither meet the promise President Biden made to the American people regarding public lands, nor address the urgency demanded by the climate crisis.”
To be fair, the Interior Department can only do so much. It can’t eliminate the program altogether—only Congress can do that—and a federal court shot down its leasing “pause” (the administration is appealing that ruling). Yet there was nothing stopping the agency from going further with its recommendations or from urging Congress to overhaul the system. It could still revive the Obama-era master leasing plan program, jettisoned by Trump, which offered a more wholistic look at leasing on a regional, landscape level.
The administration also has other avenues for tackling the impacts of public lands oil and gas development. The administration is proposing oil and gas emissions rules, restored the boundaries of Bears Ears and Grand Staircase-Escalante National Monuments, thereby putting hundreds of thousands of acres off-limits again to new leasing, has launched the process of eliminating leasing within 10 miles of Chaco Culture National Historical Park, has suspended leases in the Arctic National Wildlife Refuge, and is poised to up protections on the greater sage grouse, which could hamper drilling across vast swaths of the West. And, even though industry and some land managers would disagree, the Bureau of Land Management field offices have broad discretion in rejecting drilling permits on existing leases—the graph above shows that they’ve not exercised that discretion, however.
It appears that the Biden administration is refraining from tackling pollution and climate change on a programmatic level, and instead is targeting specific landscapes for protection—a sort of hodgepodge approach that, while worthy of praise, may not be enough.
CORRECTION: The original drilling permit graphic in this post contained an error. It has been corrected and updated.
The administration may get some help determining which landscapes to save from a nifty new “climate atlas” developed by the Durango-based Conservation Lands Foundation. The tool is an interactive map that allows users to highlight protected areas, federal lands, tribal lands, and so forth, while adding layers relating to climate resilience, biodiversity, climate stability, and ecological intactness. Anyone who reads the Land Desk knows that I’m a bit of a map junkie, and we’ve already been tinkering with this one for hours. The best way to get a sense of what it is and does is to play around with it yourself. So dive in.
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