Vol. 26, No.49 Week of December 05, 2021
Providing coverage of Alaska and northern Canada's oil and gas industry

DOI proposes federal onshore & offshore leasing program reforms

Click here to go to the full PDF version of this issue, with any maps, photos or other artwork that appears in some of the articles.

Alan Bailey

for Petroleum News

On Nov. 11 the U.S. Department of the Interior released a report on the status of oil and gas leasing procedures on federal onshore and offshore lands, with proposals for reforms to the leasing programs. The report envisages continued oil and gas leasing, but with a more focused approach on where to hold lease sales, taking into account resource potential, environmental impacts and community interests. The DOI also wants to see increased fees for leaseholders.

“Our nation faces a profound climate crisis that is impacting every American. The Interior Department has an obligation to responsibly manage our public lands and waters - providing a fair return to the taxpayer and mitigating worsening climate impacts - while staying steadfast in the pursuit of environmental justice,” said Interior Secretary Deb Haaland. “This review outlines significant deficiencies in the federal oil and gas programs, and identifies important and urgent fiscal and programmatic reforms that will benefit the American people.”

Executive order

The review that resulted in the new report was driven by an executive order issued in January by President Joe Biden, requiring federal agencies to address the threat of climate change. The report focuses on fiscal terms, leasing processes and environmental remediation requirements for oil and gas leasing on federal land. The Bureau of Land Management oversees oil and leasing on federal onshore lands, while the Bureau of Ocean Energy Management and the Bureau of Safety and Environmental Enforcement deal with offshore federal leasing.

The report recommends adjusting royalty and bonding rates. There needs to be prioritization of leasing in areas with known resource potential, while avoiding leasing that conflicts with recreation, environmental conservation, and the protection of historic and cultural resources. DOI says that it will continue to conduct outreach to stakeholders in oil and gas development, including state and local governments; tribes; conservation and environmental justice communities; and industry and labor.

The DOI review found that the federal oil and gas program fails to provide a fair return to taxpayers, even without accounting for climate-change costs. The program inadequately accounts for environmental harm from oil and gas development while fostering speculation by oil and gas companies, “to the detriment of competition and American consumers,” the review report says. The current program also extends leasing into lands with low oil and gas potential, land that has potential other higher value uses. And the program leaves communities out of important conversations about land use, the report says.

In recent decades US energy needs and the mix of available resources have changed, while the federal statutes and policies relating to U.S. oil and gas development have remained “largely static,” the report said. And the report contains a series of recommendations.

Revenues from leasing

The royalty, bonding and lease rental rates for onshore leasing, which have remained static for decades, need to rise, the report says. For example, the federal royalty rate of 12.5% is now lower than the rates in a number of states, where royalties range from 16.67% to 20%, the report says. The report does not mention the state of Alaska royalty rate that defaults to 12.5% but can be higher or lower, depending on the circumstances - in recent Alaska lease sales the rate has been either 12.5% or 16.67%, depending on how the state views the value of the acreage. In terms of bonus bids for acquiring leases, the report says that the Government Accountability Office has found that leases acquired with higher bonus bids are more likely to be developed in their first terms than leases acquired with low bids. And federal rental rates of $1.50 to $2 per acre have not changed since 1987.

Surety bonding for oil and gas drilling has become a contentious issue in Alaska in recent years, with the Alaska Oil and Gas Conservation Commission raising bonding levels to more realistically represent the anticipated costs of plugging and abandoning wells. The DOI report says that federal bonding requirements provide insufficient financial assurance for wells drilled on federal land and that the BLM should appropriately increase required bonding amounts, with bonding requirements being adjusted as appropriate while new bonding regulations are being developed.

For offshore federal land, the report says that BOEM is currently responding to several GAO recommendations aimed at ensuring that the agency is capturing the full market value of lease tracts from the offshore leasing programs. Offshore royalty rates currently range from 12.5% to 18.75%, depending on the water depth.

Offshore surety bonds currently range from $50,000 to $1 million, depending on the area covered by the bonding and the type of activity being conducted. However, following some recent bankruptcies, the companies involved have been unable to cover their decommissioning liabilities - financial assurance coverage needs to be strengthened, to protect the government and taxpayers from having to cover these costs, the report says.

Land use priorities

In terms of onshore oil and gas leasing, BLM needs to ensure that this type of leasing does not take priority over other land uses, the report says. There is a need to assess what land makes most sense for leasing, in terms of anticipated development value in relation to conflicts with other uses such as recreation and wildlife habitat. And, rather than opening most federal land for potential leasing, BLM should avoid wasting time and money over the leasing of land with low resource potential, instead focusing on areas that have moderate or high potential, the report says.

Lease bidders should be screened to ensure that they are appropriately qualified to develop leases.

In the offshore, BOEM needs to consider ending the practice of areawide lease sales, instead focusing on smaller areas that have high resource potential, taking into account other factors including environmental protection and subsistence use needs, the report says.

“Modernization of the federal oil and gas program has been delayed for decades to the detriment of the American public, their public lands and waters, the environment, wildlife and more,” the report concludes. “In its current form, the program falls short of serving the public interest in a number of important respects.”

Murkowski responds

U.S. Sen. Lisa Murkowski, R-Alaska, slammed the report in a Nov. 29 press release, arguing that the short report lacks any meaningful analysis and misrepresents how oil and gas development actually works.

“This report is exactly what we thought it would be: a series of preordained conclusions that are designed to end federal oil and gas production,” Murkowski said. “President Biden campaigned on that, and his administration is now advancing what amounts to a death-by-a-thousand-cuts strategy to achieve it … The policies it calls for won’t maximize returns for taxpayers or even reduce emissions - instead, they will hurt production in states like Alaska, further raise energy prices, and increase our nation’s import dependence.”


Print this story | Email it to an associate.

Petroleum News - Phone: 1-907 522-9469
[email protected] --- ---

This story has 1500 words, takes 3 min. to speedread and it is 3318 pixels high.