US Interior raises costs of oil, gas production on federal lands

The US Department of the Interior will raise the prices it charges companies to produce oil and natural gas on federal lands for the first time in decades, according to a final rule it released April 12.

The Fluid Mineral Leases and Leasing Processes rule codifies changes directed to Interior by the Inflation Reduction Act, US President Joe Biden's marquee 2022 legislation. That law instructed the Interior Department and the Bureau of Land Management to change how agencies oversee fossil fuel production on the nearly 700 million acres of federal lands they oversee, including increased fees for oil and gas producers and a rework of the bonding requirements associated with producing on federal land.

The final rule is also designed to concentrate leasing in areas that are most likely to be developed or feature existing infrastructure, and away from areas with sensitive wildlife, recreational uses, or other conservation designations.

"Our public lands are owned by all Americans, and the Bureau of Land Management remains committed to managing them in a balanced, responsible way," said BLM Director Tracy Stone-Manning. "This rule will help protect critical wildlife habitat, cultural resources, and recreational values, and it will ensure a fair return for American taxpayers."

Costs rise, leases change

The rule raises the royalty rates companies must pay for oil, gas and other minerals they produce on federal land to 16.67% until 2032. The previous rate, 12.5%, had been in place since the 1920s. Likewise, auction bid minimums are increasing for the first time since 1988, to $10 an acre, up from $2.

Leases are also getting more expensive, alongside a change in the framework of deals. Previously, companies paid $1.50/acre for the first five years of a lease, then $2/acre for the following five years. Under the new rule, leases will include a rental of $3/acre/year during the first two-year period after issuance, then $5/acre/year for the following six years. After that point, costs increase to $15/acre.

Both increases are designed to help reduce speculation and prevent companies from purchasing large tracts of federal land they don't actually plan to use for production, complaints raised in the Interior Department's own "Report on the Federal Oil and Gas Leasing Program," which it prepared in response to a Biden executive order in November 2021.

Bonding requirements, the money companies must front to pay for cleanup of disused projects, are also being significantly increased for the first time since 1960, when the government set a $10,000 lease bond amount that had not changed since. The new minimum lease bonds are $150,000, with the minimum statewide bond rising to $500,000, amounts the administration believes will disincentivize companies from polluting or otherwise failing to meet their reclamation obligations and forcing the costs onto taxpayers.

Environmentalists pleased, oil industry fumes

The response to the Fluid Mineral Leases and Leasing Processes broke along familiar political lines April 12, with climate-aligned Democrats and conservation groups praising the move, while some Republicans and oil interests denounced it.

The American Petroleum Institute, the US' largest oil industry trade group, cited an analysis it conducted and submitted during the rule's comment period, which found that onshore federal oil and natural gas development supported 250,000 jobs and contributed $36.7 billion to GDP in fiscal year 2022.

"As energy demand continues to grow, oil and natural gas development on federal lands will be foundational for maintaining energy security, powering our economy and supporting state and local conservation efforts," API's vice president of upstream policy, Holly Hopkins, said in a statement. "Overly burdensome land management regulations will put this critical energy supply at risk. We are reviewing the rule to ensure the Biden administration is upholding its responsibilities to the American taxpayers and promoting fair and consistent access to federal resources."

US Senator John Barrasso, the ranking member of the Senate Committee on Energy and Natural Resources, said Biden was "doing all he can to make it economically impossible to produce energy on federal lands."

Independent Petroleum Association of America Chief Operating Officer and Executive Vice President Dan Naatz accused the administration of ignoring people "in local towns and communities across the West in order to placate a small group of environmentalists."

Western Energy Alliance President Kathleen Sgamma, meanwhile, said the rule will drive small producers off public lands, and that her organization "has no other choice but to litigate this rule."

Environmentalists, and environmentally inclined Democrats, were broadly pleased, with House Natural Resource Committee Ranking Member Raul Grijalva of Arizona citing the rule as a good first step toward eventually phasing out fossil fuels altogether.

"When Big Oil uses our public lands, it stands to reason that they should be giving American taxpayers a fair return for the privilege," Grijalva said in a statement. "The ultimate goal is phasing out fossil fuels for good, but these new taxpayer protections will help make sure the American people aren't getting ripped off in the meantime."

"Updating royalty, rental, and bonding rates—and ensuring those rates don't fall out of date again in the future—ensures a fair return for taxpayers and is the fiscally responsible thing to do," Center for Western Priorities Policy Director Rachel Hamby said. Melissa Hornbein, senior attorney at the Western Environmental Law Center, agreed, but criticized the Biden administration for not going further to intentionally decline the federal oil and gas program. "While bonding, royalty, and other fiscal reforms are welcome, the Bureau once again missed a critical opportunity to make a meaningful difference with respect to climate with this rule," she said.

The rule is the latest in a sweeping suite of new regulations designed to reach the Biden administration's climate goals. Last month, the Environmental Protection Agency released its final rule on tailpipe emissions for light- and medium-duty vehicles, rules designed to sharply reduce greenhouse gas emissions from ground transportation and push manufacturers and consumers further toward electric vehicles in the coming years.

On April 11, the administration announced its final Renewable Energy Rule, which updated regulations to incentivize wind and solar energy development on national public lands.