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Episode 27 – Transcript

Announcer:

Welcome to Budget Watchdog All Federal, the podcast dedicated to making sense of the budget, spending, and tax issues facing the nation. Cut through the partisan rhetoric and talking points for the facts about what’s being talked about, bandied about, and pushed in Washington. Brought to you by Taxpayers For Common Sense. And now the host of Budget Watchdog AF, TCS President Steve Ellis.

Steve Ellis:

Welcome to All American Taxpayers Seeking Common Sense. You’ve made it to the right place. For over 25 years, TCS, that’s Taxpayers for Common Sense, has served as an independent, non-partisan budget watchdog group based in Washington, DC. We believe in fiscal policy for America that is based on facts. We believe in transparency and accountability, because no matter where you are in the political spectrum, no one wants to see their tax dollars wasted. Budget Watchdog AF faithful, last week we brought you a breakdown of what revenue razors broadly were in the Inflation Reduction Act, aka fiscal year 2022 budget reconciliation.

Steve Ellis:

And if you listened to that episode, you know that one thing TCS feels confident about, at this point anyway, is that the R in IRA will most likely lead to the reduction of the deficit. What it will do to reduce inflation remains an open question. Well, today, TCS Vice President Autumn Hanna, Research Analyst Mia Huang, and I will take you on a guided tour of the IRA provisions that directly impact reform in the federal oil and gas leasing program, an issue that our team has been laser focused on for many years. Autumn and Mia, welcome back to the podcast.

Mia Huang:

It’s good to be back, Steve.

Autumn Hanna:

Yeah. Thanks, Steve. Big doings.

Steve Ellis:

To be sure. Autumn, please give us a lay of the land. What’s happening on key issues like oil and gas leasing reforms, increasing the onshore royalty, rental rates, and minimum bid amounts in lease auctions?

Autumn Hanna:

Well, Steve, it took a hundred years, but it looks like Congress has poised to pass the first update to onshore oil and gas royalty rates since 1920. This is something that we’ve been advocating here at TCS for coming up on three decades, really since our founding back in 1995. Royalties in states have been raised multiple times and have reached as high as double the federal rate of 12.5%. States like Texas charge 25%. And now the good news is, is the reconciliation bill will bump up the federal rate to 16.67%. Unfortunately, we didn’t get quite as high as we have been pushing for.

Autumn Hanna:

We have been generally looking for an 18.75% rate, which is on par with what we charge in federal waters, but 16.67% is a good start and we will definitely take it. We finally have broken through here for the first time in a century, and we’re pretty excited that we are going to have this in statute, fingers crossed, if reconciliation passes the House this week. We’re going to just take a minute and step back and celebrate that we are moving towards a better deal for taxpayers for the resources we own.

Steve Ellis:

Well, that was no small feat. I know that we even supported pausing oil and gas leasing overall because we thought it was so important to bring leasing into the 21st century, and that’s something that we discussed back on our inaugural podcast in January of 2021. I mean, we had not had any efforts to reform these onshore rates moved to the president’s desk since Ronald Reagan was an office.

Autumn Hanna:

Yeah, that’s right. Rates across the board had lag, to put it mildly. So not just our 100 year old royalty rates, but rental rates and minimum bid amounts had not even been adjusted for inflation since the 1980s. I’m sure we’d all like to be paying 1987 rates today. The bill updates all of these. It increases oil and gas minimum bids from $2 an acre to $10 an acre for all leases in the next 10 years. It raises oil and gas rental rates too. Currently, leases are charged approximately a $1.50 per acre for the first five years and $2 for the next five.

Autumn Hanna:

The reconciliation bill would increase this rate to $3 an acre for the first two years and $5 an acre for the next three to eight, and then the last two years, years nine and 10, would get $15 an acre.

Steve Ellis:

Wow, that’s a lot of numbers, but I’m sure that the revenue that this was going to generate helped make the case to include these reforms in the reconciliation bill since Senator Manchin and others were so interested in tackling the deficit as part of reconciliation. Remind podcast listeners what not updating these fiscal leasing policies has already cost taxpayers, and also, what do we stand to gain now?

Autumn Hanna:

For years, federal on onshore royalty rates have not kept pace with energy markets. Have the royalty rate of 18.75 been charged, the one that we’ve been advocating for in the last decade, we would’ve gotten more than $13 billion in new revenue. Remember, a lot of states are already charging more, so this is money left on the table. Taxpayers have also lost hundreds of millions of dollars, more than 300 million in fact in the last 10 years, on rental rates that haven’t been updated. Those haven’t been adjusted for inflation, like we said, since the 1980s .overall, the Congressional Budget Office has estimated that these reforms will raise about half a billion dollars in the next decade.

Autumn Hanna:

Steve, you mentioned Senator Manchin, had he not been committed to getting taxpayers a better deal on our oil and gas leasing policies, these definitely wouldn’t have made it into the package. He has noted several times in Congressional hearings and statements that these royalties and other oil and gas rates needed to be updated to make sure that we were getting taxpayers a better deal and we couldn’t agree more

Steve Ellis:

Right. Senator Manchin not just sort of being the lead negotiator with Majority Leader Schumer getting this reconciliation package through, he’s also the chairman of the Energy and Natural Resources Committee. He had a lot of sway and a lot of say over what was going to be in the energy portions of the reconciliation package, and a lot of these reforms were in an earlier version that that committee had put out. This is all good news for taxpayers. One more tally in the wind column I think I heard at the water cooler, a real doozy of a policy that may have gotten the acts and the bill, the loophole that allowed oil and gas interest to lock up land for no bid at all to two years after it was leased.

Steve Ellis:

I remember you worked with The New York Times exposing some of these crazy situations where parcels were nominated by an industry player, then they sat out the competitive auction, only to be able to get the land with no bid at all basically the day after the sale.

Autumn Hanna:

Yeah, Steve, that one egregious example was in Montana. Highlands Montana Corporation was able to swoop in and get 222 leases covering 113,000 acres in Montana in 2017 and 2018. A lot of these non-competitive leases are offered and sent in, as you said, the day after the sale. Clearly this company was interested and played taxpayers to get that land with no minimum bid. Listeners can learn a lot more about the Highlands example and other egregious examples on our website. It is quite shocking. I mean, Nevada, for instance, has only had one lease enter production since 1999. Much of their lease land goes non-competitively.

Autumn Hanna:

In total, at the end of FY 2021, there were 24.9 million acres of federal land leased for oil and gas development, 9.7 million acres sat idle. Ending this noncompetitive leasing will really help make sure that we’re leasing land competitively and that land is then used for oil and gas production. Bottom line is we’re really excited to see the end to this loophole included in the bill.

Steve Ellis:

Yeah, that’s great, Autumn. I mean, we won some really important battles here and updated some ridiculously old rates. All right. Let’s turn to Mia to hear about where we came up short. Mia, anything that we wanted that didn’t make it into the bill?

Mia Huang:

Well, Steve, obviously we’re very excited to see the royalty and other reforms Autumn mentioned. We’re also disappointed that some really important bonding provisions were dropped. They would’ve held the oil and gas industry more accountable for their actions on federal land and helped taxpayers better cover cleanup costs. What oil and gas bonding means is that before operators can start drilling on federal lands, they have to submit bonds as financial assurance that they will clean up the wells after production ends. In the event they don’t, like when companies go bankrupt, these bonds will be used to cover the cost of cleaning up.

Mia Huang:

But bond minimums were set back in the 1950s and ’60s and have not been adjusted for inflation since. And not to mention the cost of cleaning up wells have risen drastically with the advent of fracking. According to a government accountability office report, the average bond coverage on federal land is a little over $2,000 per well in 2019. But actual cleanup costs are way higher. It can go anywhere from $20,000 to 145K per well. What happens is that taxpayers have to foot the bill because the bonds are insufficient.

Mia Huang:

The original draft of the IRA included a provision that would’ve raised the bonding minimums to finally hold industry accountable and limit taxpayer liabilities in the future. Unfortunately, it was dropped in the Senate pass bill due to the Byrd rule.

Steve Ellis:

That’s a good point, Mia. The Byrd rule, Budge Watchdog AF listeners, was named for the former Senate Majority Leader Robert Byrd, who’s a very consequential figure, a long time appropriations chair. And not long after budget reconciliation process or the whole budget process started in 1974, he put some limits on it so that anything that’s in the reconciliation, which you can get through, as you all know, with a 50 vote plus one majority in the Senate as opposed to a 60 vote majority, essentially has to substantially deal with revenue, spending, or the debt limit.

Steve Ellis:

This is where they try to make sure that certain things don’t get added on and you’re not passing policy rather than spending or revenue reforms through reconciliation. Okay, enough procedure, let’s get back to oil and gas. It’s disappointing that we lost these reforms. We don’t want industry to pass the buck on to taxpayers, so I’m sure we’re going to keep pushing for some of these bonding reforms and other things. Autumn, I remember you worked on some freestanding legislation related to bonding with Congressman Lowenthal, right?

Autumn Hanna:

Yes. Representative Lowenthal, chair of the Energy and Mineral Subcommittee on the House Natural Resource Committee, has really been committed to bonding reform for years. He’s introduced legislation to increase the individual lease bond minimums from the $10,000 they are now to $150,000 for the individual well, the statewide bond from 25,000 to 500,000, and the national bond minimum from 150,000 to 2 million. Those are important reforms in that bill. And then even in the Senate, we’ve had Senator Bennet of Colorado introduce similar legislation to raise those minimums to the same amount.

Autumn Hanna:

We really hope those efforts can move forward since we fell short here in the reconciliation bill. I should also note that the reforms I mentioned earlier have strong champions in Congress that have pushed over the years for many of those fiscal rates, we mentioned the royalty rates, the rental rates, the minimum bids, to be updated. We’ve had bipartisan legislation led by Senator Rosen of Nevada and Senator Grassley of Iowa. There’s been non-competitive leasing bills championed by Senator Hickenlooper of Colorado. On the House side, we’ve had many champions as well, including Congresswoman Katie Porter of California.

Autumn Hanna:

These issues have been getting attention. We just fell short at ever getting anything pushed forward. That’s why it’s exciting to see some traction here and hopefully these reforms getting enacted into statute.

Steve Ellis:

You’re listening to Budget Watchdog All Federal, the podcast dedicated to making sense of the budget, spending, and tax issues facing the nation. I’m your host, TCS president Steve Ellis, and we continue now with TCS vice president Autumn Hanna and research analyst Mia Huang. Something else I read in our oil and gas analysis of the reconciliation reforms was that oil and gas leasing in general seems to be linked to renewables. Mia, can you explain what that’s all about?

Mia Huang:

There’s definitely one pretty questionable proof in this bill and that is tying wind and solar development to oil and gas lease sales on federal lands. Basically during the 10 year period following the enactment of this bill, the Department of the Interior, or DOI, may not issue a right of way for wind or solar development on federal land, unless the DOI has met two requirements. One is it has held an onshore oil and gas lease sale within the last quarter, and two, has offered at least either two million acres or 50% of acreage nominated by industry, whichever is lesser, over the past year.

Steve Ellis:

Let’s give our listeners some context, Mia. I mean, do we often hit that threshold? I can see this tying hands on wind and solar energy production and what will this mean in practice?

Mia Huang:

In the last year of the Trump administration, only 800,000 acres were offered for sale and that did not meet the requirement included in this bill. In all the years before that, even when more than 2 million acres were offered for sale, really only less than 25% got leased. But that’s kind of beside the point, just because we could doesn’t mean we should. The Bureau of Land Management is mandated by Congress to manage public lands for a variety of uses, including energy development, recreation, et cetera, and offering a valuable public lands for oil and gas development just to meet a certain threshold even when it’s not the best use for that land is kind of contradictory to that mission.

Mia Huang:

Not to mention that a lot of times these lands under oil and gas leases are just sitting idle when they could have more valuable uses. This is definitely a questionable provision that clearly hampers the best and most efficient use of federal lands.

Steve Ellis:

That’s a very good point, Mia. I mean, the Department of Interior is tasked with managing our federal lands in the taxpayer’s interest. And as you said, forcing an oil and gas lease sale may not be the best strategy or use of those lands, especially when we now have so much land already locked in for oil and gas development, but is sitting idle. I know we’ve been raising the red flag about oil and gas interests raking in profits and choosing not to produce more oil to keep prices high, or at least in effect keeping prices high. Even though gas prices have eased a bit, we’ve all been digging deep into our pockets to pay at the pump, while oil and gas companies are pocketing record amounts of cash.

Mia Huang:

That’s right, Steve. We’ve been tracking oil and gas industry profits for a long time, and they’ve had a really strong recovery since the pandemic ended, posting record profits quarter after a quarter. In fact, in the second quarter this year, the top 20 US-based oil and gas exploration and production companies, that’s Exxon, Chevron, ConocoPhillips, Occidental, Devon Energy, et cetera, these companies reported combined profits of $58.4 billion. That’s almost six times the $10 billion they brought in over the same period last year and almost five times what it made in Q2 2019 before the pandemic started.

Steve Ellis:

Just to underscore this, I mean, what you’re saying, Mia, is, is that they’re making six times what they made last year and five times what they’re making even before the pandemic. Why are the oil companies raking it in, Mia?

Mia Huang:

Well, Steve, in a nutshell, there is the pent up demand after the pandemic, along with a few other factors, the most significant of which obviously is the war in Ukraine. All these contributed to soaring oil and gas prices. This in turn led to these strong earnings and record cash flows. If you dig into the earning releases and quarterly reports of these oil and gas companies, you can start seeing a pattern. All these companies highlight how much cash they have on hand and how they plan to return most of these cash, in some cases, more than 90%, back to investors in the form of stock buybacks, dividends, and variable dividends.

Mia Huang:

For example, Exxon announced increasing their stock buyback to $30 billion earlier this year, and Chevron plans to spend $10 billion in buybacks and ConocoPhillips also $10 billion to buyback variable dividends.

Steve Ellis:

Wow! Well, that’s not the whole picture, is it, Mia? I mean, it’s like these companies took their foot off the gas in terms of production, correct?

Mia Huang:

You’re absolutely right, Steve. We’ve observed that oil and gas companies have pledged capital restraint on choosing to limit the production growth through reward investors. In fact, Pioneer Resources CEO said back in March that they would not produce more, not even for $200 per barrel oil. For context, oil reached an all time high around $120 earlier this year, and finally coming back down to around $100. Basically what they’re saying is they will not produce more no matter how high oil prices will be.

Mia Huang:

Meanwhile, these companies are exploiting people’s concerns about gas prices and energy security to call on the administration to unleash oil and gas development, even though oil production reached its highest level of all time on federal lands in 2021. What is there to unleash? What they really want is more an easier access to federal lands. And in a sense, they got what they wanted through the provision that we mentioned earlier in the reconciliation bill. In fact, in our recent report on oil and gas lobbying, we found that in Q1 of this year, many oil and gas companies have lobbied Congress and the administration around the war in Ukraine and crude oil exports.

Mia Huang:

Despite raking in billions of dollars and setting record profits each quarter, just for this fiscal year, these oil gas companies can pocket $3.2 billion in tax breaks and $3.6 billion in sweetheart leasing terms. The oil and gas leasing reforms that we just mentioned that’s included in the reconciliation bill will be a step forward and ensure taxpayers get a fair return on the valuable natural resources that we all own.

Steve Ellis:

Thanks, Mia. I just want to underscore, one of the things that they’re doing here is trying to misdirect and take advantage of people’s anger about oil and gas prices and saying, “Oh no, look over there. We don’t have enough production,” even though there is highest levels of production. I mean, even for these guys, this is a very cynical game. There were external factors on demand and on supply through Ukraine and also in easing of the pandemic, but as gas prices shot up, they didn’t produce more oil. They pocketed the profits off of investors and used the crisis to ask for more subsidies and giveaways. It’s really good and it’s past time that taxpayers got some long awaited reforms in the reconciliation package.

Autumn Hanna:

Steve, just to add to your point and all the great information that Mia just gave us, I mean, the whole point of these fiscal reforms really is to make sure that we’re using this land for oil and gas development and that we’re getting taxpayers a fair return. And that that land, if it is leased for oil and gas development, oil and gas should be developed. We shouldn’t be speculating. We shouldn’t be holding land. When we make it so cheap, it’s easy to do that, right? It incentivizes that behavior. These reforms put us on the right track to fixing some of these problems we’ve seen in the system for decades.

Steve Ellis:

Thanks for that, Autumn, and thank you, Mia, for your hard work and joining me today. This has been really interesting. Well, there you have it, listeners. Once again, there’s more to this bill than its name. This is the frequency. Mark it on your dial. Subscribe and share. And know this, Taxpayers for Common Sense has your back, America. We read the bills, monitor the earmarks, and highlight those wasteful programs that poorly spend our money and shift long-term risk to taxpayers. We’ll be back with a new episode, and I hope you’ll meet me right here.