Another Step Towards Federal Oil and Gas Leasing Reform

Legislative UpdateAnother Step Towards Federal Oil and Gas Leasing ReformHouse Energy and Mineral Resources Subcommittee held a hearing to examine bills that would increase taxpayer returns from federal oil and gas

Energy & Natural Resources,  | Analysis
Mar 17, 2021  | 9 min read | Print Article

On March 9th 2021, the Subcommittee on Energy and Mineral Resources of the House Natural Resources Committee held a legislative hearing  to consider several bills introduced last week by Representatives Porter (D-CA), Lowenthal (D-CA), DeGette (D-CO) and Levin (D-CA) to reform the federal oil and gas leasing system. After the remarks of the bill sponsors, a panel of witnesses presented testimony and then were questioned by subcommittee members.

For background information, Taxpayers for Common Sense has extensively documented how federal oil and gas leasing works and why it is a broken system that desperately needs reform. In short, the way the Bureau of Land Management (BLM) currently leases federal lands for oil and gas development cedes billions of dollars to the oil and gas industry through outdated royalties, rents, minimum bids, and process loopholes.

Bill Overview

The five bills discussed during the hearing aim to reform the federal oil and gas system by updating leasing terms that were set between 30 and 100 years ago, introducing fees to cover administrative costs, preventing cleanup liabilities from falling to taxpayers, and reducing resource waste among other things. Below is a brief summary of each bill:

H.R. 1517, Ending Taxpayer Welfare for Oil and Gas Companies Act, introduced by Rep. Katie Porter (D-CA-47), proposes to:

  • Raise royalty rate for new onshore federal oil and gas leases to 18.75 percent
  • Adjust the national minimum acceptable bid to $5 per acre
  • Increase the rental rate to $3 per acre for the first five years of a lease and then $5 per acre for the last five years of a lease
  • Require the Secretary of Interior to update the fees set in the bill at least every four years
  • Charge royalties on all gas from federal leases with certain small exceptions to reduce methane waste and increase royalties
  • Reform other aspects of federal oil and gas leasing like increasing rates for reinstated leases, instituting inspection fees, updating penalties for violating statutes, etc.

Learn more about the bill here.

H.R. 1505, Bonding Reform and Taxpayer Protection Act, introduced by Rep. Alan Lowenthal (D-CA-45), proposes to:

  • Require oil and gas companies to submit detailed interim and final reclamation plan to the Bureau of Land Management before drilling on federal land
  • Increase the bond amount that covers wells on a single lease from $10,000 to $150,00
  • Increase the bond amount that covers wells in the single state from $25,000 to $500,000

For more information on federal oil and gas bonding, see our fact sheet here.

H.R. 1506, Transparency in Energy Production Act, introduced by Rep. Alan Lowenthal (D-CA-45), would require fossil fuel companies to record and report emissions from drilling in accordance with reporting standards established by the Sustainable Accounting Standards Board (SASB).

H.R. 1492, Methane Waste Prevention Act introduced by Rep. Diana DeGette (D-CO-1), establishes multiple methane emission reduction goals and would require 85 percent of all gas produced on public lands be captured within 3 years of enactment and 99 percent be captured within five years. The bill would also establish more stringent lost gas reporting requirements and make the data publicly available.  Read our report on royalty-free lost gas here.

H.R.1503, Restoring Community Input and Public Protections in Oil and Gas Leasing Act, introduced by Rep. Mike Levin (D-CA-49) would: eliminate the noncompetitive leasing process; require a fee to nominate lands for lease; raise the onshore oil and gas royalty rate, rental fee and minimum bid; require the disclosure of identity for any company that nominates lands for oil and gas leasing or bids on leases at auction; restore community input in the leasing process; reinstate the use of master leasing plans to protect environmental resources, etc. Learn More about noncompetitive leasing here.

Hearing Recap

The Biden Administration’s executive order to pause federal oil and gas leasing was a central part of the debate during the hearing.  Chair Lowenthal (D-CA-45) was first to raise the temporary pause asking about the impact of a permanent leasing moratorium compared to that of a carbon fee. Dr. Prest, a witness from Resources for the Future, noted that a hypothetical permanent leasing ban would result in a loss of revenue in the long run, about $5-6 billion per year, but in the short term the effect is minimal because the leasing pause will not affect existing leases.

This is consistent with TCS analysis that the leasing pause will not affect current oil and gas production. Out of the 24.7 million acres of federal land under lease at the end of FY2019, more than 50% or 13.4 million acres were sitting idle and had not entered production.

Tax subsidies for oil and gas were also raised multiple times in the hearing. Mr. Mark Murphy, an owner of an oil and gas production company, repeated the inaccurate claim that the deduction for intangible drilling costs is like other business deductions and oil and gas companies do not enjoy any tax advantages compared to other industries. An explanation of how tax breaks that allow fast capital cost recovery subsidize industry is included in a recent TCS report Bad Bet: Oil & Gas Troubles Predate Pandemic Despite a Century of Subsidies. The report also notes that the form of various tax subsidies for the oil and gas industry like percentage depletion, expensing of exploration and development costs, etc. will cost taxpayers $12.5 billion over the next five years.

Rep. Graves (R-LA), commenting on the noncompetitive leasing process, claimed “someone is paying us for not doing anything…I’ll take that.” Unfortunately for taxpayers, federal lands leased noncompetitively generate very little revenue because rental rates were set more than 30 years ago and have never been adjusted for inflation. The likelihood of noncompetitive leases generating other revenue is also low. According to a recent Government Accountability Office report, only 1.2 percent of noncompetitive leases issued since 2003 were ever developed and started generating royalties for taxpayers.

Noncompetitive leasing, along with low bids and rental rates, also encourages federal land speculation. Private entities, or speculators, lease lands and seek to profit by reselling leasing rights to a production company. Few acres get resold, but vast stretches of federal land are locked up for years in the process.  Noncompetitive leasing is a process loophole in the federal oil and gas leasing system that needs to be addressed.

Rep. Graves ultimately withheld support for the measures at issue but did acknowledge problems in the federal oil and gas program and expressed willingness to work across the aisle on these reform measures. The ranking member of the whole Natural Resources Committee, Rep. Westerman (R-AR), expressed similar interest.

The impact of legislative reform versus Administrative action was also addressed. Because Executive Orders can be undone every four years, enacting legislative reforms enables long-term, strategic, and transparent management of valuable federal resources and better ensures taxpayers get a fair return for their development.

For TCS, these bills are an important step towards reforming the federal oil and gas leasing system.  Valuable resources and public lands that we all own deserve to be managed strategically and transparently. TCS will continue to track these bills as they move through the legislative process.

Photo Credit: Simon Foot via Flickr
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