FAQs about the Pause on Federal Oil and Gas Leasing

FAQFAQs about the Pause on Federal Oil and Gas LeasingThe federal oil and gas leasing system, what's broken and what exactly President Biden's EO will do.

Energy & Natural Resources,  | Analysis
Feb 1, 2021  | 13 min read | Print Article

A week after taking office, the Biden Administration announced a pause on federal oil and gas leasing. Taxpayers for Common Sense applauds the decision. We have been calling for oil and gas leasing reform for years because the current system is broken, and each new lease issued under it is a loss for taxpayers. Outdated royalty rates, below-market rental fees, and noncompetitive practices like day-after-sale giveaways all need to be fixed for taxpayers to start getting a fair return from development of the oil and gas we all own.

To help you understand the current system, what’s broken, and what exactly the Biden Administration announced, below are answers to some frequently asked questions (FAQs) primarily focusing on onshore federal oil and gas leasing, which operates differently than leasing in the Gulf of Mexico and other federal waters. Leasing in Alaska is also unique and not covered here. Information specific to leasing in the Arctic National Wildlife Refuge (ANWR) in Alaska is available here.

For more information, we’ve compiled some of our other research here.

As its name implies, the Bureau of Land Management (BLM) under the U.S. Department of the Interior (DOI) is responsible for managing 245 million acres of land owned by the federal government. That means managing all activity on the land, from recreation and conservation to grazing and, importantly, the production of natural resources like hardrock minerals, coal, oil, and natural gas. The federal government owns development rights underneath private lands, so the BLM actually manages 700 acres of “mineral estate.” The BLM’s rules and processes for managing how companies explore for and develop oil and natural gas on federal lands is referred to as the “federal oil and gas program.”

As part of the program, the BLM holds lease sales that determine who get exploration and development rights to parcels of federal land, issues rules for responsible development and cleanup, and conducts enforcement activities to make sure they’re followed. At the end of 2019, the BLM was managing more than 38,000 leases covering more than 26 million acres of federal land. The leases are concentrated in five western states (Colorado, Montana, New Mexico, Utah, Wyoming) and Alaska, where leases are in the National Petroleum Reserve-Alaska (NPR-A) and operate under separate rules. This FAQ mostly describes the federal oil and gas program in the Lower 48.

In 2019, roughly 1 in every 13 barrels of oil and 11 cubic feet of natural gas produced in the U.S. came from federal lands.

By law, it is federal policy that taxpayers must receive “fair market value for the use of public lands and their resources…” The federal oil and gas program tries to collect this value for taxpayers at separate points in the leasing process. However, the terms set by the BLM during the lease sale process and in the lease agreements with operators currently fail to achieve the fair market value requirement.

To capture the value of the rights to explore for and develop federal oil and gas resources, the BLM sells leases to the highest bidder in a live auction. This revenue is called “bonus bid” revenue. To capture the value of holding onto federal land (and preventing some other uses of it), the federal government charges lease holders rent. And to capture the value of the oil and gas itself, the BLM charges operators a set percentage of the resources’ value when they sell the oil and gas to others. This percentage is the “royalty rate.”

At every step along the way, however, taxpayers lose (see below). Nearly half (49%) of all revenue generated by federal oil and gas leases is shared with the states where the leases are located. So, the low returns from the federal oil and gas program affect state and federal taxpayers alike.

Of course, aside from direct revenues, oil and gas development on federal land also benefits taxpayers by supporting economic activity.

To find a more detailed walkthrough of the leasing process, read our Oil and Gas Leasing 101.

The Secretary of the Interior is required to hold leases sales at least quarterly in every state where unleased lands are eligible under the Mineral Leasing Act. Lease sales are now held through a commercial on-line website called EnergyNet.

The lease sale process begins with public nominations of available lands to be included in a sale. The BLM state office considers these nominations and conducts an environmental review. Based on that review, the state office then issues a notice of sale, with a period for public comments or formal protests on the proposed leases. After the comment period, the state office publishes the final list of tracts available for lease and opens the online bidding.

Lands that are offered for sale go through a competitive bidding process and the legal minimum for a bid, also known as the bonus bid, is $2/acre. Companies who win the bid will have to pay the BLM an application fee, the bonus bid amount, and the first year’s rent priced at $1.5 per acre.

However, not all lands offered for sale get bid on and the ones that did not would be available for noncompetitive leasing for 2 years. Oil and gas operators can file for a noncompetitive offer and if accepted, only have to pay the $1.5/acre first year’s rent and an administrative fee.

The Biden Administration has taken two immediate steps that affect management of the federal oil and gas program. On January 20th, the Acting Secretary of the Interior, Scott de la Vega, issued secretarial order No. 3395, Temporary Suspension of Delegated Authority. On January 27th, President Biden signed Executive Order #14008, Tackling the Climate Crisis at Home and Abroad.

The executive order put a pause on oil and gas leasing on public lands and in offshore waters indefinitely pending a comprehensive review of permitting and leasing practices, which will include reconsidering the royalty rates for coal, oil and gas. The executive order did not put a pause on other aspects of oil and gas development like application for permit to drill (APD), which usually takes place after land parcels have already been leased. The executive order also called for the elimination of fossil fuel subsidies to the extent that federal funding “is not directly subsidizing fossil fuel”.

Compared to the Interior Department secretarial order signed on Jan 20th, the executive order issued a longer pause but the focus of the pause is narrower. The secretarial order would only remain in effect for 60 days, but the authority to conduct most activities pertaining to Department of Interior’s mission was suspended except for high-level staff. Once the 60-day effect of the secretarial order ends, other regulatory operations related to oil and gas development, like environmental review, granting rights of way, issuance of amendment to or extension of a lease and permit to drill, etc. shall resume, since the executive order does not preclude these operations.

Because we have been tracking the federal oil and gas leasing for years and believe that taxpayers have been shortchanged by BLM and oil and gas companies through low royalty and rental rates, low minimum bonus bid and the noncompetitive leasing process.

Lost Royalties:

The century-old royalty rate of 12.5 percent cost taxpayers up to $12.4 billion in lost revenue over the last decade compared to the rate for offshore federal oil of 18.75 percent. Meanwhile, private and state interests charge royalties as high as 25% on adjacent and nearby lands.

Out-of-date rental rates:

Rent for leased lands were first set in 1987, at $1.5/acre for the first 5 years and then $2/acre for the second half of the lease term. Had BLM simply adjusted for inflation on rental rates, it could have collected $335 million more over the last decade in rents alone, saving taxpayers money.

Noncompetitive sale:

The existence of noncompetitive sale process allows oil and gas companies to nominate lands for auction, not submit any bid on the day of auction and snag it the very next day with a noncompetitive offer without paying a bit. In one case, a lease sale in Montana in December 2017 offered 204 parcels of land and only 55 of which received a bid. Highland Montana Corporation swooped in to get 132 out of the remaining 149 parcels of land the next day, acquiring 67,000 acres without a single bid. In fact, according to a GAO report, noncompetitive leases comprised about 27% of all leases and 38% of all acreage over 2003-2019. The report also found that only 1.2% of noncompetitive leases from 2003 to 2009 ever entered production

We believe that taxpayers win when we reform the broken and outdated leasing system and bring it into the 21st century. With these reforms:

  • Raising royalty rates
  • Eliminate non comp
  • Increasing min bids
  • Adjusting rental rates

This is no cause for alarm. The executive order only put a pause for new leasing and will not affect existing oil and gas leases.

In the last four years, we’ve leased 4.8 million acres and few have entered production yet. And even before the Trump Administration fast-tracked leasing we had millions of acres of federal land leased for the purpose of oil and gas development but had yet to be developed—of the 24.7 million acres under lease at of end of FY2019, 11.8 million acres are sitting idle and not producing. Our oil and gas supply is outpacing demand and the glut is keeping prices low.

State and federal revenues will see little impact because leasing land doesn’t equal production (see above). Yes there will be some temporary impact to bidding revenue, but bids have dropped in recent years so in the long run slowing down and taking stock will be a win for taxpayers. Lastly, bid revenue delayed is not bid revenue denied; acres not leased this year will likely be available for lease later.

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