With Russia’s invasion of Ukraine and soaring oil and gas prices, federal oil and gas development gets spotlighted during every discussion on energy development and energy prices. Below are answers to some frequently asked questions (FAQs) primarily focusing on onshore federal oil and gas leasing to help you understand how the current leasing system works, why it’s broken, what the Biden Administration’s leasing pause was about and why it had little effect on federal oil and gas production.

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 million 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 gets 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 2021, the BLM was managing more than 35,000 leases covering more than 22 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 2021, roughly 9.5% of oil and 8.9% 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 $1.50 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 $1.50/acre first year’s rent and an administrative fee.

On January 27th, just one week after taking office, President Biden signed Executive Order #14008, Tackling the Climate Crisis at Home and Abroad, and paused new oil and gas lease sales on publics lands and in offshore waters indefinitely. The Department of the Interior (DOI) was ordered to conduct 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 pause any other aspects of oil and gas development like application for permit to drill (APD) or production, which usually takes place after land parcels have already been leased.

In the Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions released in June 2021, the Biden Administration signaled that it would use agency authority to reform some the leasing system, which was likely tied to the ongoing DOI review at the time. The DOI issued their federal leasing report in November 2021 after the comprehensive review, further reaffirming the need for reform. The DOI will release its proposal for updated leasing terms in January 2023.

The federal oil and gas leasing is in need of reform. For decades taxpayers have been shortchanged by the BLM and oil and gas companies through low royalty and rental rates, low minimum bonus bids, 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 $1.50/acre for the first 5 years and then $2/acre for the second half of the lease term. Had the 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 the 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 bid. 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 to 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 fix the broken and outdated leasing system and bring it into the 21st century with these reforms:

  • Raising royalty rates
  • Increasing minimum bids
  • Adjusting rental rates
  • Eliminate noncompetitive leasing

No. The pause was lifted by court injunction in June 2021. At the end of June 2022, the Bureau of Land Management (BLM) held the first quarterly auctions for oil and gas leases on federal lands of the Biden Administration. In total, the BLM held five sales, offering 162 parcels containing 128,510 acres of federal lands in seven states—Wyoming, Montana, North Dakota, Oklahoma, New Mexico, Nevada, and Colorado. For all parcels offered the sales, the BLM included a royalty rate of 18.75% that’s more in line with what states offer compared to the statutory minimum rate of 12.5% set in 1920. However, this updated rate was specific to these sales. Taxpayers will continue to lose out on potential royalty revenues if the higher 18.75% rate that matches the rate for offshore parcels is not permanently established.

No. While the pause was in effect, oil production on federal land rose by 18% and reached its highest production level of all time. Gas production increased slightly by 0.66% from 2020 to 2021.

The executive order only put a pause for new leases and did not affect existing oil and gas leases. When the pause was announced, there were around 11.3 million acres, or 47% of all leased federal lands, sitting idle and not producing oil or gas. And at the end of 2021, the industry was still sitting on 9.6 million acres waiting to be developed.

Combined with rising oil and gas prices, royalties collected from federal onshore oil and gas leases in 2021 were more than twice the total amount collected in 2020.

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