Reform Federal Oil & Gas Leasing to Protect Taxpayers

Oppose efforts to derail important reforms that will modernize the federal leasing system and secure a fair return for taxpayers.

The federal leasing system has not kept pace with the oil and gas industry.  Decades-old, below-market rates have cost taxpayers BILLIONS. Every new lease signed under these terms was a financial loss, which is why recent efforts to fix federal oil and gas leasing are a win for taxpayers.

In 2022, Congress took an important step forward by reforming many terms in the onshore oil and gas leasing system. Two years later, the Department of the Interior finalized a new rule that secured these reforms, updated bonding requirements that left taxpayers shouldering the costs of orphaned well clean-up, and directed oil and gas leasing to areas that make sense.

The new rule helps ensure a fair return for taxpayers and protects taxpayers from shouldering the high costs of abandoned well cleanup.

1. Updates decades-old bonding requirements that forced taxpayers to pay millions of dollars to clean up wells the oil & gas industry has abandoned.
2. Solidifies recent reforms – including increases to the royalty rate, rental rates, and minimum bid – that are expected to raise $484 million over the next decade.
3. Takes further steps to raise revenue, protect taxpayers from future liabilities, and promote a federal oil and gas leasing system that fosters responsible development of our oil and gas resources.
   

Updated Oil & Gas Bonding Rates

Oil and natural gas producers operating on federal land are required to plug their wells and clean up the surrounding sites after production ends. To guarantee the cleanup of these potentially hazardous and environmentally harmful sites is paid for, producers are required to post a bond before they start drilling. If the company abandons its wells on a federal lease, or goes bankrupt, the bond is supposed to cover the reclamation expenses. But for leases on federal land, the required bond amounts hadn’t changed in 60 years and failed to cover the full cost of cleanup.

According to the Department of the Interior, it costs roughly $71,000 to plug and clean up an orphaned well, yet the Government Accountability Office reported that the agency held an average value of $2,122 per well in bonds in 2019 – leaving taxpayers paying millions of dollars for abandoned wells scattered across federal lands.

The new rule from the Bureau of Land Management changed that, increasing per lease and statewide bond minimums while also eliminating nationwide bonds and unit bonds. This rule better protects taxpayers from having to shoulder the oil and gas industry’s liabilities, keeping communities safe and saving taxpayers billions of dollars.

Market-Rate Royalties

For decades, the federal government employed the same, below-market royalty rate to oil and gas produced on federal lands; for every dollar of revenue a producer made on a barrel of oil, taxpayers got just 12.5¢. That rate of return, or royalty rate, was dramatically lower than what most states charge – Texas charges up to 25% – and what we get from a barrel of oil from the Gulf of Mexico – 18.75%. If a royalty rate of 18.75% had been imposed over the last decade (2012-2021), taxpayers would have received an additional $13.1 billion in revenue.

In August 2022, Congress updated these rates for the first time in over a century, raising the onshore royalty rate to 16.67% for the next 10 years. Often equal to or below the rate charged on adjacent state late, this new royalty rate will bring in billions of dollars in new revenue without impacting production. The final rule by the Department of the Interior codified this update and kept the royalty rate at 16.67% after the 10-year window.

However, more can be done to ensure taxpayers a fair return from the development of valuable oil and gas resources. The Department of the Interior should consider charging a royalty rate of 18.75% beyond the window, as 18.75% is more in line with what many states charge and what the federal government charges for oil and gas production in federal waters.

Up-To-Date Rental Rates

For too long, the federal government refused to raise rent for leases on federal land, charging just $1.50 or $2 dollars per acre for oil and gas developers who were not yet producing on federal land. Because of inflation, taxpayers received less than half what we should have, and lost roughly $292 million over the last decade.

In August 2022, Congress also updated these terms and started charging a fair price for holding valuable federal land for the next 10 years. The new rule not only secured these higher rates, but also guaranteed they are regularly updated for inflation after the law’s 10-year period ends.

Updated Minimum Bids

Until recently, the minimum amount companies could bid at auctions for federal oil and gas leases hadn’t been updated for nearly 35 years. Bidders had to pay a mere $2/acre to purchase leases on federal land. Of the 544,000 acres sold at auction in 2020, roughly 37% of all acres sold received the minimum bid.

Like royalties and rent, this minimum required bid was updated in August 2022. The new $10/acre rate helps taxpayers get a fair return for valuable federal land and the resources contained in it. The Department of the Interior’s new rule codifies this rate after the law’s 10-year window and regularly adjusts it for inflation.

The Elimination of Noncompetitive Leasing

In 1987, Congress said every oil and gas lease had to be offered in a competitive auction where companies can bid for it. BUT, they left in a loophole: the day after the auction, a company (or land speculator) could avoid paying a bid altogether by submitting a NONcompetitive offer for anything that didn’t sell the day before.

The result was predictable – companies regularly nominated land they wanted to lease, sat on their hands during the auction, and swooped in the next day to get the lease without even paying taxpayers the measly $2/acre minimum. Over the last 10 years, more than 2 million acres have been leased with no bid.

Luckily, this loophole was finally closed by Congress in August 2022, helping to keep oil and gas companies and speculators from acquiring noncompetitive leases on federal land without actually developing oil and gas resources. The Department of the Interior’s new rule ensures that codes reflect the elimination of noncompetitive leasing.

State Taxpayers Also Benefit from Recent Reforms

Most federal land and oil and gas production on federal land is concentrated in the West. States where federal land is leased get roughly half of all revenue from the leasing process and production, like auction bids, rent, and royalties. This means that state taxpayers were also losing big under the old system and will benefit equally from recent reforms that will bring in more revenue.

 
Find out about federal leasing and its impact on your state: