US Interior Review Targets ‘Speculative’ Leasing

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The US Department of the Interior (DOI) took aim at what it characterizes as “speculative” leasing practices in its long-awaited review of the federal oil and natural gas leasing program.

Quietly released just before the Thanksgiving holiday weekend, the department’s review stops short of suggesting the curtailing of future leasing, focusing instead on reforms to protect taxpayers.

The review finds that the federal oil and gas leasing program “fails to provide a fair return to taxpayers, even before factoring in the resulting climate-related costs that must be borne by taxpayers.”

Unhappy Customers

The report drew ire from both oil and gas lobbies and environmental groups.

Industry read the “overall tenor” as looking to cut back on federal leasing, according to the American Petroleum Institute (API). Dan Naatz, vice president of government relations for the Independent Petroleum Association of America (IPAA), said the report’s recommendations would dis-incentivize production.

Meanwhile, environmental activists argued that the report falls far short of Biden’s campaign pledges to halt new leasing.

“Greenlighting more fossil fuel extraction, then pretending it’s OK by nudging up royalty rates, is like rearranging deck chairs on the Titanic,” said Randi Spivak, public lands director at the Center for Biological Diversity.

Acreage Atrophy

But the 18-page report itself does not go into much depth on climate concerns. Rather, it is critical of what it calls “speculation by oil and gas companies” that locks up acreage with low production potential from other possible uses.

Industry interests objected to the characterization as misconstruing the time and multiple factors involved in developing leases.

“Our guys are businessmen, they’re not going to pay to rent, speculate and then never produce it,” Naatz says.

The report highlights a series of reform measures aimed at tightening the parameters and financial conditions around leasing, overlapping with much of what Democrats have already been pursuing in legislation.

For onshore acreage, the report says that oil companies hold more than 9,600 approved permits to drill and that the Bureau of Land Management (BLM) has approved more than 5,000 permits this fiscal year, with 4,400 still being processed.

“Industry suggests that the significant surplus of leases and permits is necessary for a successful business model, but this speculative approach contributes to unbalanced land management,” the report says.

In the offshore, the report notes that of the more than 12 million acres under lease in the Outer Continental Shelf, about 45% is either producing oil and gas or is subject to approved exploration and development plans. The remaining is either in an earlier stage of development or being held for speculative reasons.

The report comes on the heels of Lease Sale 257, which the Biden administration held under court order. The sale drew nearly $192 million in total high bids across 308 blocks.

Higher Royalties, Minimum Bids

The report makes the case for higher royalty rates, which the Biden administration has long planned to pursue, and limiting discretionary royalty relief.

Royalty rates for federal acreage are currently 12.5% for onshore operations and up to 18.75% in the offshore, depending on water depth.

Additionally, the report argues that minimum bonus bids should be substantially raised from the current $2 per acre, citing research from the Government Accountability Office (GAO) that found leases purchased with higher price tags are more likely to be developed in their first term.

New Standards

The GAO also identified roughly $2.3 billion in offshore decommissioning liabilities that are not covered by bonds, which Interior said adds stress to its plans to write new financial assurance regulations.

The department also outlined plans to develop a new “fitness to operate” standard for evaluating potential lessees based on their environmental, safety and reclamation histories.

Offshore Oil and Gas, Policy and Regulation, Upstream Licensing
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