U.S. Interior Blueprint Calls for Boosting Oil Royalty Rates

(Bloomberg) -- The Biden administration on Friday issued a long-awaited blueprint for overhauling oil and gas development on federal lands that includes boosting royalty rates despite high gasoline prices that have spurred demands to accelerate domestic production.

The Interior Department report recommends higher fees and more limits on federal oil and gas leasing to better account for climate change and ensure a higher return to taxpayers. The analysis represents the culmination of a comprehensive review that President Joe Biden ordered in January. 

The Interior Department said its 18-page blueprint could modernize oil and gas leasing programs “to better restore balance and transparency to public land and ocean management and deliver a fair and equitable return to American taxpayers.” The current program “falls short of serving the public interest” and “shortchanges taxpayers,” the report said.  

Among the changes recommended are boosting annual lease rental payments and raising the royalties that energy companies pay for the oil and gas they extract. The agency also recommended new restrictions on what lands are made available for oil and gas development, a big shift from the current practice in which most federal lands are open.

The assessment is being delivered against the backdrop of higher gasoline prices that have provoked concern at the White House and spurred calls for the Biden administration to go in the opposite direction, accelerating domestic oil and gas production. After OPEC+ nations rebuffed the administration’s call to ramp up oil production, Biden on Tuesday moved to release 50 million barrels of crude from U.S. emergency stockpiles. 

Frank Macchiarola, a senior vice president at the American Petroleum Institute, the oil industry’s top trade group, noted the report’s timing just days after the White House said Biden was “using every tool available” to lower gasoline prices. Instead, Macchiarola said, the Interior Department had “proposed to increase costs on American energy development.”

The report, which has spent months under review at the White House, was cast as a “reform agenda” for federal leasing. It telegraphs a slew of changes the Bureau of Land Management will pursue administratively. Other policy pivots would require action from Congress and dovetail with provisions of the just-passed House tax-and-spending bill.

If fully enacted, the recommended changes would winnow the land available for oil and gas development while raising the costs of that activity even where new leases are sold. 

The agency halted the sale of new leases while conducting its review, under a directive Biden issued Jan. 27. After a federal district judge ruled the moratorium unlawful in June, the agency moved to resume leasing, beginning with the sale of drilling rights in the Gulf of Mexico last week. 

Environmentalists Disappointed

Environmentalists expressed disappointment that the plan wouldn’t ban leasing altogether. 

“The administration needs to manage public lands and waters consistent with its climate commitments, and today’s report does not offer a plan to do that,” said Representative Raul Grijalva, a Democrat from Arizona who leads the House Natural Resources Committee. “What it does offer is a set of important and long overdue reforms to the federal fossil fuel leasing program, which until now has been a public subsidy for oil and gas drilling and extraction.”

Activists have pressed Biden to permanently block oil and gas development on federal lands and waters, having argued a warming world can’t afford to burn the fossil fuels they contain. Yet they are also a major source of American energy, supplying more than 20% of U.S. oil production and slightly more than 10% of its natural gas production.

Candidate Biden

On the campaign trail, Biden vowed to block new oil and gas permitting on public lands and waters. And more than 50 groups insisted in a June letter that the president should expand his campaign commitment to “not only end the federal leasing programs, but to wind down existing federal oil and gas production.” Activists blasted the administration’s decision to conduct the Gulf of Mexico lease sale, which was rescheduled in the face of a potential contempt of court citation. 

Collin Rees, a senior campaigner at the environmental group Oil Change U.S., called the report “woefully inadequate” and said it “reads as if it was written in the 1990s,” with “almost no new insights.”

“President Biden promised to end the leasing program entirely due to its deadly threat to the climate,” Rees said. “Interior’s recommendations fall far short of that goal, and ring particularly hollow days after the largest lease sale in U.S. history.”

But industry leaders and allies argue the U.S. can’t afford to curtail oil and gas development on federal lands and waters that provide about a quarter of the nation’s crude production. They warned against pivots that could jeopardize production on federal land and leave the U.S. more vulnerable to demand spikes like the one currently gripping the U.S.

“Arbitrary leasing or permitting restrictions only serve to cause uncertainty for American businesses and strained budgets for state and federal governments as well as local communities,” said Anne Bradbury, chief executive of the American Exploration and Production Council. “We appreciate where this report recognizes the positive contribution that our industry makes to the country and look forward to working with the administration to build on our environmental and economic progress together.”

The Interior Department said the Bureau of Land Management should consider changes to better screen lease buyers and narrow the amount of land that is available for auctions -- a shift that could ensure the highest-potential territory is tapped.

The department also said the bureau should boost rental rates, bonding requirements and royalty rates -- some established roughly a century ago. Companies typically have been charged 12.5% the value of oil and gas extracted from onshore leases, under a rate dating to the 1920s. For offshore leases, royalty rates have ranged recently from 12.5% to 18.75%. By contrast, in Texas, royalty rates can be double what the federal government charges. 

“States with leading oil and gas production apply royalty rates on state lands that are significantly higher than those assessed on federal lands,” Interior said. Meanwhile, bonding requirements haven’t been raised for 50 years and minimum bids and rents have been fixed for more than three decades, the department said.

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