Biden’s Oil-Leasing Review May Alter Royalties Set in 1920s

President Joe Biden’s moratorium of oil and gas leasing buys time for a broad review of whether -- and how -- fossil fuels should be extracted from lands under the U.S. government’s control.

The result could have a profound impact on an industry that employs hundreds of thousands of Americans by determining what access it will have on a 10th of the nation’s land and almost all of its coastal waters.

Biden on Wednesday directed the Interior Department to pause issuing new oil and gas leases “to the extent consistent with applicable law,” as part of a series of new climate policies and directives.

“We’re going to review and reset the oil and gas leasing program,” Biden said in a speech at the White House. “We’ll start to properly manage lands and waterways in ways that allow us to protect and preserve the full value they provide to us for future generations.”

Under the president’s order, regulators are being asked to conduct a “rigorous review of all existing leasing and permitting practices related to fossil fuel development on public lands and waters.”

Environmentalists want Biden to make the suspension of leasing permanent. But even if he doesn’t, future leasing could encompass far less terrain and come with higher costs and environmental limits.

“Anything moving forward is going to be much more carefully scrutinized,” said Josh Axelrod, a senior advocate for the Natural Resources Defense Council’s nature program.

Conservationists have been seeking major changes in the government oil and gas program for years, warning that the current approach shortchanges taxpayers and means annual rental fees for some leased acres can cost less than a cup of coffee.

Under the current regime for onshore acreage, oil speculators and developers can anonymously nominate tracts for development -- which prompts federal auctions of the territory -- and then buy unsold acreage later at bargain-basement prices.

Companies must pay the federal government a royalty for the oil and gas they extract from federal lands and waters -- but the rates, at 12.5% for onshore tracts, have been frozen since the 1920s. Offshore, the rates have ranged recently from 12.5% to 18.75%.

By contrast, states typically charge much more -- even as much as 25% in Texas -- for the oil and gas that comes out of their land, according to an analysis by the Center for Western Priorities that has lobbied for increases.

Beyond financial changes, the review will help dictate what areas might be up for grabs.

“The biggest thing this review will be figuring out is what areas should actually be up for lease or be up for drilling at all,” said Jenny Rowland-Shea, a senior policy analyst with Center for American Progress.

That includes identifying what areas overlap with the movement of wildlife, are near already protected lands, have low oil potential, threaten critical water supplies or could be better used to generate renewable power, Rowland-Shea said. “We’ll also see lots of suggestions for areas that should be withdrawn from mineral production altogether.”

Biden stopped short of ordering a halt to the sale of new coal rights, amid an ongoing legal challenge to the Trump administration’s reversal of an earlier coal leasing moratorium. But as part of the government review, regulators will consider changes to ongoing coal leasing too, said Gina McCarthy, White House national climate adviser.

While tens of millions of acres are leased for oil and gas development, less than half of those leases are actively producing, according to the Bureau of Land Management in 2018. That doesn’t mean the tracts are just sitting idle; oil companies can be conducting geological surveys to identify potential reserves or engaging in exploratory drilling.

Any future leasing could come with stipulations and fee structures designed to promote more rapid development. Democratic lawmakers have long advanced similar “use it or lose it” proposals in Congress.

“There’s this huge question of why is so much land leased if it’s not being used for production, does so much land need to be leased and is there any way to claw back leases that are never going to be produced?” Axelrod said. “Those questions will be looked at under the lens of Biden’s pretty clearly articulated climate and environmental goals.”

The Biden administration review will have to navigate a phalanx of competing interests -- including Native Americans and local governments worried about losing revenue tied to energy development. Oil and gas development currently provides billions of dollars annually to federal, state and tribal governments.

Even a one-year pause will be “devastating,” said Rob Black, president of the New Mexico Chamber of Commerce. Roughly 39% of New Mexico’s budget comes from burgeoning oil production, and within the state’s borders, much of the oil-rich Permian Basin is on federal land.

“This will not impact demand for oil. It will just move where the oil comes from and who benefits,” Black said. “Not only will we lose those tax revenues, but the oil and gas production will also move to areas with less environmental and climate controls than we have in New Mexico.”

The economic hit is expected to be biggest in New Mexico, North Dakota and other states with substantial oil and gas reserves on federal land. The effects on the oil industry also will be uneven, with the impact falling heaviest on producers with significant federal acreage, such as Devon Energy Corp. and Cimarex Energy Co. onshore and Murphy Oil Corp. offshore.

Stockpiling Leases, Permits

The moratorium would not affect existing oil and gas leases or ongoing operations on federal lands and waters, nor land the U.S holds in trust for tribes. Oil producers stockpiled leases and drilling permits last year in anticipation of more restrictions under Biden, with some companies amassing enough acreage to keep them busy for years.

About 22% of total U.S. crude supplies and 12% of U.S. natural gas came from federal lands and waters in 2019, according to the Energy Information Administration.

The effects of the leasing halt on U.S. oil and gas production could take longer to realize, especially in the Gulf of Mexico, where it can take years for companies to make a discovery and bring the resulting oil production online. If a leasing ban were extended to 2025, an option not now contemplated, it could pare Gulf production by some 300,000 barrels of oil equivalent per day from 2030 on, said Artem Abramov, head of shale research for Rystad Energy.

Biden’s move is already being challenged in court. The Western Energy Alliance filed a lawsuit in a Wyoming-based U.S. district court arguing that a leasing halt is an “arbitrary and capricious” move that violates federal laws, including a statutory requirement to hold quarterly sales of onshore leases.

Biden has more latitude to cancel currently scheduled sales of offshore leases, and his Interior Department could write a new plan limiting future auctions of tracts in the Gulf of Mexico and Alaska’s Cook Inlet from 2022 to 2027. Anything that rules out sales entirely “might prove hard to defend,” given that federal law requires the government sale schedule to consider the interest of potential oil and gas producers, ClearView Energy Partners, a research firm, said in a note for clients.

Conservationists are lobbying the Biden administration to make the temporary leasing pause permanent.

“Our public lands should be part of the solution on climate -- not the problem,” said Athan Manuel, director of the Sierra Club’s Lands Protection Program. “We know what happens when you develop and burn these fossil fuels, and we know what the result is going to be. There’s no way to do it safely or in a better way -- it’s just the time to keep this stuff in the ground, if we’re serious about fighting climate change.”

©2021 Bloomberg L.P.

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