Interior Department Report Paves Way for Increase in Royalty Rates for Drilling on Public Lands and in Public Waters

On November 26, 2021, the Department of the Interior (DOI) released its long-awaited “Report on the Federal Oil and Gas Leasing Program” (the Report), drafted in response to Executive Order 14008, “Tackling the Climate Crisis at Home and Abroad.” The Report, while thin on details, concludes that the federal oil and gas program “fails to provide a fair return to taxpayers, even before factoring [in] the resulting climate-related costs that must be borne by the taxpayers.” Key findings of the Report include:

• Royalty rates onshore are lagging the rates charged by oil- and gas-producing states.

• Bonding requirements provided by oil and gas companies to secure lease obligations have not been modified for decades and are currently inadequate to ensure oil and gas companies meet their lease obligations, especially regarding decommissioning.

• The minimum bid requirements for onshore leases are inadequate and have led to speculative trading of leases.

• Significant amounts of leased properties onshore and offshore are nonproductive, leading the DOI to conclude that there is “a sufficient inventory of leased acreage to sustain development for years to come.”

For onshore operations, the Report calls on the Bureau of Land Management (BLM), which oversees drilling on federal lands, to “improve the return to taxpayers and create an oil and gas program that is more consistent with BLM’s multiple-use sustained yield mandates.” The Report recommends an increase in the minimum onshore royalty rate of 12.5% to a rate consistent with the royalty rates charged by the states (e.g., 20%–25% in Texas, 16.7% in Wyoming, 20% in Colorado). The Report also calls on the BLM to increase the minimum bonus bid that is currently $2 per acre to a rate that would “discourage speculators and … provide a better return to the taxpayer.” The Report also calls on the DOI to “screen buyers” that bid on onshore leases to ensure bidders are “financially and technically qualified to develop leases.” 

The Report is far less specific with respect to offshore drilling and merely calls on regulators to continue “to study the most appropriate method for revising royalty rates and other fiscal terms to monetarily account for the costs of carbon dioxide, methane, and nitrous oxide.” Additionally, citing recent bankruptcies in the industry, the Report concludes that the “current regulatory structure governing financial assurances does not have the appropriate checks to intervene in advance of bankruptcies to require additional financial assurances.” The Report notes that the Trump administration proposed revisions to the financial assurance or bonding regulations and that the DOI will carefully review the proposed rule with the aim of “improving financial assurance requirements to better manage the risks associated with industry activities on the [Outer Continental Shelf].” The Report also calls on the DOI to move away from “area-wide leasing” to leases that offer “smaller areas” in order to “ensure that American taxpayers are receiving a fair return for offshore oil and gas resources.” 

While few specifics are offered, the Report also calls on the DOI to ensure that oil and gas operators on federal lands and waters are fit to operate leases, stating that companies with poor environmental, safety, or reclamation histories should not be entitled to bid on federal leases. The Bureau of Ocean Energy Management plans to develop a “fitness to operate” standard for companies seeking to be designated as oil and gas operators and to evaluate how to apply such a standard to potential new lessees or current lessees seeking to gain additional properties.

The Report will likely pave the way for legislation that increases royalty rates, minimum bid requirements, and other financial requirements in federal leases, especially for onshore leases. It is no surprise that all the reforms included in the Report were included in Congressman Raúl Grijavla’s House Natural Resources Committee’s markup of the Build Back Better budget reconciliation legislation. The committee included dozens of oil and gas reforms in its markup, but not all of them are included in the Report. Accordingly, based on the timing of the Report’s release and the fact that the Report recommended only a few oil and gas reforms, it appears that the only modest, albeit important, revisions to drilling on federal lands and federal waters will be included in the final version of President Biden’s Build Back Better Act. Environmental groups have criticized the Report for failing to call for a complete ban on drilling on federal lands and federal waters.