On November 26, 2021, the Department of the Interior (“DOI”) released its report on federal oil and gas leasing practices in response to Executive Order 14008, Tackling the Climate Crisis at Home and Abroad. The report focuses on outlining the Federal government’s reform goals with respect to leasing processes, financial terms, and remediation requirements for oil and gas leases on federal lands. Although there is no definite timeline for the implementation of these reforms, exploration and production companies with federal leases or looking to lease federal land should be aware of the potential for the increased costs and government oversight that the DOI’s report contemplates.

Overview

The Secretary of the Interior was required to review and reconsider Federal oil and gas leasing and permitting practices as part of one of the Biden administration’s first executive orders. The report, which considers both onshore and offshore oil and gas leasing programs, identifies numerous recommendations which purport to serve three main goals:

• Providing a fair return to the American public and States from Federal management of public lands and waters, including for development of energy resources;
• Designing more responsible leasing and development processes that prioritize areas that are most suitable for development and ensure lessees and operators have the financial and technical capacity to comply with all applicable laws and regulations; and
• Creating a more transparent, inclusive, and just approach to leasing and permitting that provides meaningful opportunity for public engagement and Tribal consultation.

Most of the proposed reforms, discussed in more detail below, relate to the DOI’s findings that the fiscal components of Federal oil and gas programs have not changed over the past 30-100 years. The onshore proposals are aimed at increasing government revenue and curtailing lease speculation, while the offshore proposals are aimed at tackling the DOI’s environmental concerns. The recommendations serve as a high-level blueprint, and do not include specifics or timetables for the implementation of the recommendations.

Recommendations for Increasing Government Revenue

Onshore

The DOI’s recommendations for onshore federal leasing reforms are focused on increasing government revenue and curtailing lease speculation. Specifically:

• Royalty Rates: The DOI found that the Mineral Leasing Act’s minimum royalty rate 12.5% is less than the royalty rate for state owned lands. The DOI recommends that the Bureau of Land Management (the “BLM”) initiate rulemaking to establish a higher minimum royalty for onshore oil and gas leases. The report also asks the BLM to consider limiting discretionary royalty relief.
• Bonus Payments: The DOI cited a Government Accountability Office (“GAO”) study which reported that leases with bonus bids exceeding $100 per acre were 20 times more likely to be developed in their first lease term than leases purchased with the minimum bid of $2 per acre. The DOI recommends that the BLM initiate rulemaking to increase the minimum bid in an effort to reduce lease speculation and increase government revenue.
• Delay rentals: The DOI found that delay rental rates have not changed since 1987 and recommended that the BLM initiate rulemaking to increase delay rental rates for future leases.
• Bonding: The DOI recommends that the BLM increase minimum lease surety bond amounts to promote compliance with lease obligations including decommissioning and reclamation. The DOI also recommends that the BLM adjust bonds for already existing high-risk leases during adequacy reviews, when leases are reinstated, and when applications for permits to drill are extended.

Offshore

The DOI’s recommendations for offshore leases relate to increasing government revenue and factoring in costs of greenhouse gases into royalty rates:

• Royalties and Royalty Relief: The DOI acknowledged that the Outer Continental Shelf Lands Act (“OCSLA”) requires the government to negotiate leases such that the government receives fair market value. The DOI recommends that the Bureau of Ocean Energy Management (BOEM) and the Bureau of Safety and Environmental Enforcement (BSEE) continue to study appropriate methods to revise royalty rates to account for the costs of carbon dioxide, methane, and nitrous oxide. The DOI also reports that the BOEM and BSEE will reevaluate royalty relief guidance and economic assumptions that are currently used to evaluate royalty relief applications.
• Financial Assurances: The DOI found that recent bankruptcies have resulted in companies being unable to cover decommissioning liabilities, and that the current regulatory structure governing financial assurances does not have the appropriate checks to intervene in advance of such bankruptcies to require additional financial assurances. The DOI recommends that financial assurance coverage be strengthened to protect the government and acknowledged in its report that the BOEM and BSEE already published a notice of proposed rulemaking to address these issues in 2020.
• Fitness to Operate: The DOI wants to inhibit companies with poor environmental, safety, or reclamation histories from bidding for offshore leases or acquiring leases from other companies. To that end, the DOI reports that the BOEM plans to develop a “Fitness to Operate” standard for companies seeking to be designated as oil and gas operators and will evaluate how to apply such a standard to potential new lessees or current lessees seeking to gain additional properties. The DOI’s plan would establish mandatory criteria that companies must meet in order to operate on the U.S. Outer Continental Shelf.

Recommendations to Increase Government Oversight

Onshore

Throughout the land use planning process, BLM determines what land is available for leasing, what stipulations to apply, and what “conditions of approval” may be necessary on permits to drill. The DOI recommends that BLM should ensure that oil and gas is not prioritized over other uses and carefully consider expected yields of oil and gas, prospects of Federal royalty payment, conflicts with other uses, and the views of local communities, Tribes, businesses, and State and local governments.

• Low Potential Lands: The DOI recommends that BLM disincentivize companies from nominating large parcels of land for leasing which includes low-potential land, which often create costly and time-consuming community-led protests in areas without previous oil and gas development, and instead limit the focus to nominating and leasing areas with moderate or high potential for oil and gas resources in proximity to existing infrastructure.
• Bidding Requirements: The DOI recommends that BLM ensure bidders and any subsequent proposed leaseholders or operators are publicly identified and financially and technically qualified to develop leases in order to screen out speculators seeking to re-sell leases at higher prices or shield the identity of companies purchasing leases.

Offshore

The DOI’s only recommendation for offshore leases in this category relates to the practice of area-wide leasing. The DOI found that area-wide leasing significantly reduces the amount of competition and the value of bids. The DOI recommends that the BOEM consider advancing alternatives to the current practice of area-wide leasing. The DOI’s goal is to move to a leasing model where smaller areas are offered according to criteria including environmental protection, subsistence use needs, resource potential and financial considerations.

Recommendations to Create a more Inclusive and Just Approach to Managing Federal Land

The DOI claims that its processes for outreach and receipt of public input are not fair, adequate or equitable and perpetuate environmental injustice. Specifically, the DOI identified the practices of anonymous lease nominations and efforts to restrict or eliminate public notice and comment periods as leaving out local community voices, including Tribal voices. The DOI recommends that it undertake Tribal consultations and solicit more public input into the leasing and permitting process.

Conclusion

In sum, the DOI’s recommendations primarily involve increasing government revenue through raising royalty rates and increasing payment amounts. However, companies should be aware of the potential creation and implementation of “Fitness to Operate” standards and “conditions of approval,” which companies may have to meet to operate on the Outer Continental Shelf or be granted a permit to drill. There are no specific implementation timelines for these recommendations, and, notably absent, is any substantial mention of climate policy.

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