|Bureau of Land Management California manages nearly 600 producing oil and gas leases covering more than 200,000 acres and 7,900 usable wells, with the vast majority in the San Joaquin Valley on public lands such as these. Photo: John Ciccarelli, BLM. Flickr Creative Commons. Click to enlarge.|
Issue Backgrounder: Politics Putting Down Stakes Over Oil, Gas Leasing on Federal Lands
If the topic of oil and gas leasing on federal lands sounds arcane, think again.
It’s already come up in the upcoming election cycle, as several Democratic presidential candidates raise questions over the practice.
That alone suggests environmental journalists may want to solidify their grasp of leasing fundamentals in order to to stay ahead of the story.
Start with the basics: The U.S. government owns lands in a number of categories, and some — not all — of them can be “leased” for oil and gas drilling. The current administration, generally speaking, wants to offer as much as possible to oil companies as fast as possible.
The oil companies may applaud this. But fire-breathing Democratic candidate Sen. Elizabeth Warren, among others, has quite a different view. She says she would sign an executive order stopping all leasing on Day One if she gained the White House.
Why might the United States not want to adopt a “drill, baby, drill” policy? There are several reasons.
Climate change is the biggest: Burning hydrocarbons, whether oil or gas, means emissions of greenhouse gases like carbon dioxide and methane.
Another is ancillary environmental damage of drilling, such as destroying habitat for wildlife like sage grouse. Moreover, wells can harm groundwater if not sunk or plugged properly.
Finally, pumping huge quantities of oil quickly into a glutted market will not only drive down the price of oil, but yield low revenue for the Treasury when leases are auctioned.
Federal oil and gas leasing is complicated and bureaucratic. Hence this explainer. It can only skim the surface, but will help with the basics.
What federal lands can be leased?
The Interior Department’s Bureau of Land Management oversees the largest amount of federal land — much of it what has traditionally been called the “open range,” and almost all of it out West.
Most BLM land is managed under the Federal Land Policy and Management Act, or FLPMA, which typically allows for “multiple use” — e.g., grazing, drilling, habitat and recreation.
But other federal lands come under other jurisdictions, such as the National Forest System. National Forest lands have a separate set of rules (beginning with the Forest Service Organic Administration Act of 1897). But keep in mind, they too can be leased for drilling.
Some categories of federal lands
are definitely and legally
out of bounds for oil and gas leasing.
Some categories of federal lands are definitely and legally out of bounds for oil and gas leasing. Among them are National Park System and National Wilderness lands. And leasing happens only rarely on lands within the National Wildlife Refuge System.
The petroleum-bearing tracts offshore on the Outer Continental Shelf also are leased, but under a separate set of rules and economic conditions. [Editor’s Note: Offshore leasing will not be covered in this explainer (nor will coal leasing), but more information is available in previous SEJournal TipSheets here, here and here].
Not every federal acre that might legally be available gets leased. There are a number of procedural hoops to jump through first.
Lease sales must be held quarterly in every state where unleased lands are still available. Tracts must be of a certain size and compactness. Companies can nominate tracts that they want to see offered.
BLM then must conduct an environmental impact assessment for the proposed tracts, and these tracts are open for public comment and can be protested. Then the state BLM office decides what tracts will be offered.
How are leases sold?
Typically, leases are auctioned. A batch of tracts will be offered and bid on. A winning bidder gets the right to develop a tract. Eventually, developers will pay royalties to the federal Treasury for oil and gas actually extracted.
In administrative practice, BLM conducts the leasing of oil and gas for other federal lands agencies, under rules based mostly on the Mineral Leasing Act of 1920 (although other laws are also involved). Those agencies include, for example, the Forest Service and the Fish and Wildlife Service, and they may even include “split estate” private lands where the federal government owns the subsurface mineral rights.
In the old days, auctions of tracts to lease were held in public, in-person sessions. But during the late Obama administration, environmentalists were becoming increasingly active in protesting and disrupting auctions.
The bids in these auctions are actually called “bonus bids,” because the bids are a one-time variable amount paid in addition to other fees. Generally, the highest bidder (above a minimum of about $2 per acre) gets the tract. After bids are in, bidders must meet certain qualifications to win.
A lease is awarded for a “primary term” of 10 years. If drilling has begun during that time, the lease may be extended for another two years. If oil or gas is produced in commercial quantities during those years, then the lease can continue while it produces.
Before a lease produces, the lessee must pay rental fees, set at $1.50 per acre during the first five years and $2 per acre thereafter. Once the tract is producing, lessees pay royalties, currently set at 12.5 percent of the value of oil or gas produced.
Currently, BLM has set both rental and royalty rates at the lowest amount allowed by law. The federal royalty rate right now is considerably less than the rate charged for many state and private lands. On their own lands, states charge royalty rates ranging from 16.67 to 25 percent.
Before drilling, a lessee must obtain a permit from BLM. The Application for Permit to Drill, or APD, must include a technically detailed plan for the operation. The lessee must also post some kind of bond or assurance that affected lands and waters are restored and reclaimed after production stops.
How much drilling is or should be done?
The oil and gas markets are dynamic — and the politics of oil and gas are even more dynamic. The political struggles over drilling did not start with the Trump administration. They have gone on for many decades.
A few decades ago, domestic production was falling as U.S. oil plays matured, and many politicians preached about a dangerous U.S. dependency on foreign oil, usually as an argument for more oil-friendly federal policies.
Today, the landscape is transformed. The fracking revolution has revved up U.S. production to the point where we rival even Saudi Arabia — even as geopolitical chaos (and, yes, U.S. foreign policy) has suppressed production from places like Iran, Iraq, Venezuela, Nigeria or Libya.
Rather than being dependent on foreign oil or gas, companies based in the United States are steadily ramping up exports. At the same time, the politics and economics of OPEC have changed, and the United States or Russia are as likely as OPEC to be using oil and gas as a weapon.
The political position of the oil and gas industry
has been consistent: a strong and steady
pressure for more — more leasing, more production.
Through all this, the political position of the oil and gas industry has been consistent: a strong and steady pressure for more — more leasing, more production. What is different is that the Trump administration seems eager to give the industry what it wants.
In the coming years, political and legal conflict over federal leasing seems likely. For example, in February 2019, Trump’s BLM held a major lease auction of sage grouse habitat — whose protection was a major conservation achievement of the Obama administration.
The conflict between oil and gas leasing and natural resource conservation continues on a wide front. The Trump administration has been trying to sweep away regulations (may require subscription) that limit drilling on public land and shortening environmental reviews (may require subscription).
But in March 2019, a federal judge invalidated (may require subscription) some leases because BLM had not considered their climate impacts before issuing them. That decision could spawn much more litigation.
How much is enough?
Oil industry critics have pointed out that many of the leases bought up by oil companies during go-go leasing remain unused. Oil and gas companies can hold unused leases cheaply, and buying them at cheap rates can be a hedge against future uncertainty.
Also, it is frequently the case in lease sales that many more tracts are offered than are bid on. According to the Center for Western Priorities, BLM made over 47 million acres available for leasing at the behest of companies between 2009 and 2018, but only about 10 million of those acres received bids.
Is BLM flooding the market? Many critics, including the Government Accountability Office, think this approach deprives the Treasury (and taxpayers) of a fair price for publicly owned resources.
* From the weekly news magazine SEJournal Online, Vol. 4, No. 19. Content from each new issue of SEJournal Online is available to the public via the SEJournal Online main page. Subscribe to the e-newsletter here. And see past issues of the SEJournal archived here.