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The federal oil and gas leasing process plays a critical role in deciding whether, where and when oil and gas resources on public lands are developed, the revenue the government takes in, and the extent to which the local environment is protected. Federal law requires the U.S. government to balance among three, often competing, priorities in the oil and gas leasing process. It demands that policymakers develop federal lands for the economic benefit of the country, while simultaneously ensuring that environmental and cultural spaces are protected for future generations, and that U.S. taxpayers receive a fair return for the use of public resources. Yet, as concerns mount about the environmental impact of abandoned wells, low financial returns on federal resources, and slow development of leased lands, it is becoming clear that the government is not meeting its tri-partite requirements under the law.
Recognizing the need for reforms, President Joe Biden temporarily suspended oil and gas lease sales in January while his administration could review the program—a review that is still ongoing. The Biden administration has also signaled its commitment to clean up abandoned and orphaned oil and gas wells on federal lands, potentially putting displaced oil and gas workers to work cleaning up the wells. And all of this comes against the backdrop of intensified focus on addressing climate change not just within the administration but also in Congress and the broader public debate.
On November 15, EPIC hosted Interior Deputy Secretary Tommy Beaudreau for a conversation on the future of oil and gas drilling on federal lands as the Biden administration focuses on a transition to a clean energy economy. The Washington Post’s Juliet Eilperin led the conversation, which included EPIC Scholar and Harris Public Policy Professor Ryan Kellogg. Earlier this year Kellogg and his coauthor, Booth School of Business Assistant Professor Thom Covert, outlined recommendations to reform the oil and gas leasing process as part of the U.S. Energy & Climate Roadmap.
The conversation kicked off with Kellogg and Covert’s first recommendation: for the U.S. Bureau of Land Management (BLM) to set a royalty rate—that is, the share of the revenue generated by the leases that goes back to taxpayers—at a level consistent with rates in Louisiana, New Mexico, North Dakota, and Texas, where the royalty rate can exceed 20 percent. On federal lands the rate is just 12.5 percent.
“If you take the perspective that for federal lands we should be really emphasizing the oil and gas production more than revenue, which I think is really hard to do these days if you’re worried about climate, you can accept that [disconnect with state practices],” Kellogg says. “I think increasingly, myself included, it’s not clear why we’d have such a big disconnect between what the feds do and everybody else.”
Beaudreau said reforming the oil and gas leasing process, including royalties and the overemphasis on production, was a big reason why he came to the department. The emphasis on production is one that was set back in the 1970’s when priorities were different, Beaudreau noted. Now they must “unwind 40 years of administrative practice to align the programs with realities facing the United States and the world, particularly around climate.”
Speaking of the ongoing review, Beaudreau said that nothing in it will be a secret, but rather that the review was an exercise of “owning up to” the faults of the program and to “flip the script on the purpose of public lands away from one dominated, to use the rhetoric of the last administration, by the oil and gas interests, and one that instead is oriented as a baseline around the public’s interests, including local communities directly impacted by oil and gas activity on public lands,” Beaudreau said, also mentioning that he can now point people to Kellogg and Covert’s paper that provides a good overview of the problems and needed steps forward.
One part of the process that Kellogg and Covert also said needs to be reformed is the amount of time drillers can sit idle on federal lands. Right now, firms that sign federal leases get 10 years to develop them—double the amount of time major oil and gas producing states give to drillers on state lands.
Beaudreau underscored that this ties up land that otherwise could have been used for cultural activities, recreation, hunting and fishing, and wildlife conservation. Since Congress is unlikely to change the leasing term by statute, the department needs to find other ways to address it, Beaudeau said.
One way they can approach this as they’re reforming the program is to take a closer look at what lands are eligible and available for leasing in the first place. For example, Eilperin pointed out that on the day of the event President Biden was proposing a 20-year ban on oil and gas drilling in Chaco Canyon and surrounding areas in northwestern New Mexico, a sacred tribal site that also contains valuable oil and gas.
In addition to protecting sacred and historical sites, Eilperin unpacked another problem that the administration is confronting: orphaned and abandoned oil and gas wells—environmental hazards that will cost billions to decommission.
“I really don’t remember a time where discussions of orphaned wells or abandoned oil and gas wells were major a part of the conversation,” Kellogg said, noting that the bipartisan infrastructure bill, signed into law on the day of the event, contains money to help plug these orphaned wells.
“These are just a huge hazard in terms of local pollution, they leak methane which is a terrible greenhouse gas pollutant, so spending money and directing federal money at cleaning up these wells is a great investment just for the environmental aspects of it,” Kellogg said. “It’s also a great opportunity to employ an oil and gas labor force that hasn’t had as much work to do over the past couple of years. It’s one of those rare policy win-win-wins all around. But then that leaves this question. We have this horrible mess where we have hundreds of thousands of orphaned wells throughout the United States, how do we prevent that from happening again?”
Kellogg explained that most states and the federal government have regulations that mandate that an oil and gas company properly fill and decommission a well and remediate the site before they leave. But that is not happening because as these wells get older, they get bought by smaller and poorly capitalized oil and gas firms that often dissolve or go bankrupt, which then “leaves nobody left to pay the bill.”
Kellogg and Covert propose that the department increase the insurance, or bond, firms must post to cover decommissioning of wells to ensure oil and gas companies pay for clean-up costs. Currently, firms post a single $25,000 bond to cover all of their wells in each state, when modern shale wells cost more than $24,000 each to properly plug and abandon.
Beaudreau pointed out that indeed the Infrastructure Act does have about $4.67 billion to be devoted to orphan well clean up, but said, “that in itself reflects, in my view, a regulatory failure.”
“From a regulatory standpoint, both onshore and offshore, there’s no question that the financial assurance regime as it’s currently implemented by the department is inadequate and it is another example of the way it’s been constructed with the industry’s interests first,” Beaudreau said, and at the end of the day “the taxpayer is left holding the bag.”
He said the department is now having very focused conversations on exactly this issue as part of the reform of the oil and gas programs to prevent having to spend money again after the fact to clean up abandoned wells.
Beaudreau ended by saying that the reforms to the department need to not only address fiscal terms, a focus of Kellogg and Covert’s paper, but also the process itself.
“That means having better environmental reviews that learn from the litigation, but also directionally are in alignment with the policy priorities of the country, including around climate,” Beaudreau said. “It means from the outset reducing conflicts either with wildlife habitat or cultural sites such as Chaco. And again, flipping the script away from the default to ‘is there a reason that we lease there?’”