The U.S. federal government owns vast acreage of resource-rich public lands; $25 billion of oil and gas was produced from federal lands in 2019 alone. But thanks to decades of stagnant policies, these resources are being all but given away to oil and gas companies, to the detriment of taxpayers and the environment. The current pause on new oil and gas leasing offers the opportunity to turn these resources into a larger source of federal funds, while better protecting the local environment and helping to confront climate change.
Improving federal leasing policies doesn’t require novel policy ideas. The government can generate benefits for taxpayers and the environment simply by following practices that private landowners and major oil and gas producing states have pursued for years: high royalty rates, short lease lengths, high minimum bids, and strong bonding requirements.
Private landowners capture a high share of production revenue by demanding royalty rates that are often as high as 25%. These robust royalties help landowners earn fair value for their oil and gas, even when they are dealing with a sophisticated firm that knows more about the resource size than they do. Private landowners also demand that the work gets done quickly, giving firms 3 to 5 years to either start producing or surrender their drilling rights.
Individual states closely follow the private market. Texas sets royalties of 20 to 25% and lease lengths of 3 to 5 years on Texas state land. The lowest royalties used in Louisiana, New Mexico, and North Dakota are 20%, 18.75%, and 16.67%, respectively. None of these states awards leases with terms longer than 5 years.
Being the largest landowner in the United States, one would think the federal government would follow similar successful practices. It doesn’t. The royalty rate on federal leases is only 12.5%, and firms that sign federal leases get 10 years to develop them.
These shortcomings are compounded by the fact that firms don’t need to pay much up-front to get this sweetheart deal. The minimum up-front purchase “bonus” to get a federal oil and gas lease via auction is just $2 per acre. In Texas lease auctions, minimum bids are often as much as $5,000 per acre.
To make matters worse, firms can avoid even the $2 per acre payment by not bidding at all and then paying a small fee to obtain a lease through a “non-competitive” award process. As a result, firms with little interest in drilling can easily speculate on federal leases with no up-front expenditure. No wonder that 53% of all federal onshore leased acreage is not producing.