Climate bill would force oil companies to pay more to drill on federal land

(Bloomberg) — The climate-and-tax bill passed by the Senate would force oil companies to pay more for drilling on federal land and block them from stockpiling leases at rock-bottom prices, changes that conservationists and good-government groups have sought for years.

Supporters of the changes argue the current approach cheats taxpayers, with annual rental fees for some leased land sometimes amounting to less than the cost of a cup of coffee.

“The federal oil and gas program is broken, just giving away our public lands for nowhere-near-market rates,” said Jenny Rowland-Shea, deputy director of the public lands program at the left-leaning Center for American Progress. The bill’s proposed “fiscal reforms are going to do a lot” to change that, she added.

The changes have triggered alarm within the oil and gas industry, which has warned that the bill, if enacted, would hike costs for key steps in developing federal land in the western U.S. Industry leaders say it would further discourage drilling in those areas, including major swaths of the prolific Permian Basin in New Mexico, exacerbating supply concerns at a time of high crude and gasoline prices.

Collectively, the bill would “hurt American energy producers and drive up energy costs for the American people,” said Anne Bradbury, chief executive officer of the American Exploration and Production Council.

Simply nominating federal land for potential lease sales would now come at a price of $5 per acre, through a nonrefundable fee that would be adjusted for inflation every four years. The minimum price for bids at auction would rise to $10 per acre from $2 currently.

Existing onshore royalty rates of 12.5%, unchanged since they were codified under President Woodrow Wilson in 1920, would increase to 16.67%.

The bill also would end noncompetitive leasing, a practice where companies are able to anonymously nominate tracts for oil and gas development -- thereby prompting auctions of the territory -- and, later, buy up unsold acreage at bargain-basement prices without being hit by minimum bid requirements. A 2019 report from the Center for American Progress found that noncompetitive leasing locked up more than 2.9 million acres of US land over the previous decade.

The bill is more favorable for offshore drillers, after industry leaders helped beat back a slew of proposed fees on subsea pipelines, idle wells and production.

As passed by the Senate, the legislation would boost the royalties charged for offshore oil and gas production from a 12.5% minimum now to at least 16.67% and no more than 18.75%.

And, under a compromise secured by Senator Joe Manchin, the West Virginia Democrat whose vote was crucial for its passage, the bill would force the Interior Department to sell leases in the Gulf of Mexico and Alaska’s Cook Inlet, with three sales by Sept. 30, 2023. The bill also would reinstate a November 2021 auction of Gulf drilling rights that had been tossed out by a federal judge. And it would make future wind and solar rights on federal lands contingent on oil leasing.

That’s a stark shift from the current landscape. Interior Department officials have been mulling the possibility of holding no more offshore lease sales before 2028.

“On the path we were on, the Gulf of Mexico was vulnerable in terms of its continued investment viability, and this puts it back on track,” said Erik Milito, president of the National Ocean Industries Association. We “came out of a Democratic climate bill with mandates for offshore oil and gas leasing.”