Oil and gas companies should pay more to drill on public lands and waters, Interior Department says

A pump jack over an oil well along Interstate 25 near Dacono, Colo., in 2018. (David Zalubowski/AP)

The 18-page Interior Department report describes an “outdated” federal oil and gas leasing program that “fails to provide a fair return to taxpayers, even before factoring in the resulting climate-related costs.”

The document calls for increasing the government’s royalty rate — the 12.5 percent of profits fossil fuel developers must pay to the federal government in exchange for drilling on public lands — to be more in line with the higher rates charged by most private landowners and major oil- and gas-producing states. It also makes the case for raising the bond companies must set aside for cleanup before they begin new development.

Though Friday’s report focuses on the fiscal case for updating the leasing program, Interior officials say they will also consider how to incorporate the real-world toll of climate change into the price of permits for new fossil fuel extraction. The Biden administration this year set its “social cost of carbon” at $51 per ton of emissions, but suggested the number could go even higher as researchers develop new estimates of the damage caused by raging wildfires, deadly heat, crop-destroying droughts and catastrophic floods.

“The direct and indirect impacts associated with oil and gas development on our nation’s land, water, wildlife, and the health and security of communities — particularly communities of color, who bear a disproportionate burden of pollution — merit a fundamental rebalancing of the federal oil and gas program,” the report says.

But many activists were dissatisfied with the document, which they say breaks President Biden’s campaign promise to ban new oil and gas leasing on public lands.

“We are destroying life on Earth by extracting fossil fuels,” said Randi Spivak, public lands program director at the Center for Biological Diversity. “The process needs to end, not be reformed.”

Economic analyses suggest the changes to royalty and bonding rates will increase revenue, but they will not significantly curb carbon emissions.

After a summer during which 1 in 3 Americans experienced a climate disaster, Spivak compared the administration’s plans to “rearranging deck chairs on the Titanic.”

The American Petroleum Institute’s Frank Macchiarola criticized the proposal for increasing the cost of fuel development in the United States.

“During one of the busiest travel weeks of the year when rising costs of energy are even more apparent to Americans, the Biden Administration is sending mixed signals,” Macchiarola, API’s senior vice president for policy, economics and regulatory affairs, said in a statement.

The long-awaited Interior Department report comes just days after Biden released 50 million barrels of oil from the Strategic Petroleum Reserve in an effort to combat rising gasoline prices. Earlier this month, Biden also approved the largest sale of offshore oil and gas leases in U.S. history, which a government analysis said could generate up to 1.1 billion barrels of oil and 4.42 trillion cubic feet of natural gas in the coming decades.

The report also coincides with efforts from congressional Democrats to pass a suite of oil and gas leasing changes included in the Build Back Better budget deal. The version of the bill passed by the House last month includes provisions that would raise the minimum royalty rate for onshore drilling for the first time in a century, shorten the length of leases from 10 to five years and eliminate a noncompetitive program that lets speculators buy leases for as little as $1.50 per acre.

That legislation now rests in the hands of the Senate, where Energy and Natural Resources Committee Chairman Joe Manchin III (D-W.Va.) — a powerful Democrat from a fossil fuel-producing state — has said he wanted to review the Interior Department’s leasing report before agreeing to new laws.

The Interior Department is able to increase royalty and bonding rates on its own. But enshrining the higher rates in legislation would shield the policies from the court battles that have held up other environmental initiatives.

In a statement, House Natural Resources Committee chairman Raúl M. Grijalva (D-Ariz.) called the current leasing program a “public subsidy for oil and gas drilling and extraction” and said the Interior report helps make the case for congressional action.

Friday’s report does not propose a new royalty rate, though officials have expressed openness to higher rates like those required by most oil- and gas-producing states, including North Dakota and Texas.

Raising the royalty rate to 18.75 percent — the rate charged for drilling in deep waters offshore — would generate an additional $1 billion per year between now and 2050, according to research by Brian Prest, an economist at the think tank Resources for the Future. A royalty rate of 25 percent for both on- and offshore drilling would double that number to nearly $2 billion annually. Neither policy would significantly impact energy prices for U.S. households.

But nor would they make much of a dent in greenhouse gas emissions, Prest said in testimony before the House Natural Resources Committee this spring. Less than 10 percent of oil and gas produced in the United States comes from Interior-controlled land, and cuts to U.S. production will be partly offset by increases in other countries. Prest estimated that the reductions from raising the onshore royalty rate to 18.75 percent would amount to just 0.1 percent of U.S. annual emissions.

Changing the bonding rate could have a more significant environmental impact, according to University of Chicago economist Ryan Kellogg.

The Interior Department said its lands contain scores of “orphaned wells” — abandoned oil and gas infrastructure the owners of which have disappeared, gone bankrupt or been lost to history. These facilities can continue to leak pollution for years, but the current minimum bond rate — just $25,000 for all a company’s facilities across an entire state — is not enough clean up even one shuttered well.

“Each one of these wells is a little time bomb in the ground that is ultimately going to leak methane” — a potent greenhouse gas, Kellogg said.

Raising the bonding rate ensures that funds for plugging old wells are dedicated ahead of time, rather than as an afterthought, he said.

The Interior Department document also calls for policy changes to discourage speculation and give communities more input in the leasing process.

Currently, there is no requirement that bidders on leases be publicly identified. Leases that don’t get sold at competitive auctions are put into a “noncompetitive” pool from which companies can rent land for a small administrative fee. This leads to firms buying and reselling leases at a higher price, the agency says — generating profits for speculators, rather than taxpayers. And it creates an incentive for companies to purchase leases even if they have no plans to develop, preventing that land from being used for recreation, habitat restoration or other purposes.

Many of these shortcomings have been identified in decades of reports from the Government Accountability Office and the Interior Department’s Office of Inspector General.

Tik Root contributed to this report.