Recent Developments

 

Federal Oil and Gas under the Biden Administration

Executive Order 14008. One of the highlights of the great many policy changes that the Biden administration has made, affecting the federal oil and gas program, is the “Executive Order on Tackling the Climate Crisis at Home and Abroad” that was issued by President Biden on January 27, 2021.  Most importantly, among the numerous actions directed by that order, the Secretary of the Interior, to the extent consistent with applicable law, was to “pause new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of Federal oil and gas permitting and leasing practices,” and to “consider whether to adjust royalties associated with coal, oil, and gas resources extracted from public lands and offshore waters, or take other appropriate action, to account for corresponding climate costs.”

Litigation was filed in response to the “pause,” including cases in the U.S. District Court for the District of Wyoming, Western Energy Alliance v. Biden, and State of Wyoming v. U.S. Department of the Interior (which was consolidated with the Western Energy Alliance case); and in the U.S. District Court for the Western District of Louisiana, State of Louisiana v. Biden, and American Petroleum Institute v. U.S. Department of the Interior. On June 15, 2021, the court in the State of Louisiana case granted a nationwide preliminary injunction against implementation of the leasing pause. The Interior Department appealed the preliminary injunction to the U.S. Court of Appeals for the 5th Circuit; but the Department stated that it would comply with the court’s directive and resume leasing while the appeal was pending.

Several BLM State Offices, by way of asserted compliance with the District Court’s preliminary injunction, posted notices on August 31, 2021, identifying limited numbers of parcels that were under consideration for inclusion in upcoming lease sales — the first step of a process that would bestow leasing opponents with three bites at the apple: the 30-day scoping comment period in the schedule that the Department presented to the court; a 30-day comment period following environmental review of the parcels under the IM; and a 30-day protest period upon publication of the sale notice.  According to the BLM website, any sale notices resulting from the review process — which was to be conducted in accordance with Instruction Memorandum 2021-027 (see below) — were to be published by December, implying a resumption of leasing in the first quarter of 2022.

However, it took the BLM State Offices until April 18, 2022, to actually issue notices of competitive lease sales, to be held in the second quarter; and by that time, BLM’s review process — under new policy guidance to avoid offering lands with “potential conflicts with other resources,” “low potential lands,” and lands that are not “near areas with existing development” — had led to a drastic reduction in the number of parcels being considered, with a BLM press release of April 15 being able to boast of “an 80 percent reduction from the acreage originally nominated.”  Moreover, under BLM’s new policy guidance, the royalty rate for any leases that might issue as a result of the June 2022 lease sales would be raised from 12.5% to 18.75%.

Since its second-quarter 2022 lease sales, BLM has failed to hold any further lease sales whatsoever — although a limited number of parcels are presently under consideration for possible lease sales in the second and third quarters of 2023.

(One offshore lease sale was conducted by the Department, on November 17, covering lands in the western Gulf of Mexico; but that sale then was invalidated by a January 27, 2022, decision of the U.S. District Court for the District of Columbia in Friends of the Earth v. Haaland, requiring further analysis of the sale’s potential impact on greenhouse gas emissions.  And the Department announced, on May 11, 2022, that the three remaining offshore lease sales that were to be held under the current five-year leasing plan would not take place at all.  The status of those offshore sales, however, has been altered by provisions of the Inflation Reduction Act of 2022, discussed below, directing the Secretary to issue leases for the tracts that were won in the November 2021 sale, and to conduct the other sales that were scheduled.)

On August 17, 2022, the preliminary injunction that the District Court had issued in the State of Louisiana case was vacated by the U.S. Court of Appeals for the 5th Circuit.  The Court of Appeals’ decision did not address the merits of the injunction, but instead remanded the case to the District Court based on a finding that the preliminary injunction had failed to sufficiently specify the conduct that was being enjoined.

The following day, however, the U.S. District Court in Louisiana issued a permanent injunction against the federal government’s implementation of “a Stop, referred to in Executive Order 14008 as a Pause, on new oil and gas leases on public lands and in offshore waters, as set forth in Section 208 of Executive Order 14008, as to all ‘eligible’ lands both onshore and offshore.”  The court found the pause to be a violation of the requirement to conduct lease sales under the Mineral Leasing Act and the Outer Continental Shelf Lands Act.  (Addressing the Court of Appeals’ objection to the District Court’s previous ruling, the District Court specified that the Stop, or Pause, that was being enjoined was “the cessation of the leasing process of eligible federal lands” pursuant to the Executive Order.)  The applicability of the permanent injunction was limited, however, to federal actions in those states that were parties to the case: Louisiana, Alabama, Alaska, Arkansas, Georgia, Mississippi, Missouri, Montana, Nebraska, Oklahoma, Texas, Utah, and West Virginia; and the court’s order also was only applicable to federal actions taken on or before the date of filing of the case (March 24, 2021).

In the Wyoming litigation, meanwhile, the court on June 30, 2021, dismissed, without prejudice, that case’s motion for a preliminary injunction, as being mooted by issuance of the nationwide preliminary injunction in the Louisiana litigation.  The Wyoming court stated that the motion could be renewed if the preliminary injunction in Louisiana “is vacated, withdrawn, or otherwise altered in a material manner.”  On September 2, 2022, however, that court issued a decision on the merits of the case, ruling in the government’s favor on the leasing pause.  The decision was narrow in scope, though.  The court, first of all, threw out all challenges to agency actions that took place after the lawsuits were filed — i.e., anything other than BLM’s failure to hold first-quarter 2021 sales. The court then rejected the challenge to those sales based on evidence that, irrespective of the leasing pause, BLM’s failure to hold those sales could be justified by a need for further environmental review of greenhouse gas impacts from the sales. Until that review was completed, the court concluded, BLM could properly find that the lands were not “available” to be offered in a lease sale.  On December 1, 2022, the state of Wyoming filed an amended petition with the court, addressing the Interior Department’s failure to hold lease sales in Wyoming for the second and third quarters of 2021, and the third quarter of 2022, as well as “the Secretary’s adoption of an unwritten policy that stopped quarterly oil and gas leasing.”

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Report on the Federal Oil and Gas Leasing Program.  On November 26, 2021, the Interior Department issued its report in response to Executive Order 14008 of January 27.  The report’s introduction summarized its findings, which — as repeatedly telegraphed by the Department’s press releases in the meantime — were a predetermined conclusion:  “The review found a Federal oil and gas program that fails to provide a fair return to taxpayers, even before factoring in the resulting climate-related costs that must be borne by taxpayers; inadequately accounts for environmental harms to lands, waters, and other resources; fosters speculation by oil and gas companies to the detriment of competition and American consumers; extends leasing into low potential lands that may have competing higher value uses; and leaves communities out of important conversations about how they want their public lands and waters managed.”  To address these asserted shortcomings, the report recommended a number of actions that the Department could take, as well as encouraging Congress to take some further actions.  Specific recommendations in the report included:

  • Royalties — “The BLM should begin to adjust royalties for competitive leases offered in individual lease sales and initiate a rulemaking to establish a higher minimum royalty for onshore oil and gas leases.  The BLM also should consider limiting discretionary royalty relief . . . while it updates its current royalty relief guidance and reassesses the economic assumptions used during royalty relief application evaluations.”
  • Bonus Bids — “The BLM should initiate rulemaking to increase the minimum bid to discourage speculators and to provide a better return to the taxpayer.”
  • Rental Rates — “The BLM should initiate a rulemaking in order to increase rental rates for future lease sales.”
  • Bonding — “The BLM should increase minimum bond amounts and set appropriate levels taking into consideration changes in technology, the complexity and depth of modern wells, inflation, and the risk of abandonment.  While such regulations are being developed, BLM should adjust bonds for individual, high risk leases through adequacy reviews and when leases are reinstated or applications for permits to drill are extended.”
  • Planning — “As an overarching policy, BLM should ensure that oil and gas is not prioritized over other land uses, consistent with BLM’s mandate of multiple-use and sustained yield.  The BLM should carefully consider what lands make the most sense to lease in terms of expected yields of oil and gas, prospects of earning a fair return for U.S. taxpayers, and conflicts with other uses, such as outdoor recreation and wildlife habitat.”
  • Low-Potential Lands — “The BLM should evaluate operational adjustments to its leasing program that will avoid nomination or leasing of low potential lands and instead focus on areas that have moderate or high potential for oil and gas resources and which are in proximity to existing oil and gas infrastructure.”
  • Bidding Requirements — “The BLM should consider reforms that ensure that bidders — and any subsequent proposed leaseholders or operators — are publicly identified and technically qualified to develop leases.”

Instruction Memorandum on Land Use Planning and Lease Parcel Reviews

The Bureau of Land Management, on April 20, 2021, issued Instruction Memorandum No. 2021-027, updating its policies for the review of parcels for inclusion in competitive oil and gas lease sales. The Trump administration, in 2018, had issued IM No. 2018-034 to streamline the parcel review process, which set a target for parcels to be offered for competitive bidding within six months from when the lands were nominated. That target (a worthy goal, though seldom if ever met) was a response to the extensive delays that had developed in the preceding years, due partly to prior administrations’ parcel review policies, but also to the chronic staff shortages suffered by BLM offices. IM No. 2018-034 was superseded by the new Biden administration IM, which establishes 30-day public review and comment periods for either a Determination of NEPA Adequacy or an environmental assessment during the parcel review, as well as a 30-day protest period from the posting of a lease sale notice. (With regard to protests, IM No. 2021-027 specifies that an unresolved protest will not defer the offering of a parcel in a lease sale; but a lease may not issue for that parcel unless and until the protest is denied.) The new IM – which is applicable to federal minerals except under lands managed by other surface management agencies (but which is applicable to federal minerals under private surface within National Forests, for which the IM encourages either a joint environmental review by BLM and the Forest Service or an environmental review by the Forest Service that is then adopted by BLM) – finds a middle ground between the Trump administration process and the more-burdensome process that was developed under the Obama administration, expressly declining to reinstate the use of Master Leasing Plans as an added layer of the process. The new IM also directs that BLM’s lease parcel reviews are to be conducted simultaneously with environmental reviews, rather than having one await the completion of the other; it affirms that BLM will not routinely defer leasing while awaiting an amendment to a resource management plan; and it disfavors site visits as an extra step in the review process.


Inflation Reduction Act of 2022

This Act, which was signed into law on August 16, 2022, includes a number of provisions with significant impacts on federal onshore oil and gas leasing (with comparable changes being made for offshore leasing):

  • Expression-of-Interest Fee. The Act imposes a new fee of $5/acre (subject to adjustment for inflation) for filing an expression of interest to nominate lands for competitive leasing. (Comment: This provision appears calculated to deter most expressions of interest from ever being filed, thus cutting off the flow of new parcels to be offered in future lease sales.)
  • Oil and Gas Minimum Bid. The Act raises the minimum bid at lease sales to $10/acre (from a current minimum of $2/acre). (Comment: This provision similarly seems calculated to reduce the number of federal leases that are issued, especially in conjunction with the Act’s elimination of noncompetitive leasing.)
  • Rental Rates. The rental rate for new leases is raised to not less than $3/acre for the first two years; $5/acre for the next six years; and not less than $15/acre for the remainder of the primary term (from a current rate of not less than $1.50/acre for the first five years, and not less than $2/acre for the remainder of the primary term). The rental rate for reinstated leases is raised to not less than $20/acre (from a current rate of not less than $10/acre).
  • Onshore Oil and Gas Royalty Rates. The royalty rate for new leases is raised to 16-2/3% (from a current rate of not less than 12.5%). The royalty rate upon reinstatement of terminated leases is raised to not less than 20% (from a current rate of not less than 16-2/3%).
  • Elimination of Noncompetitive Leasing. BLM may no longer issue new noncompetitive leases. The Act instead provides for (but does not require) a new round of competitive bidding for lands on which no bids are received in a competitive sale. Note: Ambiguities in the Act’s wording appear – perhaps unintentionally – to eliminate the authority for Class II reinstatement of all terminated noncompetitive leases, including noncompetitive leases that are already in effect.
  • Lease Terms. The Act makes subtle (but potentially significant) changes to the wording of the statute as to lease terms:
    • (1) current: “shall continue so long after its primary term as oil or gas is produced in paying quantities,” vs. new: “shall continue after the primary term of the lease for any period during which oil or gas is produced in paying quantities;” and
    • (2) current: a lease where “actual drilling operations were commenced prior to the end of its primary term and are being diligently prosecuted at that time shall be extended for two years and so long thereafter as oil or gas is produced in paying quantities,” vs. new: a lease where “actual drilling operations were commenced and diligently prosecuted prior to the end of the primary term of the lease shall be extended for 2 years and for any period thereafter during which oil or gas is produced in paying quantities.”
  • Royalties on All Extracted Methane. Royalties will be assessed, for newly-issued leases, on all gas that is consumed or lost, except for gas vented or flared for up to 48 hours in emergencies; gas used or consumed on or for the benefit of a lease or unit or communitized area; or gas that is unavoidably lost.
  • Ensuring Energy Security. During the 10 years following enactment, a right-of-way for wind or solar development on federal lands may be issued only if (a) an onshore oil and gas lease sale has been held (somewhere in the country) during the preceding 120 days, and (b) the total area offered in lease sales during the preceding year is at least 2,000,000 acres or 50% of the acreage for which expressions of interest were filed during the year (whichever is less).  (Comment: This section was included in the Act as an incentive for the Department to maintain a certain level of onshore and offshore sales in trade for additional wind and solar development. But compliance will only require the Department to hold the sales, not to issue any leases as a result of them.)

Leasing Program Guidance under the Inflation Reduction Act

The Bureau of Land Management, in the wake of the Inflation Reduction Act, issued a series of seven new Instruction Memoranda on November 21, 2022:

IM 2023-006 – Implementation of Section 50265 in the Inflation Reduction Act for Expressions of Interest for Oil and Gas Leases. Sec. 50265 is the compromise provision that was put into the Act which makes BLM’s further issuance of wind and solar energy rights-of-way contingent on (1) BLM’s holding at least one onshore oil and gas lease sale in the preceding 120 days and (2) BLM’s offering a certain number of acres in onshore sales (dependent on the number of acres for which expressions of interest have been filed) during the preceding year. This IM provides guidance on calculating the acreages in question. (Comment: If the Inflation Reduction Act’s new $5/acre fee on expressions of interest succeeds in throttling the filing of EOI’s, then BLM isn’t going to have to offer very many acres in oil and gas lease sales, in order to qualify for the continued issuance of wind and solar rights-of-way.)

IM 2023-007 – Evaluating Competitive Oil and Gas Lease Sale Parcels for Future Lease Sales. This IM – the most significant of the batch – sets out criteria that the BLM offices are to follow in evaluating whether parcels that have been determined to be available for competitive leasing should be offered in lease sales. Under this guidance – which comes into play at the end of the public scoping period – parcels that are found to have a “low” preference will be deferred from further consideration. And parcels will have a “low” preference if they fail to meet any one of the following criteria. (“Once a single criterion for a parcel is determined to be low, the evaluation and determination of other criteria are unnecessary.”):

  • Proximity to existing oil and gas development, giving preference to lands upon which a prudent operator would seek to expand existing operations. This criterion will be met by active wells or other types of oil and gas infrastructure – excluding pipelines and access roads – that are within five miles of the exterior boundary of the parcel; or where the federal mineral estate is potentially being drained.
  • The presence of important fish and wildlife habitats or connectivity areas, giving preference to lands that would not impair the proper functioning of such habitats or corridors. A “high” preference under this criterion requires that the parcel not be within an important habitat or connectivity area, and that “there is not a high potential for conflict with important habitats.” (“Important habitat” is defined to include “lands that have dominant patterns across the ecoregion, including the extent and condition of habitats for occupation and species connectivity requirements and overall plant and animal species diversity within the analysis.”)
  • The presence of historic properties, sacred sites, or other high value cultural resources, giving preference to lands that do not contribute to the cultural significance of such resources. A “high” preference under this criterion requires that the parcel not be “within an area of high cultural resource values.”
  • The presence of recreation and other important uses or resources, giving preference to lands that do not contribute to the value of such uses or resources. A “high” preference under this criterion requires that the parcel “not contain incompatible uses.”
  • Potential for development, giving preference to lands with high potential for development. Potential for development is based on a Reasonably Foreseeable Development Scenario prepared by the BLM office. Parcels will receive a “high” preference under this criterion when the RFDS has rated their development potential as Very High or High; and parcels with a Moderate development potential rating are to be evaluated on a case-by-case basis. (As to land use conflicts in active fluid mineral areas with high or medium potential for further development, the guidance states that BLM must “determine what, if any, problems or conflicts may arise as a result of the multiple resource objectives and uses.”)

This IM (with Sec. 50265 of the Inflation Reduction Act clearly in mind) seeks to moderate the impact of these criteria by stating, “If there are no high preference parcels available for the sale, the office will select one or more low preference parcels that present the least conflicts based on the criteria listed above in this IM.”

Comment: The parcel evaluation criteria in this IM closely resemble the standards that were imposed in connection with the lease sales held in June 2022, which enabled BLM to boast of having eliminated some 80% of the parcels that were under consideration for those sales. It is worth recalling that, when the previous administration issued an IM that was intended to streamline the parcel review process, leasing opponents were able to get it struck down by the courts (at least as it applied to sage grouse areas) on the premise that, even though it was issued as guidance to the BLM offices, some of its provisions were regulatory in effect, and thus could only be adopted through a lawful notice-and-comment procedure. A good case could be made for a challenge, on similar grounds, to the parcel evaluation criteria in the current IM.

This IM also establishes a new policy for the many pending expressions of interest that have long been awaiting action by BLM offices: “The longer it takes to offer a parcel on a lease sale, the more likely it is that the interest in the parcel may diminish. [Who would have guessed?] Therefore, BLM will close all EOIs that have remained pending for three or more years. The State Office will notify each EOI submitter of a planned closure when the BLM has the contact information for the EOI submitter. The notice will provide 30-days for the EOI submitter to express a continuing interest in the EOI(s), which would result in the EOI remaining active.”

IM 2023-008 – Impacts of the Inflation Reduction Act of 2022 (Pub. L. No. 117-169) to the Oil and Natural Gas Leasing Program. This IM is largely a summary of the Inflation Reduction Act’s provisions affecting the leasing program. It does, however, include at least two significant interpretations with regard to those provisions. First, when unleased federal lands are committed to an oil and gas agreement (e.g., a communitization agreement), and an unleased lands account (ULA) is set up for the revenues from those lands, the IM specifies that the increased royalty rate of 16.67% under the Act will be applied even to existing ULA’s. And second, the IM makes clear that, pursuant to a (probably-misworded) provision of the Act, reinstatement under Class II (with increased rental and royalty) is no longer available for terminated public-domain leases that issued noncompetitively – although it remains available for noncompetitive leases covering acquired lands.

IM 2023-009 – Discretion to Grant Oil and Gas Lease Reinstatements. The upshot of this IM is that lease reinstatement, upon automatic termination of the lease for failure to make a timely rental payment, is discretionary, and is now disfavored: “The BLM should carefully consider the lands subject to a lease reinstatement in terms of expected yields of oil and gas, prospects of earning a fair return for U.S. taxpayers when applicable, and conflicts with other uses, such as outdoor recreation and wildlife. In addition, complying with the National Environmental Policy Act (NEPA) for reinstating a lease often requires the equivalent workload of issuing a new lease . . . . Considering this workload, the BLM will verify that reinstating a terminated lease, as opposed to offering a new lease, is in the public interest.” (Comment: Offering a new lease? In how many years, now that BLM’s new parcel-evaluation procedures are being superimposed on such preexisting conditions as chronic BLM staff shortages? And the concern about the workload required for environmental review of a lease reinstatement arises from the highly-questionable premise that reinstatement qualifies as a “major federal action” affecting the environment under NEPA.)

IM 2023-010 – Land Use Planning and Lease Parcel Reviews. This IM provides a summary of the parcel review process, from initial screening of expressions of interest through issuance of leases. A few notable points:

  • The IM affirms that environmental reviews are to be conducted simultaneously with the other components of lease parcel reviews.
  • Although BLM state offices are to hold lease sales quarterly, the IM encourages rotating lease parcel review responsibilities among the field offices under a given BLM state office.
  • Site visits during the parcel review process “are not required in all instances but may be deemed necessary by the authorized officer on a case-by-case basis.”
  • This IM applies to all BLM-surface and split-estate parcels. It does not apply to federal minerals under lands managed by other agencies, however – although it does apply to split-estate lands within units of the National Forest System.
  • The environmental analysis for split-estate lands within National Forest System units “may be done through documentation prepared jointly by the Forest Service (FS) and the BLM or prepared by the FS and adopted by BLM.”
  • A lease sale notice should be posted, at least 45 days prior to the sale date, in the public room of the BLM state office conducting the sale, and also on the National Fluid Lease Sale System website.
  • When a protest has been filed against a lease sale parcel, the sale for that parcel should proceed, but a lease may not issue for the parcel until the protest is resolved. If a protest has still not been resolved 60 days after a successful bidder at the lease sale has made all required payments for the parcel, BLM should offer the successful bidder the opportunity to decline the lease and receive a refund. A decision denying a protest may be appealed to the Interior Board of Land Appeals; but “appeals will not automatically halt the auction or issuance of leases” (although lease issuance may be stayed by the Board).

IM 2023-011 – Approved Application for Permit to Drill Extensions. The crux of this IM is that APD extensions are discretionary, “and should only be approved when the permit extension serves the public interest.” The default for an APD extension is two years; but if BLM grants an extension, it has authority to do so for a shorter term – or, in extenuating circumstances, a longer one.

IM 2023-012 – Suspensions of Operations and/or Production. A suspension of operations and production, in the interest of conservation of natural resources, may be granted under Sec. 39 of the Mineral Leasing Act (30 U.S.C. 209). The IM states that “BLM is obligated to grant a suspension of operations and production where BLM’s own actions or inactions prevent a lessee from commencing drilling operations during the primary or extended term of its lease;” but under other circumstances, a suspension of operations and production is discretionary. A suspension of operations or of production, where the lessee is prevented from operating or producing a lease by matters beyond the lessee’s reasonable control (force majeure), may be granted under Sec. 17(i) of the Act (30 U.S.C. 226(i)). Force majeure suspensions are discretionary. (The IM states that a suspension under Sec. 17(i) “is available only for leases that have a well capable of production;” but that is inaccurate: a suspension of production requires a producing well; but a suspension of operations would not.) Some specific points made in this IM:

  • “In general, BLM should not grant a suspension for a lease where the applicant cites, as the basis for the suspension, a pending APD filed less than 90 days prior to the expiration date of the lease.”
  • “Likewise, an APD and related requests for suspensions are generally not timely filed where a lease contains timing restrictions, such as wildlife protection stipulations, and the [timing of the] APD and related suspension request did not account for the stipulations.”
  • “The BLM will authorize Section 39 lease suspensions where the efficient exploration and development of the lease or leases cannot occur due to their proximity to unleased federal lands needed to complete lease blocks on a geologic play,” and the lease or leases are “soon to expire.”
  • When possible, the granting and lifting of a suspension should be effective as of the first day of the month in question, “to ensure easier calculation for future rental payments.”

For notable recent court opinions, decisions by the Interior Board of Land Appeals, federal regulations, and BLM lease sale information, click the following links:

Court Opinions

Interior Board of Land Appeals

Regulations

BLM Lease Sales