Recent Developments

 

Federal Oil and Gas under the Biden Administration

The Biden administration has made a great many policy changes affecting the federal oil and gas program; and further changes are likely.  Here are some highlights:

Executive Order 13990 of January 20, 2021. On the day he took office, President Biden issued an “Executive Order on Protecting the Public Health and the Environment and Restoring Science to Tackle the Climate Crisis.” This order targeted “the promulgation of Federal regulations and other actions during the last 4 years that conflict” with the new administration’s objectives, specifically including an Environmental Protection Agency regulation on methane emissions from oil and gas operations. The order, among other things, also directed a temporary moratorium on federal activities relating to oil and gas leasing in the Arctic National Wildlife Refuge, pending a further environmental analysis; it reinstated the Obama administration’s withdrawal of certain areas in the Arctic outer continental shelf and the Bering Sea from oil and gas drilling; it revoked the permit for the Keystone XL Pipeline; it revoked a number of executive orders issued under the Trump administration (including orders on waters of the United States, and on promoting energy independence); and it directed the Council on Environmental Quality to rescind its 2019 draft guidance on consideration of greenhouse gas emissions.

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Secretarial Order No. 3395 of January 20. On that same day, the Acting Secretary of the Interior issued an order temporarily suspending the authority of Interior Department bureaus and offices to take certain actions for a period of 60 days, and requiring any such actions during that time to instead be approved at the level of the Assistant Secretary or above. Among the affected actions were the publication of Federal Register notices; the issuance or revision of resource management plans; the granting of rights-of-way, easements, or conveyances of property interests; and most significantly, the issuance of “any onshore or offshore fossil fuel authorization, including but not limited to a lease, amendment to a lease, affirmative extension of a lease, contract, or other agreement, or permit to drill,” although with a note that this “does not limit existing operations under valid leases.” The Bureau of Land Management (and other bureaus) continued to be able to process these actions during the 60 days, but were required to submit them to the Assistant Secretary for review and approval. Prior to the expiration of the Secretarial order, the Principal Deputy Assistant Secretary for Land and Minerals Management issued a memorandum, on March 19, indefinitely extending the requirement for review by the Assistant Secretary as to certain actions, including resource management plans; records of decision; lease sale notices; reinstatement of terminated oil and gas leases; extension of applications for permit to drill; lease suspensions; and applications for royalty relief.

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Executive Order 14008 of January 27. The President, a week later, issued an “Executive Order on Tackling the Climate Crisis at Home and Abroad.” 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.” Also noteworthy, the order sought “to eliminate fossil fuel subsidies” that may be provided by federal agencies; to “promote ending international financing of carbon-intensive fossil fuel-based energy;” and to embrace a policy of “conserving at least 30 percent of our lands and waters by 2030.” As part of the review of the federal oil and gas program that was directed by this executive order, the Interior Department, on March 25, held an online forum with representatives from the Department, Native American groups, industry, the environmental community, labor groups, environmental justice advocates, and the academic community. (The initial press release announcing the forum, on March 9, had a distinctly adversarial tone, comprising a litany of criticisms of the federal oil and gas program, with a declaration by the Principal Deputy Assistant Secretary that that program “is not serving the American public well.”) Members of the public were invited to submit written comments (to which I contributed my own two cents); and the Department said that members of Congress, governors and other state and local officials, and Tribes would be consulted as well. The Department announced that the review of the federal oil and gas program would lead to issuance of an interim report in early summer; but it was not until November 26 that a report actually emerged.  (See below.)

Meanwhile, 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 has been 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 — which until then had given no indication whatsoever as to whether, or when, the “pause” on new leasing might be lifted — stated that it would comply with the court’s directive and resume leasing while the appeal is pending.

The intent to comply with the preliminary injunction was proclaimed by means of an August 16 press release — coinciding with the filing of the Department’s appeal — in which the Department presented a wholesale condemnation of its own oil and gas leasing program (and in so doing, implicitly maligned all of the Departmental staff, to say nothing of all of the responsible industry representatives, who have worked diligently throughout the years to ensure that program’s proper operation).  The press release, leaving very little room for doubt that the outcome of the Department’s review of its leasing program under the executive order was predetermined, enumerated every conceivable accusation that might be made against the program by advocacy groups, and indiscriminately accepted all of those accusations, however unfounded or inconsequential many of them may be.  And then, for good measure, the release declared, “In complying with the district court’s mandate, Interior will continue to exercise the authority and discretion provided under the law to conduct leasing in a manner that takes into account the program’s many deficiencies” — laying the groundwork for a potential collision between the court’s order and a Departmental determination that “the program’s many deficiencies” preclude Interior, within a timeframe anticipated by the court, from conducting any further leasing at all.

On August 24, the Department issued a further press release, stating that it had advised the court in the State of Louisiana case of a “schedule demonstrating compliance with the district court’s injunction:” the publication in September of a sale notice for a Gulf of Mexico lease sale, along with the issuance sometime in the fall of a draft environmental impact statement for a lease sale in Cook Inlet; and the commencement by the end of August of a 30-day scoping period for comments on onshore parcels that BLM originally had expected to offer for competitive leasing in the first and second quarters of 2021, followed by environmental reviews of those parcels, leading to the posting of lease sale notices later in the year for those parcels that were found to be eligible.  Keeping in character with its previous press releases, the Department reiterated that its conduct of further leasing would “take into account the [leasing] programs’ many deficiencies.”

Several BLM State Offices, by way of fulfilling the Department’s announced schedule, posted notices on August 31 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.

Following the 30-day scoping period, the various BLM State Offices posted notices, on October 29, moving on to the next step of the process by publishing environmental assessments for the parcels that remained under consideration — by no means all of the parcels that had been identified in the original notices on August 31 — and commencing a 30-day comment period for those EA’s.  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 further 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 lease sales would be raised from 12.5% to 18.75%.

It remains to be seen whether the Department’s professed intent to comply with the court order will translate into the actual issuance of any leases that were won in BLM’s second-quarter sales.  And the deadline has come and gone for BLM to announce any lease sales for the third quarter of this year.

(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 may be renewed if the preliminary injunction in Louisiana “is vacated, withdrawn, or otherwise altered in a material manner” — which of course it now has been; and that that court would proceed to consider the merits of the case in the meantime.)

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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 — which were based largely on previous recommendations by the Inspector General’s office and GAO (including citations to some GAO statements between 1980 and 1990 addressing issues that have long since been remedied), as well as an interest group (Taxpayers for Common Sense) — 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.”

These recommendations ranged from serious proposals that were worthy of honest debate, to baseless potshots at the oil and gas industry.  (Symptomatic of the latter is the report’s dismissive and misleading statement — undoubtedly written by someone with no experience in the oil and gas business — on the “problem” of non-producing leases and unused drilling permits:  “Industry suggests that the significant surplus of leases and permits is necessary for a successful business model, but this speculative approach contributes to unbalanced land management.  When land is under contract for potential oil and gas activity, the shared public lands cannot be managed for other purposes, such as conservation or recreation.”)

Comment:  Now that the Department has issued its report on its comprehensive review of the leasing program as mandated by the Executive Order, and now that most of its federal leasing wish list has been granted through the Inflation Reduction Act of 2022, any further continuation of the administration’s leasing pause — with or without a court injunction — is indefensible.


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. Among the changes made by IM No. 2018-034, as a way of expediting the review process, was a reduction in the times for public participation; but in the specific context of parcels within sage-grouse habitat management areas, those reduced times were found by courts to be inadequate. 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.)

 

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