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 – arbitrarily, and perhaps unintentionally – to eliminate the authority for Class II reinstatement of all terminated noncompetitive public-domain leases (although not acquired-land 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, and — “if any acceptable bids have been received for any parcel” in a sale — to issue as few as one lease as a result of that sale.)
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” (emphasis added).
▸ 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.”