Federal onshore royalty rates to jump to 18.75% for new leases, Interior says

New oil and gas leases for onshore federal lands will carry an 18.75% royalty rate, up from the current standard of 12.5%, the Interior Department said April 15. In addition, the acreage offered in the new round of sales will be cut by 80% from previously nominated acreage.

The Bureau of Land Management (BLM), Interior’s onshore leasing agency, was to issue more details on the policy changes April 18 as part of the sale notices and final environmental assessments for oil and gas lease sales.

Interior said the sales will incorporate many of the recommendations made in a November report by Interior on policy changes for oil and gas leasing; changes mostly in the form of higher imposed costs (OGJ Online, Nov. 29, 2021).

BLM analyzed hundreds of parcels of federal land nominated by energy companies for leasing. Of the roughly 733,000 acres nominated, the agency decided to offer lease sales covering 144,000 acres, hence the 80% reduction figure.

Interior provided some indicators of the selection criteria for parcels. The approach “focuses leasing on parcels near existing development and infrastructure, such as gathering lines that can help reduce venting and flaring, and will help conserve the resilience of intact public lands,” the department said.

Existing leases will not be affected by the increase in royalty rates because their rates are locked in by the terms of their federal contracts.

Federal vs. state costs

Many Democrats in Congress have for several years argued that federal royalties should be substantially higher because many state royalty rates are much higher, an idea Interior echoed in its announcement.

The higher federal royalty rate will be “on par with rates charged by states and private landowners,” Interior said.

Industry representatives have said repeatedly that federal-state comparisons should not be confined to royalties. They say the costly overall burdens of federal regulations and litigation undercut the value of leasing on federal lands and make lower federal royalty rates advisable. Higher royalties and fees could cause a slump in federal leasing and revenues, as well as blocking jobs, the industry spokesmen have said.

Democrats also have cited analyses by the Congressional Budget Office and the US Government Accountability Office to argue that increased costs will not necessarily reduce federal revenues, because higher royalties and fees could more than compensate for a modest reduction in lease bidding.

Interior’s new royalty rates will provide a test of those competing viewpoints.

“It’s frustrating”

Rep. Raul Grijalva (D-Ariz.), chairman of the House Natural Resources Committee, issued a statement welcoming the higher royalty rates and calling the status quo “a rip-off for the American people.”

Sen. John Barrasso (R-Wyo.) did not share Grijalva’s view. “After begging American oil and natural gas companies for months to produce more, the Biden administration is still doing all it can to restrict leasing on federal lands,” he said.

Dan Naatz, senior vice president of government relations and political affairs at the Independent Petroleum Association of America, said his group has repeatedly tried, without luck, to engage the Biden administration in discussion of how federal policies and oil and gas companies can together provide energy supplies to the public.

“They’ve had no interest in talking about how we can work together to address these needs,” Naatz said. “It’s frustrating.”

Now, with fuel pump prices high and efforts underway to block Russian oil in many nations, the administration announces more leasing, a timing that led Naatz to say, “I think this is strictly a political maneuver.”

As for the pattern of parcel selection for leasing, Naatz said it would have been nice if the administration had consulted with industry experts to make the most appropriate decisions. As of mid-afternoon April 18, his group was still waiting to see what BLM has decided.