Interior moves to raise drilling fees on BLM tracts

By Phil Taylor | 04/17/2015 01:06 PM EDT

The Interior Department kicked off a major rulemaking today that would update fees oil and gas companies pay to drill on public lands.

The Interior Department kicked off a major rulemaking today that would update fees oil and gas companies pay to drill on public lands.

The Bureau of Land Management published an advanced notice of proposed rulemaking (ANPR) that requests public comment on potential changes to oil and gas royalty rates, rental payments, lease sale minimum bids, civil penalty caps and financial assurances.

The public has 45 days to weigh in.


"It’s time to have a candid conversation about whether the American taxpayer is getting the right return for the development of oil and gas resources on public lands," Interior Secretary Sally Jewell said in a statement. "The BLM’s regulations have not kept pace with technological advances and market conditions, so this is an important information-gathering step as we seek to improve the way the federal government does business."

The ANPR asks the public to suggest how BLM should craft a rule, but it is not a regulation in itself.

Updates to BLM’s royalty rate structure would offer the agency important flexibility at a time when oil production has risen on public lands in each of the past six years, Jewell said.

Conservation groups have supported higher fees to produce and maintain leases on public lands. Roughly half of those revenues go to the U.S. Treasury, with the rest going to the states where drilling occurs.

But today’s move will generate blowback from energy companies that argue they already pay more to operate on federal lands due to longer permitting times and the persistent threat of lawsuits from environmental groups.

BLM’s current royalty rate of 12.5 percent has not changed since the 1920s. Western states typically charge significantly more, and Interior charges offshore drillers 18.75 percent on sales of oil and gas.

In 2012, then-Interior Secretary Ken Salazar said he planned to raise royalty rates for oil drillers on public lands by roughly 50 percent, an amount he said was necessary to generate a fair return for American taxpayers (E&ENews PM, Feb. 16, 2012). But efforts to update royalty rates stalled.

Jewell has taken a more cautious position, arguing that rates must be fair for taxpayers but shouldn’t discourage companies from investing in public lands.

But without changes to its regulations, BLM is unable to make timely adjustments to onshore royalty rates and ensure taxpayers receive a fair return, the Government Accountability Office concluded in a late 2013 report (Greenwire, Dec. 17, 2013).

Interior today said BLM would need more flexibility to offer new competitive leases at higher royalty rates. Raising the current 12.5 percent onshore oil and gas royalty rate to 18.75 percent would raise an additional $1.25 billion over a decade, Interior concluded in 2011, according to the GAO study.

Bonding, civil penalties

Today’s notice also asks for public comment on whether BLM is requiring sufficient bonds to ensure wells are properly managed and reclaimed. It is also considering removing caps for civil penalties in order to deter "unlawful conduct," particularly drilling without authorization and trespassing.

Minimum bond amounts range from $10,000 to $150,000 but have not been updated in two generations, BLM said. The GAO in 2011 reported that BLM’s minimum bond amounts may not be high enough to discourage operators from abandoning their wells after production stops.

"Our current minimum bonding rates and maximum penalties are ripe for a fresh look," BLM Director Neil Kornze said in a statement. "Today’s bonding rates were set when Dwight D. Eisenhower was president. We are long overdue to consider an update that will help us ensure that oil and gas sites are properly managed and reclaimed and that taxpayers aren’t left picking up the tab."

BLM is also seeking comment on the minimum bids companies may submit to obtain an oil and gas lease at auction and what companies must pay to hold onto those leases before production begins.

Interior said current minimum bids of $2 per acre are probably too low. Rental rates are currently $1.50 per acre for the first five years and $2 per acre for years five through 10. BLM has repeatedly asked Congress to establish a new fee on nonproducing leases to prod companies to develop them more quickly, but Republican lawmakers have rejected it.

Today’s notice comes several months after dozens of House Democrats sent a letter to Interior Assistant Secretary for Land and Minerals Management Janice Schneider urging her to "make modernizing the outdated and inadequate onshore oil and gas fiscal system a top priority," including by updating the royalty rental rates.

Matt Lee-Ashley, a former Obama administration Interior official who now works at the Center for American Progress, cheered today’s move.

"The royalty rate for oil and gas on U.S.-owned lands has lagged behind the royalty rate of states and for offshore areas like the Gulf of Mexico, and has been costing local governments and taxpayers hundreds of millions of dollars in lost revenue," he said. "This is a common-sense step toward delivering a fairer return for taxpayers from the oil and gas boom and leveling the playing field within U.S. energy markets."