Compounding the urgency for Congress to act, the Biden administration recently announced that it would resume oil and gas leasing on public lands under an outdated program that allows oil and gas industry CEOs to profit at the expense of taxpayers and communities.
This column shines a light on the broken fossil fuel and mineral leasing programs and outlines fiscally responsible and bipartisan reform ideas that—if included in the budget—would be a win for taxpayers, public lands, and the climate.
Leasing reform: An economic, climate, and conservation win
The leasing laws for public lands were written more than a century ago, when a gallon of milk cost just $0.36. The program—which is considered “high risk” by the Government Accountability Office (GAO)—is full of loopholes, subsidies, and a lack of competitive bidding, causing taxpayers to lose out on billions of dollars while prioritizing corporate profits. Companies pay pennies on the dollar for each acre they lease on public lands; and in most cases of hard rock mining, they pay nothing at all. Moreover, inadequate bonding and idle well requirements leave taxpayers holding the bag when it comes to cleanup.
Fossil fuel programs on national public lands are linked to nearly 25 percent of U.S. greenhouse gas emissions annually. The current leasing programs only entrench this status quo. Yet U.S. public lands and waters have a tremendous capacity to act as carbon sinks, with the ocean, forests, and other lands sequestering significant amounts of carbon from the atmosphere. Under the Biden administration’s commitment to conserve 30 percent of lands, waters, and ocean by 2030, federal agencies will have a hand in ensuring that the country’s public lands are a climate solution, not part of the problem.
The following list of reconciliation considerations—many of which are included in the House Committee on Natural Resources budget reconciliation bill—could raise billions of dollars in revenue to support programs that help conserve our public lands as natural carbon sinks.
Congress must take advantage of this opportunity to implement reforms that would save taxpayer dollars, end wasteful corporate oil subsidies, and meaningfully address climate change.
Increase royalty rates both on and offshore
The current onshore royalty floor of 12.5 percent has not been updated in a century and is dramatically lower than the rates charged by states and private landowners—in some cases by up to 25 percent. According to Taxpayers for Common Sense, the United States has lost up to $12.4 billion in revenue over the past decade due to the 12.5 percent royalty rate.
Meanwhile, the current offshore royalty rate is 12.5 percent for leases in waters less than 200 meters deep and 18.75 percent for all other areas. The GAO found that the Bureau of Ocean Energy Management’s valuation policies still undervalue oil and gas resources, “resulting in the government collecting hundreds of millions of dollars less than it otherwise could.”
Congress should consider increasing both of these royalty rates so that companies are paying their fair share and taxpayers don’t miss out on reasonable profits.
Raise onshore rents and bonus bids
Rental rates and minimum bids for onshore oil and gas leasing have not been updated since the 1980s. Current rental rates are too low, standing at $1.50 per acre for the first five years of a lease and $2 per acre thereafter. Companies are largely willing to shell out the nominal rental fee because the benefits of doing so—in the form of increased reserves that inflate their market value—outweigh the annual costs to hold on to undeveloped land. A higher rental rate, however, would incentivize companies to either develop on the land or turn the lease back over to the public.
Relatedly, oil and gas companies only pay rents before production on any given lease. Per-acre producing and nonproducing lease fees on and offshore would ensure that taxpayers are being compensated annually for holding onto a lease once companies start production and after they stop.
The current minimum bonus bid—the payment an oil and gas company offers to purchase a lease on public lands—is also far too low. It is set at just $2 for an acre of public land and should be significantly increased.
End the noncompetitive leasing program
The noncompetitive leasing program, which allows companies to secure parcels unsold at auction without paying a bonus bid, is a wasteful and unnecessary program that shortchanges taxpayers and provides an avenue for companies to game the system. According to a recent GAO report, 99 percent of recently issued noncompetitive leases never produced oil or gas, meaning taxpayers receive no revenue as oil companies lock away public lands from other uses.
Given the clear lack of public benefit on noncompetitive leases and the incentive for speculation, it would be both sensible and cost-effective for Congress to abolish noncompetitive leasing.
Establish a fee for expressions of interest
Currently, anyone who wants can, at no cost, nominate parcels of public lands for oil and gas leasing—called an “expression of interest.” In order for the government to recoup the costs of running the leasing program, Congress should include a meaningful filing fee for expressions of interest.
These administrative fees would help deter casual speculators and shift some of the costs of administering lease sales to the oil and gas industry, instead of taxpayers.
Update bonding requirements
The Senate-passed Infrastructure Investment and Jobs Act includes a $4.7 billion dollar investment toward plugging and cleaning up the hundreds of thousands of orphaned wells across the country. But to get at the root of the problem—namely, the creation of more orphaned wells—Congress should update current bonding requirements.
Several analyses have found that reclamation costs outpace what is currently covered by oil and gas company bonds to the tune of billions of dollars. Congress must implement stronger bond amounts based on realistic reclamation and cleanup costs to ensure that the responsibility of cleaning up the oil industry’s mess does not fall on taxpayers yet again.
Establish idle well fees
Idle wells that aren’t actively producing oil or gas can still spew greenhouse gases into the atmosphere and threaten water sources.
Congress should therefore assess an annual idle well fee—concurrent with updated bonding requirements—that would increase the longer a well remains idle. These fees would increase revenues while also discouraging companies from locking up federal lands they aren’t using or generating revenue from.
Establish royalties and fees on new and existing hard rock mines
Under the antiquated General Mining Act of 1872, the federal government does not charge any royalties for hard rock minerals extracted from most public lands. As a result, mining companies—many of which are foreign owned—have deprived the federal treasury of billions of dollars. Earthworks estimates that since 1872, at least $300 billion worth of metals such as gold, silver, copper, and uranium have been mined with no return to the taxpayer.
Establishing a new royalty for both new and existing mines would end this subsidy and help raise revenue. Companies operating on private, state, and federally acquired lands all pay royalties already, so there is no rationale to exempt companies operating on most public lands.
Congress must also increase bonding requirements for mineral mines and deliver additional funds to clean up legacy mining sites that continue to pollute and cause health risks to communities. Further, lawmakers should implement an annual hard rock mining claim maintenance fee and a reclamation fee based on the amount of displaced material produced during mining.
Establish conservation fees
In order to account for fossil fuel companies using public lands—and potentially harming landscapes and habitats—Congress should impose a per-barrel fee for on and offshore oil and gas development, as well as a per-metric ton production fee for coal on public lands.
Capture vented and flared methane gas
Drilling for oil on federal lands also results in the release of methane, which is often vented into the atmosphere or burned at the wellhead. The GAO and the Environmental Protection Agency have estimated that approximately 40 percent of the gas that is vented or flared could be economically captured and used, increasing supplies of natural gas for the market and generating additional royalty revenue.
Congress should direct the U.S. Department of the Interior to make permanent changes to its oil and gas programs, requiring companies to use the best available technologies to capture methane as part of their operations.
Eliminate royalty relief both on and offshore
In the final year of the Trump administration, more than 100 companies received cuts to the royalties they pay the government on the oil and gas they extract from public lands for leases covering more than half a million acres. The GAO found this assignment of royalty relief to be haphazard, without establishing that relief was even necessary for companies to keep wells in operation. A few months later, in December 2020, the Trump administration sought to significantly reduce royalties for companies drilling offshore as well, despite the fact that many offshore operations have been exempt from royalties for the past 25 years.
Royalty relief is simply oil subsidies by a different name; it must be eliminated to fix a lopsided system that cuts breaks to oil and gas CEOs at the expense of the taxpayer.
Establish an offshore pipeline owner’s fee
In addition to the miles of active pipelines servicing offshore oil and gas facilities, there are thousands of miles of decommissioned pipelines that have been left to decay and pollute the ocean floor and marine ecosystems.
An annual per-mile fee on all existing pipelines servicing offshore facilities would create revenue while incentivizing pipeline oversight and maintenance.
Raise inspection and penalty fees
To ensure that wells and production sites are safe and that the government can recoup costs, Congress should raise inspection fees for new and existing on and offshore leases. Further, the Office of Natural Resources Revenue should increase civil and criminal penalties to incentivize oil and gas companies to follow the law.
Conclusion
Budget reconciliation presents an opportunity to create new revenue to help pay for critical conservation and climate programs while, at the same time, reforming a federal leasing program riddled with speculative practices, corporate subsidies, and outdated fiscal policies. With the Biden administration primed to restart leasing, it is essential that Congress act now to institute these reforms.
Jenny Rowland-Shea is the deputy director for Public Lands at the Center for American Progress. Ryan Richards is a senior policy analyst for Public Lands at the Center.
The authors would like to thank Nicole Gentile, Mark Haggerty, Kelly Kryc, and Steve Bonitatibus for their contributions to this column.