Interior Department report seeks more revenue from oil and gas on federal land

A brief but anticipated report from Interior Department leaders largely concludes the government is not charging enough for oil and gas produced from federal territory.

Alaska-based oil and gas analysts noted the administration did not go out of its way to target Arctic leasing and development as some expected, which could be viewed as a victory of sorts for the industry in the state.

Industry representatives said the report is the latest in a series of confusing messages from the Biden administration regarding energy policy.

Interior officials said in a statement accompanying the report that the agency recommends reforms that would improve returns for taxpayers, discourage speculation in leasing federal acreage and hold operators more responsible for site remediation.

“The Interior Department has an obligation to responsibly manage our public lands and waters — providing a fair return to the taxpayer and mitigating worsening climate impacts — while staying steadfast in the pursuit of environmental justice,” Interior Secretary Deb Haaland said. “This review outlines significant deficiencies in the federal oil and gas programs, and identifies important fiscal and programmatic reforms that will benefit the American people.”

According to the report, onshore federal royalties “are consistently lower than state-issued leases and federal offshore leases” and in many instances have never been raised. Interior officials also highlighted that leases not sold in a competitive auction can often be acquired by an operator for a “modest” administrative fee without needing to offer a bonus bid.

The report subsequently recommends Bureau of Land Management officials increase royalties for individual lease sales and initiate rule-making processes for setting higher minimum royalties as well as increasing the $2-per-acre minimum bid for most federal leases — a price set in 1987.

“Such low prices for leases, coupled with generous 10-year lease initial terms that are frequently extended, encourage speculators to purchase leases with the intent of waiting for increases in resource prices, adding assets to their balance sheets, or even reselling leases at a profit rather than attempting to produce oil or gas,” the report states.

Alaska Republican Sen. Lisa Murkowski said in a statement from her office that the report is “a series of preordained conclusions” aimed at eventually ending production from federal acreage.

“What is especially upsetting is that it took Interior 10 months to produce a document that is just 15 pages long, lacking any meaningful analysis, and that repeatedly misrepresents how development actually works,” Murkowski said. “The policies it calls for won’t maximize returns for taxpayers or even reduce emissions — instead, they will hurt production in states like Alaska, further raise energy prices, and increase our nation’s import dependence.”

Delegation staffers also questioned why royalty rates that are a portion of production value and not a nominal fee need to increase over time, as well as how the report and other actions the administration has taken will impact how the industry deploys capital in the country.

President Joe Biden ordered the report via an executive order issued shortly after he took office, directing agencies to review all rules and policies that could impact climate change.

The Interior Department claims the authority to make most of the recommended changes through regulation.

Alaska oil and gas analyst Brad Keithley wrote via email that from the state industry’s perspective, the report could be a positive for what it doesn’t have — Alaska-specific provisions or broad, climate or environmental-focused rules, which leaves room for those items to be more tailored to local conditions.

However, Keithley also noted the report mentions Interior agencies will continue evaluate ways to revise fiscal terms “to monetarily account for the costs of carbon dioxide, methane, and nitrous oxide.”

“These can be addressed as they arise, but it leaves a sense that this report isn’t the last word on what may be coming down the pike,” he wrote.

Alaska Oil and Gas Association CEO Kara Moriarty called the report simply “disheartening,” particularly given the president’s recent decision to sell a portion of the Strategic Petroleum Reserve and his urging for OPEC nations to increase production to curb price increases amid recovering demand following the 2020 market collapse.

“Why wouldn’t you be sending signals for immediate policy and future policy that says, ‘We want to meet that demand and increase supply here.’ ” Moriarty said.

Longtime Alaska petroleum economist Roger Marks said federal leases are often more fiscally attractive to oil and gas operators because the royalty rates are typically lower than those tied to state or private acreage and the federal government does not impose a severance tax on produced resources.

Royalty rates in Lower 48 states with significant production generally range from 16.67% to up to 25% in portions of Texas.

The state of Alaska charges a 16.67% royalty on most new leases and 12.5% on the legacy leases that supply the vast majority of oil production from the North Slope.

Because oil companies predominantly judge investments in leases based on an expected rate of return, higher royalty rates on produced resources would likely lead to smaller and fewer bids, but that might not be a bad thing for the Treasury as long as there is eventually production, according to Marks.

“If a property comes through (and produces) you’ll end up getting much more money, and if the property doesn’t prove to be commercial you’ll end up getting less money because the bid will be less,” he said.

Marks also said he previously encouraged the Alaska congressional delegation to find ways to increase taxes and fees for production from federal lands because states are at a competitive disadvantage. In Alaska, the situation mostly applies to offshore production from fields beyond the three-mile state boundary. That’s because the state’s oil production tax applies to the 23-million-acre National Petroleum Reserve-Alaska on the North Slope, the result of management legislation specific to the NPR-A. Additionally, royalty rates are 16.67% for leases in the “high-potential” areas of the NPR-A — mostly in the eastern, more accessible portion of the reserve — and 12.5% for other areas.

Bidding activity in NPR-A lease sales has ebbed and flowed with industry’s view of the area’s prospectivity. Millions of dollars of bids were submitted in the years after the discovery of the large Alpine oil field on nearby state lands, followed by a period of relative dormancy before ConocoPhillips’ Willow discovery in 2017 refocused attention back to the NPR-A.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.