BLM Finalizes Oil and Gas Rule

Amidst a flurry of activity at the Bureau of Land Management (BLM), the agency finalized a long-awaited update to its onshore oil and gas leasing rule. The rule formalizes the agency's approach to legislated reforms contained in the Inflation Reduction Act (IRA)and advances further reforms aimed at limiting speculation that allowed oil and gas companies to claim assets they had no intention of developing while locking up lands that could be used for conservation and recreation, discouraging permit hoarding, and expanding operator liability for well cleanup. The suite of reforms contained in the rule represents the culmination of decades of community advocacy and red flags by government watchdogs.

On the IRA side of the ledger, the rule provides important implementing provisions on:

• Oil and gas royalty rates, which will rise from 12.5 percent to 16.67 percent-or at least 20 percent for reinstated leases-through 2032. After 2032-when the IRA's fiscal terms expire-royalty rates will remain set at 16.67 percent.
• Minimum bids-which companies offer during a lease auction to secure the right to lease lands for oil and gas production-will rise from $2/acre to at least $10/acre through 2032. Following expiration of the IRA, the final rule ties further minimum bid increases to inflation.
• Rental rates will rise from $1.50/acre to $3/acre. Rents will then increase in defined intervals to encourage development or lease relinquishment, with rents topping out at $15/acre after year nine or $20/acre for reinstated leases. Following expiration of the IRA, the final rule ties further rent increases to inflation.
• An "expression of interest" fee of $5/acre on companies looking to nominate-or suggest-acres for lease at a future lease sale.
• An end to non-competitive leasing, which allowed companies to anonymously procure leases at cut-rate prices but rarely resulted in development of those leases.

As a group, this set of reforms provides a remarkable shakeup of the status quo. The oil and gas industry has lost a great deal of its incentive and ability to lock up federal public lands with no other purpose than to pad balance sheets. Meanwhile, taxpayers who own the oil and gas extracted from beneath public lands, will see greater revenues that align with the types of fees charged on state lands where oil and gas activities take place.

The second suite of reforms update regulations that existed long before the IRA and that history has shown to be insufficient to ensure responsible development of federal lands. Specifically, the new rule:

• Increases bonding rates from $10,000 to $150,000 per lease, and statewide bonding for multiple wells from $25,000 to $500,000. In addition, the rule ends the horrendous practice of nationwide bonding, which allowed industry to cover all its liabilities nationwide with a single minimal bond valued far below the actual cleanup costs a company incurs during oil and gas production. All operators producing oil and gas on federal lands will need to increase their bond amounts within three years to comply with these changes-with holders of nationwide bonds required to convert to statewide or lease-wide bonds within the year. Bond levels will be adjusted for inflation every 10 years.

• Formally adopts existing guidance on the BLM's use of preference criteria to screen nominated lease parcels for potential conflicts with other important values like wildlife habitat, cultural resources, sacred sites, and lands used for recreation. This approach has allowed the BLM to better steer leasing and development only to those areas with a strong likelihood of being developed.

• Sets a three-year term for newly issued drilling permits, which will now expire unless developers begin work on their leases. This change seeks to encourage diligent development on leases, lower administrative costs on the overburdened BLM, and limit permit stockpiling.

To understand just how big a deal these changes are, it's good to recall how sweet a deal the oil and gas industry had prior to passage of the Inflation Reduction Act. For most of the past century, an acre of federal land in the U.S. could be leased to an oil and gas company for as little as $1.50/year. If a company wanted to ask the government to offer certain acreage for lease, it could do so anonymously and for free and if the BLM decided to offer those acres for lease, bids started at just $2/acre. Those bargain basement prices led to rampant speculation across much of the western United States, with leased acreage reaching nearly 27 million acres in 2020 with over 50 percent of that area not producing any oil and gas. Similarly, where oil and gas were being produced, industry has long enjoyed royalties significantly lower than states in most instances, thereby avoiding millions in annual payments that would have otherwise benefited taxpayers.

But that only offers a snapshot of how desperately the fiscal terms of the federal onshore oil and gas program needed updating. The changes in today's rule also take a major step toward closing a major liability loophole whereby oil and gas operators paid next to nothing to ensure that their wells would be cleaned up and plugged after operations cease. Under the old regulations, bonding levels were so low that BLM only held $2,100 per well in 2018, a figure at least 10 times smaller than the cost of plugging and remediating the cheapest and simplest oil and gas wells. Often, modern wells can cost well over $100,000 to plug. New studies are already demonstrating how the bonding level increases in today's rule are just a start and likely insufficient to cover actual plugging costs, a fact demonstrating just how free from accountability the oil and gas industry has historically operated.

As expected, the final rule does not put forth an approach for addressing the elephant in the room: greenhouse gas emissions. Nonetheless, in a sign that BLM recognizes the challenges created by the federal oil and gas program, the agency acknowledged that it "may proceed with . . . future rulemakings that more directly address [greenhouse gas] emissions." This is a welcome acknowledgement from an agency that could play an outsized role in helping to drive down the nation's emissions as we transition away from fossil fuels.

Oil and gas production on BLM-managed lands generates 10 percent of the entire country's greenhouse gas emissions, meaning it is both a major driver of the United States' climate pollution problem and a major contributor to global climate change. While this rule doesn't take direct action to limit greenhouse gas emissions, it-and a suite of rules from BLM and other agencies-sets the stage for tackling these emissions moving forward. The agency's actions to constrain and direct leasing means that fewer acres will be nominated by industry for lease, leading to a dramatic rightsizing of the oil and gas lease footprint. The changes to bonding levels-in concert with the orphaned well plugging program in the Infrastructure Investment and Jobs Act (IIJA)-should significantly reduce orphaned wells on federal lands, which in turn will help lower methane emissions that often come from these unplugged, non-producing wells. Finally, the BLM's methane waste rule, the Environmental Protection Agency's methane rule, and BLM's proposals and analyses for renewable energy can all work in concert to fundamentally shift energy production on federal public lands from the fossil fuels of the past to clean energy sources of the future.

With this final rule out the door, NRDC and our partner organizations will shift our focus toward directly tackling climate pollution caused by federal oil and gas production. Under well-established legal authorities, the BLM has ample discretion to do more to account for all aspects of its multiple use, public welfare, and conservation mandates. This means not only recognizing the significant effect that federal oil and gas production is having on global climate change, but also the powers the agency can exert to begin reigning in the climate pollution under its management purview.

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