The US federal oil and gas leasing programme for both onshore and offshore acreage is antiquated and in need of significant improvements, according to the US Department of the Interior.

Assembled in response to an executive order from President Joe Biden, a new report said the current programme “fails to provide a fair return to taxpayers, even before factoring in the resulting climate-related costs that must be borne by taxpayers”.

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One of the primary complaints made by the DOI centred on current royalty rates, which it said are far below market value and considerably less than those charged by individual states.

“The fiscal components of the onshore federal oil and gas programme are particularly outdated, with royalty rates that have not been raised for 100 years,” the department said.

“States with leading oil and gas production apply royalty rates on state lands that are significantly higher than those assessed on federal lands. The Texas royalty rate, for example, can be double the federal rate.”

The Mineral Leasing Act, passed in 2020, set the royalty rate for onshore leasing at 12.5%, while the State of Texas charges royalties between 20% and 25%. The DOI did not recommend a new royalty rate level, despite the mordant criticism.

“The [US Bureau of Land Management] should begin to adjust royalties for competitive leases offered in individual lease sales and initiate a rule-making to establish a higher minimum royalty for onshore oil and gas leases,” the Interior Department said.

Offshore royalty rates currently vary between 12.5% for leases in waters of depths between 0 and 200 metres, increasing to 18.75% at 200 metres or greater.

The DOI said the US Bureau of Offshore Energy Management should scrap the commonly used practice of area-wide lease sales, saying such a method is not legally required.

Instead, the DOI suggested altering lease sales to offer significantly smaller areas, which it believes will increase competition and lead to higher bids.

“Moving to a leasing model where smaller areas are offered according to a number of criteria — including environmental protection, subsistence use needs, resource potential and financial considerations — will help ensure that American taxpayers are receiving a fair return for offshore oil and gas resources,” the DOI said.

The Interior Department’s report was panned by industry advocates, who said the document gave neither the government nor the industry a clear direction forward for leasing federal land or waters.

Mixed signals

“The Biden Administration is sending mixed signals. Days after a public speech in which the White House said the president ‘is using every tool available to him to work to lower prices and address the lack of supply’, his Interior Department proposed to increase costs on American energy development with no clear roadmap for the future of federal leasing,” American Petroleum Institute senior vice president Frank Macchiarola said.

US Senator Lisa Murkowski criticised the DOI for releasing the report on the Friday after the Thanksgiving holiday and for its lack of specifics. She said the premise of the document would be "music to Opec+'s ears".

10 months in the making

“This report is exactly what we thought it would be: a series of preordained conclusions that are designed to end federal oil and gas production. President Biden campaigned on that, and his administration is now advancing what amounts to a death-by-a-thousand-cuts strategy to achieve it,” the Alaska Republican said.

“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."