BLM Begins Regulatory Process to Increase Oil and Gas Royalties, Rentals, Minimum Bids, Bonding and Penalties

As promised by Secretary Jewell in March, see previous post, BLM is initiating a rulemaking process– Announcement of Proposed Rulemaking (ANPR)– to “solicit public comments and suggestions that may be used to update the BLM’s regulations related to royalty rates, annual rental payments, minimum acceptable bids, bonding requirements, and civil penalty assessments for Federal onshore oil and gas leases.” The comment period will close on June 5, 2015. At the end of the ANPR, the BLM poses a series of questions and readers will want to review the questions carefully for how best to respond to the ANPR. http://www.gpo.gov/fdsys/pkg/FR-2015-04-21/pdf/2015-09033.pdf

The BLM cites three principle reasons that compel their consideration of increasing the cost of developing federal oil and gas. 1) Three GAO reports, two in 2008 and the most recent in 2011, that have questioned whether BLM is obtaining an appropriate royalty for the development of federal oil and gas; 2) the finding that none of the regulatory rates have been adjusted for inflation or changed since they were put in place several decades ago; and 3) in order to ensure a fair return to the taxpayer. This effort will also further three initiatives that the Administration has been pursuing – higher royalties, the concept of “use it or lose it” for federal leases and an emphasis on enforcement and inspection by increasing bonding and penalties to ensure that companies are incentivized to do the right thing.

The current royalty rate is 12.5% and any change in the rate will be for leases issued in the future not existing leases. The proposed royalty changes will not apply to Tribal or Allotted leases issued under the Indian Mineral Leasing Act. BLM admits that adjusting the royalty rate is difficult, it references several studies it has done to get at the question, provides a chart of state royalty rates currently being used in states with federal oil and gas and considers that complex questions of economics are involved. “The BLM acknowledges that current oil and gas prices are low, relative to the average price over the past decade; however, recognizing the historic variability of those process, the BLM would be interested in information on the impacts of any royalty rate change at a range of oil and gas prices.”

In this ANPR, the BLM is also considering whether to raise the minimum acceptable bid for competitive leases; the bid amount has not been changed since enacted in 1987. For non-competitive leases the minimum bid is set by statute and can’t be changed by rule. As to increasing rental rates, “the BLM has not increased the rental rates ($1.50-2.00) since they were initially set in 1987 . . .” Similarly, as to bonding BLM has not “increased the minimum bond since 1960” and wants to consider whether the individual/lease, statewide and nationwide bond amounts are adequate to protect the taxpayer from the costs of reclamation. Finally, BLM, in response to a critical Inspector General report, wants to examine the regulatory caps on the penalties BLM can assess for trespass and other violations of law. Each of these proposed changes has the potential to add considerable cost to the already high cost of doing business on federal lands.

The breadth of the proposal is sure to attract the attention of Congress. Indeed, BLM recognizes that before it can change the minimum bid, the Mineral Leasing Act requires the Secretary to provide 90 days’ notice to the House Natural Resources Committee and the Senate Energy Committee. 30 U.S.C. 226(b)(1)(B). Congress and industry will all need to pay close attention to this process. In particular, it is important for the industry to respond to the questions that BLM has raised as well as the questions they have failed to raise in the ANPR by June 5, 2015.