New obstacles raise questions over US Interior's court-ordered restart of oil, gas leasing

The US Interior Department, as promised, has moved forward with steps to restart oil and natural gas leasing on public lands and offshore waters, but environmental groups and progressive lawmakers have made moves that could now scuttle those plans.

The first lease sale of the Biden administration, for the Gulf of Mexico, could come as soon as October, with onshore lease sales following in Q1 2022. Washington observers, however, are skeptical as to whether those lease sales will be further stalled or come to fruition at all.

Though Interior is fighting a court order that blocked its pause on new federal oil and gas leasing, the Bureau of Ocean Energy Management on Aug. 31 released an updated record of decision for Lease Sale 257, indicating the department's intention to proceed with the sale of offshore leases on more than 80 million acres in the Gulf of Mexico this fall.

Interior's Bureau of Land Management on Aug. 31 also followed through with starting 30-day scoping processes, soliciting public input on parcels comprising at least 750,000 acres across nine states that were previously under consideration for deferred Q1 and Q2 2021 onshore lease sales.

"Interior could still suspend the sales if it wins its appeal, or, alternatively, the Biden administration could draw out environmental reviews, cancel sales via other statutory authorities, or impose terms that might make the sales less attractive to potential bidders," ClearView Energy Partners said in a research note.

New lawsuit

Bolstering skepticism on the fate of upcoming lease sales, Friends of the Earth, Healthy Gulf, Sierra Club and the Center of Biological Diversity on Aug. 31 challenged in a federal district court the Interior's decision to hold Lease Sale 257, while the House Natural Resources Committee floated legislative proposals that would raise oil and gas royalty rates and leasing costs for development on federal land and put further prohibitions on offshore leasing areas.

The lawsuit charges Interior with relying on "arbitrary environmental analysis" to greenlight the largest offshore lease sale in US history, a move environmental groups say will "contribute substantially to greenhouse gas pollution" and "exacerbate the climate crisis" in the Gulf of Mexico.

The environmental groups assert that Interior's review of the sale comes to an "irrational conclusion" that the resulting forecast production of up to 1.12 billion barrels of oil and 4.4 Tcf of gas will not contribute to climate change. They further argue that Interior used an outdated environmental analysis that lacks new information on threats to newly listed endangered species, new interest in leasing the Gulf for wind projects and other issues not considered in the previous National Environmental Policy Act review.

The groups asked the US District Court for the District of Columbia to vacate Interior's "unlawful decision" to hold Lease Sale 257 and enjoin any leases issued pursuant to the unlawful sale (Friends of the Earth, et al v. Haaland, et al, 21-cv-02317).

Offshore 'attractiveness'

Activity in the US Gulf of Mexico has picked up in recent months. A couple of large projects, notably Shell's Whale development, have been greenlighted, as producers moved to take advantage of higher oil prices.

Also, costs have come down dramatically in the last four or five years as oil companies have rethought and redesigned large facilities to be smaller and more purpose-driven. They also tend to replicate new production hub designs for similar water depths and sea conditions.

The offshore sale BOEM prefers would be a regionwide Gulf sale encompassing the Western and Central Planning Areas and a small portion of the Eastern Planning Area not under moratorium. That type of sale has characterized US Gulf federal auctions for the past several years. Prior to that, BOEM held separate areawide Central, Western and Eastern Gulf sales.

But whether the sale might match or exceed the nearly $121 million reaped from Sale 256 in November 2020 is anyone's guess, said Erik Milito, president of the National Ocean Industries Association.

"It is still too early to tell what the lease results of this specific sale will be," Milito said. "Deciding to hold a regionwide lease sale is welcome news and is a step in the right direction, but oil prices and available acreage are only two variables that determine interest in offshore lease sales."

Milito explained that the Biden administration still needs to post the final notice of sale, and that could end up affecting the "attractiveness" of new leases. In addition, the budget reconciliation process now underway in Congress may also impact the Gulf of Mexico outlook.

The House Natural Resource Committee will mark up its portion of the reconciliation package Sept. 2. Among measures up for a vote will be draft legislation to raise onshore and offshore fossil fuel royalty rates from 12.5% to 20%, raise minimum bids for oil and gas leasing from $2/acre to $10/acre, raise annual rents on oil and gas leases, and cut the duration of leases to five years.

"There are dramatic fee and cost increases that would be placed on companies involved in the production of Gulf of Mexico oil and gas, barrels that are low-carbon and support jobs in every US state," Milito said of the draft legislation.

"Federal policy, whether it's dictated from the White House or Congress, must provide regulatory certainty and not raise the cost of doing business in the Gulf of Mexico to a level where investment dollars are forced to flee."

If Congress passes new fees that burden producers with millions of dollars of new costs annually, American offshore energy production will be hit with a severe cost disadvantage, Milito added. "Unfortunately, that outcome will not result in less energy demand, only a wide market opportunity that higher emitting foreign countries, like Russia and China, will happily seize."

Others applauded the legislative proposals, such as Aubrey Bertram, staff attorney at Wild Montana, who criticized the oil and gas leasing restart as a return to a broken system.

"That system has created the absurd circumstances we're in today, whereby industry is sitting on 36 years' worth of leases in Montana at a moment when the market is favorable and yet not a single rig is currently operating in the state," Bertram said in a statement Sept. 1.

Prospects for aspects of these leasing changes surviving the mark-up process are favorable, according to ClearView.

"Although fossil-levered moderate Democrats in both chambers seem likely to balk at several proposed rescissions and modifications of oil and gas tax policy, they represent relatively little federal oil and gas production," ClearView analysts said. "Accordingly, we think at least some of [the House panel's] changes could survive to become law."