Oil and natural gas operators were leery of a surprise deal among Senate Democrats to introduce inflation and energy legislation July 28 that would make available $369 billion in energy security and climate change spending over the next decade.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
With fossil fuel advocate Senator Joe Manchin, Democrat-West Virginia, a key player behind the package, the legislation offers some wins for the oil and gas sector, including reinstatement of offshore oil and gas lease sales that were either cancelled or whose results were vacated. But it also raises royalty rates and takes other steps that could affect producers' bottom lines.
Nathan Hasbrook, an energy analyst with S&P Global Commodity Insights, said that methane fees imposed on oil and gas operators in the new bill, dubbed the Inflation Reduction Act of 2022, could increase operators' breakeven costs by an average of 25 cents/b.
"The impact to other aspects of the oil and gas industry are not well defined at this time but could impose further hurdles to US E&P companies," he added.
The American Petroleum Institute said that the spending package offered "some improved provisions," but the group remains opposed to "policies that increase taxes and discourage investment in America's oil and natural gas," according to Amanda Eversole, API's executive vice president and chief advocacy officer.
American Exploration and Production Council CEO Anne Bradbury similarly said that independent E&P companies "are very concerned about this bill's potential negative impact on energy prices and American competitiveness, especially in the midst of a global energy crisis and record high inflation."
Oil, gas pain points
Among the pain points for the oil and gas industry would be an uptick in the cost of production on federal lands and waters as the budget reconciliation package looks to raise revenue through higher oil and gas royalty rates and leasing costs for development.
The offshore royalty rate would be set between 16.67% and 18.75%, compared with the current rate of no less than 12.5%. Onshore royalties would rise to 16.67% from 12.5%. And minimum bids for oil and gas leases would jump to $10/acre from $2/acre.
Fossil fuel rental rates would go from $1.50/acre to $3/acre for each of the first two years of a new lease, rising to $6/acre a year for the next six-year period and rising again to at least $15/acre for each year thereafter. The minimum rental rate for reinstated leases would double to $20/acre.
The bill also creates nonrefundable fees tied to expressing interest in leasing land for oil and gas development of $5/acre; increases minimum bond requirements for lease holders; extends royalty rates to methane emissions with limited exceptions such as in emergencies and for "gas that is unavoidably lost;" and eliminates noncompetitive leasing.
Democrats have argued that increased fossil fuel rates and revenue raisers would protect taxpayers by correcting outdated rules and laws that have allowed the fossil fuel industry to take advantage of rock-bottom royalty rates, limited fees and easy access to public lands and waters, while Republicans have argued the measures were meant to discourage domestic oil and gas production.
About 7% of US oil production and 8% of US gas output is produced on federal onshore lands, while federal offshore acreage accounts for about 16% of US oil output and 3% of gas output, according to the Interior Department.
Oil, gas wins
In a positive turn for the industry, the bill would reinstate Lease Sale 257, which opened up some 80 million acres of the Gulf of Mexico but was canceled by a federal judge over climate concerns. It also demands that three offshore lease sales that were supposed to occur in 2022 but were cancelled by Interior take place.
Interior in May blamed court-related delays for the cancellation of Gulf of Mexico lease sales 259 and 261 and said a lack of industry interest was behind the cancellation of Lease Sale 258 in Alaska's Cook Inlet.
They were the final three sales listed on the 2017-2022 offshore leasing plan, which expired June 30. And industry was contemplating an at least two-year gap between offshore lease sale auctions as Interior continues to work on the next five-year plan.
Interior's July 1 proposal for the 2023-2028 National Outer Continental Shelf Oil and Gas Leasing Program envisions holding up to 10 auctions for Gulf of Mexico acreage and one for Alaska's Cook Inlet, with the possibility of zero lease sales over that five-year period on the table.
Platts Analytics did not anticipate a near-term production impact from the then-expected two-year gap in lease sales and gauged the price influence of Interior's proposal as neutral as operators have secured enough leases to develop.
Environmental groups were quick to lash out against this aspect of the Senate deal as well as an "ensuring energy security" provision requiring more acres of public lands and waters to be offered for oil and gas development before any new solar or wind energy projects could be built in those areas.
Specifically, the bill bars Interior from issuing any rights-of-way for wind or solar projects on federal lands unless an onshore lease sale has been held within the last 120 days and onshore lease sales during the past year have at least totaled the lessor of 2 million acres or 50% of the acreage for which expressions of interest were submitted in that one-year year.
No leases for offshore wind development could be issued without an offshore oil and gas lease sale having taken place within that last year and at least 60 million offshore acres having been offered in that year-long period.
"This is a climate suicide pact," Brett Hartl, government affairs director at the Center for Biological Diversity, said. "It's self-defeating to handcuff renewable energy development to massive new oil and gas extraction. The new leasing required in this bill will fan the flames of the climate disasters torching our country, and it's a slap in the face to the communities fighting to protect themselves from filthy fossil fuels."
The Western Environmental Law Center also took issue with the legislation's provisions that it viewed as propping up the oil and gas industry.
"While we're cognizant of DC political dynamics, this fact should light a fire under the Biden administration to immediately leverage its well-established legal authorities to avoid, minimize, and compensate for ongoing exploitation of the country's shared public lands for fossil fuels," WELC Executive Director Erik Schlenker-Goodrich said.
Notwithstanding the limitations put on offshore wind development, the bill would authorize wind power leasing in areas previously prohibited by the Trump administration. Executive orders signed in 2020 effectively banned leasing along the coasts of Florida, Georgia, South Carolina, and North Carolina. It also permits offshore wind lease sales in US territories.
Manchin, a swing vote and formidable hurdle to previous efforts to advance climate and energy policy in the evenly divided Senate, late July 27 announced he had reached a deal with Senate Majority Leader Chuck Schumer for a party-line budget reconciliation bill that included climate provisions. The announcement caught much of Washington by surprise as Manchin earlier in the month said he would not support clean energy and tax provisions while inflation remains at a 40-year high.
There is still uncertainty as to whether the bill, in its current form, can pass both the House and Senate to reach the president's desk.
"The question for my colleagues is whether they are willing to put their election politics aside and embrace the commonsense approach that the overwhelming majority of the American people support and will best serve the future of this nation," Manchin said in a statement.
Arizona Senator Kyrsten Sinema, also a moderate Democrat, previously stood as a roadblock to legislation with corporate tax hikes, and a contingent of House Democrats previously posed obstacles when they felt climate priorities were not given enough attention.