US House panel studies proposal to alter federal leasing

A legislative draft that would substantially change federal oil and gas leasing has been circulating around the US House Natural Gas Resources Committee.

Nick Snow
Washington Editor

WASHINGTON, DC, May 29 -- A legislative draft that would substantially change federal oil and gas leasing has been circulating around the US House Natural Gas Resources Committee.

The proposal by the committee's majority would consolidate the US Bureau of Land Management and US Minerals Management Service, according to a copy that OGJ obtained on May 29. It would shorten lease periods from 10 to 5 years, increase onshore royalty rates to 18.75%, require diligent development of leases, and impose best management practices on new leases.

Offshore, the proposed legislation would institute a "no discharge" requirement for new leases. It also would establish what the draft calls "a production incentive fee" on existing onshore and offshore leases that are not producing in their later years to encourage production and discourage speculative holding of federal resources.

The bill's draft also would change the federal royalty program in several ways including elimination of royalties-in-kind, ending federal reimbursement of interest accrued on overpayments lessees erroneously make, revision of several ambiguous legal provisions which the bill's proponents say hinder accurate accounting, and increased penalties for inaccurate royalty reporting and payments.

The draft also would establish regional ocean councils and onshore statewide teams modeled on existing voluntary collaborative management efforts such as the Northeast Regional Ocean Council and the Western Governors Association's Renewable Energy Zones project.

OCS planning councils
OCS regional planning councils would be established for the Atlantic, Pacific, and Gulf of Mexico regions. These councils would prepare marine spatial strategic plans to guide OCS energy development amid other activities. The plans would then incorporate into the 5-year OCS leasing plans that are already being developed under the OCS Lands Act.

Onshore, the draft proposes creating federal-state-stakeholder teams to develop comprehensive energy plans for each public lands state. The plans would be used to guide federal land management and leasing decisions. The bill also would create federal leasing programs for wind, solar, and uranium on public acreage to create a basic framework for the various kinds of energy development.

The draft proposal also would create an oceans trust fund, which would dedicate a portion of OCS revenues to grants for coastal states and regional collaborations to protect, maintain, and restore ocean, coastal, and Great Lakes ecosystems.

Oil and gas industry association leaders immediately criticized the proposals. American Petroleum Institute Pres. Jack N. Gerard said on May 29 that the draft poses a major threat to US energy security, and to the jobs, revenues, and secure energy supplies that would result from more domestic oil and gas development. "We need more energy. Provisions of this draft bill will not provide us with more energy. Instead, the draft bill will impose hurdles, drive up costs, and stifle investments, which will lead to less energy," he maintained.

The Natural Gas Supply Association will send a letter next week to House Natural Resources Committee Chairman Nick J. Rahall (D-W.Va.) and the majority staff, "letting them know that this legislation eliminates jobs, reduces domestic supply, and puts upward pressure on natural gas prices at a time when people are worried about jobs and prices," said NGSA Pres. R. Skip Horvath on May 29.

Payments in billions
Horvath noted that gas producers remitted $2.9 billion to the federal government in royalties, rents, and other payments in 2007, and more than doubled such payments to $7.2 billion in 2008. "Those numbers don't even include the taxes we pay," Horvath said, citing US Energy Information Administration figures showing that major gas producers had an effective income tax rate of 40.3% in 2007, significantly higher than the 35% US statutory rate and the 26.6% effective rate for all US manufacturers.

"At a time when unemployment is running in the double digits in states like California and Michigan, now is not the time to raise taxes or create uncertainty in the energy market. That hurts consumers on both the job front and in the pocketbook. By our calculations, natural gas provides approximately 4 million American jobs. This legislative proposal will put those jobs at risk," Horvath said.

Other trade association officials tried to quantify impacts and resolve uncertainties in the legislative draft. "The bill, as a package, seems to express an anti-oil, anti-natural gas bias. We've completed a review and are waiting to discuss it with member companies," Richard L. Ranger, a senior policy advisor at API, told OGJ on May 29.

"It's clear that they're trying to boost renewable energy development on public lands. At the same time, they're making it more difficult to produce natural gas, which we need to enable those renewable energy resources and tackle climate change. On the one hand, the government is trying to increase renewable energy production. On the other hand, it's making it more difficult to develop the natural gas that will be needed to back up intermittent renewable sources," observed Kathleen Sgamma, government affairs director at the Independent Petroleum Association of Mountain States.

Daniel T. Naatz, vice-president of federal resources and political affairs at the Independent Petroleum Association of America, said, "We need to look more closely at these proposals, which are only a draft. Our main concern is that it will create further delays. We've seen from the environmentalists' playbooks that the more opportunities there are, the more they'll make it difficult to actually do work. The idea of planning councils sounds reasonable on its face, and we may not be opposed to it. But our experience suggests that it simply could create a more efficient way to slow things down."

Proposing to cut onshore lease periods in half suggests that no effort was made to consider the time necessary to move from leasing to development to production in frontier US areas which are being leased now, API's Ranger said.

'Often takes longer'
Ranger said, "If you roll up the deep gas plays in the Intermountain West and the work in the Gulf of Mexico in deep water, you're looking 4-9 years before production begins. Each of these prospects and plays brings its own challenges. As we move to frontier areas and drill deeper to pursue projects in more challenging regimes, it often takes longer. The idea of a 5-year lease term would have worked a generation ago when you were chasing basic sandstone gas plays on 160-acre tracts in western Oklahoma, but it won't work now."

Land ownership patterns also pose challenges for producers, IPAA's Naatz told OGJ. "It is important to recognize that in the Intermountain West, a producer often has to work with federal, state and private landowners to put acreage together to secure credit. In and of itself, this won't put people out of business. But it will make it more difficult for independent producers," he said.

IPAMS's Sgamma said the association is more concerned about the proposal to increase fees and royalty rates, which she said would result in less gas produced from federal lands. "When costs go up, a producer has less money to spend on actually developing the resources," she said.

Ranger said he was most troubled by the draft's proposed requirement that a lessee supply the government information every couple of years that he has been pursuing development diligently troubled him most. "The bill is silent by what benchmarks this will be determined. It also doesn't consider how government employees will look at reams of paper and electronic filings they would receive in response to this requirement," he said.

Ranger added, "Finding oil and gas requires ongoing judgment calls, comparing leases and prospects. Somehow, there's to be some arbitrary standard to determine leases are diligently being developed. We have it already with the existing leasing system, where companies have to risk additional capital to determine if the lease has commercial properties. We've been finding real oil and gas. What this process is going to add in administrative burdens will make it that much harder."

'Every incentive already'
Production incentive fees also are unnecessary, Naatz said. "Operators are part of a competitive bid process when they bid for leases. They pay bonuses and rental rates. No company I know simply doesn't lease land and sit on it. They're conducting seismic work, putting land packages together, and otherwise trying to move ahead. Companies have every incentive to produce already. This will simply add more costs and, certainly, for marginal areas when prices are low make it that much harder to produce," he said.

Sgamma said, "Why wouldn't they figure out what due diligence is before they propose punitive measures? Shouldn't they be looking harder at data inconsistencies and problems the Interior Department has? They propose additional fees, but show no appreciation for the exploratory work, environmental analysis and permitting companies do on their leases."

The three oil and gas association officials also questioned the rationale behind combining BLM and MMS. "I don't understand what a bureaucratic organization is going to do when institutions have been in place for half a century. It's hard to tell from the proposals what the impacts would be. At a time when there's so much change being proposed, I think a major reorganization would delay positive gains in improving energy security and developing renewable resources," Sgamma told OGJ.

"I don't understand what a bureaucratic organization is going to do when institutions have been in place for half a century," she said, adding, "It's hard to tell from the proposals what the impacts would be. At a time when there's so much change being proposed, I think a major reorganization would delay positive gains in improving energy security and developing renewable resources."

Ranger said, "The draft's proposal to create a new single office of federal energy mineral's leasing has great potential to be a totally wasted exercise. There are functions performed by BLM and MMS that are unique. The loss of efficiency and expertise that would be lost would be considerable."

Withdrawals, delays
The assocation officials also questioned whether creating new planning councils would be effective in producing more energy domestically. Ranger said, "The legislation is silent as to whether this new committee-driven planning effort will stop all other processes until it delivers its findings. It also, particularly offshore, seems to invite the planning councils to identify new areas to be withdrawn."

He said, "Overall, this approach seems destined to change and transform a decision-oriented approach with accountabilities and expectations with endless planning creating new opportunities for special interest groups to insert themselves into the process to stop energy development. It's possible that even if these planning groups produce a recommendation for leasing, one of these groups will sue to force consideration of one of their recommendations."

Ranger said, "It seems tailor-made to throw new roadblocks in the way of America's energy security in places out west and in deepwater frontiers. It will create new burdens on both government and industry at a time when we're concerned about jobs, about revenues, about investment and about sustainable energy supplies and energy securities. This bill works against every one of these objectives."

Sgamma said, "It's impossible to say from the bill how that would interact with the already existing land use planning processes. BLM has spent hundreds of man-years and millions of dollars developing these processes over several decades. It spent $35 million in Utah over the last 6 years. That's just one state. The bill is unclear how this new structure would interact with this."

The officials emphasized that the proposals could change before the bill is introduced, but are troubling just the same. "Taken in total, they go exactly against efforts to increasing energy, and oil and gas in particularly, on federal lands," Naatz said, adding, "All of these provisions are going to make it more difficult for independent producers in particular to explore for oil and gas in the Intermountain West and across the country."

Contact Nick Snow at nicks@pennwell.com.

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