In April, the U.S. Department of Interior’s Bureau of Land Management (“BLM”) issued guidance reducing the royalty rate for energy companies that drill for oil and gas on public land.[1] The announcement came as analysts began to understand the dire financial consequences of the COVID-19 pandemic on the oil and gas industry. BLM’s guidance aimed to provide a lifeline to the already struggling industry.[2]

The Mine Leasing Act of 1920 (“MLA”) governs the development of oil and gas on federal land.[3]  It authorizes the Secretary of the Interior to hold auctions for the subsurface rights of federal lands that contain fossil fuel deposits.[4] Under this arrangement, an energy company submits a bid for the lease, and, if successful, pays the federal government rent and royalties for its use.[5]

The federal royalty rate is a set percentage of the sales value of oil and gas produced from federal lands.[6] Prior to the BLM’s most recent guidance, the royalty rate was 12.5 percent—a rate that had not changed since the legislation was enacted a century ago.[7] But the April royalty relief guidance cut the rate to between 2.5 and 5 percent.[8] The rate reduction was met with skepticism by critics who claimed that the reduced rate incentivizes oil production at a time when the United States is already enjoying an oil surplus[9] and when scientists agree more fossil fuel production is incompatible with reducing emissions to a level that avoids the worst effects of climate change.[10]

BLM’s authority to reduce royalty rates is also derived from the MLA. The BLM can accept applications for rate reduction when it is “necessary to promote development.”[11] As detailed in the regulations, applications for reduction must include the number, location and status of each well drilled and a statement of operational costs and expenses.[12] According to data collected by the independent non-partisan organization Taxpayers for Common Sense, as of August, more than 500 leases covering 346,496 acres of public land in Colorado, Montana, North Dakota, Utah and Wyoming received rate relief since the lower rate structure was instituted in April.[13]

BLM recently indicated that it could begin winding down the program as states begin to re-open and manage operations during the ongoing pandemic despite a number of outstanding applications for rate relief,.[14]

In what may be a reflection of continued volatility and historically low prices in the oil and gas market, BLM recently conducted its first auction since postponing the practice earlier in the spring.[15] The auction, originally scheduled to take place in June, was deferred until August and offered 45,000 acres of public lands to lease in New Mexico.[16] The auction drew far less interest compared to others held before the pandemic—reports show that the average bid per acre was $169, while the average price at a similar auction in February drew bids closer to $1,386 per acre.[17] Still, lower-than-expected prices have not put a halt to future auctions as BLM as moves forward with other scheduled auctions ahead of the November election.[18]

[1] Ben Lefebvre, Trump administration cuts royalty payments for oil companies, Politico (May 21, 2020) https://www.politico.com/news/2020/05/21/trump-administration-cuts-royalty-payments-for-oil-companies-273548.

[2] Id.

[3] 43 C.F.R. § 3100 (2020).

[4] Id. § 3101.

[5] Id.

[6] Taxpayers for Common Sense, Oil & Gas Royalty Relief–Data & Analysis (Sept. 10, 2020), https://www.taxpayer.net/energy-natural-resources/federal-royalty-relief-data-analysis-2/.

[7] Id.

[8] Lefebvre, supra note 1.

[9] Will Englund & Dino Grandoni, Oil companies drilling on federal land get break on royalties. Solar and wind firms get past-due rent bills, Washington Post (May 20, 2020), https://www.washingtonpost.com/business/2020/05/20/blm-royalty-relief/.

[10] See Hiroko Tabuchi, Oil and gas may be a far bigger climate threat than we knew, N.Y. Times (Feb. 19, 2020), https://www.nytimes.com/2020/02/19/climate/methane-flaring-oil-emissions.html.

[11] 43 C.F.R. § 3103.4-1 (2020).

[12] Id.

[13] Taxpayers, supra note 6.

[14] Id.

[15] Dino Grandoni, The Energy 202: Trump administration pauses some oil and gas leasing amid coronavirus pandemic, Washington Post (May 27, 2020), https://www.washingtonpost.com/news/powerpost/paloma/the-energy-202/2020/05/27/the-energy-202-trump-administration-pauses-some-oil-and-gas-leasing-amid-coronavirus-pandemic/5ecd2cc2602ff165d3e41658/.

[16] Id.; U.S. resumes oil, gas lease auctions; bids weaker than pre-pandemic levels, Reuters (Aug. 26, 2020), https://www.reuters.com/article/us-usa-energy-new-mexico/u-s-resumes-oil-gas-lease-auctions-bids-weaker-than-pre-pandemic-levels-idUSKBN25M1E2.

[17] U.S. oil and gas auction draws tepid bidding from weakened drillers, Reuters (Aug. 27, 2020), https://www.reuters.com/article/us-usa-energy-new-mexico/u-s-oil-and-gas-auction-draws-tepid-bidding-from-weakened-drillers-idUSKBN25N332.

[18] See Kate Aronoff, Trump’s fire sale of public lands for oil and gas drillers, The New Republic (Sept. 9, 2020), https://newrepublic.com/article/159290/trumps-fire-sale-public-lands-oil-gas-drillers.