Nov 26, 2021 - Energy & Environment

Department of Interior proposes raising cost of drilling on public lands

oil pump jacks on federal land in new mexico

A horizontal drilling rig and a pump jack sit on federal land in Lea County, N.M. Photo: Callaghan O'Hare/Bloomberg via Getty Images

Oil and gas companies should pay more to drill on federal lands and waters, the Department of the Interior argued in a report released Friday, saying that the current rates were "outdated."

Driving the news: The Department of Interior report said that the federal government's oil and gas leasing and permitting program "fails to provide a fair return to taxpayers, even before factoring in the resulting climate-related costs that must be borne by taxpayers."

  • The report found that the current program "falls short of serving the public interest" and "shortchanges taxpayers and States."

The big picture: The report recommends increasing the 12.5% royalty rate the government charges to match higher rates that private landowners and major oil and gas producing states charge.

  • Federal royalty rates had not increased for 100 years, the report said, and as a result, the federal government often charges less than what companies pay states and private landowners.
  • The Texas royalty rate, for example, can be double the federal rate, according to the Department of Interior.

By the numbers: The report stops short of proposing a specific increase to the royalty rate, but hiking the minimum to the 18.75% charged for drilling in deep waters offshore would raise an additional $1 billion a year through 2050, The Washington Post reports.

Our thought bubble: The Black Friday release underscores how the administration is in a politically delicate spot on oil-and-gas policy, Axios' Ben Geman writes.

  • Biden campaigned on aggressive steps to limit federal lands development as part of his wider climate agenda. But the administration also faces political jeopardy from elevated gasoline prices (though they're likely to fall thanks to declining oil prices) and just days ago announced a major oil release from the Strategic Petroleum Reserve.

The bottom line: While the Interior report backs a more restrictive approach to leasing, it stops far short of endorsing a halt to selling oil-and-gas drilling rights on federal lands and waters, Geman notes.

  • "This approach could still significantly curtail future federal oil and gas production activity while remaining consistent with existing laws," a note from research firm ClearView Energy Partners said.
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