New climate and budgetary legislation announced on July 27 by Senate Democrats—including longtime holdout Joe Manchin, D-W.Va.—includes multiple increases on the cost of doing business on federal lands. 

The Inflation and Reduction Act of 2022, which was long under negotiation, attempts to address climate change, corporate taxes, health care and inflation but also includes many provisions rewriting the rules on how much oil and gas companies pay for royalties and introduces a fee just for window shopping. Also included are higher bonding requirements for the plugging and abandonment of wells.

For both onshore and offshore leasing, the bill specifies increasing the rate of governmental royalty payments, currently set at 12.5%, to a range of 16.67% to 18.75%. The Bureau of Ocean Energy Management's most recent Gulf of Mexico (GOM) lease sales have set 12.5% royalty rate for shallow water leases (less than 200 meters) and a 18.75% royalty rate for deepwater leases.

In June, the U.S. Department of the Interior (DOI) reported that federal onshore leases generated about $6.2 billion for the federal coffers. The proposed 16.67% royalty would have raised collections to roughly $8.3 billion and, at the highest rate of 18.75%, to $9.3 billion. The higher royalty is eliminated 10 years after the enactment of the Inflation Reduction Act of 2022, capping the rate at 16.67%.

Kathleen Sgamma, president of the industry group Western Energy Alliance, said the Inflation Reduction Act is a good example of flawed legislation that’s worked out behind closed doors. The 725-page bill was announced on July 27.

“There are multiple technical problems with the onshore provisions that raise serious implementation questions that would have gotten addressed if the bill went through the committee process,” Sgamma said. “The language on lease reinstatement introduces a whole host of technical issues that Sen. [Joe] Manchin doesn’t understand and I don’t think were his intention to introduce.”

“The bottom line is that the 33% increased royalty rate along with several new and higher fees make this bill the Energy Inflation Expansion Act—there’s no reduction as the ill-named bill asserts,” Sgamma said. “Increased costs on American producers will continue to impede energy production at a time of high prices and further exacerbate inflation.

James E. Smith, a Houston attorney who focuses on environmental and safety matters at Crain, Caton & James, said the higher royalties are in the middle ground between what the energy industry and environmentalists had agitated for.

“I have sensed some complaint from the energy industry about it,” he said. “But my sense is the more vociferous complaints, the louder complaints have come from the environmentalists who wanted a ban on new extraction from federal lands and they didn’t get it because of this program.”

Sgamma also criticized a new nominations fee for leasing, which will have serious implications “because of the way the government defers millions of acres for years before offering leases for sale.”

That portion of the bill amends the Mineral Leasing Act by increasing the minimum bid on onshore acreage to $10 per acre from $2 per acre. The Interior Secretary is empowered by the legislation to adjust the minimum bid based on inflation.

The legislation also requires the Interior Secretary to assess a $5 per acre “nonrefundable fee against any person” who submits an expression of interest (EOI) in leasing land for the development of oil or gas.

Expressions of interest are the mechanism used by the Interior Department’s Bureau of Land Management (BLM) to identify lands the BLM should consider for inclusion in future oil and gas competitive lease sales.

Currently, such EOIs are informal and do not require a fee.

In January 2021, for instance, BLM offered leases in New Mexico consisting of 6,850.72 acres. EOIs on those acres would have resulted in about $34,000 in fees, not including lands on which EOIs were filed but were not part of the auction.

“I don’t think his intention was to tie up multiple millions in capital in a non-productive manner, but that will be the outcome,” she said. “Those issues could have gotten cleared up in committee and still accomplished his goals.”

The legislation also addresses abandoned or orphaned wells through increased bonding requirements for oil and gas wells. The area has been one of longstanding criticism by fossil fuel critics as well as regulators.

In a 2019 report, the Government Accountability Office (GAO) reported that bonds are insufficient to prevent orphaned wells “in part because they do not reflect full reclamation costs for the wells they cover.”

“Bonds that are high enough to cover all reclamation costs provide complete financial assurance to prevent orphaned wells because, in the event that an operator does not reclaim its wells, BLM can use the bond to pay for reclamation.”

Hart Energy August 2022 - Bureau of Land Management Regulatory Minimum Oil and Gas Bond Values Comparison chart

Bond minimums are based on the bond category and do not adjust with the number of wells they cover, which can vary greatly, the GAO report said. However, the bonds regulatory minimums haven’t been adjusted since the 1950s and 1960s to account for inflation, the GAO said.

Bonds have been set at:

  • $10,000 for all of an operator's wells on an individual lease; 
  • $25,000 for all of an operator's wells in a state; and 
  • $150,000 for all of an operator's wells nationwide.

The legislation raises bonding requirements beyond the levels the GAO suggested. It would amend the Mineral Leasing Act to require each bond, surety or other financial arrangement for leases by individual companies to $150,000; for all wells held by an operator statewide to $500,000; and increase for entities operating nationwide the bond requirements to $2 million.

The cost of plugging a well can be affected by various factors such as depth, condition, location and accessibility of a well, according to the DOI. The average cost ranges from $2,400 to $227,000, according to the Interstate Oil and Gas Compact Commission (IOGCC).

In 2021, the DOI has authorized to spend $4.7 billion in taxpayer funding from 2022 to 2030 to reclaim and plug abandoned wells.