Biden Administration Moves to Raise the Cost of Drilling on Federal Lands

The Biden administration on Thursday proposed a rule that would raise the royalties that fossil fuel companies pay to pull oil, gas and coal from public lands for the first time since 1920, while increasing more than tenfold the cost of the bonds that companies must pay before they start drilling.

The Interior Department estimated that the new rule, which would also raise various other rates and fees for drilling on public lands, would increase costs for fossil fuel companies by about $1.8 billion between now and 2031. After that, rates could increase again.

About half of that money would go to states while a third would be used to fund water projects in the West.

Officials at the Interior Department characterize the changes as part of a broader shift at the federal agency as it seeks to address climate change by expanding renewable energy on public land and in federal waters while making it more expensive for private companies to drill on public lands.

“The Interior Department has taken several steps over the last two years to ensure the federal oil and gas program provides a fair return to taxpayers, adequately accounts for environmental harms and discourages speculation by oil and gas companies,” said Laura Daniel-Davis, the Interior Department’s principal deputy assistant secretary for land and minerals management. “This new proposed rule will help fully codify those goals and lead to more responsible leasing and development processes.”

Oil and gas companies forcefully opposed the changes, several of which were required by the 2022 Inflation Reduction Act. In a letter sent to Congress when the law was passed, more than 50 oil and gas industry groups complained that the increased fees placed “constraints on the ability of companies to develop and produce the energy that Americans need to fuel our economy and strengthen our energy security.”

Lem Smith, a vice president of the American Petroleum Institute, which lobbies for the nation’s largest oil companies, wrote of those provisions, “It bears repeating at a time of high energy costs, when Americans need more energy supply, it does not make sense to raise costs for American energy production.”

The Inflation Reduction Act directs the Interior Department to increase the royalty rates paid by companies that drill on public lands to 16.67 percent from 12.5 percent, and to increase the minimum bid at auctions for drilling leases to $10 per acre from $2 per acre, among other provisions. The 12.5 percent royalty rates have been in place since 1920.

The law also orders the agency to set a minimum rental rate of $3 per acre on public drilling leases in the first two years after a lease is issued, rising to $15 per acre after 10 years, and to establish a new fee of $5 per acre for companies to formally register their interest in leasing public land for drilling.

But the Interior Department’s new rule would go even further than Congress required: It would dramatically raise the cost of the bonds that companies must guarantee to pay to the federal government before drilling on public lands, which has not increased since 1960. The department wants to use those funds to remediate damage left by abandoned uncapped oil and gas wells, so that the cost is borne by companies rather than taxpayers.

The new rule proposes to increase the minimum bond required upon purchasing an individual drilling lease to $150,000 from $10,000. The cost of a bond required upon purchasing a drilling lease on multiple public lands in a state would rise from 25,000 to $500,000. The changes would eliminate an existing national bond under which companies can pay $150,000 as insurance against damaged, abandoned wells anywhere in the country.

The new rule, which could take effect as soon as next year, would also require the agency to prioritize approvals of new permits in areas where drilling is already taking place, as opposed to those for more pristine lands.

The huge increase in bond payments responds to years of efforts by environmental advocates and budget watchdog groups who have urged the government to enact policies that shift the burden of paying to clean up so-called orphan wells from taxpayers to the oil and gas companies that drill the wells and later abandon them.

“This is a huge step in the right direction,” said Autumn Hanna, vice president of the fiscal watchdog group Taxpayers for Common Sense. “Taxpayers have been losing for so long — we were just giving these assets on federal lands away, and industry hasn’t been paying the reclamation cost of damaging them. Leaving these rates to sit untouched for decades when the oil industry has changed so much is just super egregious.”

The Interior Department estimates that there are 3.5 million abandoned oil and gas wells in the United States. When oil and gas wells are abandoned without being properly sealed or capped, which can happen in cases when companies go bankrupt, the wells can leak methane, a powerful planet-warming pollutant that is a major contributor to global warming.

A 2021 infrastructure law provided for $4.7 billion to cap orphan wells, but, the Interior Department wrote, “this proposed rule aims to prevent that burden from falling on the taxpayer in future years.”

“Up until now it’s like BP could get a $150,000 blanket bond for 3,000 wells, but those bonds don’t come close to remedying the situation,” Gwen Lachelt, executive director of the Western Leaders Network, a conservation group, said in an interview last year. “And the state agencies just haven’t had the money to do this.”

The changes “end the madness of companies leaving this mess behind and taxpayers holding the bag,” she said.

The Biden administration has had to navigate challenging terrain when it comes to extraction of fossil fuels on public lands and in federal waters, which is responsible for almost a quarter of the nation’s greenhouse gas emissions.

As a candidate, Mr. Biden promised “no more drilling on federal lands, period. Period, period, period.”

But since Mr. Biden took office, his administration has continued to sell leases to drill, compelled by federal court decisions. The Biden administration approved more permits for oil and gas drilling in its first two years (over 6,900 permits) than the Trump administration did in the same period (6,172 permits). Major oil and gas companies saw record profits in 2022.

Environmentalists excoriated Mr. Biden for his administration’s final approval earlier this year of an $8 billion oil drilling project in Alaska known as Willow.

At the other end, Republicans and at least one Democrat, Senator Joe Manchin of West Virginia, have accused the administration of waging a war on fossil fuels that makes the country less secure.