[BLM is encouraging public-lands drilling in the midst of a global
oil glut ] [[link removed]]

THE BUREAU OF LAND MANAGEMENT WENT OUT OF ITS WAY TO PROVIDE PANDEMIC
RELIEF TO OIL COMPANIES  
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Nick Bowlin
May 26, 2020
Mother Jones
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_ BLM is encouraging public-lands drilling in the midst of a global
oil glut _

A storm moves through Big Smoky Valley in Central Nevada. , Patrick
Donnelly/Center for Biological Diversity

 

In April, oil prices on the stock market dipped below zero and into
negatives for the first time in history. In effect, companies were
paying investors to take oil off their hands. The coronavirus pandemic
had caused an unprecedented plunge in global demand. The market was
saturated; storage facilities filled up across the world. News reports
from Singapore described dozens of oil tankers sitting off the coast,
filled with petroleum that no one would buy. And the low prices have
endured, causing the largest ever-recorded decline in US oil and gas
rig counts. Some companies have gone bankrupt, with more likely to
follow, and many others have laid off workers and scaled back
operations.

When it comes to addressing this oil supply excess, the federal
government has few tools at its disposal. In some of the nation’s
top oil-producing regions, including West Texas and North Dakota, much
of the drilling takes place on private land. In the Western US,
however, the federal Bureau of Land Management oversees about 96,000
oil and gas wells on more than 24,000 leases, according to 2018
statistics. Today, even Texas and Oklahoma—states that tend to favor
industry, not regulation—have considered measures to limit drilling.
But the federal government has taken the opposite approach.

The day after oil futures went negative, Nicholas Douglas, a
top-ranking national BLM official, emailed the agency’s Western
state directors. This email thread, obtained by _High Country News_,
shows the agency encouraging public-land drilling, despite the
continued glut in the global market.

The new policies instruct state offices to let companies apply for
lease suspensions and avoid royalty payments, which are the legally
mandated taxes on the revenue from resources drilled or mined on
public lands. Several BLM state offices confirmed to _High Country
News _that they are carrying out these policies.

These new directives are not outliers. Despite the pandemic, the BLM
appears to be encouraging public-lands drilling, rather than pressing
operators to shut in wells and not produce oil. In the past few
months, the BLM held lease sales in Colorado, Montana, Nevada and
Wyoming. A September auction could make more than 100,000 acres of
public land available for drilling just outside Canyonlands and Arches
national parks in Utah. No such aid has been offered to renewable
energy industries, which have also suffered in the downturn. Instead,
the Interior Department hit solar and wind projects on federal land
with large retroactive rent bills in mid-May, _Reuters_ reported
[[link removed]].

Taken as a whole, these drilling incentives will not do much to help
the oversaturated oil market, said Mark Squillace, professor of
natural resource law at University of Colorado Law School. But since
federal oil and gas leases last 10 years—and companies often get
them extended—operators can grab cheap leases now and sit on them
until oil prices rebound, while the lease suspensions and royalty rate
reduction provide short term relief on existing wells. The BLM is
offering lease sales at the exactly wrong time, selling valuable oil
and gas properties during a down market, Squillace said. That,
combined with the royalty reduction, means lower financial return on
federal oil for energy-dependent Western states. “It looks like an
effort to exploit COVID-19 to give away public resources in ways that
are ultimately quite destructive,” he said.

A BLM employee who requested anonymity for fear of retaliation,
told _High Country News_ that the new guidance was not only
unnecessary, it was created in a way that violated agency procedures.

Guidance documents of this sort often go through something called the
“Instructional Memorandum” process, which, according to the
agency website [[link removed]],
exists for “new policy or procedures that must reach BLM employees
quickly, interpret existing policies or provide one-time
instructions.” The process includes reviews from agency
experts—lawyers, engineers and regulatory officials—who are
consulted to make sure the documents track with federal law and agency
regulations. According to the employee, this process was only
partially followed for the lease suspension guidance and was skipped
altogether for the royalty tax policy.

“The guidance was written at the highest levels of the BLM
Washington Office (or DOI) without consultation from the usual BLM
experts,” the employee wrote to _High Country News_. “The
guidance was not reviewed internally by BLM personnel who would be
implementing it and was definitely not checked to make sure it
conforms to regulation. This is highly unusual.”

An internal memo drafted by agency lawyers and obtained by _High
Country News_, was sent to acting BLM Deputy Assistant Director Mitch
Leverette on April 16. The document provided legal backing for the
lease suspensions, stating that the pandemic justifies the suspension
of drilling operations or production under the lease. “Operators are
shutting in producing wells because they cannot travel to well sites
or work together at close quarters due to the public health risks and
government constraints associated with the coronavirus pandemic or
that personnel or service contractors are not available,” the memo
read.

But no equivalent memo was produced for the royalty rate relief or
shared with agency staff, according to the BLM employee. In the
document emailed to state directors, the national BLM directs state
offices to let oil and gas operators set their own royalty rates,
suggesting 0.5 percent rather than the standard rate of 12.5 percent.
Federal royalty rates are calculated based on the price of the
commodity, meaning that, since oil prices are low, active drillers on
public land are already getting a reduction.

Squillace, a former Interior Department lawyer, agrees that the
process was abnormal. He added that significant changes of this sort
ought to be treated as rules that likely warrant environmental
assessments, as well as public notice and comment periods. But the
merits of these particular proposals concern him even more than the
unusual process, especially when it comes to the royalty rate
relief. 

Now, companies can request a lower royalty rate if they can
demonstrate economic hardship due to the COVID-19 pandemic. For most
operators, this will not be hard to do. Companies must also show that
their leases would become “economic” once the standard royalty
rate is reduced. Operators have already submitted hundreds of
applications for lease suspensions and royalty rate relief, with many
of the relief rate requests at either 0.5 percent or 0.0 percent,
according to agency and industry sources.

Both the lease suspensions and the royalty relief period are set at 60
days, according to the BLM website. Yet both policies include
open-ended language allowing the agency to extend lease suspensions
and rate reductions as long as the pandemic endures, without public
notice and without the operator having to reapply every 60 days. State
BLM officials confirmed to _High Country News _that some companies
are receiving six-month extended periods of royalty relief and lease
suspensions. “The lease suspensions can be extended beyond 60 days
if COVID-19 conditions exist,” wrote Chris Rose, BLM Nevada
spokesperson. “In the case of the royalty rate reductions, the BLM
action referred to in the guidance allows us to extend the rate relief
without the producer having to file an application every 60 days. The
time frames are also subject to modification if conditions improve.”
The national BLM office did not respond to _HCN_‘s request for
comment on the new guidance.

“There is too much oil worldwide.”

Industry groups say that these relief policies are not overly helpful.
The requirement that companies re-apply for suspensions and relief
every two months is an arduous one, said Kathleen Sgamma president of
the Western Energy Alliance, a trade group that represents hundreds of
independent oil and gas companies in the intermountain West. Sgamma
wrote in an email that a comprehensive “system-wide policy” of aid
would better serve struggling operators. She added that the conditions
for royalty reductions are misguided, because at current prices, few
wells are profitable even at a reduced rate. Low demand and an
over-supplied global market are to blame, and that will not change
anytime soon.

“There is too much oil worldwide. Companies need to shut in
production and suspend operations because there is often simply no
physical place to put all the oil,” Sgamma wrote.

Even without the royalty rate relief, the royalty payments owed by oil
and gas companies would have been down in 2020. Few companies are
turning a profit due to the bad market. Combine bad economic
conditions with the royalty rate cuts, and BLM oil and gas revenues
are poised to plummet. 

Half of all oil and gas royalties go to the states where the resource
was produced, so this decline matters a great deal for states like
Wyoming and New Mexico. In fiscal year 2019, New Mexico received $1.1
billion in federal mineral royalties, according to Interior Department
data. Wyoming industry produced $640 million in the same time. These
royalties fund state universities, public school systems and
hospitals. A record-setting
[[link removed]] lease
sale on the New Mexico side of the Permian Basin, for example, helped
fund a $450 million increase in public education spending for fiscal
year 2020.

That was before the coronavirus. Oil and gas revenues make up 40
percent of New Mexico’s current budget, which was based on oil
prices twice what they are now. Now, due to COVID-19, the state faces
a potential $2 billion budget shortfall for the fiscal year that
begins this summer, the _Albuquerque Journal _reported
[[link removed]].

Royalty payments exist because the public lands and the resources they
contain are held in common by the American public. So when a company
profits from these resources, Squillace pointed out, it stands to
reason that the public should benefit, too—especially citizens in
the state where the extraction took place. Oil and gas companies are
struggling. But so are Western states, and the new BLM policies allow
companies to drill for public resources while generating scant public
revenue. “That amounts to effectively giving away the public’s
oil,” Squillace said.

_This piece was originally published in_ High Country News
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and appears here as part of our _Climate Desk Partnership
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