One of President Joe Biden’s earliest executive orders instructed U.S. Secretary of the Interior Deb Haaland to “pause” new oil and natural gas leases on public lands or in offshore waters, conduct a comprehensive review of federal oil and gas permitting and leasing practices and consider whether to adjust extraction royalties to account for climate costs.
This summer a federal judge in Louisiana ruled that the moratorium was illegal, issued a nation-wide, preliminary injunction; the Biden administration appealed. Meanwhile, the state of North Dakota filed a complaint, explaining that pausing the federal lease sales adversely affects production on private and state leaseholds and seeking preliminary and permanent injunction. This column puts the lease litigation in perspective and offers a glimpse of what may come.
The U.S. Bureau of Land Management (BLM) manages energy production on all onshore federal lands, as well as 710 million acres the federal subsurface estate. Additionally, there are approximately 1.7 billion offshore acres in federal waters on the U.S. outer continental shelf (OCS), including the Gulf of Mexico and Alaska regions, which are managed by the Bureau of Ocean Energy Management (BOEM).
BOEM and BLM disburse lease revenues to the states. Coastal states receive 27 percent of the revenue generated from leases under the Outer Continental Shelf Lands Act (OCLSA). Additionally, under the Gulf of Mexico Energy Security Act (GOMESA), Gulf States shares 37.5 percent of qualified OCS revenues to aid in coastal-restoration efforts. Under the MLA, BLM must hold quarterly lease sales, with the state in which the lease is located receiving 50 percent of the bonuses, production royalties and other revenues and 40 percent granted to the Reclamation Fund, which maintains irrigation systems in several Western States — except for Alaska, which receives 90 percent of revenues.
Leasing Moratorium Exacerbated Declines in Federal Oil & Gas Production
While overall crude oil production increased in the last decade, the federal share of production fell 36 percent from its peak in 2009 to less than 24 percent in 2017. Last year, U.S. production averaged 11.3 million barrels per day (bpd), an 8 percent decrease from all-time high in 2019. Production decreased most in the federal offshore Gulf of Mexico, which dropped by 13 percent to 1.65 million bpd in 2020; the second biggest decrease was in North Dakota, which declined by 17 percent to 1.18 million bpd. Reduced production in 2020 adversely affected the tax revenues in the Gulf States (such as Louisiana) and North Dakota. The “Biden Pause” made things worse in Louisiana and North Dakota, and each state sued to stop the pause.
Louisiana and Other States Sue
In March, Louisiana and 12 other states sued President Biden, Secretary Haaland and BLM officials, claiming that (1) the president had no power to authorize the moratorium and that the Interior Secretary/BLM’s implementation of the moratorium violated the Administrative Procedures Act (APA), OCSLA and the MLA, and (2) violating these laws irreparably harmed the states. They asked the court to declare the leasing moratorium illegal and enjoin the Biden administration from pausing lease sales on federal lands and offshore waters.
As background, the overriding policy of OCSLA is the “expeditious development” of offshore resources. The statute requires the Interior Department to establish five-year plans for lease sales. The current five-year plan for 2017-2022 began in 2014, during the Obama administration, was noticed multiple times, received approximately 500,000 public comments, was finalized in January 2017, and ultimately scheduled 11 lease sales, including Lease Sale 257, comprising the western and central planning areas of the Gulf.
Louisiana stated that it has a $50 billion coastal restoration and recovery program funded by OCSLA revenues. Without revenue from Lease Sale 257 and other leases, Louisiana cannot fund the program. Other Gulf States would be harmed too: the cancelation or suspension of just three leases (257, 259 and 261) would reduce GOMSEA funding by $1 billion.
Western states also stood to lose large sums from the MLA moratorium. The hardest hit is New Mexico, which, ironically, is the home state of Interior Secretary Haaland. Testimony revealed that a federal drilling ban over the next five years would result in an annual investment loss of $2.6 billion and an annual revenue loss of $946 million for New Mexico.
In June, the court issued a preliminary injunction because: (1) neither OCSLA nor MLA give the President or Interior Secretary the right to pause lease sales; (2) states could lose billions of dollars; (3) the losses could not be recovered by suing the federal government because of sovereign immunity; and (4) the government should follow the law.
North Dakota Followed Suit
After the court issued the preliminary injunction, North Dakota filed its own complaint against BLM to address a unique concern with the “split estate” of surface and mineral rights. During the depression, the Federal Land Bank foreclosed on North Dakota farms and took ownership, but later sold the land, while keeping the mineral interests. This “allows relatively small federal mineral interests to control exploration and production from much larger pooled and co-located State and private surface mineral interests that are jointly operated under Communitization Agreements that include the Federal government.” North Dakota argued that BLM not have authority to pause the MLA lease sales and that due to split estate framework and “checkerboard” of state and federal interests, any moratorium acts as a “force multiplier” to block the development of pooled state and private interests.
North Dakota, whose economy is based 54 percent on oil and gas production, demonstrated that the moratorium canceled MLA lease sales in March and June, significantly harming the state:
- 146,097 total acres blocked, of which most are state and private acres
- Over 1,000 wells blocked
- Over $3 billion in gross extraction taxes lost
- $750 million in State royalties lost
- Over $1 billion in private royalties lost
- $218 million in sales tax and personal income tax lost
- Total loss to the State of $4.77 billion
The litigation seeks to show that federal leases are inextricably intertwined with private oil and gas production in the State and that federal moratoria (especially if ultra vires and without proper notice) produce disastrous consequences, which should never be repeated. The case is still pending.
On Aug. 16, the Administration appealed the Louisiana federal court’s ruling, committing to issue a report outlining steps to reduce greenhouse gas emissions attributable to federal oil and gas leases, and, in the meantime, “exercise the authority and discretion provided under the law to conduct leasing in a manner that takes into account the program’s many deficiencies.” Cynics might say that the Biden Administration intends to find other ways to delay production on federal lands.
For example, in the same executive order revoking Keystone XL’s permit, Biden halted all activities in the Arctic National Wildlife Refuge (ANWR) relating to the Coastal Plain Oil and Gas Leasing Program and ordered a comprehensive review. In August, BLM issued notice initiating the public scoping process to supplement a prior environmental impact statement (EIS) to address new concerns with regard to caribou, polar bears, birds, vegetation and surface water. At issue is approximately 1.6 million acres within ANWR. Written comments are not due until Oct. 4. BLM estimates that a draft supplemental EIS would issue in six to eight months, followed by more comments. And so on and so on.
“In Washington, ‘delay’ is too often code for ‘derail.’ Wink, wink.”
Congressman Peter Welch (D. Vermont)
Washington Watch is a regular report on the oil and gas pipeline regulatory landscape. Steve Weiler is an attorney at Dorsey & Whitney LLC in Washington, D.C. Contact him at [email protected].