Who should be able to bid for oil and gas leases on federal land?

Michael Giberson

At PERC Reports, Shawn Regan argues that rules preventing direct participation by environmentalists in federal land lease auctions leaves few options available to such groups other than lobbying for political protection (or worse):

Under current federal leasing rules, leases cannot be held by environmental groups for non-consumptive use. Even if they are the highest bidders, rules require that leaseholders must develop their parcels, precluding such groups from holding them for habitat protection or recreational use. In 1996, an environmental group that submitted the highest bid for a 275-acre timber allotment in Okanogan National Forest in Washington was disqualified because the group did not plan to cut any trees. Politically powerful ranching, timber, and oil interests have kept the bidding process free of competition from environmental groups, thereby keeping leases at below-market levels.

Left out of the commodity leasing and sale options, environmentalists have turned not only to “monkey-wrenching,” but to the political system as a means to set aside land for preservation. This method has largely been successful for environmental groups, who spend millions each year lobbying the government to set aside land into the public domain. Since 1960, over 35 million acres have been added to the federal estate, which is the equivalent of adding an area greater than the size of Rhode Island each year. However, the political allocation of protected lands is made with little regard to the opportunities foregone of alternative uses of the land. By contrast, in a truly competitive bidding process, where environmental groups can bid alongside the oil and gas industry, the winners must face the tradeoffs associated with drilling or preserving the land.

One of the troubles with relying on political allocation is that it encourages expansive rhetoric about the fragility of the ecosystem and how every acre is sacred.  Relying on competitive market allocation encourages consideration of how the ecosystem works, which parcels are particularly important for their low-impact recreation or non-use values, and how much these things are worth.

Maybe you think this idea is pie-in-the-sky dreaming. Think again:

Some states have experimented with allowing environmental groups to bid on state land leases. In 1996, the Forest Guardians outbid a rancher for 644 acres of damaged riparian habitat in New Mexico. The area is now held for nongrazing use, which has restored the watershed’s sensitive ecosystem. Since then, Arizona and Montana have begun to allow private owners and nonprofit groups to bid on state grazing allotments for alternative uses such as nature or recreational leases and other forms of joint land management. In 1999, a coalition of environmental groups and private individuals bought the right not to harvest timber on 25,000 acres of Loomis State Forest in Washington. A remarkable $16.5 million was raised in just one year by more than 5,000 people to protect the forest in the equivalent of a conservation easement, which will remain entirely roadless and serve as important habitat for grizzly bears, fishers, and the Canadian lynx.

Regan said, “By inviting private owners and nonprofit groups into the bidding process, competition could promote cooperation between environmentalists and the oil industry.”  That seems like a great idea for the right combination of people.

A oil and gas developer and environmental group willing to work together could pool resources and bid as a team to get what they wanted from a parcel: the oil and gas developer pursues the petroleum in a way that satisfies the environmental group’s interest in protecting the rest of the value of the land. The contract laying out mutual obligations of the two partners could be drawn up in advance and made contingent on success in the auction.  If the team wins, the contract is in place to manage the cooperation.

Obviously not all environmental groups (or all oil companies) would be suitable for such partnerships. A group philosophically opposed to the use of fossil fuels won’t be able to find common ground with a developer, and some oil companies may be unwilling to change their operating methods to accommodate the interests of potential environmental group partners.  That’s fine.  Especially in cases in which there are potentially significant mineral resources and significant environmental values in the same location, a team of bidders that aimed to get the most value from both kinds of resources should be able to outbid competitors that only value the parcel for one part of its resource.

Of course, if this team-bidding is such a great idea, why isn’t it already happening? Unlike a pure environmental-group bid that would be proscribed by rules requiring development of the oil and gas resources, a mixed team as suggested would be planning to develop the oil and gas. Such bids should already be permitted, but we don’t see them.  Why? Here are some ideas: (A) environmental groups find a better return-on-investment from political lobbying, or (B) maybe existing regulations preserve enough of the environmental value that the marginal improvement possible, from the point of view of the environmental group, isn’t worth the cost, or (C) oil and gas companies judge the added expense is not worth the cost of cooperation, or (D) environmental groups and the oil and gas industry just don’t trust each other enough to contract together.

But whether or not enviro-oilco teams would bid, it is still a good idea to open up the lease auctions to a broader range of competition.

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3 thoughts on “Who should be able to bid for oil and gas leases on federal land?

  1. Uh, don’t oil and gas producers have to pay royalties on production in addition to bids for federal land? Preservationist environmental groups would not produce anything — so would pay no royalties.

    I agree with your principle of opening bidding to everyone, but, as it stands, they would not be apples-to-apples bids because the federal government is always going to get more money from a producer via royalties. For example, an environmental group could “outbid” a producer by offering more cash for the bid — knowing they will pay no development costs and no royalties — and the federal government accepts but actually ends up with substantially less money. This is not an optimal outcome from the position of the federal government (or, by extension, the taxpayer).

  2. On the other hand, not producing anything now means the resource is still available later. The royalty payment can be seen as a payment for diminishing the stock of the resource, and if you are not diminishing the stock of the resource then no royalty payment is due.

    But if the foregone revenue issue is a problem, the government could attach a low minimum annual payment to a parcel. The fee would hamper non-developer participation and lead them to bid less, but if the minimum annual payment is lower than expected royalty payments developer bids would not be affected.

    But the question of what auction rules gets us the best outcome depends on whether the resources are better used for oil and gas development or better used in some other way. Net transfer to taxpayers is only one part of the larger cost-benefit evaluation.

  3. Michael:

    I don’t have a source handy, but I’m fairly certain that BLM does, in fact, charge annual rental payments for on-shore leases that aren’t producing anything. The idea is to encourage lessees to begin extraction relatively quickly, rather than just sitting on it.

    On the other hand, I don’t think off-shore leases have rental payments because it takes so long to explore, find oil/gas, construct a rig, and actually start drilling.

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