How should the BLM reflect social costs when leasing federal lands for oil and gas development?

In April the U.S. Department of the Interior issued an advanced notice of proposed rulemaking (ANPR) seeking comments on a handful of economic issues surrounding the leasing of federal lands for oil and gas development. Most of the questions raised in the ANPR concern aspects of the “government take” – the royalty rates, minimum bids, annual rental rates, bonding requirements, and non-compliance penalties – arising from the leasing program.

One of the questions asked raises a broader point: “Should the [U.S. Bureau of Land Management (BLM)] consider other factors in determining what royalty level might provide a fair return, such as life cycle costs, externalities, or the social costs associated with the extraction and use of the oil and gas resources? If the BLM should consider such factors, please explain how it should do so.”

In a public interest comment recently filed in the ANPR docket, Shawn Regan of the Property and Environment Research Center and I suggest an answer to this question on social costs. Quoting from our comment:

Federal lands offered for oil and gas leasing often contain a wide range of non-energy characteristics. If the BLM could accurately determine the full social cost of developing energy resources for each property, in principle the value could be employed as a property-specific minimum acceptable bid in the lease auction. Such a change would ensure that properties are developed only when the value of the energy resources produced is expected to be greater than the value of the environmental benefits sacrificed.

Two problems arise. First, under current federal law BLM is constrained to employ a single minimum acceptable bid nationwide. Second, and more importantly, federal lands are potentially valued for a wide variety of use and non-use values, some of which values complement each other and some of which conflict. No method reliably integrates the variety of diverse, predominantly subjective, and sometimes conflicting values into a single, uncontroversial auction reserve price.

We suggest that these subjective and conflicting values could be incorporated into federal land practices by direct participation of recreation, environmental, and conservation groups in oil and gas auctions. Should these groups desire that a property be held out of development, they simply need to outbid oil and gas developers in the lease auction.

In this system, the highest bid from a conservation group serves as a reserve price. An oil and gas developer would have to bid higher than the highest conservation group bid to obtain the lease. Should a conservation group bid the highest, it obtains the rights to either develop oil and gas resources or hold the property out of development. The greater the conservation values at stake, the greater would be the likely bids from conservation groups. The process would at least in part mimic a system in which the BLM could measure the social costs of oil and gas development and employ that measurement as a minimum bid price in the lease sale.

We do not claim our suggestion would work perfectly, only that it provides an approach to bringing social costs into the leasing system and no administrative system would do a better job. Our proposal is not fully developed in the comment filed, but we do address a few obvious questions.

Feedback appreciated, so take a look and let us know what you think.

So far only one other “academic-y” comment filed in the docket. Jayni Foley Hein of the NYU School of Law submitted a detailed report, “Harmonizing Preservation and Production: How Modernizing the Department of Interior’s Fiscal Terms for Oil, Gas, and Coal Leases Can Ensure a Fair Return to the American Public.” (Have not had a chance to read it yet.)

By the way, the deadline for comments in response to the ANPR has been extended to June 19, so if you have a view on social costs or the government take associated with oil and gas leasing on federal lands, feel free to let the Department know how you feel.

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