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The Energy 202: How Biden may get oil companies to pay more to drill

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For years, environmental advocates have argued petroleum producers pay too little for the privilege of drilling on federally controlled lands — under rates originally set in the 1920s. 

Now President Biden may do something about that.

A big but underappreciated part of Biden's far-ranging climate actions is a review of just how much money federal and state governments make from the oil and gas extracted by private companies from public lands.

For years, environmental advocates have argued taxpayers have gotten a raw deal. Petroleum producers, they say, pay too little for the privilege of drilling on federally controlled lands — under rates originally set in the 1920s.

Now Biden's Interior Department may reconsider the royalty rate and other fees levied on oil and gas companies as the new administration halts auctions off drilling rights on federal lands

“The program is outdated and doesn’t work for anyone except oil companies and their executives,” said Jenny Rowland-Shea, a policy analyst at the Center for American Progress, a left-leaning think tank with the Biden administration's ear.

But oil companies are pushing back on the notion of higher fees at a time when so much of the industry is still reeling from the pandemic-fueled downturn.

The royalty rate for oil and gas drilling hasn't been updated since the Woodrow Wilson administration.

It was set at at a minimum of 12.5 percent when he signed the Mineral Leasing Act in 1920 — but hasn't budged up since, even as drilling for oil became more lucrative and less risky over time. 

By comparison, drillers working on state-owned land in Texas cough up as much as 25 percent of revenue from oil and gas sales to the Lone Star State, with companies keeping the rest. The royalties for state leases in Colorado, Montana, New Mexico, North Dakota, Utah and Wyoming all are typically higher than the federal rate, too, according to the Center for American Progress.

While companies can still drill on existing federal leases under Biden's moratorium, they may end up being subject to higher rates. Biden asked the Interior Department to review the entire leasing program while it is put on pause— with an eye toward ensuring “fair return to taxpayers for the use of their resources, according to the department

But Kathleen Sgamma, head of the Western Energy Alliance, which represents oil and gas drillers in western states, said a lower rate for federal drilling is justified because oil and gas on federal lands is typically more expensive to extract and subject to tougher environmental rules.

“it just takes so much more red tape on federal lands,” she said. 

The Biden administration's review is part of a broader effort to move the United States away from fossil fuels.

The new president wants to confront what he calls the “existential threat of climate change from the buildup of greenhouse gases. Oil, gas and coal extracted from federal lands are a big chunk of U.S. emissions, accounting for nearly a quarter of the country’s annual carbon output. 

But states, including blue ones such as Colorado and New Mexico, rely on the nearly $8.1 billion in tax revenue generated by the leasing program to fund schools, parks and other programs. The oil and gas industry points to that revenue stream as a reason to both reopen oil and gas leasing and keep royalty rates low.

“The federal government should be looking at ways to incentivize domestic energy production, not driving it away through increased costs and restrictions on access, Frank Macchiarola, senior vice president of policy, economics and regulatory affairs for the American Petroleum Institute, said. 

That revenue, he added, provides “critical funding for education, infrastructure and other local priorities.”

But advocates for higher royalty rates say it is hypocritical for oil and gas companies to lobby to keep royalties down while arguing that drilling revenue is crucial to funding states. Rowland-Shea also encouraged the Biden administration to consider raising the annual rents paid to hold a lease, which can be just $1.50 per acre.

“The prices right now are essentially a subsidy for the oil and gas companies,” she said. 

According to the Government Accountability Office, the nonpartisan auditing agency, raising royalty rates could decrease production on federal lands while still increasing government revenue.

Hiking royalties also may be a way for the Biden administration to account for the economic damage caused by greenhouse gas emissions. 

Biden last week revived an interagency working group set to estimate the “social cost of carbon” after the Trump administration abandoned efforts to calculate the figure.

Congress may have something to say, too. Last year, House Democrats endorsed the idea of increasing royalty rates through legislation, though that bill did not gain traction in the Senate.

Rep. Raúl Grijalva (D-Ariz.), chair of the House Natural Resources Committee, argued passing a law would prevent another administration from lowering rates again.

“Raising royalty rates now through executive action is a good and very overdue move, he said in a statement. But he added Democrats will reintroduce a bill this Congress to end "this legalized ripoff once and for all.”

Power plays

A federal judge threw out a Trump rule limiting what science the Environmental Protection Agency can use.

The U.S. District Court for the District of Montana, Great Falls vacated the so-called “secret science” rule on Monday, marking “a victory for environmental groups and public health advocates," our colleague Juliet Eilperin reports

Finished just two weeks before Biden’s inauguration, the rule was among the slew of last-minute environmental and public health rules issued by former EPA administrator Andrew Wheeler and the rest of the outgoing Trump administration. 

The Biden administration is “pleased” with the court decision. Made in the name of transparency in government decision-making, the Trump-era rule would have assigned “less weight to studies built on medical histories and other confidential data from human subjects where the underlying information was not revealed," per Eilperin. 

ExxonMobil carves out a “low carbon” business unit as Biden takes office.

“Exxon said Monday that the new business, dubbed ‘low carbon solutions,’ would invest $3 billion through 2025 on lower emission energy technologies, primarily on carbon capture and storage projects, which gather carbon emissions from industrial processes or directly from the air and deposit them underground,” the Wall Street Journal reports. “Those investments would represent roughly 3% to 4% of Exxon’s planned annual capital expenditures.”

The announcement comes as the country's largest oil company is squeezed financially by the coronavirus pandemic and is under pressure from activist investors to focus on clean energy — all coming in addition to the threat of drilling restriction and new regulations from the incoming Biden team. 

It also comes as Exxon disclosed its first annual loss in 40 years, per Bloomberg News, as many of its customers have cut back on driving and flying during the pandemic.

Extra mileage

Punxsutawney Phil predicts six more weeks of winter.

“Don’t stow your winter hat and jacket quite yet,” our colleague Matthew Cappucci writes in a Groundhog Day dispatch. “The groundhog spotted his shadow in Punxsutawney, Pa. on Tuesday morning, portending six more weeks of winter — if you trust a rodent for your forecast.”