Changes in federal oil and gas rules coming to Montana in 2023, upping royalties and squeezing noncompetitive sales

The Bureau of Land Management recently issued guidance for how leases will be handled under new laws created by the Inflation Reduction Act. One issue key for Montana will be an end to noncompetitive leases, the kind that go off at bargain-basement prices and often yield no production. BLM is also increasing royalty rates to 16.67%, identical to the Montana rate. The previous federal royalty rate was 12.5%.

The new law also requires that renewable energy leases be part of the quarterly sale regimen.

For years, conservation groups have called for an end to noncompetitive leases, which come about after a parcel nominated for leasing receives no bid. After there are no takers, the parcels are then leased out for less than $1.50 an acre annually. The companies holding paper to the land leverage the transaction to attract investors.

“They really have been an asset on paper that companies can use to bolster what their asset portfolio looks like. They have these low-risk, low-reward leases that they were able to get for pennies on the dollar and pay pennies on the dollar in annual rent,” said Audrey Bertram, an attorney representing Wild Montana and several other groups who have advocated for an end to noncompetitive leases.

In some cases, those leased acres could have been put to use for recreation and tourism, which are a big contributor to Montana’s economy, said Alec Underwood, senior policy and development director for Montana Wildlife Federation.

“It’s an antiquated system. A lot of these policies that organizations like ours are advocating to change, it’s to modernize the system, especially given the impact that outdoor recreation has on these small communities ” Underwood said. “Big game hunting, when you look at the economic statistics, is doing a lot more for these communities than oil and gas leases that are noncompetitive. That’s our main emphasis.”

Montana has had several high-profile noncompetitive leases. A London-based oil and gas company’s noncompetitive leases for helium exploration near Miles City had become a running joke before becoming the lead example in a New York Times article on the subject. One Montana Board of Oil and Gas employee told Montana Lee Newspapers in 2021 that the joke was that helium was an imaginary gas given that all it ever produced was speculative talk and interest.

Montana isn’t a big oil producing state. It ranked a distant 11th nationally for crude oil production in 2021 with about 18.9 million barrels that year, according to the U.S. Energy Information Administration. The nation’s biggest producer, Texas, turned out 1.7 billion barrels in 2021, North Dakota 405.1 million. Low production means federal lease sales in Montana rarely attract more than a handful of bidders.

In 2020, federal leases issued in Montana went to Levi Sap Nei Thang, a perfume magnate from Myanmar, who took advantage of Trump Administration lease sales to scoop up western state acres, which were then sold at much higher prices on social media. Federal lease records show that in 2020, the 11,713 federal acres leased in Montana all went to Thang for about $1.50 an acre, plus a bonus payment of about $20.13 an acre.

A Reuters investigation found that a sampling of leases Thang purchased that year for $213,000 were then sold for $550,000. In some instances, the leases were flipped for 13 times what Thang paid.

That September 2020 sale, in which Thang was the only person buying federal lease land in Montana, turned out be BLM’s only Montana lease sale for 21 months, a delay brought about by President Joe Biden suspending lease sales within his first weeks in office. Biden had campaigned as a 2020 presidential candidate on ending oil and gas drilling on federal land to curb greenhouse gas emissions. A federal court eventually ordered the leases to continue, which sparked the June 30, 2022 Montana sale, before quarterly leases again stalled.

The expectation is that leases resume in 2023 under the new rules passed as part of the Inflation Reduction Act, said Alan Olson, Montana Petroleum Association executive director. Oil producers aren’t pleased with the increase in royalties, or new rental rates of $3 an acre for the first two years, $5 for the following five, then $15 an acre thereafter. All lease sales also now require a minimum bonus bid of $10 an acre.

The new lease terms will add to what Olson said is already a challenging cost of preparing a federal lease site.

“It’s definitely going to increase the cost of doing business on federal land. The new royalty rate is 16.67%. That’s identical to what it is to lease on state lands in Montana, but you can get a state drilling permit for $125. A federal permit is $10,950,” Olson said.

Noncompetitive leases, most of which produce no oil or gas, still produce money for the federal government, a portion of which is passed onto the state, Olson said. Records show that Thang’s 2020 leases of federal land in Montana produced a $235,872 bonus paid to the government. There’s no environmental consequence, which means there’ s not much to object to, Olson said.

The legal battle over the president’s ban on oil and gas drilling on federal land has been a focus of the delays in the federal sales that by law are supposed to be held quarterly. But Olson said the industry’s challenge stems from the original suspension. The new rules passed as part of the Inflation Reduction Act mark the beginning of production under the president’s terms, although it isn’t the suspension Biden promised supporters.

“That’s where the big issue started,” Olson said. “He campaigned on ‘no more oil and gas.’ Now, he’s begging us to pump it faster, drill more, and courting foreign governments for oil and everything else. That’s the politics of it.”

Olson said he would like to see BLM consider the true cost of carbon related to importing oil compared to the cost of domestic production.

“What’s the social cost of carbon and environmental damage when we have to start importing oil from the middle east, or west Africa or from Central America? That should drive the carpet numbers through the roof,” Olson said.