The Inflation Reduction Act of 2022 (IRA), passed by the Senate on August 7^th, contains several important oil and gas reforms that will finally bring the federal leasing system into the 21^st century. Many of these reforms were previously included in drafts of the Build Back Better (BBB) Act, the predecessor to the IRA.

The Senate passed the following oil and gas reforms in the Inflation Reduction Act:

• Raise the onshore oil and gas royalty rate for all leases issued during the 10-year period following the enactment of this bill from 12.5% to 16.67% and increase the royalty rate on back royalties and reinstated leases from 16.67% to 20%.
• Increase oil and gas minimum bid from $2/acre to $10/acre for all leases issued during the 10-year period following the enactment of this bill.
• Raise oil and gas rental rates for all leases issued during the 10-year period following the enactment of this bill. Currently, leases are charged no less than $1.5/acre for the first 5 years and no less than $2/acres for years 6-10. The IRA would increase this rate to $3/acre for the first 2 years; $5/acre for years 3-8; and then no less than $15/acre for years 9-10. It also raises back rentals and rent for reinstated leases from $10/acre to $20/acre.
• Establish an expression of interest fee of $5/acre, to be adjusted every 4 years to reflect inflation. There is currently no expression of interest fee to nominate parcels of federal land for oil and gas leasing.
• Eliminate noncompetitive oil and gas leasing. Noncompetitive leasing is a process by which oil and gas companies can avoid paying a bid by submitting a noncompetitive offer for parcels of land that did not sell at the previous day’s competitive auction. This process allows companies to nominate parcels of land for auction, sit on their hands during the auction, and swoop in the next day to get leases for cheaper. The IRA would eliminate this practice and legislate that lands that received no bids at auction could be made available for a new round of competitive bidding.
• Charge royalties on all extracted methane from federal lands that is consumed or lost by venting or flaring except for gas that is vented or flared in an emergency for not more than 48 hours, gas that is used for the benefit of the lease (beneficial use), and gas that is unavoidably lost.

The initial draft of the Inflation Reduction Act, revealed by Senators Chuck Schumer (D-NY) and Joe Manchin (D-WV) late July 27^th, also included reforms to onshore oil and gas bonding requirements that did not make it in the final Senate-passed bill. This section of the bill was excluded because of a budget reconciliation rule that prohibits non-budgetary provisions in reconciliation bills.

When an oil or gas well ceases production and becomes inactive, it can pose environmental and public health risks if not reclaimed properly. Oil and gas bonds are used to recuperate at least some of the costs of reclamation when operators abandon wells or otherwise fail to adequately restore the landscape. The oil and gas bonding reforms proposed in the initial draft of the IRA would have increased the individual lease bond minimum from $10K to $150k, the statewide bond minimum from $25K to $500k, and the nationwide bond minimum from $150K to $2 million. The legislation also would have required these bond minimums to be adjusted for inflation every 4 years.

Current onshore oil and gas bonding requirements are egregiously outdated and cost taxpayers. Present bonding rates have not been updated for inflation since the 1950s and 1960s and fail to account for the high costs of reclaiming oil and gas wells. According to a Government Accountability Office report, the average value of bonds held by the Bureau of Land Management in 2019 was $2,122 per well. Actual reclamation costs were much higher, ranging from $20,000 to $145,000 per well. Onshore oil and gas bonding reform is needed to protect taxpayers and hold oil and gas companies accountable for cleaning up after themselves.

The reforms included in the IRA represent a significant step forward in reforming the federal oil and gas leasing system. According to preliminary estimates by the Congressional Budget Office (CBO), these oil and gas reforms will bring in $484 million over the next decade. With this momentum we hope Congress and the Administration will take additional steps, including reforming bonding, to protect taxpayers from future liabilities and ensure we get a fair return for publicly owned natural resources.