08/25/2022 - Federal Policy - Oceans & Offshore Energy

The IRA Offshore Energy Leasing Provisions’ Potential Impacts

by Abby Husselbee, Hannah Oakes

This blog post was published on August 25, 2022; for more updates and recent decisions, visit our Federal Onshore and Offshore Oil and Gas Leasing Pause and Review Regulatory tracker.

 

The Inflation Reduction Act (IRA) requires the Department of the Interior (DOI) to hold offshore oil and gas lease sales, but regulatory and economic factors will determine whether those auctions lead to development and extraction. A lease auction is the first step in a long regulatory process before oil or gas can be extracted. In this analysis, we look at the IRA’s changes to federal offshore leasing programs, how they fit in the current legal landscape and industry trends, and what might happen next with these programs.

Offshore energy production is governed by the Outer Continental Shelf Lands Act (OCSLA), which directs DOI’s Bureau of Ocean Management (BOEM) to lease federal offshore land for development, subject to environmental safeguards, including National Environmental Policy Act (NEPA) reviews. The IRA restricts DOI’s authority within this framework by conditioning new offshore wind leasing on oil and gas auctions and by requiring DOI to hold several previously cancelled lease sales. But the IRA also pushes in the other direction by, for example, increasing fees for oil and gas leasing, and several analyses project that the IRA is likely to have significant net emissions benefits.[1] These provisions, however, do not address concerns regarding the environmental and public health impacts of expanded offshore oil and gas development, particularly in overburdened communities.[2]

In the following three sections, we describe how the IRA alters agency authority to issue offshore energy leases. First, we discuss the IRA’s incentives for offshore wind as well as requirements for DOI to hold oil and gas lease sales before granting offshore wind leases. Next, we explain how the IRA’s reinstatement of recently cancelled offshore oil and gas lease sales affects litigation and regulatory processes for these sales. Finally, we outline the impact of the IRA’s increased fees for offshore oil and gas sales.

Although the IRA Ties Oil and Gas Auctions to Offshore Wind Leasing, Additional Factors Will Determine the Resulting Emissions Impact

The IRA creates significant economic incentives for renewables and opens new areas for offshore wind, but it also ties those offshore wind leases to new oil and gas lease sales. Under the IRA, DOI may not issue a lease for offshore wind development during the ten-year period after IRA enactment unless it has held an “offshore lease sale” in the preceding year and offered at least 60 million acres in those auctions.[3] An offshore lease sale is an oil and gas lease auction that results in the issuance of a lease only if that auction receives any “acceptable” bids.[4] This means that DOI is only required to offer 60 million acres of offshore land for oil or gas leasing before it can issue an offshore wind lease. This important distinction may limit the greenhouse gas (GHG) emissions that result from these requirements because, as discussed more below, historical trends indicate that a fraction of offered lands result in a lease issuance and most of that leased land never produces oil or gas.

The IRA May Drive Offshore Wind Investment but Does Not Remove Regulatory and Legal hurdles

President Biden set a goal to deploy 30 gigawatts of offshore wind by 2030, and the IRA supports this goal through tax credits and agency funding. However, the IRA does not eliminate the regulatory hurdles and potential litigation that have historically plagued offshore wind project development. The IRA allows offshore wind to qualify for its new clean energy electricity investment tax credit, creates a bonus credit for projects that meet certain worker pay and apprenticeship requirements, and adds a credit for manufacturers that domestically produce offshore wind components. The IRA also appropriates $100 million to facilitate offshore wind transmission and $150 million to DOI to conduct environmental reviews, which may speed up a process that has historically impeded offshore wind leasing. Notably, wind projects must still undergo BOEM’s regulatory review process, NEPA analyses, and survive potential litigation by opponents of projects which historically have included the fishing industry, wildlife advocates, and nearby landowners.[5]

The IRA Opens Additional Regions for Energy Development but Does Not Guarantee Developer Interest

The IRA opens offshore regions in the Southeast and in US territories for energy development, but it is unclear whether this will lead to substantial offshore wind development. In September 2020, President Trump issued two memoranda withdrawing areas off the coast of Florida, Georgia, South Carolina, and North Carolina from consideration “for any leasing” during the ten-year period beginning on July 1, 2022. President Trump touted these actions as environmental conservation measures while running for reelection,[6] but the broad language effectively banned offshore wind development.

Prior to the IRA, it was unclear which mechanism could be used to remove these moratoriums. President Trump withdrew the land under Section 12(a) of OCSLA, which provides the President the power to withdraw unleased lands from disposition.[7] A federal district court held in League of Conservation Voters v. Trump that Section 12(a) does not give the president power to revoke a previous president’s withdrawal of land, but the Ninth Circuit later vacated that judgment based on mootness.[8] The IRA provides certainty to offshore wind developers and avoids unsettled law with respect to executive revocations under OCSLA Section 12(a).

While this additional land could provide an opportunity for offshore wind leasing, removing the leasing moratoriums also opens the potential for oil and gas leasing, and it is unclear how much offshore wind generation capacity exists in the region. Of these four moratorium states, only North Carolina has expressed interest in offshore wind development.[9] In addition, the IRA amends OCSLA to include specific submerged lands adjacent to US territories and directs DOI to evaluate potential offshore wind lease opportunities in these areas.

The IRA Adds Complexity to the Litigation on Biden’s Oil and Gas Leasing Pause

Early in his presidency, President Biden directed the Secretary of the Interior to “pause” all new oil and gas leasing in offshore waters pending a comprehensive review of the leasing program and its environmental impacts. Thirteen states challenged the pause as a violation of OCSLA, among other claims.[10] In Louisiana v. Biden, US District Judge Terry Doughty issued a nationwide preliminary injunction, relying on League of Conservation Voters to find that Section 12(a) of OCSLA gives the president the power to withdraw land from leasing but does not give the president power to “pause” offshore oil and gas leasing.[11]

The Biden administration asked the Fifth Circuit to revoke the court’s preliminary injunction, and on August 17, 2022, the Fifth Circuit vacated and remanded the injunction on procedural grounds.[12] In response to cross motions for summary judgment, on August 18, 2022 Judge Doughty issued a permanent injunction, halting the pause in the thirteen states that challenged the policy.[13]

While it will be important to assess the Biden administration’s response to Judge Doughty’s latest decision, the IRA will shape the ongoing litigation regarding the pause, as the IRA now requires offshore oil and gas auctions.[14] However, President Biden retains some discretion in directing these auctions, as neither the IRA nor the litigation alters the executive’s authority to withdraw lands from oil and gas leasing under OCSLA.[15]

The Acreage That DOI Must Offer for Oil and Gas Leasing is Less Than Historically Auctioned, and May Not Result in Production

In addition to the regulatory considerations, it is also important to consider the historical context for oil and gas development. In DOI’s 2017-2022 five-year leasing plan, the agency offered 545 million acres for offshore oil and gas leasing, averaging 109 million acres per year.[16] By comparison, the IRA ties granting offshore wind leases on DOI offering 60 million acres of offshore land annually for oil and gas. This amount is consistent with the acreage offered during much of the Bush and Obama administrations, and far less than the acreage offered every year during the Trump administration.[17]

Notably, the language of the IRA does not require that a lease be sold, only that DOI offer land for auction. This language is key because many of the acres offered for lease never receive bids and many of the acres leased are not developed. For example, in the 2017-2022 five-year offshore leasing program, less than one percent of all acres offered for lease received bids.[18] Moreover, as of June 2022, fewer than 28 percent of BOEM’s active leases were producing.[19]

Though these historic numbers reflect past trends and future outcomes are unknown, these data suggest that it is unlikely that the entire amount of land the IRA requires for auction will reach the production stage. According to DOI, “most of this production is in the Gulf of Mexico, where the amount of acreage under lease has declined by more than two-thirds over the last 10 years . . . mostly driven by market conditions and changes in companies’ strategic approach to leasing”.[20] The IRA’s incentives for offshore wind and additional fees on oil and gas extraction might further shape offshore oil and gas production as well.

The IRA Reinstates Oil and Gas Lease Sales, but Many More Steps Remain before Drilling

In addition to the annual oil and gas acreage provisions, the IRA requires BOEM to move forward with four offshore lease sales from its 2017-2022 leasing program. These four sales would have been the first offshore leases issued during the Biden administration. However, they all have been cancelled for various reasons based on the differing environmental risks, economic value, and regulatory requirements in the Gulf of Mexico and Cook Inlet, Alaska.

We outline these reasons for cancelling the sales and the next steps for reinstating them below. Like the provisions described in the previous section, these provisions support the oil and gas industry. However, because of additional environmental reviews and low interest in the areas offered, the impact that these provisions will have on oil and gas production is uncertain.[21]

More Environmental Reviews for Gulf of Mexico Lease Sales

When President Biden entered office, three lease sales in the Gulf of Mexico remained as part of the 2017-2022 program. The IRA directs BOEM to move forward with these sales. BOEM already held the first of these sales, Lease Sale 257, in November 2021. That sale auctioned 80.8 million acres, making it the largest offshore lease sale offered in US history. However, litigation halted that sale before the agency accepted bids or issued leases.

In Friends of the Earth v. Haaland, environmental groups challenged Lease Sale 257, arguing that BOEM’s decision to hold the sale violated NEPA because the environmental impact statement (EIS) did not adequately consider how this sale may affect global oil consumption.[22] Under NEPA, federal agencies must consider and disclose for public comment the environmental impacts of “major federal actions”. In January 2022, the District Court for the District of Columbia agreed with the groups’ argument, vacating Lease Sale 257 and remanding it back to the agency to correct its NEPA error.

Though the Biden administration did not appeal this decision, Louisiana and the oil industry intervened and appealed.[23] In its DC Circuit brief, BOEM argued that factors beyond the agency‘s control delayed its processes, and that the agency did not have time to complete the new EIS, receive and review comments on the EIS, and release a new record of decision before the 2017-2022 program ended on June 30, 2022.[24] BOEM also argued that OSCLA forbids the agency from holding the sale now that the five-year program is over. The DC Circuit has not yet scheduled oral argument.

Without referencing the NEPA issues or the ongoing litigation, the IRA requires BOEM to accept the highest valid bids received in November 2021 and to issue leases within 30 days. It is likely that this provision moots the litigation in Friends of the Earth because BOEM is required to hold the lease sales.[25] Under current NEPA implementing regulations, a non-discretionary agency action is not considered a major federal action requiring an EIS.[26]

However, there are additional processes and NEPA reviews that must be completed before those leases can be developed. For example, before exploration activities, lessees submit an exploration plan that the regional supervisor of BOEM evaluates under NEPA.[27] Following this approval, lessees submit a Development Operations Coordination Document, which the regional supervisor of BOEM also evaluates under NEPA.[28] Frequently, both of these documents require BOEM to complete a site-specific environmental assessment. Thus, BOEM will have additional opportunities to consider the impact of this sale on emissions. Though NEPA does not require agencies to adopt the most environmentally conscious approach, it does require agencies to consider a project’s environmental impacts before making a decision.[29]

At the time of the cancellation of Lease Sales 259 and 261, BOEM had not issued a notice of availability or other final planning documentation for these sales. However, the IRA requires that BOEM hold Lease Sale 259 by the end of 2022 and Lease Sale 261 by September 2023,[30] meaning that BOEM will have to move fast to complete these sales by their statutory deadlines. Because these sales are also nondiscretionary, they may also move forward without a supplemental EIS to address any flaws raised in Friends of the Earth.[31] However, like Sale 257, lessees will have to comply with project-specific environmental reviews prior to engaging in exploration, drilling, and production.

Lease Sale in Alaska to Proceed, Though Interest is Unclear

In addition to the Gulf of Mexico sales, the IRA also requires BOEM to hold Lease Sale 258 for acres in Cook Inlet, Alaska. Sale 258 is also part of the 2017-2022 program, and BOEM cancelled the sale in May 2022 for “lack of industry interest” after receiving zero nominations in response to the Call for Nominations and Notice of Availability. In its announcement, the agency also noted that it has historically cancelled lease sales in Cook Inlet for lack of industry interest.

The IRA requires BOEM to hold this lease sale by the end of 2022.[32]  However, the requirement to hold the lease sale may still not receive any bids.

The IRA Imposes Significant Fees on Extraction Activities

Though the IRA requires DOI to hold new oil and gas lease sales, it also raises costs to producers through increased extraction fees that may discourage potential bidders. For leases in federal waters, the IRA increases the minimum royalty rate and sets a maximum royalty rate for the next ten years,[33] which responds to some of DOI’s requested changes from its November 2021 Leasing Reform Report.

For any new lease in federal waters, the IRA also expands the scope of existing gas production royalties to include gas consumed or “lost by venting, flaring, or negligent releases through any equipment during upstream operations”.[34] Previously, producers were required to pay royalties as a percentage of the oil or natural gas sales and DOI generally exempted operators from paying royalties on methane lost during production.[35] The IRA provisions do not specify the extracted methane royalty rate.

These changes could dissuade potential bidders. For example, in the 2023-2028 program plan, BOEM acknowledged that royalties significantly influence bidder interest. Moreover, Rhodium, Princeton’s Repeat, and Resources for the Future’s IRA emission models all concluded that these increased fees are likely to put downward pressure on future production.[36] These fees for oil and gas could complement the offshore wind incentives discussed earlier to further drive the energy transition.

Next Steps

In the coming months, we will continue tracking the IRA’s implications for federal oil and gas lease sales, including industry bids for lease sales, ongoing or new court challenges, and decisions by the Biden administration on what federal lands are offered for lease. For clean energy development, it will also be important to continue to follow how effectively the IRA accelerates offshore wind development through the tax credits, additional federal waters, and directing funds for environmental reviews. In the coming months, we will be tracking these updates and assessing the implications in future legal analyses.

 

[1] For example, the Rhodium Group estimates that the IRA can reduce US net greenhouse gas emissions by an additional seven to nine percent below 2005 levels by 2030 compared to pre-IRA policy.

[2] For examples, see statements and analyses from the Climate Justice Alliance (CJA), the Indigenous Environmental Network, and The Black Hive – The Movement for Black Lives (M4BL).

[3] The IRA also includes requirements for federal onshore leasing, but this blog focuses on offshore leasing.

[4] IRA § 50265(a)(2). (“The term ‘offshore lease sale’ means an oil and gas lease sale — (A) that is held by the Secretary in accordance with the Outer Continental Shelf Lands Act (43 U.S.C. 1331 et seq.); and (B) that, if any acceptable bids have been received for any tract offered in the lease sale, results in the issuance of a lease.”)

[5] There are ways to expedite the permitting process, such as through the FAST-41 Federal Permitting Improvement Steering Council.

[6] Brady Dennis & Dino Grandoni, The Washington Post, In Reversal, Trump to Ban Oil Drilling Off Coasts of Florida, Georgia and South Carolina (Sept. 8, 2020), https://www.washingtonpost.com/climate-environment/2020/09/08/reversal-trump-ban-oil-drilling-off-coasts-florida-georgia-south-carolina/.

[7] “The President of the United States may, from time to time, withdraw from disposition any of the unleased lands of the outer Continental Shelf.” 43 U.S. Code § 1341(a).

[8] In League of Conservation Voters, the Alaska District Court rejected a provision of Trump’s executive order revoking the Obama administration’s withdrawals of land from oil and gas leasing, finding that Section 12(a) does not give the president power to revoke a withdrawal of land. President Trump appealed this judgment. In 2021, after President Biden revoked President Trump’s invalidated executive order provisions, the Ninth Circuit held that “President Biden’s revocation . . . rendered these appeals moot” and vacated the district court’s judgment in League of Conservation Voters. League of Conservation Voters v. Trump, 363 F. Supp. 3d 1013 (D. Alaska 2019), vacated and remanded sub nom. League of Conservation Voters v. Biden, 843 F. App’x 937 (9th Cir. 2021).

[9] North Carolina has set offshore wind targets and has an advanced offshore wind project (Kitty Hawk) and held a competitive offshore wind lease auction in the Carolina Long Bay lease sale.

[10] Louisiana v. Biden, Docket No. 2:21-CV-00778 (W.D. La.). In a separate case in the District of Wyoming, industry filed a lawsuit alleging the leasing pause violates MLA’s directives to hold quarterly lease sales, but the court has not yet ruled in that case. Western Energy Alliance v. Biden, 0:21-cv-00013 (D. Wy.)

[11] The judge relied on League of Conservation Voters, in which a federal district court rejected President Trump’s EO that purported to revoke previous administrations’ EOs withdrawing lands from the OCSLA and held that under Section 12(a) of the OCSLA the President may withdraw unleased lands of the Outer Continental Shelf but only Congress may revoke a previous president’s withdrawal. Memorandum Ruling, Louisiana v. Biden, Docket No. 2:21-CV-00778, 4-5 (W.D. La. Jun. 15, 2021).

[12] The administration argued that EO 14008 was a “straightforward articulation of the President’s views as to how Interior should use the ample discretion Congress granted the agency under existing law, including the MLA and OCSLA,” and that he is not an agency and therefore not subject to APA review, among other arguments. Appellants Opening Brief, Louisiana v. Biden, Docket No. 21-30505, 19 (5th Cir. Nov. 16, 2021). The Appeals court held, “We cannot reach the merits of the government’s challenge when we cannot ascertain from the record what conduct — an unwritten agency policy, a written policy outside the Executive Order, or the Executive Order itself — is enjoined.” Id. Published Opinion, Vacated and Remanded, 8 (Aug. 17, 2022).

[13] Memorandum Ruling Granting in Part and Denying in Part Motion for Summary Judgement and Cross Motion for Summary Judgment, Louisiana v. Biden, Docket No. 2:21-CV-00778, (W.D. La. Aug. 18, 2022). The thirteen states include Louisiana, Alabama, Alaska, Arkansas, Georgia, Mississippi, Missouri, Montana, Nebraska, Oklahoma, Texas, Utah, and West Virginia.

[14] President Biden’s Executive Order 14008 specifies that the pause applies “[t]o the extent consistent with applicable law.” Tackling the Climate Crisis at Home and Abroad, 86 Fed. Reg. 7619 (Jan. 27, 2021), https://www.federalregister.gov/documents/2021/02/01/2021-02177/tackling-the-climate-crisis-at-home-and-abroad.

[15] For example, in 2016 President Obama issued a memorandum withdrawing certain areas on the Outer Continental Shelf from mineral leasing, which would leave this region open to offshore wind development. The White House, Presidential memorandum – Withdrawal of Certain Areas off the Atlantic Coast on the Outer Continental Shelf from Mineral Leasing (Dec. 20, 2016), https://obamawhitehouse.archives.gov/the-press-office/2016/12/20/presidential-memorandum-withdrawal-certain-areas-atlantic-coast-outer.

[16] The 2017-2022 five-year offshore leasing plan initially included eleven lease sales but four were cancelled, as explained further in this blog. Of the seven remaining lease sales, 545 million acres were offered and less than one percent of that acreage received bids (5 million acres).US Department of the Interior, Bureau of Ocean Energy Management, Lease Sales, https://www.boem.gov/oil-gas-energy/lease-sales.

[17] See 2012-2017 Program; 2007-2012 Program; 2002-2007 Program, https://www.boem.gov/oil-gas-energy/lease-sales (last visited Aug. 23, 2022). Moreover, in some of the years when BOEM did not offer 60 million acres for sale, the agency cancelled sales due to lack of industry interest. The practice of cancelling lease sales for lack of industry interest is less likely to continue given the IRA’s requirements, as the agency is incentivized to offer land whether or not there are likely bidders.

[18] The 2017-2022 five-year offshore leasing plan initially included eleven lease sales but four were cancelled, as explained further in this blog. Of the seven remaining lease sales, 545 million acres were offered and less than one percent of that acreage received bids (5 million acres). Id.

[19] There are currently 2,013 active leases and 549 that are currently producing. See 2023-2028 National OCS Oil and Gas Leasing Proposed Program at 7, BOEM (July 2022), https://www.boem.gov/sites/default/files/documents/oil-gas-energy/national-program/2023-2028_Proposed%20Program_July2022.pdf.

[20] US Department of the Interior, Report on the Federal Oil and Gas Leasing Program, 5 (Nov. 2021), https://www.doi.gov/sites/doi.gov/files/report-on-the-federal-oil-and-gas-leasing-program-doi-eo-14008.pdf.

[21] Like above, it should be noted that Biden administration’s pause likely does not conflict with these required lease sales because the pause  only applies “[t]o the extent consistent with applicable law.”

[22] Friends of Earth v. Haaland, No. 21-cv-02317-RC (D.D.C.). The complaint was filed in August 2021, predating the Sale date.

[23] Friends of Earth v. Haaland, Docket No. 22-05037 (D.C. Cir.).

[24] Specifically, BOEM points to the Western District of Louisiana’s injunction that barred agencies from employing the Biden administration’s social cost of greenhouse gases. BOEM argues that it could not correct the NEPA deficiencies without relying on blocked accounting practices. Though this decision was later stayed, it did prevent the Biden administration from using its estimates between February 11, 2022 and May 26, 2022. See Order Granting Prelim. Inj., Louisiana v. Biden, No. 2:21-cv-01074 (W.D. La. Feb. 11, 2022); Order Granting Stay, Louisiana v. Biden, No. 22-30087 (5th Cir. Mar. 16, 2022)(per curiam). On July 1, 2022, DOI proposed its 2023-2028 plan as required by OSCLA.

[25] On August 17, 2022, BOEM filed a 28(j) letter to the court indicating that the agency was reviewing the IRA and its relation to the case.

[26] Update to the Regulations Implementing the Procedural Provisions of the National Environmental Policy Act, 85 Fed. Reg. 43,304, 43,320 (July 16, 2020)(codified at 40 C.F.R. 1501). Though the Biden administration has replaced some of the Trump administration’s NEPA implementing regulations, this provision is still effective.

[27] 30 C.F.R. § 550.232.

[28] 30 C.F.R. § 550.269.

[29] For examples of NEPA’s past impacts on projects’ designs, see Elly Pepper, Never Eliminate Public Advice: NEPA Success Stories, NRDC (Feb. 1, 2015), https://www.nrdc.org/resources/never-eliminate-public-advice-nepa-success-stories.

[30] For Lease Sales 259 and 261, the IRA also addresses that potential legal issue that BOEM is no longer authorized to hold sales because the 2017-2022 program ended. The IRA says that the sale is to move forward “[n]otwithstanding the expiration of the 2017-2022 leasing program.”

[31] Laura Comay, Cong. Rsch. Serv., IF11909, Offshore Oil and Gas: The Biden Administration’s Leasing “Pause” and Subsequent Actions (Sept. 9, 2021), https://crsreports.congress.gov/product/pdf/IF/IF11909/2.

[32] Like the upcoming Gulf Lease Sales, the IRA tells BOEM to hold sales “[n]otwithstanding the expiration of the 2017-2022 leasing program,” addressing potential concerns that the underlying program authorizing the sale has expired.

[33]  Prior to the IRA, though some lease sales were offered at the new maximum of 18.75%, leases in shallow water were offered at 12.75%.

[34] IRA § 50263.

[35] The federal government has analyzed this issue previously. See, e.g., The White House Office of Domestic Climate policy, U.S. Methane Emissions Reduction Action Plan, 7 (Nov. 2021), https://www.whitehouse.gov/wp-content/uploads/2021/11/US-Methane-Emissions-Reduction-Action-Plan-1.pdf; US Government Accountability Office, Federal Oil and Gas Leases: Opportunities Exist to Capture Vented and Flared Natural Gas, Which Would Increase Royalty Payments and Reduce Greenhouse Cases (Oct. 2010), https://www.gao.gov/assets/gao-11-34.pdf.

[36] See Ben King, John Larsen, & Hannah Kolus, A Congressional Climate Breakthrough, Rhodium (July 28, 2022), https://rhg.com/research/inflation-reduction-act/; see also Brian Prest, Inflation Reduction Act Can Achieve Emissions Reductions Even with Oil and Gas Provisions, Resources for the Future (Aug. 15, 2022), https://www.resources.org/common-resources/inflation-reduction-act-can-achieve-emissions-reductions-even-with-oil-and-gas-provisions/; see Jesse Jenkins et al., Preliminary Report: The Climate and Energy Impacts of the Inflation Reduction Act of 2022, REPEAT Project Princeton (Aug. 2022) https://repeatproject.org/docs/REPEAT_IRA_Prelminary_Report_2022-08-04.pdf.