Posts Tagged ‘Inflation Reduction Act’

Senator Manchin and the Alaska delegation criticized the DOI decision memo for Sale 258. The memo implied that the highest allowable royalty rate was chosen to minimize bidder interest and limit future production. Unfortunately, the “Inflation Reduction Act,” which mandated these lease sales, was not particularly helpful in creating interest in the less attractive OCS tracts like those in the Cook Inlet and the shallower waters of the Gulf of Mexico.

Sec. 50261 of the IRA raised the minimum allowable royalty rate from 12 1/2% to 16 2/3%, while capping the maximum rate at 18 3/4%. This provision favors deepwater operators, typically majors and large independents, whose royalty rates were capped at 18 3/4%, the same rate as for previous OCS sales.

Conversely, the IRA royalty provisions penalize the smaller companies and gleaners who are critical to sustaining shallow water (shelf) operations, including environmentally favorable nonassociated (gas-well) natural gas production, by raising the minimum royalty rate to 16 2/3%. DOI exacerbated IRA’s impact by electing to charge the highest allowable royalty rate for Cook Inlet and GoM shelf leases. The net result was a 50% royalty rate increase from prior sales (12.5 to 18.75%).

The table below illustrates the royalty rate implications of the IRA language and the DOI decisions.

AreaSaleDate% royalty: <200m water depth% royalty: >200m water depth
Cook Inlet2446/21/201712.512.5
Cook Inlet25812/30/202218.7518.75


  • The base primary term for GoM shelf leases is only 5 years vs. 10 years for leases in .>800 m of water.
  • In lease year 8 and beyond the rental rates are nearly double for shelf leases vs. deepwater leases ($40/ac vs. $22/ac).
  • While deepwater development typically requires more time, the higher rental penalty for delayed shelf production (which must be approved by BSEE) is not warranted. $40/acre or $240,000 per year (plus inspection and permitting fees) is a high cost for a marginal shelf lease.
  • Cook Inlet Sale 244 drew 14 high bids totaling more than $3 million. Sale 258 drew only 1 bid of $64,000. While many factors influence lease sale participation, the 50% increase in royalty rate certainly made the Cook Inlet leases less attractive.
  • Other than the increased royalty rate, the terms for both Cook Inlet sales were essentially the same. The primary lease term was 10 years and the minimum bonus bid was $25/hectare for both sales. The rental rate was increased by only $3/hectare ($13 to $16).

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As a result of a provision in the Inflation Reduction Act, leases may be sold but not awarded. See the paragraph below that was inserted at the end of the sale notice. No wind leases may be issued until Sale 259 oil and gas leases are issued (presumably late next spring).

XV. Compliance With the Inflation Reduction Act (Pub. L. 117-169 (Aug. 16, 2022)(Hereinafter, the “IRA”):

Section 50265(b)(2) of the IRA provides that “[d]uring the 10-year period beginning on the date of enactment of this Act . . . the Secretary may not issue a lease for offshore wind development under section 8(p)(1)(C) of the Outer Continental Shelf Lands Act (43 U.S.C. 1337(p)(1)(C)) unless— (A) an offshore lease sale has been held during the 1-year period ending on the date of the issuance of the lease for offshore wind development; and (B) the sum total of acres offered for lease in offshore lease sales during the 1-year period ending on the date of the issuance of the lease for offshore wind development is not less than 60,000,000 acres.” Section 50264(d) of the IRA provides that “. . . not later than March 31, 2023, the Secretary shall conduct Lease Sale 259[.]” Conducting Lease Sale 259 is needed for BOEM to satisfy the requirements in section 50265(b)(2) of the IRA and issue the leases resulting from this lease sale. Notwithstanding the foregoing, nothing in the IRA prevents BOEM from holding this auction.

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Per legislation signed by the President on Aug. 16, 2022:

(1) ACCEPTANCE OF BIDS.—Not later 30 days after the date of enactment of this Act, the Secretary shall, without modification or delay
(A) accept the highest valid bid for each tract or bidding unit of Lease Sale 257 for which a valid bid was received on November 17, 2021; and
(B) provide the appropriate lease form to the winning bidder to execute and return.

The Department of the Interior has been silent on their implementation of this provision. We are particularly interested in:

  1. how the 94 carbon sequestration bids will be handled
  2. whether any bids will be rejected on fair market value grounds

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Contrary to some media reports and industry comments, the Inflation Reduction Act does NOT require the Department of the Interior (DOI) to award leases to the high bidder on each Sale 257 tract. The legislation requires DOI to accept the highest valid bid for each tract.

As BOE has previously explained, the 94 carbon sequestration bids were clearly not valid, and leases should not be awarded. These bids accounted for 30.5% of the entire sale in terms of the number of tracts receiving bids. (More on the CCS bids.)

There is also the matter of fair market value. Only 9 of the 214 (non-CCS) tracts received more than one bid and none received more than 2 bids. DOI/BOEM may determine that some of the bids did not pass the fair market value test. Are such bids “valid” under the terms of the IRA legislation? Note that 7 of the 93 high bids submitted at the previous sale (Lease Sale 256, November 2020) were rejected on fair market value grounds. All 7 were single bid tracts.

Lastly, there is the unresolved matter of the decision by Judge Contreras to vacate Sale 257. While the legislation seems to clearly supersede that decision, who knows what might happen next on the litigation front.

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Final text

  • The flaring provision complicates compliance and may increase safety risks: (p. 649) Exception 1 exempts “gas vented or flared for not longer than 48 hours in an emergency situation that poses a danger to human health, safety, or the environment.” This is inconsistent with the carefully constructed BSEE regulations which allow limited (48 hours cumulative) flaring for certain operations (e.g. during the unloading or cleaning of a well, drill-stem testing, production testing, and other well-evaluation testing). Such flaring is essential but not normally “an emergency situation.” The bill could thus compromise safety by unnecessarily restricting or complicating well operations and by limiting flaring in circumstances where such flaring reduces safety risks.
  • Time for BOEM to get to work 😉: (p. 650): Per our previous post, the highlight section of the bill (from an offshore oil and gas standpoint) reinstates Lease Sale 257 (GoM) and requires that the scheduled 2022 lease sales 258 (GoM) and 259 (Cook Inlet) be held by 12/31/2022. Lease Sale 261 (GoM) must be held by 9/30/2023.
  • Petty but perhaps necessary: p. 655: The provision restricting wind leasing when no oil and gas lease sale has been held in the prior year is in the final bill.

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They are listed here. This one is the most entertaining 😀

Strike line 1, page 1, and all that follows.

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