Opinion: The Good, The Bad, The Climate Bill

After a volatile year for the energy sector, the surprise resurgence of a congressional tax and climate bill brings with it significant implications for the industry.

That development comes as the current geopolitical climate has stymied supply, consumers are experiencing significant increases at the pump, and prospects for increased U.S. production have narrowed. In April, the Bureau of Land Management issued final environmental assessments and sales notices that significantly reduced available acreage on public lands for onshore oil and gas lease sales, increased royalty rates and included a provision to examine the “social cost of carbon” for lease sales.

In addition, the U.S. Department of the Interior (DOI) released its proposed five-year National Outer Continental Shelf Oil and Gas Leasing Program (OCS) Program, which called for the removal of all prospective leases off the Atlantic and Pacific coasts. The plan, announced in July, would also limit new lease sales to one potential sale in Alaska’s Cook Inlet and 10 in the Gulf of Mexico. In contrast, the 2018 program proposed 47 lease sales across 25 of the 26 OCS planning areas. The DOI’s current proposed program even contemplates freezing new lease sales over the next five years.

However, some reprieve was given late last month when Sens. Joe Manchin (D-W.Va.) and Chuck Schumer (D-N.Y.) announced the resurrection of a tax and climate budget reconciliation bill, a deal they coined the Inflation Reduction Act (IRA).

As expected, the energy provisions within this proposal lean heavily toward credits and rebates for research, development and installation of renewable energy technologies and carbon capture projects, providing incentives to move away from fossil fuel energy consumption. While the new legislation may seem like a setback for the energy industry, there are major benefits and drawbacks for oil and gas decision makers to consider.

The Good

• IRA tethers future offshore wind development to domestic oil and gas production, stipulating that the administration must meet a 60-million-acre threshold of offshore oil and gas leases to advance additional offshore wind leases;

• The bill ties the issuance of rights-of-way for wind or solar energy development on federal lands to onshore lease sales of 2 million acres or half of the acreage nominated;

• It reinstates lease sale 257—one of the historically largest offshore oil leases—and requires lease sales of 258, 259 and 261;

• It devotes $150 million to the Department of the Interior, $125 million to the Department of Energy, and $100 million to the Federal Energy Regulatory Commission for staffing and the development of programmatic documents to facilitate timely and efficient environmental reviews; and

• The bill allocates $70 million to the Federal Permitting Improvement Steering Council (FPISC), $40 million to the Environmental Protection Agency, and $20 million to the National Oceanic and Atmospheric Administration to conduct a more efficient and timely permitting approval process.

The Bad

• IRA increases minimum onshore lease bids and eliminates non-competitive leasing;

• It increases onshore and offshore royalty rates to 16.67%, and raises rental rates for leases;

• The bill reinstates the Superfund tax on oil production and imports at 16.4 cents per barrel; and

• IRA implements fees for CO₂ emissions from facilities greater than 25,000 metric tons annually.

Permitting bill

It is all but certain Speaker Nancy Pelosi (D-Calif.) will be able to muscle the IRA through the House by Aug. 12.

There is a silver lining to this deal. Sens. Manchin, Schumer and Speaker Pelosi have made a subsequent hand-shake agreement to advance an energy permitting bill this session of Congress. While this bill exists in concept only, a framework was released which includes tangible gains in the federal permitting process. Specifically, the proposal is reported to include the following reforms:

• A two-year limit for National Environmental Policy Act (NEPA) reviews regarding major projects, and a one-year timeline for lesser projects;

• Designation of a lead federal agency to coordinate inter-agency reviews;

• Expansion of FPISC eligibility for additional energy projects;

• Establishment of a statute of limitations for litigation against permits;

• Prohibition of states and tribes from requesting withdrawal of an application under Section 401 of the Clean Water Act; and

• Legislation requiring completion of all relevant permits for the Mountain Valley Pipeline.

What the final text may look like for this energy permitting proposal is much less certain, as is its path forward in the House and Senate. While the current permitting reform bill framework leaves a lot of scraps on the cutting room floor, it nonetheless is a step in the right direction. It could serve as a bipartisan admission by Congress that meaningful permitting reform is crucial to the completion of any and all domestic energy projects.

William “Bill” Ball is a public affairs director with Foley & Lardner LLP. He is a member of the government & public policy practice in Washington, D.C.