Changes to state oil and gas regulations coming to Montana in 2023 that will increase royalties and stifle uncompetitive sales

An overhaul of federal oil and gas leasing rules, including an end to uncompetitive sales, will take hold in Montana next year with the expectation that statutorily mandated quarterly lease sales will resume.

The Bureau of Land Management recently issued guidance on how leases will be handled under new legislation created by the Inflation Reduction Act. A major issue for Montana will be the end of uncompetitive leases, which are priced low and often produce no production. BLM also increases royalty rates to 16.67%, identical to Montana’s rate. The previous federal tax rate was 12.5%.

The new law also requires renewable energy leases to be part of the quarterly sales regime.

Bainville oil pump

An oil well pumps on the outskirts of Bainville along US Highway 2.

CASEY PAGE, Billings Gazette

For years, conservation groups have called for an end to uncompetitive leases that are formed after a proposed lease parcel has not received an offer. With no takers, the parcels are leased for less than $1.50 per acre annually. The companies holding paper on the properties are using the transaction to attract investors.

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“They really were an asset on paper that companies can use to improve the look of their asset portfolio. They have these low-risk, low-reward leases that they could 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 campaigned to end non-competitive leases.

In some cases, those leased acres could have been used for recreation and tourism, which are major contributors to Montana’s economy, said Alec Underwood, senior policy and development director for the Montana Wildlife Federation.

“It’s an outdated system. Many of these policies, which organizations like ours are campaigning to change, are designed to modernize the system, especially given the impact that outdoor recreation is having on these small communities,” Underwood said. “If you look at the economic statistics, big game hunting is doing a lot more to these communities than the uncompetitive oil and gas leases. That is our main focus.”

Montana has had several high profile non-competitive leases. A London-based oil and gas company’s uncompetitive 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. A Montana Board of Oil and Gas staffer told the Montana Lee Newspapers in 2021 the joke is that helium is an imaginary gas since all it has ever produced is speculation and interest.

Ranking of the state's crude oil production

Montana ranks 12th among states for crude oil production at around 51,000 barrels per day. Source US Energy Information Administration.

Tom Lutey

Montana is not a large oil producing state. It ranked a distant 11th nationwide for crude oil production in 2021, with about 18.9 million barrels that year, according to the US Energy Information Administration. The country’s largest producer, Texas, produced 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 Myanmar perfume magnate, who used the Trump administration’s leasehold sales to acquire land in the western state, which was then sold at much higher prices on social media. Federal lease records show that in 2020, the 11,713 federal acres leased in Montana went to Thang for approximately $1.50 per acre plus a bonus payment of approximately $20.13 per acre.

An investigation by Reuters found that a sample of leases Thang bought for $213,000 that year were then sold for $550,000. In some cases, leases were flipped for 13 times what Thang paid.

That September 2020 sale, in which Thang was the only person to buy federal leasehold land in Montana, turned out to be BLM’s only leasehold sale in Montana for 21 months, a delay caused by President Joe Biden canceling the leasehold within suspended his first weeks in office. As a 2020 presidential candidate, Biden campaigned to end oil and gas drilling on federal land to curb greenhouse gas emissions. A federal court eventually ordered the leases to continue, triggering the Montana sale on June 30, 2022, before quarterly leases stalled again.

Leases are expected to resume in 2023 under new rules passed under the Inflation Reduction Act, said Alan Olson, executive director of the Montana Petroleum Association. Oil producers are not happy about the increase in royalties or the new rental rates of $3 per acre for the first two years, $5 for the next five years, and then $15 per acre thereafter. All leasehold sales also now require a minimum bonus bid of $10 per acre.

Ranking of state natural gas production

Montana ranks 20th among states for natural gas production, with approximately 37.9 billion cubic feet in 2020. Source: US Energy Information Administration.

Tom Lutey

The new lease terms will add to what Olson says is already a challenge in preparing for a federal lease site.

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

Uncompetitive leases, most of which don’t produce oil or gas, still bring in money to the federal government, some of which is passed on to the state, Olson said. Records show that Thang’s Montana state land leases paid a $235,872 bonus to the government in 2020. There’s no environmental impact, meaning there’s not much to complain about, Olson said.

The legal battle over the president’s ban on oil and gas drilling on federal land has been a focus of delays in federal sales, which by law were scheduled to occur quarterly. But Olson said the industry challenge stems from the original suspension. The new rules, passed as part of the Inflation Reduction Act, mark the start of production under the president’s terms, though it’s not the suspension Biden promised supporters.

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

Olson said he would like BLM to consider the true cost of carbon associated with importing oil versus the cost of domestic production.

“What is the social cost of carbon and environmental damage if we have to start importing oil from the Middle East or West Africa or Central America? That should send the carpet numbers through the roof,” Olson said.