The Inflation Reduction Act Promises Thousands of New Oil Leases. Drillers Might not Want Them.

The U.S. Senate passed the largest climate action bill in American history on Sunday, clearing the path for hundreds of billions of dollars for clean energy and other climate-related measures (in addition to billions for other Democratic Party priorities). But because the so-called Inflation Reduction Act bears the imprint of swing-vote Senator Joe Manchin, it also includes numerous provisions that support oil and gas producers.

The fossil-fuel policy that has drawn the most attention in the weeks since Manchin and Senate Majority Leader Chuck Schumer unveiled their deal is a provision that requires the federal government to auction oil and gas leases on federal land and in the Gulf of Mexico. Though presidential administrations of both political parties have historically leased this territory for drilling, the Biden administration has attempted to halt the federal leasing program; recent lease auctions have also been delayed by litigation from environmental groups.

The reconciliation bill reinstates old auctions that the Biden administration has tried to cancel and forces the administration to hold several new auctions over the coming years. The legislation also requires that the government auction millions of acres of oil and gas leases before it can auction acreage for wind and solar farms. The Center for Biological Diversity, one of many environmental organizations to oppose these provisions, said they turned the bill into a “climate suicide pact,” since they have the potential to prolong the lifespan of the domestic oil industry. However, energy and climate experts who spoke to Grist said that the provisions may not add significantly to U.S. emissions — in part because the fossil fuel industry may not be all that interested in what the government has to offer. 

“I wouldn’t say the provision requiring offshore lease sales is entirely insubstantial, but I also wouldn’t classify it as some kind of major victory for the oil and gas industry,” said Gregory Brew, a historian of oil at Yale University.

That’s for one simple reason: Even if the government does keep auctioning off federal territory, it’s far from certain that oil and gas companies will want to build new drilling operations on that territory. The industry has shifted resources away from federal lands and the Gulf of Mexico in recent years, and there’s currently less capital available than ever for new production in these areas The issue with Manchin’s lease provision is not so much that it will open up a bonanza of new oil production, but instead that it won’t do anything to make energy more available or affordable in the short term — and may even slow down the buildout of renewables in the long run.

The American oil industry was built on federal land and water. Massive companies like Exxon, Chevron, and Hess rose to prominence in the twentieth century by drilling the Gulf of Mexico for all it was worth, and further expansion of so-called “conventional” production took place on federal lands across the West. Over the past 20 years, though, the industry has shifted its capital elsewhere. The fracking revolution unlocked massive shale oil reserves in the Bakken Formation of North Dakota and the Permian Basin of Texas, where almost all land is in private hands; most analysts now expect that the future of American oil production hinges on the Permian, which accounts for around 40 percent of U.S. oil production. Meanwhile, large companies like Exxon have cultivated young oil fields in countries like Guyana, where production could surpass U.S. offshore production in just a few years, and Suriname, which is expected to start exporting oil in 2025. These basins are far less developed than the Gulf of Mexico, which means the cheapest-to-drill oil in them still hasn’t been tapped as thoroughly as it has in the Gulf.

As new production plays have opened up, industry attention has shifted away from traditional federal acreage, especially onshore, according to Raoul LeBlanc, a vice president for energy at the financial analytics firm S&P Global and a former strategist for the oil company Anadarko Petroleum. He added that there is a finite amount of investment capital available for drilling, and that companies are likely to direct it to the most economical opportunities.

“In terms of oil, our view is that virtually all of the highly prospective [onshore] acreage is already leased and held,” he told Grist. “In that sense, opening up a lot of auctions for more development is unlikely at this point to yield a lot of actual activity.”

The market for offshore leases is stronger, because there’s still a lot of untapped oil in the deeper sections of the Gulf of Mexico, but it’s far from voracious. According to a 2021 report from the Department of the Interior, the amount of acreage under lease in the Gulf of Mexico has declined by more than two-thirds over the last decade, as existing leases have expired and oil companies have declined to renew them. The government attributed this change to “market conditions and changes in companies’ strategic approach to leasing” — in other words, companies were no longer willing to buy and explore new acreage unless they were certain there was oil underneath.

The only producers who still have any appetite for offshore acreage, according to LeBlanc, are the largest oil majors, like Hess and Shell, who can afford to spend hundreds of millions of dollars on rig projects that may take as long as a decade to build. These offshore rigs are far costlier to start up than new shale drilling rigs, and they come with significant legal and environmental liabilities.

“[New production sites] are going to be in deep water, they’re going to be high-tech, high-capital, and there’s only really a handful of players that have chosen to play in the deep water,” said LeBlanc. “It’s not like the onshore [auctions], where you may have a party and nobody shows up, but people are also not crazy for this.” LeBlanc added that many companies are expecting oil demand to decline as a result of the energy transition, and therefore may not want to commit to decades-long projects. 

The result is that offshore auctions just aren’t what they used to be. Take for instance the offshore lease auction that the Biden administration held last November, the largest such sale in history. The government offered companies around 80 million acres of offshore territory for bidding, but it only received bids for about 1.7 million acres. Much of that leased acreage may never actually produce oil: About a third of the auction’s 300 bids came from ExxonMobil, which snapped up wide swaths of shallow territory close to the Louisiana coastline. Most analysts agree there’s very little oil left in those tracts, which suggests that Exxon may want to use the seabed to sequester the carbon it captures from other operations. 

“Industry trends suggest a decline in interest toward offshore exploration, in part due to the problems associated with acquiring leases, but also due to related costs, higher risk, and the more competitive state of shale fields,” said Brew, the historian.

Even so, the bill will resolve a long period of uncertainty around the federal leasing program, which may tempt producers back to the Gulf of Mexico. President Biden promised on the campaign trail that he would halt all new oil leases on public lands, but his administration has lurched back and forth on the leasing question several times already. Biden signed an executive order in January 2021 that ordered the Interior Department to “pause” all new leasing, but a federal judge blocked that order soon afterwards. Then, in November of last year, the administration held the largest-ever offshore lease auction. A few months later, though, another federal judge threw out the results of that auction, saying the administration hadn’t conducted adequate analysis of greenhouse gas emissions from the sale. In the months since then, the department has paused all leases again (in February), then resumed some leases (in April), and canceled an auction in the Cook Inlet of Alaska, citing lack of interest (in May). Earlier this summer, the Interior Department again delayed a final decision on whether to offer new leases. The Inflation Reduction Act would end all this back-and-forth. 

Even if all the auctions move forward, however, the emissions benefits of the bill’s clean tax credits will likely dwarf the impact of new oil production. An analysis from the Rhodium Group, a data analytics firm, estimates the Inflation Reduction Act will prevent 24 tons of carbon emissions for every new ton of carbon emissions it creates.That’s in part because the energy credits are so generous, but it’s also because the leases aren’t as enticing to big oil producers as they would have been a few decades ago.

In fact, the biggest win for the oil and gas industry may be the expanded tax credits for carbon capture technology, an area where producers like Exxon and Occidental have made big investments, plus a still-to-come permitting bill that could eliminate regulatory hurdles for pipelines and other fossil-fuel infrastructure. That permitting deal could lead to further air and water pollution in fenceline communities.

Fossil fuel companies might also be thankful that certain provisions were cut from the legislation at the last minute on technicalities: An earlier version of the bill, for instance, included provisions that would have increased costs for oil and gas companies in order to help reduce the number of abandoned wells on federal lands. Oil and gas companies are required to post financial assurances in the form of bonds to cover the cost of cleaning up their operations should they go bankrupt. But the amount of money that companies are currently required to post before they can drill on public lands is a fraction of the true cost of cleanup, which often forces the federal government to foot the bill. Current rules require operators to post $10,000 per individual lease and $150,000 for multiple leases nationwide. The bill initially raised the bonding requirement to $150,000 per individual lease and $2 million for leases nationwide. 

However, this provision was removed in the hours before passage because the Senate parliamentarian ruled that it did not meet the requirements for passage under reconciliation rules. (The Inflation Reduction Act was passed through a special legislative process called budget reconciliation, which allowed Senate Democrats to bypass the filibuster and pass the bill with a simple majority.)

A bigger question about Manchin’s fossil fuel leasing provisions is if they’ll even succeed on the West Virginia senator’s own terms. As Manchin has it, the reason for the lease mandate was to ensure that the U.S. has enough reliable energy during the transition away from fossil fuels.

“You’re not gonna be able to do any more offshore wind … unless we’re absolutely doing more production with drilling,” he told a Fox News anchor last week. “We need more energy today, and we also need to invest in energy for the future. This is a balanced approach.” 

But according to Megan Milliken Biven, founder of the oil and gas worker advocacy organization True Transition and a former official at the federal Bureau of Ocean Energy Management (which handles offshore leases), the lease provisions won’t actually help ensure energy security.

For one thing, Biven said, there’s potential for all these new offshore oil leases in the Gulf of Mexico to crowd out future wind energy investment. That’s because much of the promising wind acreage in the Gulf is already littered with pipelines and abandoned wells, and the new legislation’s mandate could mean that more of that territory is snapped up by oil and gas companies; this will further burden Gulf communities that already serve as oil and gas hubs.

“We have a lot of potential wind [in the Gulf], but there is already junk in there,” she said. “The old industry is imposing costs on the new industry.”

Furthermore, she argued, the lease provision won’t help reduce domestic energy costs, at least in any tangible or timely fashion. In Manchin’s telling, more domestic fossil fuel production will yield more domestic energy supply, which will reduce prices. But any new production in the Gulf of Mexico, for example, would take several years to yield oil or gas. And the U.S. already has a shortage of gasoline refinery capacity, meaning any new crude production is likely destined for export overseas anyway. 

“We are conflating production with energy security, when that’s not the case,” Biven told Grist. “The bill creates a lot of incentives that are counter to most people’s desires and wants for the trajectory of our country.”

Naveena Sadasivam contributed reporting to this story.