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No Buyouts In The Gas Patch

We're pleased to bring on Rob Inglis as an occasional contributor to The Vine. Rob writes for High Country News, a nonprofit publication covering political and environmental issues in the American West. 

You've probably heard the Democratic line about federal oil and gas leases: Before we issue any more of them, we need to makes sure that oil companies are using the ones they already have. But federal leases already contain a use-it-or-lose-it rule, as House Republicans frequently point out. And, in fact, this rule does put downward pressure on the price of oil and gas—just not in the ways you'd expect.

Right now, anyone who buys an oil or gas lease from the federal government has ten years to show economically viable production from at least one well on the lease. Otherwise, the mineral rights return to a federal pool to be auctioned off to someone else. There are ways to extend the ten-year period, but it can't be extended forever. The rule actually benefits oil producers by preventing conservation groups from employing an Everglades-style strategy of buying up leases to keep them from being used—except in Montana's Rocky Mountain Front, where Congress has specifically prohibited re-leasing.

The use-it-or-lose-it rule also shuts out another, larger group of potential buyers from the energy-lease market: landowners who don't want drill rigs in their front yards. A bit of background: Under the 1918 Homestead Act and other laws, the federal government retained the sub-surface rights to much of the land it gave away to settlers in the West, and so still controls the oil and gas rights under some 58 million acres of private land. Oil companies with federal drilling leases don't need permission from landowners to drill—they just need to carry out a bit of environmental remediation (like planting grass where they disturb the ground). This allows oil producers to avoid paying one of the biggest costs associated with oil and gas production—namely, the reduction in the value of the land being drilled.

That market failure would begin to correct itself if landowners were allowed to buy the rights to the oil and gas underneath their land. But under current law, this is exactly what they can't do—unless, of course, they plan on doing some drilling themselves. And removing a large—and in many areas, well-funded—group of buyers from the leasing process artificially depresses the price of an oil and gas lease. So the use-it-or-lose-it rule is already doing its part to keep fossil fuel prices down. The problem is that it's doing so by creating yet another barrier to the efficient functioning of oil and gas markets.

--Rob Inglis