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8 Discussion and Recommendations INTRODUCTION The committee agreed that a number of the problems involved in balancing oil and gas development with other uses of the federal lands could be ameliorated by adjustments in current planning and leasing practices. In some cases, the BLM and the Forest Service are already making such adjustments. The planning process now used by both agencies provides some gov- ernmental guidance and control for what had been a system of largely privately initiated mineral development. A strength of that prior system was that it could respond quickly to changes in economic conditions. The modern planning system mandated by Congress for both BLM and Forest Service lands requires that decisions be made well in advance of specific kinds of activities, thereby limiting the private sector's ability to respond promptly to changes in market conditions. Federal land and resource planning has evolved rapidly in response to increasing demands for resources from these lands and to growing concerns for environmental protection across the society as a whole. At the same time, the agencies have markedly improved their ability to meet the re- quirements of the National Environmental Polic y Act in their planning and leasing decisions, although recent court decisions demonstrate that some uncertainty still exists about these legal mandates. These court decisions and the evolving refinement of the planning process have increased the complexity, cost, and length of time required for that process. 113

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114 These plans, upon adoption by the agencies, are legally binding; that is, they control the agency's exercise of its management discretion unless and until modified. In some situations these plans will preserve options for various future uses of federal lands and resources, and will provide some measure of stability by limiting agency discretion over the plan's life. On the other hand, the plans may restrict future uses of federal lands on the basis of currently available information, and may create new costs and limits for future generations. For example, communities surrounded by federal lands may find their opportunities to respond to changes in economic and other conditions constrained by planning decisions that may not be easy to alter in coming years. The planning process attempts to balance national and local interests, and makes judgments about costs and benefits, although it may not do so explicitly. The statutory definitions of the "multiple use" management goals, assigned by Congress to both the Forest Service and the BLM in the Federal Land Policy and Management Act of 1976 (43 USC 1701-1782) explicitly caution, however, that the agencies are "not necessarily to iselect] the combination of uses that give the greatest economic return or the greatest unit output" (43 USC 1702(c)~. Perceptions of benefits and costs are not necessarily the same for the national and the state or local interests. For example, the cost of closing some federal lands to oil and gas development to meet national demands for recreation and environmental quality may be largely borne by people in the immediate area of federal lands. On the other hand, the cost of meeting national needs for oil and gas may be borne by local communities in terms of recreational and environmental impacts. Community opinion may be divided between those who welcome economic opportunities from oil and gas activity, and those who place a premium on recreation and preservation or who emphasize stability, continuity, support for existing industries (such as timber), and avoidance of boom-bust cycles. The committee visited and heard from officials in two counties (both named Teton County, one in Wyoming and one in Montana), where the public officials took diametrically opposed positions on oil and gas leasing on federal lands within their jurisdictions. The disparities in these local attitudes underscore the difficulty facing any planning and decision-making process. SUMMARY OF CORE RECOMMENDATIONS The committee has addressed a number of significant issues posed by current practice. The following is a summary of its core recommendations. In general, the agencies should analyze the reasonably foreseeable impacts of oil and gas exploration and development in land and resource plans

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115 formulated for those areas where potential exists for oil and gas activist. As a result of this analysis, one of three judgments ought to be made: 1. If this analysis leads the agencies to conclude that oil and gas development can be regulated to control its impacts on other values to acceptable levels, they should make such lands available for leasing, with such stipulations as the planning analysis indicates are required to protect those other values. 2. In some cases, information available at the planning stage may not be sufficient to analyze the necessary trade-offs between protecting an area's important environmentally related values and developing any oil and gas that might exist. This may be the case with large areas of unexplored land. In such cases, however, available information may be sufficient to conclude that a limited number of exploratory wells can be drilled without creating unacceptable impacts. If so, the agency ought to make the lands available for leasing on a segmented basis. Such leases would contain stipulations that convey to the lessee only the right to drill one or more exploratory wells in areas identified by analysis in the planning process as environmentally acceptable. The lessee would not have the right to bring the lease into production until and unless the agency concludes that the impacts of production are environmentally acceptable. The agency would use the information gained by the exploratory wellts) to carry out a better- informed, less-speculative analysis of the benefits and costs of production, before making a final decision whether to allow it. If the agency decides, after this further analysis, to disallow production, the lessee ought to be reimbursed for the direct costs it incurred in acquiring and exploring the lease. 3. In some cases, the information available at the planning stage may show that even the drilling of exploratory wells, regardless of how strictly it is regulated, would probably create unacceptable impacts on other high-priority values. If so, the agency should declare that the lands involved are presently unsuitable for oil and gas leasing. The agencies should formulate specific criteria for determining unsuitability through a combination of nationally applicable standards (established by rule making to amend the agencies' generic planning regulations) and more localized standards (formulated and applied in the planning process for local planning units). The committee also recommends that all onshore oil and gas leases contain a carefully drawn stipulation that allows the land management agency to prohibit further activity on any lease after it has been issued where the agency determines that serious, unacceptable, environmental harm is likely to result and the benefits of such prohibition outweigh the

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116 costs. In such situations, lessees ought to be compensated for their direct costs in obtaining and developing their leases. The reasoning behind the committee's core recommendations is two- fold. First, it believes the planning process should be the principal focal point for making decisions about where and under what conditions oil and gas leasing should proceed on federal lands. Practically all the disparate interests that addressed this issue in their presentations and comments to this committee agreed upon that approach, even though they had somewhat diverging views on exactly how the planning process should arrive at these decisions. The committee is persuaded that the planning process, with its systematic, interdisciplinary approach, allowing ample opportunity for participation by all interests, is an essential component of decision making. Second, the committee is concerned or that the planning process could be saddled with a task that in some circumstances it could not perform well. That is, in some cases it may simply be beyond the inherent limits of the planning process to make meaningful, realistic forecasts about the impacts of oil and gas development (as opposed to exploration) on other resources and values. Where that is the case, further analysis may be necessary after exploration has produced enough information to allow such projections to be made. Furthermore, in some cases environmental concerns may be recognized or be more fully appreciated only after the planning and leasing process is completed. This suggests the need for agencies to retain continuing authority to prohibit, with reimbursement of the lessee's out- of-pocket costs in appropriate cases, activities in order to prevent serious environmental harm. An elaboration of the committee's core recommendations follows. After that, a few other, narrower recommendations to improve the oil and gas leasing process are set forth and explained. RECOMMENDATION ONE The agencies should use their planning processes to forecast the reasonably foreseeable consequences of oil and gas exploration and development Where those consequences are deemed acceptable, the agencies should make the lands available for leasing. As noted earlier, there is usually a significant time lag between agency planning and leasing, exploration, or development. The period can stretch over several decades. A plan may be in effect for 15 years. Leasing may not take place until near the end of the plan's term. A lease is typically not drilled even for exploration until the last year of either a 5- or a 10-year lease term, and it may take several more years to drill step-out wells and prepare a field for full production. A moment's reflection on the changes in technology, public opinion, policy, and scientific knowledge

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117 of environmental impacts that have occurred in the past few decades demonstrates the difficulty of making realistic projections over such a time period. Changes that can occur over such a time scale can cut both ways; that is, they may make mineral activity more or less acceptable. An energy crisis and the emergence of new, lower-impact exploration and development technology are examples of the former. The identification or formal listing of an endangered species and the discovery of a geologic condition that makes oil and gas development hazardous are examples of the latter. Agency decisions not to lease or to lease only with severe restrictions can readily be altered to accommodate changes that make mineral devel- opment more acceptable. No-leasing decisions can be reversed and leases issued; restrictive lease stipulations can be waived, suspended, or modified. It is more difficult to deal with changes that argue for restricting mineral development after leases are issued. The problem is a mixed one of policy (honoring legitimate expectations of lessees! and law (the potential "taking" of property rights). ~ .,4_ TV ~1 ~" ~ Besides the problem of time lag and evolving information and values? there is the additional problem of efficiency; namely, the potential waste of (mostly governmental) resources involved in assessing the possible en- vironmental impacts of developing thousands of leases, when only a small fraction of them will actually be drilled, and still fewer will yield petroleum in quantities sufficient to warrant full field development. The government's response to this problem has generally been to try to avoid or postpone doing the environmental assessment until a proposal to drill is actually made. This has usually been close to the end of the primary lease term, and can be as much as 20 to 25 years after a land and resource plan is prepared for the area. The committee believes that the agencies should generally attempt in their planning processes to forecast the reasonably foreseeable conse- quences of oil and gas exploration and development. In many, perhaps most, areas, such forecasts can be made with considerable confidence. Ar- eas subject to planning may have already experienced exploratory drilling or even production. Nearby areas under the jurisdiction of another agency, federal or state, may have likewise seen oil and gas activity that has yielded useful information about petroleum potential and the likely impacts of petroleum activity on the lands subject to the planning process. In some areas, however, particularly in wildcat areas where reliable information on petroleum potential is lacking, forecasting the reasonably foreseeable consequences of exploration and development will require sub- stantial speculation because the actual impacts of oil and gas development are controlled by the location, quality, and other characteristics of the petroleum resource. Even in these wildcat areas, however, the agencies,

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118 prodded by some of the court decisions discussed in this report, are working to improve the reliability of such forecasts. In most cases, the committee believes that enough information about the likely consequences of development will be available to allow the agen- cies~to determine, at the planning stage, whether the consequences of exploration and development are acceptable, considering the other values and uses of the lands. If the agency determines that the impacts are accept- able, the lands ought to be made available for leasing under stipulations identified in the planning process as appropriate to protect other values. In such cases the agencies should, in advance of actually holding lease sales, perform an additional analysis to ensure that the conditions and assumptions made in the planning process leading to the decision in favor of leasing have not significantly changed. If they have, of course, the agencies should prepare NEPA documentation and, if necessary, plan amendments, to explore whether leasing remains acceptable. Similarly, the agencies should also perform an additional analysis in advance of acting on applications for permits to drill. and orior to anoroval , ,1 A ~ of full field development plans of operations, in order to ensure that the forecasts in the planning process have not significantly changed. If they have, the agencies should prepare NEPA documentation and, if necessary, plan amendments, to determine the appropriate level or type of activities. While the committee recommends placing principal reliance on the planning process in making basic decisions about oil and gas leasing, it urges the agencies to try to keep the information they use as current as possible. Agency plans sometimes tend to take on a life of their own, and agencies may be reluctant to make major revisions or update the information in these plans in subsequent plan amendments or revisions. Given the speculative nature of some of the information, particularly geologic dam, used in the planning process, the committee believes it is especially important that the agencies attempt to ensure that the most current and reliable data are used in these plans or any amendments or revisions thereof. Information and accompanying analyses in previous plans should not, through inertia, go unexamined over time. In the end, the plans may only be as good as the accuracy of the data used. RECOMMENDATION TWO In areas where available information indicates the potential for high- value oil and gas resources, but where surface values are especial) high and potential land use conflicts cannot be resolved during planning, lands should be made available for leasing with a right on) to drill exploratory wells in defined locations. Information gained by that exploration should be used to make a subsequent analysis and agency decision on proceeding

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119 with development if discovery of petroleum makes development possible. If; after that analyst farther exploration and development Is prohibited, the lessee should be reimbursed for its direct costs of obtaining and eurplonng the leasehold. In some situations, especially in wildcat areas where petroleum poten- tial is significant but where little hard information is available, and where other values that might be jeopardized by oil and gas development are Important, a decision to issue leases that convey a right to proceed to full development may be problematic. That is, because the actual charac- teristics of any petroleum resource discovered in the area will determine many of the impacts of development, in some cases the agency may simply be unable to determine at the planning stage what these impacts will be, and therefore be unable to make meaningful judgments about whether the impacts are acceptable. Put a little differently, in some cases information available to the agency at the planning stage suggests that the competing values involved are in rough balance with each other (and that some of these values may not be subject to conventional dollar weighing). This information is relevant to both the benefit and the cost sides of the leasing decision. On the benefit side, it shows the positive contributions obtained from oil and gas activity (necessary to weigh against the environ- mental costs of the development). On the cost side, this information is a primary determinant of the environmental impact of the activity, because the presence, location, and characteristics of the petroleum resource will control the number and location of roads, drilling sites, gathering lines, processing facilities, and other components of a producing field. On the other hand, there will usually be enough information available at the planning stage for the agencies to make a meaningful assessment of the likely cumulative impacts of oil and gas exploration, because exploration usually involves the drilling of a limited number of wells in relatively discrete areas. This will generally allow the agency, in turn, to determine at the planning stage whether the impact of exploration on other values is acceptable. In these cases, which would generally be areas that have never been explored by drilling, the committee recommends that the agencies concen- trate their analysis at the planning stage on the impacts of exploration. If those impacts are deemed acceptable, the agencies should make such lands available for leasing with a special stipulation that would convey to the lessee only the right to drill exploratory wells. The lease would not convey the right to proceed to production or full field development. Such a right would only be granted to the lessee after further analysis and a further decision by the agency. The agency would use the information gained by the exploratory Welles) to engage

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120 in a better-informed, less-speculative analysis of the benefits and costs of production, before making a final decision whether to allow it. This additional analysis could take place in a process to amend the agency's plan, in an environmental impact statement under NEPA, or in a document that serves both functions. This circumscribed category of staged leasing would not be the same as the contingent rights stipulation sometimes used in the past. Leases with contingent rights stipulations carry with them no rights to explore or develop without further permission. The staged leasing the committee proposes would contain a right to explore under suitable mitigating conditions, but not a right to proceed to development. The exploration permitted would obtain information on the petroleum resource sufficient to allow the agency to engage in a much more informed analysis of the consequences of development. Although this staged approach to leasing would pose some risk to lessees, a number of features would substantially mitigate the risk First, prospective lessees would know of this limitation in advance of leasing and could discount their bids by their assessment of the likelihood that permission to proceed with full development may be denied. Second, the recommendation is that if this subsequent analysis leads the agency to conclude that development is unacceptable, the lessee ought to receive compensation for out-of-pocket costs. This would be done by means of the lease stipulation discussed more fully under recommendation four. Third, prospective lessees may be assuaged by the expectation that if the exploratory Welles) disclose the existence of a sizeable petroleum resource, the balancing of the costs and benefits of production will likely shift toward development. In reality, in other words, the agency would be unlikely to deny the opportunity to develop the lease if substantial oil and gas resources are found, even though it would retain the right to do so. Conceivably there might be some difficulties in applying this explora- tion-only approach in areas that contain state or private land beyond the direct control of the federal agencies. In such situations, close coordination among the different owners may be necessary to ensure the efficacy of the approach, a matter dealt with in recommendation eight. The Outer Continental Shelf Model The committee's proposal for a limited amount of leasing for explo- ration only borrows from the generic approach of the oil and gas leasing program used on the Outer Continental Shelf. In its 1978 overhaul of the Outer Continental Shelf leasing statute (Outer Continental Shelf Lands Act; 43 USC 1331-1356), Congress explicitly segmented the decision-making

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121 process into four stages: (1) a 5-year leasing plan, (2) lease sales, (3) ex- ploration, and (4) development and production, (43 USC 1337, 1340, 1344, 1351). Generally speaking, each stage is separate, and the completion of one stage does not entitle a lessee to begin the next The Outer Continental Shelf program also authorizes test or ex- ploratory wells to be drilled, under governmental supervision, for envi- ronmental protection purposes (see 30 CFR Part 251~. At the conclusion of drilling, such wells are permanently plugged and abandoned (30 CF~ 251.~2(g)~. The person proposing to drill a test well must "afford all inter- ested persons, through a signed agreement, an opportunity to participate in the drilling on a cost-shanng basis" (30 CF~ 251.6-3a. The infor- mation gained as a result of the exploratory well must be shared with the federal government and others who have shared in the cost of the well (30 CFR 251.11; 251.12~. The regulations also provide detailed guidance on disclosure of the information to the public and the affected states (30 CFR 251.14-1; 251.14-3). The committee recommends that a similar approach for cost and information sharing be used in this limited category of staged leasing onshore. An Alternative Considered and Rejected One alternative considered by the committee was that the agencies determine, through analysis at the planning stage, the maximum amount of acceptable development and attach stipulations to subsequent leases that would prevent lessees from exceeding the maximum. Under this approach, the planning process would be used to fix the maximum number of de- velopment features such as wells, miles of new or upgraded roads, and length of gathering lines or pipelines, as well as the maximum amount of deterioration in air and water quality. Leases would not convey any right to develop above those maximums set in the plans. If additional development was proposed above that level, new environmental analysis (and plan amendments) would be required. Lessees would have no right to develop above that level, but leases could be suspended until the level of development drops below the maximum, thereby allowing additional activity to occur. This approach would commit the government legally to allow some level of reasonably foreseeable development that is determined to be acceptable at the plan/lease issuance stage, but the lessee would have only a contingent right to develop beyond that level. While this approach has some theoretical anneal Ohm ~ommi~P~ ha_ lieves that practical problems would prevent its functioning soundly. It would be very difficult for planners to express maximum levels of accept- able development in meaningful terms. Number of miles of roads, for rr~~ ~~~&~8~ ~-

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122 example, is much too crude a measure. The location and construction standards of roads are usually much more important than their length in determining environmental impact. Moreover, this approach would require such forecasting at the planning stage, before much may be known about the location, extent, and likely methods for extracting and processing whatever oil and gas east The Department of the Interior's coal leasing program at one time contained an idea similar to this-determining maximum levels of impact in a particular area subject to coal development but it was eventually discarded as unworkable. There might also be difficulties in sorting out rights of potentially numerous different existing lessees in an area. An analog r might be drawn here to the Environmental Protection Agency (EPA) "bubble" or emissions trading concepts under the Clean Air Act, where rights to pollute up to acceptable maximum levels may be parceled out on a first-come, first-served basis, and a private secondary market may operate to achieve the most efficient use of available development rights. But location is again arguably more important with on-the-ground impacts of oil and gas development than with air quality, where more "mixing" and uniformity of pollution are achieved in ambient air. RECOMMENDATION THREE The agencies should use their planning processes to determine whether certain lands are current) unsuitable for oil and gas exploration and develop- ment when other potential uses of the land clear) outweigh potential values for oil and gas resources. Prior to enactment and implementation of modern environmental assessment and planning laws, the federal government generally followed the practice of issuing oil and gas leases upon request, without much (if any) advance scrutiny of whether, for environmental or other reasons, exploration and development of a particular area was wise. In substantial part this traditional practice stemmed from a general consensus in the Department of the Interior (and probably the society at large) that mineral development was the highest and best use of most federal lands (those not formally withdrawn from mineral development for national parks, military uses, and the like). Under this traditional practice, nearly all available lands were offered for leasing, and for re-leasing as old leases expired, whenever anyone expressed an interest in obtaining such a lease. The leasing program had a life of its own-the Department of the Interior's role was rather mechanical and reactive. Furthermore, the Forest Service played a fairly limited role in oil and gas leasing on National Forests. This leasing practice was not, however, required by law. The Mineral Leasing Act (30 USC 181-287)

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123 enacted in 1920 gave the Department of the Interior broad discretion to lease or not to lease as it saw fit. The NEPA and the planning statutes of the 1970s- required a change in that practice by, in effect, mandating the federal agencies to be more proactive than reactive. How much of a proactive mandate these laws contain is not precisely clear, as exemplified by various court decisions dis- cussed in Chapter 4. But these court decisions are unanimous in concluding that the traditional way of proceeding leasing without some measure of environmentally conscious decision making is inconsistent with current law. These modern laws have, in other words, legislated a fundamental change in agency decision-making processes as they relate to oil and gas leasing, namely, that the wisdom of issuing oil and gas leases that carry with them some right to explore and develop the resource must be evaluated and explained in land and resource plans and/or environmental assessment documents prepared pursuant to NEPAL In the committee's judgment, the prior tradition of leasing upon re- quest (as well as the policy direction from Department of the Interior leadership in the past several years favoring leasing of all available land) has led to a strong presumption in favor of leasing. That is, it Is the committee's perception that the BLM and the Forest Service have been somewhat reluctant to make decisions that certain lands should not be leased for oil and gas. In some cases, in fact, the government may be issuing oil and gas leases in situations where the land management agency believes actual exploration and development is likely to pose an unacceptable degree of degradation to other values. Leases may be issued with the hope that exploration or development will not be proposed (because, on the average, many more leases are issued than are ever drilled), or that lease stipulations giving the government the right to prohibit certain activity or to require stringent mitigation measures will suffice to mitigate the consequences of drilling and production activity. As in earlier recommendations, the committee believes that the land management agencies should use the planning process as the primary focal point for the exercise of their discretion over leasing. Logically, this includes a decision not to lease areas where, based upon the information developed in the planning process, the agency is reasonably convinced that exploring or developing a particular area would be environmentally unacceptable. For example, an area being considered for oil and gas leasing in the planning process may contain important habitat of an endangered species. The federal agencies (which here would include the Fish and Wildlife Service, given a key role in implementing the Endangered Species Act. 16 USC 1531 et seq.) may, at the planning stage, be reasonably confident that oil and gas development can take place there without jeopardizing

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130 within a reasonable period of time (30 USC 1026(d)). No compensation would be provided if such leases were terminated under this stipulation. The Strength of the Outer Continental Shelf Analogy In making this recommendation, the committee considered the strength of the analogy between offshore and onshore oil and gas leasing. Clearly there are some differences. The scale of activity offshore is markedly different. Exploration and development costs tend to be much higher, and marketable deposits tend to be larger. The higher capital investment required makes the Outer Continental Shelf more the domain of the major . . 01 ~ compames. Moreover, transportation problems are different and so are some environmental risks (e.g., impact of oil spills on the marine environment). There are also, arguably, fewer conflicts offshore than onshore between oil and gas and other uses of the area. Also, offshore oil and gas development does not open up relatively inaccessible areas to other uses the way onshore development may. Subsurface geology in areas targeted for activity offshore tends to be less complex than onshore, at least compared to onshore areas like the Overthrust Belt in the Rocky Mountains. One consequence is that while per well costs are lower onshore than offshore (although these costs in crease if the sites are in remote or rugged terrain), smaller pools and less well defined structures generally require that more holes be drilled. Another consequence is that directional drilling is comparatively less ex pensive and likely to be more widely practiced offshore than onshore, which gives offshore drillers more flexibility in drilling sites than their onshore counterparts. Ownership patterns onshore can be very complex, involving state and private as well as federal interests. Offshore, by contrast, federal sovereignty is uniform, except along the limits of state jurisdiction (generally out to 3 miles off the coast). Management of the Outer Continental Shelf is not as subject to overlapping jurisdiction of different federal managing agencies as are onshore federal lands. Finally, offshore development has a much shorter history and is not as encumbered as onshore development by the complex assortment of thousands of existing leases of varying size with varying expiration dates. Some of these differences might argue for more environmental atten tion offshore (scale: the worst-case scenario from a major oil spill is more serious offshore), while others might support more environmental attention onshore (there are potentially greater conflicts among a wider variety of uses onshore). The question is whether these differences destroy the utility of the analogy.

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131 In the judgment of the committee, the analogy is close enough that onshore leases ought to contain the same environmental "contingency" as that included in offshore leases. The difficulty of making lasting judgments about possible environmental impacts of leasing and their acceptability over the potentially lengthy time period between leasing and development argues for the stipulation. The committee does recommend one adjustment in transplanting the offshore approach onshore. If the stipulation is invoked to prohibit further development offshore, the standard for compensation is the lesser of the fad market value of the lease or the lessee's out-of-pocket costs. This might be justified on the theory that the companies operating offshore are likely to have substantial capital reserves to bear the risks involved. Onshore, on the other hand, lessees are typically smaller independent companies much less able to bear that rise In short, while reimbursement of actual direct costs may not be of critical assistance or concern to major oil companies, it can mean the difference between survival and bankruptcy for smaller independents that are increasingly important in the federal onshore leasing program. In light of this difference, the committee recommends that the standard of compensation onshore be uniform, and the government be obligated to compensate the lessee for its out-of-pocket costs if exploration or devel- opment of the lease is prohibited because of unacceptable environmental impacts. This would mean that the lessee would be compensated for out- of-pocket costs even if the lessee's reasonable expectation of profit were less than that. Cash Versus Other Forms of Compensation Besides cash reimbursement, one option would be to compensate the lessee who is denied development by giving it a bidding credit on other leases. Such a credit has some useful advantages. It would keep the lessee's investment "in play," as it were, in the oil and gas program. If the credit was limited to bidding on other leases in the same state, furthermore, it would ensure that the same state would retain a share in the potential revenues obtained under the revenue-sharing provisions of the Mineral Leasing Act. Another option is to compensate the lessee with a right to exchange the existing lease for a new lease on another tract. This is more problematical because it cuts against the 1987 Federal Onshore Oil and Gas Leasing Reform Act's (101 Stat. 1330-256) policy of promoting competitive leasing. Furthermore, although the committee has not studied the question, it is of the understanding that the actual operation of a similar provision in the Surface Mining Control and Reclamation Act (authorizing exchanges in the context of leases in alluvial valley floors) has not proved very workable.

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132 Comparing the Committee's Recommendation to the Forest Service's Proposed Regulations ~J ~ ~' - - 1 lo The committee emphasizes that while the generic stipulation it rec- ommends would make every on-shore oil and gas lease contingent upon environmental acceptability, it believes this approach is superior to the one taken by the Forest Service in its proposed regulations published in the Federal Register on January 23, 1989. In that proposal, each oil and gas lease would contain an explicit provision that the Secretary of Agriculture "retains the authority under this lease to preclude all operations on a lease- hold where analyses of the environment indicate such action is appropriate" (proposed 36 CFR section 228(c)~. The committee's proposal differs from that of the Forest Service in two important-respects. First, it more tightly constricts the circumstances under which the retained authoripr to withhold approval from the lessee to proceed can be exercised by the agency. The Forest Service proposal is l~roetv unbounded. requiring the agency to determine only that "analyses of the environment indicate" that halting activity is "appropriate." By contrast, the language of the Outer Continental Shelf Lands Act, which the committee endorses, requires an explicit determination that activity would "probably cause serious [environmental] harm or damage" that cannot be mitigated within a reasonable period of time, and that cancellation of the lease is better than continuing it in effect. In the committee's view, the kinds of contingencies that would give rise to exercising the power retained in the stipulation would be serious ones, of the kind that would usually not have been foreseen or appreciated in the planning and environmental assessment process that occurred before the lease was issued. The contingency ought to be drawn, in other words, so that it may be invoked only as a result of a serious threat of unmitigable environmental damage. A very broad stipulation of the kind proposed by the Forest Service could undercut the agencies' incentive to take the pre-lease planning and environmental assessment process seriously. It is the committee's judgment, in short, that the agencies ought to reserve authority to restrict or prohibit lessees from proceeding where necessary in extraordinary circumstances to prevent serious harm to the environment. Such power ought not to be exercised casually. It is the committee's understanding that it has not yet been exercised offshore even though it has been part of the law for 11 years. lithe second important difference between the committee's proposal and that of the Forest SeIvice is that the latter lacks a compensation feature. The committee believes such a feature is essential to provide elemental fairness for oil and gas lessees onshore, many of whom are

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133 independent operators without the resources to absorb unexpected losses of drilling opportunities. An Alternative Considered and Rejected The principal alternative to this kind of "safeguard" lease stipulation is to issue oil and gas leases with stipulations that would let the burden of environmental unacceptability fall upon the government rather than the lessee. Under this approach, leases would arguably convey a property right to develop, and if development ultimately proved unacceptable, the government's only recourse might be to institute an eminent domain action in federal court, compensating the leaseholder with taxpayer funds for the fair market value of the lease. This approach would in effect place the burden of inertia on the gov- ernment, allowing unacceptable impacts to occur unless the government instituted a judicial action to condemn the leasehold interest. Cranking up the eminent domain machinery takes considerable time, with serious environmental harm possible in the interim. It would also severely tax the planning process, by in effect requiring the government to make the nec- essary trade-offs and enter into firm commitments to explore and develop on the basis of the information available then. In an imperfect world, this is not always possible. Mistakes will be made, and unforeseen events will occur. A proper regard for protecting the environment requires, in the judgment of the committee, that the leases contain a general safety valve for dealing with serious environmental problems, so long as the lessee is reimbursed for its direct costs if development is prohibited. Implementing the Committee's Recommendation The committee notes that a potential difficult with the compensation feature it endorses is in defining and determining what~out-of-pocket costs are compensable. For example, a lessee may hold several adjacent leases. Drilling on one might encounter the type of environmental problem that would lead the government to invoke the stipulation. A lessee might run a seismic line along the edge of that environmentally sensitive lease and then seek reimbursement for the seismic survey, even though it was intended to, and did, provide valuable information for development of the adjacent, environmentally acceptable lease. Reimbursable costs should be specifically and tightly defined to ward off such abuse. Finally, the committee also considered the possibility of establishing an insurance pool to cover the costs of compensating lessees. One idea would be to levy a small surcharge on lease bonuses and/or on lease royalties, calculated to raise a few million dollars a year. As indicated earlier,

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134 the committee believes that it should be rare for lease stipulations giving rise to compensation to be invoked; therefore, the pool for compensation need not be very large. Reimbursement decisions might be supervised by a compensation board, with members expert in resource appraisal, petroleum accounting, and other pertinent fields. The advantage of establishing a mechanism to raise money for com- pensation is that, at least theoretically, it allows the government agency to decide whether to invoke the stipulation without being unduly influenced by concerns about whether funds are available to compensate the lessee. A disadvantage is that it complicates accounting and might require creation of a minibureaucracy to administer. The committee concluded that, because the experience on the Outer Continental Shelf has been that the power to stop development of a lease had never been used, there is no need at this point to create a full-blown funding and administrative mechanism to implement this lease stipulation onshore. Until and unless experience gained under this approach suggests the need for such a mechanism, it could be handled under existing lease administration procedures. The proposals discussed above are the committee's core recommen- dations. The committee also considered a number of other matters upon which it submits the following recommendations. RECOMMENDATION FIVE The agencies should make efforts, short of creating substantial moratoria on lease offerings, to control the configr~ra~on and timing of leases in a parii.cular area to allow for better assessment of the cumulative impacts of leasehold aciivaies in the area. As noted earlier, the customary federal practice has been to offer lands for lease as soon as they become available. Because federal lands have usually not been offered for lease except upon request, and are made available for re-leasing automatically upon expiration of existing leases, the configuration (tract sizes and locations) and timing of leases are fixed relatively haphazardly. The result is that lease offerings often do not form a pattern that allows for sensible planning and assessment of impacts on surface resources. Such variations may also adversely affect the indust~y's ability to assemble logical exploration units. The Reform Act speaks a little to this issue, requiring that lease tracts `'be as nearly compact as possible" (30 USC 226(b)~1~(A)~. One way to deal with the uncertainty of whether an area contains oil and gas in developable quantities is to lease only part of an area, and refrain from leasing the remainder until more is known through exploration of the

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135 few tracts leased. In one sense, this is a variation of the concept of leasing for exploration in the committee's recommendation two. But rather than separate the development decision from the leasing decision by means of stipulations in the lease itself, this approach would separate the decision to develop a large area of land from the decision to issue an individual lease or leases for a part of that land. A major practical difficulty with moving vigorously toward such a system of leasing in stages with more coherent tract configuration is that it could lead to fin fact, would probably require in some cases) delays in re-leasing tracts as old leases expire, in order to assemble a block of unleased land to be able to start fresh. This can create difficulties for those states that are dependent upon steady streams of revenue from the federal leasing program, because it can interrupt the flow of lease revenues. Such moratoria, even if they are temporary, can also lead to concern in the petroleum industry that a delay in leasing in a particular area will make it more difficult to resume leasing. Another problem is that state and private lands are sometimes intermingled with federal lands, which lessens the control the federal agencies can exercise over the timing of exploration and development. A delay in leasing to reconfigure tracts might, on National Forest land, be seen as inconsistent with the thrust of the Energy Security Act (see p. 45), which admonished the Forest Service not to delay leasing decisions in order to prepare new plans. Cutting the other way, however, are decisions construing the National Environmental Policy Act as requiring agencies to consider, before taking any action, the cumulative impacts of several indi- vidual, contemporaneous agency actions in a single environmental analysis, such as where several pending proposals for energy development 'drill have cumulative or synergistic environmental impact upon a region" (Kleove v. Sierra Club, 427 US 390, 410 [19763~. -an a- - -rr The committee believes that the federal land management agencies ought lo pay more attention to this issue in administering the leasing system, but should move carefully because of the potential difficulties involved in delaying lease offerings. Where the agencies have the opportunity, such as in leasing areas for the first time, or where temporary delays in leasing in certain areas have occurred for other reasons, the agencies should try to configure and assemble parcels for leasing in a way that would allow better and fairer (to both potential lessees and other interests) consideration of the tradeoffs between the environment and mineral development. 1b the extent this is attempted, the Reform Act creates a potential obstacle to synchronizing leases in a particular area. It requires that lands offered for lease but not leased competitively "shall be offered promptly within 30 days for [noncompetitive] leasing . . . and shall remain available for inoncompetitive] leasing for a period of 2 years after the competitive

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136 lease sale" (30 USC 226 (b)(l)(A)). This allowance of a 2-year window for noncompetitive leasing creates the possibility that leases issued at the same time in a particular area may have considerably different expiration dates. In order to keep leases in a particular area in synchronization with each other as much as possible, the committee suggests that consideration be given to amending the statute to narrow the '~window" for noncom- petitive leasing to two weeks or 30 days. This would not require much change in actual practice, because to date, almost all of the leases issued noncompetitively are actually issued within one week of the competitive sale. RECOMMENDATION SIX leases. Consideration ought to be given to shortening the term of noncompetitive Competitive leases are issued for 5-year terms; noncompetitive leases, for 10 years (30 USC 226 berg. Shortening the noncompetitive lease term offers a partial solution to the forecasting difficulties in making leasing decisions in land use plans; that is, even year the lease term is shortened would shorten the planning horizon, and the time lag between leasing decisions and drilling, by like amount. At least theoretically, this would make better forecasts of impacts possible. Good reasons may exist independently of the problem under discussion to recommend shortening the noncompetitive lease term. Making both kinds of leases the same term would undercut the bidders' incentive to avoid bidding competitively on leases and would probably result in greater financial return to federal and state treasuries. On the other hand, the committee is unable to reach a conclusion about the impact such a shorter lease term may have upon the onshore oil and gas ir~dust~y. A shorter term may lessen the ability of onshore lessees to assemble land positions (combinations of leases) necessary to carry out an exploration program. As noted earlier, onshore land ownership patterns are more variegated and complex than offshore, and substantial time may be required to negotiate necessary arrangements. Also, the fact that onshore operators are usually smaller independent companies means they tend to require more outside financing for exploration, which may also require substantial time to negotiate. RECOMMENDATION SEVEN The agencies should improve opportunities for public participation in their decisions to issue leases and to waive, suspend, or modify lease stipulations.

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137 The committee recommends that the agencies create a simple, standard procedure for dealing with these public participation issues. These are largely technical, process matters susceptible of relatively easy solutions. They are, however, important in giving the oil and gas industry, other interest groups, the public, and other governmental agencies confidence in the oil and gas leasing program and its administration. The agencies should do more than just post a notice in their offices; they should be aggressive in reaching out to provide notice to, and solicit input from, the state and local governments and the public. The agencies should maintain a mailing list of interested parties to receive notice of sales and related decisions as a matter of routine. Furthermore, the process for rescinding, modifying, or suspending lease stipulations should be treated with the same dignity and weight as the process of selecting them in the first place. RECOMMENDATION EIGHT Where the potential impacts of oil and gas activity would extend beyond the borders of the planning area, the federal land management agency should coordinate its planning analysis with planning efforts by the same agency in _ ~ . . adjacent planning areas, and with other agencies that have Jurisdiction over nearby lands and other surface values. One of the obstacles to rational planning in relation to oil and gas development is the complexity of ownerships often encountered. Federal land or federally owned minerals may be intermingled with state, tribal, and private land or minerals. Moreover, federal land may itself be under the jurisdiction of different federal agencies. tvDicallv the ~Or~.~t .RP.n~irP and the Bureau of Land Management. Ownership and management jurisdictional lines usually depart from watershed or ecosystem boundaries, and at least some environmental im- pacts from oil and gas activity may be felt on adjacent lands. This also renders more difficult efforts to predict and assess what kind of develop- ment is reasonably foreseeable at the planning stage; that is, the agencies may have little or no control over development on state tribal Or nriv~P lands in the same area. From the standpoint of rational planning, the difficulties here are similar to those created by the hodgepodge pattern of leases and lease expiration dates that has resulted from the former o`~.nPrn] "rar~tir~ of leasing available lands upon request. ~.. . .. , ~,, ~ ~~~r-- ~^ ~I ~ ~1~`~ ~_ a__ ~^ ~ Ad_ ILL-- Vt one committee believes the agencies should coordinate their oil and gas planning and decision making with adjacent planning units of the same agency, and with other agencies and parties (federal, state, tribal, local, and private) that manage or regulate activities on nearby lands. Existing law

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138 already contains provisions that promote such coordination; to some extent problems can be mitigated if the agencies aggressively solicit the input of other affected interests during their planning and NEPA processes. Coordination does not, of course, demand consistency in recommen- dations, decisions, and policies. It can, however, help all interested parties and agencies plan for, and respond to, the activities authorized in the plans. The committee recognizes that there is no mechanism, other than persuasion, that requires adjacent planning units to cooperate in the federal land use planning process. In the event that these adjacent planning units fail to cooperate, or fail to cooperate in a timely fashion, the federal planning agencies should continue their planning activities on schedule. RECOMMENDATION NINE To the extent feasible, the foregoing recommendations ought to be incor- porated in the agencies' planing and leasing systems and applied to existing lessees. An effort to resolve the conflicts and problems arising out of current planning and leasing practices must take account of the presence of some 80,000 existing oil and gas leases covering some 67 million acres of federal lands. The nature of the rights to explore and produce conveyed in these leases may vary somewhat from lease to lease. ~ the extent that these leases actually convey vested rights to develop, they may limit or even prevent application of some of the committee's recommendations to activities conducted on the leaseholds. Furthermore, solutions to the current problems must also take into account the ongoing nature of the agencies' planning processes. In some areas plans have been completed that may not comport with the recom- mendations here. But, the agencies are taking steps to revise the treatment of oil and gas leasing In current plans that they have determined do not adequately comply with the judicial decisions discussed earlier in this report. A single, generic solution to these problems is probably not practical. The committee believes that existing leases ought to be subject, to the extent feasible, to the regime that the committee recommends. The analysis of reasonably foreseeable impacts of development and the unsuitability review the committee recommends for the planning stage obviously must not be applied in a way that destroys vested rights in existing leases. At the same time, existing leases must be taken into account. Furthermore, the committee recommends that, where possible, existing leases be made subject to the reservation of authority to prevent serious environmental harm, with an obligation to reimburse the lessee, as stated in the committee's recommendation four. Some leases may already contain such a reservation of authority. Even where they do not, it is possible that existing lessees

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139 might be agreeable to amending their leases voluntarily to include such a condition, because the promise of reimbursement upon denial of permission to proceed is a more certain remedy than lessees now have under existing law. That is, even though existing lessees may have a right of compensation under certain circumstances, costly litigation might be necessary to establish it. One way that some existing lessees might be encouraged to agree to accept the stipulation would be if the Secretary of the Interior were willing to suspend lease operations for a limited period, such as one year. One possibility that might allow this is for the secretary to use his authority under section 39 of the Mineral Leasing Act to suspend lease operations, with a commensurate extension of the lease term, in the interests of conservation (30 USC 209~. Such an extension of the term of existing leases to allow incorporation of the stipulation could, at least in sensitive areas where the availability of the stipulation might be particularly important, be a useful step to take. In any event, if applying such a stipulation to existing lessees unwilling to include it voluntarily would require legislation, the committee notes that Congress in the 1978 Outer Continental Shelf Lands Act Amendments did apply such a provision to existing lessees. Regarding land use plans, the committee recommends that the agencies continue their practice of modifying and amending their plans as necessary to conform to its recommendations. The committee cautions, however, that a general or even substantial moratorium on new leasing should not be instituted in order to implement its recommendations fully and immediately. The committee notes, in this connection, that the clarifications and adjustments in the agencies' planning processes contained in the House version of the Reform Act would have given the agencies a transition period of more than 3 years to bring their plans into conformity with the bill (see H.R. Rep. No. 100-378, pp. 4, 9~. National needs for oil and gas exploration and production and the desirability of sustaining a domestic onshore industry cannot be ignored in the transition to an improved system. Perfection in land use planning and in administering an oil and gas leasing and management program is unattainable. The committee believes that planning and leasing can be improved by implementing the recommendations in this report, but improvement may take some time to realize in the ongoing planning and leasing processes. Ted f~;~ ~^ _~ ~ __ ~ ~ _ _ _ _ 1~ ~WlllllllLL~ llama 11O 111111 V~51b for estimating the costs and agency staff needs that would be required to implement its recommendations. Land use plans such as that for the Bridger-Teton National Forest, a relatively complex and costly plan, can cost on the order of $3 million. Only a portion of the cost of such plans, which generally devote considerably

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140 more attention to other resources, concerns planning related to oil and gas exploration and development. Furthermore, the costs may decline as the new planning requirements become more familiar. The committee's recommendations would place some additional burden on the planning process and add marginally to the cost of land use planning. Bidders and lessees are also likely to incur some additional costs for data collection and analysis if the committee's recommendations are adopted. These would add marginally to the already substantial costs of evaluating federal land areas for possible exploration and development. ~ be weighed against the additional governmental and industry plan- ning costs are the costs to the public of continued stalemates in oil and gas leasing on some federal lands. These, too, are costs for which the committee is unable to provide estimates. But resolving the contentious environmental and oil and gas development issues, to which the commit- tee's recommendations are directed, Is intended to reduce these costs to the public. The committee believes that the most cost-effective and equitable way to resolve these issues is through strengthening the role of planning in the leasing process, and making some adjustments in the leasing process to make planning more effective. Finally, the committee has not examined closely whether the agencies have authority to implement these recommendations under existing law, or whether legislation is necessary. In one case committee recommen- dation six, that consideration be given to shortening the lease term for noncompetitive leases-legislation would clearly be necessary. With other recommendations, the matter is not so clear. Ultimately, the legal questions involved are up to the agencies and, if necessary, Congress or the courts to decide. REFERENCE Forest Service. 1989. Oil and Gas Resources Proposed Rule. Fed. Reg. 54(13~:3326-3339.