Regulation of natural gas production

Ownership and organisation

What is the ownership and organisational structure for production of natural gas (other than LNG)? How does the government derive value from natural gas production?

Private companies produce natural gas. The Energy Information Administration (EIA) projects that annual US natural gas production will grow by almost 25 per cent through 2050. However, more than half of this growth comes from natural gas production in oil formations, known as associated gas. The amount of associated gas that will be available from oil formations is sensitive to world oil price assumptions. Higher world oil prices increase the incentive to target oil plays, increasing the projected amount of associated natural gas.

After Congress issued the Wellhead Decontrol Act of 1989 and the Federal Energy Regulatory Commission (FERC) issued its open access policies requiring natural gas companies to unbundle (ie, separate) their sales services from their transportation services, many natural gas companies’ ownership structures changed from being integrated to focusing on upstream, midstream or downstream facilities and activities. Private companies produce natural gas in the United States.

The federal government does not produce natural gas. US federal oil and gas royalties are payments made by companies to the federal government for the oil and gas extracted on public lands and waters. On federal lands managed by the US Forest Service and the Bureau of Land Management (BLM), oil and gas companies pay royalties to the US Treasury, making royalties one of the federal government’s largest non-tax sources of revenue. The Inflation Reduction Act increased offshore and onshore oil and gas royalty rates. The Act also increased the annual rental rates for new onshore oil and gas leases.

States, such as Texas, have also updated their royalty rates to reflect modern drilling practices.

Regulatory framework

Describe the statutory and regulatory framework and any relevant authorisations applicable to natural gas exploration and production.

Private oil and natural gas companies apply for oil and natural gas leases from the BLM to produce energy onshore on federal lands. The BLM manages and conserves federal lands. It holds competitive auctions for these leases. Passage of the Inflation Reduction Act altered onshore oil and gas leasing practices for the BLM by tying federal public land renewable energy permitting to those lease sales. 

Under the Outer Continental Shelf Lands Act, as amended, the Bureau of Ocean Energy Management (BOEM) must prepare and maintain forward-looking five-year plans to schedule proposed oil and gas lease sales on the US Outer Continental Shelf. In 2022, BOEM released a proposed programme for the 2023 to 2028 period. It proposes up to 11 offshore oil and gas lease sales during the 2023 to 2028 period. All areas are initially examined, and the selection may then be narrowed based on economic and environmental analysis, including environmental review under the National Environmental Policy Act, to arrive at a final leasing schedule. At the end of the process, the secretary of the interior must submit each programme to the president and to Congress for a period of time (although the president and Congress do not have formal approval roles). The proposal may then receive final approval from the secretary and may take effect. The leasing decisions in BOEM’s five-year programmes may affect the economy and environment of individual coastal states and of the whole nation. 

State resource agencies are generally responsible for production occurring on state-owned lands. Many coastal states also have separate offshore leasing programmes and rules pertaining to coastal waters and associated pipelines.

Unconventional gas production

Are there different rules for, or any restrictions on, unconventional natural gas production (including fracking)?

The federal government does not promote one type of drilling method over another. The Department of Energy reports that millions of oil and natural gas wells have been hydraulically fractured. There are no federal requirements for drillers to disclose what chemicals they use to frack.

Various states have placed restrictions on fracking. For example, Gavin Newsom, the California Governor, directed state agencies to stop issuing new fracking permits by 2024 and to analyse pathways to phase out oil extraction in California by 2045. Vermont, Maryland, New York and Washington have banned fracking in their states. Texas, on the other hand, passed a statewide law prohibiting cities and counties from instituting fracking bans.

Required security and guarantees

Are participants required to provide security or any guarantees to be issued with a licence to explore for or to store gas?

The BLM’s oil and gas leasing regulations require, prior to commencement of surface disturbing activities related to drilling operations on a federal oil and gas lease, the operator on the ground to be covered by a bond. At least one senator, in 2022, urged the Department of the Interior’s secretary to update the bonding rates to make them sufficient to cover the costs of cleaning up drilling sites. 

States may also impose security requirements.

Interstate natural gas pipeline and storage companies may also have security and creditworthiness requirements in their tariffs.

For offshore leases, the BOEM requires that lessees demonstrate financial strength and reliability according to its regulations or post surety bonds or other acceptable financial assurances that such decommissioning obligations will be satisfied. Other factors may require supplemental security from lessees to cover decommissioning and other lease obligations.