Much has been written regarding the pros and cons of the One Big Beautiful Bill Act (OBBB, or the Act) in a general sense.  In this week’s Energy Valuation Insights, we address some of the primary impacts of the OBBB on the U.S. oil and gas industry.

The subject provisions include both those that are not specifically directed at the U.S. O&G industry and those that are.  All reflect the Trump Administration’s push beyond U.S. energy independence to U.S. energy dominance.  Notably, the OBBB rolls back several provisions of the Biden Administration’s Inflation Recovery Act (IRA) and establishes new mechanisms to reduce E&P costs, streamline leasing and regulatory processes, and enhance planning for lessees and mineral interest owners.

Tax Treatment and Capital Recovery

While some provisions of the OBBB are directed toward the O&G industry, other provisions are non-industry specific, but benefit the O&G industry all the same.  Most notable among the non-industry-specific provisions that materially impact the O&G industry are those related to tax treatment and capital recovery, and therefore affect the economics of oil and gas development.

Among the tax treatment changes, the OBBB reverts Section 163(j) interest deduction limitations from an EBIT basis to an EBITDA basis for tax years beginning after December 31, 2024.  The change will increase the amount of deductible interest expense for capital-intensive companies, thereby reducing their tax burden. The Act also makes 100 percent bonus depreciation permanent for qualifying property with a recovery period of 20 years or less, and placed in service after January 19, 2025.  Without this change, bonus depreciation would have been reduced to 40% in 2025, 20% in 2026, and would have been eliminated in 2027.

Assets covered under the “20 years or less” category include many types of drilling-related equipment, pipelines, drilling costs, and processing facility equipment. The inclusion of these categories means that much of both upstream and midstream investments qualify for full immediate expensing (100% depreciation in the first year), thereby improving the cash flow profile of new projects. Together with the restored deductibility of intangible drilling costs (IDC) and the reversion of interest expense limitations to an EBITDA basis, these provisions reduce the after-tax cost of capital for oil and gas projects in multiple ways.

The American Exploration and Production Council (AXPC) highlights these provisions as “durable reforms” that provide greater certainty for independent producers. The AXPC underscores that restoration of IDC deductibility and predictability in permitting and leasing (addressed in the following section) are especially significant for smaller companies that rely on steady reinvestment of cash flow.

Royalty Rates and Lease Economics

Among the OBBB’s provisions that are directed to the O&G industry, some of the more notable provisions are related to royalty rates, leasing schedules, certain operations procedures and vented methane royalties.

The OBBB includes revisions to the 2022 IRA’s royalty rate floor of 16.67% on new federal onshore and offshore leases. For new onshore leases, the minimum royalty rate reverts to 12.5%. For offshore leases, the Department of the Interior (DOI) is given discretion to set rates within a range of 12.5% to 16.67%. These changes apply only to new leases. Existing leases issued under the IRA remain subject to the higher 16.67% rate.

By restoring discretion to the DOI, the OBBB aims to allow offshore royalty rates to vary rather than being fixed at a minimum level. This reverses the Biden Administration’s static approach and re-establishes a system closer to historical practice, under which royalty rates were tied to market and leasing conditions. The change affects future lease economics by lowering the minimum government take on both offshore and onshore federal leases.

Leasing Schedules and Predictability

Another O&G industry benefit from the OBBB is the mandates for regular leasing activity on federal lands and waters.

Under the OBBB provisions, the Bureau of Ocean Energy Management (BOEM) must hold at least two Gulf of America lease sales per year through 2039. The first is required by December 10, 2025, followed by sales no later than March 15 and August 15, 2026. In Alaska’s Cook Inlet, six lease sales are scheduled between 2026 and 2032. These provisions establish a multi-year schedule that extends leasing activity for more than a decade and a half.

Onshore, the OBBB provisions require that the Bureau of Land Management (BLM) conduct quarterly lease sales in nine producing states: Wyoming, New Mexico, Colorado, Utah, Montana, North Dakota, Oklahoma, Nevada, and Alaska. The BLM is required to lease nominated parcels within 18 months and may not add new restrictions beyond those contained in resource management plans. Expression-of-interest fees are eliminated, and applications for permits to drill are valid for a period of four years. The BLM projects that these provisions could result in approximately 225 additional leases in 2026 and around 160 wells drilled on those leases in later years. The BLM analysis indicates that the act is expected to generate measurable increases in leasing and drilling activity on federal acreage.

These leasing mandates reinforce long-term supply expectations in the Gulf of America, where stable lease availability underpins investment in deepwater development. The analysis emphasizes that predictable federal lease sales will support large projects that require extended planning horizons and multi-year capital commitments.

Operational Procedures and Commingling

The OBBB also directs agencies to approve commingling applications unless safety or resource recovery would be compromised.

Following the Act, the DOI updated its commingling policy to align with this requirement and to streamline the processing of applications. The July 22 DOI release explained that the goal of the update is to “maximize recovery” of resources and to reduce administrative disputes. Ball Morse Lowe notes that the act expressly permits commingling of federal and non-federal production, subject to measurement and allocation requirements. The Act also clarifies surface access rules, permitting the use of federal surface to reach non-federal minerals and the placement of well pads on non-federal surface to target federal minerals.

Methane and Venting Provisions

In regard to methane venting and flaring, the OBBB repeals the IRA’s royalty on extracted methane and rescinds royalties on routinely flared or vented gas.  The AXPC noted that the Act also significantly delays a methane tax that will impose financial penalties on emissions, thereby increasing production costs and inhibiting O&G investment.

Conclusion

The OBBB represents a significant shift in the U.S. oil and gas industry and is a key component of the Trump Administration’s agenda for U.S. energy dominance.  Interior Secretary Doug Bergum commented that “The One Big Beautiful Bill Act is a historic piece of legislation that will restore energy independence and make life more affordable for American families”.  Bergum added that the BBB represents a significant shift in how public lands are managed and how our government supports energy development.

Mercer Capital has assisted many clients with various valuation needs in the upstream oil and gas space for both conventional and unconventional plays in North America and around the world.  Contact a Mercer Capital professional to discuss your needs in confidence.