By Nichola Groom and Valerie Volcovici

(Reuters) -A U.S. judge’s surprise decision this week to annul the Biden administration’s first Gulf of Mexico oil lease auction because of its climate change impact has raised questions about the future of the nation’s federal drilling program – and played directly into the president’s hand.

President Joe Biden, a Democrat, made a campaign pledge to end federal oil and gas drilling to fight climate change, and he quickly announced a suspension of all new lease sales pending a broad review of drilling’s impact on global warming after taking office. Some 25% of U.S. oil and gas production comes from federal lands and waters.

But his administration was later forced into the sale after several drilling states successfully sued in federal court in Louisiana. They argued that U.S. law requires the federal government to hold auctions on a regular basis to enhance energy independence and generate revenue.

The November auction generated more than $190 million, the highest since 2019, on 1.7 million acres sold, and drew bids from Exxon Mobil and Chevron.

This week’s ruling, from a judge in the District of Columbia who was appointed by former President Barack Obama, came after a challenge by environmental group Earthjustice. The judge vacated the auction entirely, saying the Interior Department failed to properly account for its impact on global warming.

Biden’s Interior Department had used an environmental impact statement for the auction that was prepared by the administration of former President Donald Trump, a vocal climate skeptic. It contained an argument that oil production in the Gulf of Mexico would reduce, not increase, greenhouse gas emissions because production is dirtier elsewhere in the world.

Biden’s Interior Department must now do what it originally intended: take a fresh look at environmental and climate impacts of drilling. It has not yet said yet whether it will suspend other planned drilling auctions pending review, or how long the review will take.

“CONSIDERING OUR OPTIONS”

The environmental group that sued hailed the court’s decision and hopes the administration will stop leasing. A Louisiana state official, meanwhile, accused Biden of sabotaging the auction. The U.S. drilling industry and its backers are likely to appeal the case in the hopes of keeping sales moving.

There are hints that Biden’s Interior Department knew its Gulf of Mexico oil auction was on weak legal footing.

In the Record of Decision for the sale, it noted that, months after the environmental review was finalized, a federal appeals court in 2020 ruled the government must consider foreign oil consumption in its analysis of how such sales impact greenhouse gas emissions.

That ruling had already effectively blocked U.S. approval of Hilcorp’s Liberty drilling project in Alaska.

But the Interior Department’s sale document said it did not believe it needed to conduct any additional analysis on how foreign consumption affects emissions.

An Interior Department official declined to comment.

Ali Zaidi, deputy White House national climate advisor, said the court decision shows the U.S. oil leasing program needs to be reformed and that the Interior Department should have the space to do that work

WildEarth Guardians, an environmental group that has sued the federal government repeatedly over climate impacts of onshore leasing and won several victories, said this week’s ruling raises doubts about whether the administration can proceed with other planned sales early this year.

“We’ve set a bar. This latest ruling, I think sets an even stronger bar,” said WildEarth Guardians attorney Jeremy Nichols. “And it certainly calls into question whether the Bureau of Land Management is going to be able to legally justify more onshore oil and gas leasing at this point.”

Last month the group sought a court order from a federal judge in New Mexico to stop U.S. drilling permit approvals in parcels included in three Trump administration lease sales. The Bureau of Land Management has approved 118 drilling permits on the challenged parcels.

Scott Lauermann, a spokesman for oil industry lobby group the American Petroleum Institute, said late Thursday the API was reviewing the Gulf of Mexico decision and “considering our options.”

Elizabeth Murrill, Solicitor General of Louisiana, which is an intervenor in the case, said the court and the Biden administration were hurting blue-collar workers.

“It is extremely disappointing that the Biden administration continues to sabotage oil and gas lease sales. These actions are crippling consumers, destroying jobs, and jeopardizing our national security,” she said.

Chevron CEO Michael Wirth, whose company was one of the high bidders in the Gulf of Mexico sale, said Chevron was reviewing the decision.

“We’re disappointed because these lease sales have been conducted successfully in the Gulf of Mexico for decades now and have resulted in us being one of the largest leaseholders out there with over 240 leases,” he said.

(Additional reporting by Sabrina Valle in Houston; Writing by Richard Valdmanis; Editing by David Gregorio)

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