Interior Report On Idle Leases Infuriates Oil Industry

The Obama administration’s war on domestic oil and gas interests took a different turn Tuesday, as an Interior Department report ordered by the president on March 11 on the percentage of federally-issued leases where drilling is actually occurring claimed that some two-thirds of them are presently idle.

The study reincarnates a years-old claim by Democrats seeking to deflect blame for high oil prices and low domestic production (they last introduced this gambit in the summer of 2008, when oil was over $140 per barrel). There doesn’t seem to be any change between the 2008 attempt and the current version.

“We continue to support safe and responsible domestic energy production, and as this report shows millions of acres that have already been leased to industry for oil and gas productions sit idle,” said Interior Secretary Ken Salazar in a statement. “These are resources that belong to the American people, and they expect those supplies to be developed in a timely and responsible manner and with a fair return to taxpayers.”

The usual suspects took to the microphones to push the idle-lease meme.

Rep. Ed Markey, D-Mass., for example, blasted the oil companies as “multi-billion dollar corporations warehousing millions of acres of public lands, waiting for the price of oil to skyrocket.”

And Sen. Robert Menendez, D-N.J., said Congress should do more to force companies to develop the leases they already have before opening new areas to drilling. Menendez accused oil companies of “camping out” on leases to pad their portfolios.

“It’s simply wrong for oil companies to be sitting on federal leases to boost their stock prices while American families feel the pain at the pump,” said the Senator.

The industry was having none of it. American Petroleum Institute President Jack Gerard, for example, said the study is a political stunt just like it was last year. “This is clearly an effort to divert the attention of the American people away from the fact that the administration at every turn has delayed or deferred or restricted our own access here at home,” Gerard said. “It is a way to divert the public’s attention from their outright inaction.”

The Houston Chronicle’s outlined the reason why the oil industry says today’s study is mendacious…

After all, industry representatives say, not every lease is home to valuable oil and gas — and it can take years to find out. In the meantime, lease-holding companies pay the federal government annual rental fees, on top of the money they already spent bidding on the drilling rights.

A long path of geological surveying, exploratory drilling, construction and permitting separates the initial lease sales from energy production, if oil and gas is even located on the site.

Louisiana Oil & Gas Association president Don Briggs concurred in a statement…

Reacting to mounting pressure over rising gasoline prices, President Obama commissioned the Interior Department to conduct a study on oil & gas activity on federal lands. Today, the Interior released its response report that suggests more than two-thirds of offshore leases in the Gulf of Mexico are sitting idle. The Administration claims that these leases are neither producing oil & gas resources, nor being actively explored by companies who own the leases. In addition to a large percentage of stagnant leases in the Gulf, the Interior reports that over 45% of onshore federal leases have been identified as inactive.

Interior Secretary Ken Salazar noted in reaction to the report, “These are resources that belong to the American people, and they expect those supplies to be developed in a timely and responsible manner and with a fair return to taxpayers.”

Instead of taking blame due to its failed energy policies, the Administration is attempting to put pressure on oil & gas companies to increase U.S. domestic production. In an attempt to relieve political pressure, the Administration is claiming that idle activity on federal oil and gas leases is the reason for limited supply and rising oil prices.

It would seem somewhat ironic that while the Interior Department continues its de facto moratorium in the Gulf of Mexico, it would urge companies to develop resources in a timely and responsible manner. Currently, the BOEMRE has issued six permits to companies operating in the Gulf. Prior to the federal drilling moratorium, the government was issuing approximately five permits each month. Logic would suggest that the government, not inactive companies, is to blame for the slow development of our offshore resources.

Leases on federal lands remain inactive due to a number of reasons. For starters, overburdening environmental regulations and bureaucratic permitting processes with federal government agencies have always been significant hurdles to ensuring projects on federal lands develop in a timely fashion.

A more important reason is simply that idle leases are not idle at all. When companies acquire a lease they must conduct geological analysis, seismic testing, drill a discovery well, and then attempt to determine if the lease has potential for further development and capital investment. The geological surveying alone can take years to identify whether a reserve is even capable of production. Also, a large percentage of the production in the Gulf of Mexico exists on leases that expired in the past and were re-leased from another company. Sometimes the ten-year lease process is not sufficient for many potential offshore prospects. Just because a company has a lease does not mean they are guaranteed production from the geological structures below that lease.

Currently, members of Congress are pushing for the federal government to expand and open up access to domestic resources such as ANWR and offshore leases off the Northeastern coast. To avoid pressure from environmental supporters and negative heat from consumers suffering from high gas prices, the Administration chooses to blame oil and gas companies for failing energy policies.

FuelFix, through Gerard, expanded on the regulatory issue, using Arctic drilling in Alaska as an example…

Industry representatives stressed that regulatory delays are partly to blame for inactive leases. API’s Gerard pointed to Shell’s proposed drilling in the Arctic waters near Alaska that has been delayed for years, most recently by a federal environmental appeals board’s ruling on essential air permits for the project.

Shell paid the government more than $2 billion for the right to drill in the Beaufort and Chukchi seas and has spent roughly $1.5 billion more preparing for the work, which is now on hold until 2012 at the earliest.

Gerard said it was preposterous to suggest that an industry that has spent billions and billions of dollars on leases that ultimately may not contain oil and gas would sit idle on them.

“There is a number of variables to this. It is not as simple as the administration is trying to make it seem,” Gerard said. “We are risking our capital, giving it to the government, and we pay an annual rental fee just for the right to hold it and look.”

The most colorful set of quotes on the Interior study came courtesy, however, of  Jim Adams, president of the Offshore Marine Service Association. Adams didn’t mince any words in his assessment of the idle-lease claim…

“The Obama administration first puts a moratorium on drilling permits, then blames the industry for not exploring for oil. They can’t have it both ways.

“Why would an oil company pay to lease an area to explore, then not explore it? That might make sense to the Obama administration, but it doesn’t make sense to anyone else.

“Americans know hypocrisy when they see it. Instead of trying to shift blame for rising gas prices, the Obama administration should do something about them. Let Gulf workers get back to work and start exploring for oil again.

“America needs new permits from the Obama administration, not new excuses.

“Companies aren’t exploring for oil because the White House won’t let them. It’s the permits, stupid.”

Interior claims that “inactive” leases in the Gulf of Mexico alone harbor some 11.6 billion barrels of oil and 59.2 trillion cubic feet of natural gas, and those leases are neither currently producing nor are covered by exploration or development plans. At current prices (West Texas Intermediate crude closed at $104.45 today), 11.6 billion barrels of oil would be worth some $1.2 trillion. Natural gas closed at $4.37 per thousand cubic feet today; that would be $259 billion in the Gulf.

The idea that oil companies are passing on that kind of money without a disincentive – regulatory or otherwise – from the federal government is one which may require a bit of selling. It strains credibility; Menendez didn’t try very hard to explain how oil companies are sitting on potentially lucrative leases while making payments on them and failing to develop them in some hazy plan to move oil prices higher; perhaps he didn’t want to strain himself.

Nevertheless, the administration is now pushing a $4 per acre “use it or lose it” fee as an incentive to drill on current leases. The beatings will continue until morale improves, apparently.

Back in August of 2008, the Washington Times addressed the Democrats’ former plan to pin the blame on the oil industry for the inactive leases with a still-timely piece describing the dishonesty behind it…

The truth is, finding oil is a long, complex, cumbersome, expensive process. It starts with an idea – about what kinds of geologic structures are likely to hold this vital resource. Based on that idea, companies purchase leases: agreements that allow them to test their ideas, and hopefully find and produce oil and gas from leased properties.

Then geologists look at existing data and conduct seismic, magnetic and geophysical tests of the leased areas. They create detailed 3-D computer models of what subsurface rock formations look like, and whether there might be any “traps” that could hold petroleum.

Most of the time, all this painstaking, expensive initial analysis concludes that the likelihood is too small to justify drilling an exploratory well, since the cost of a single well can run $1 million to $5 million onshore, and $25 million to $100 million in deep offshore waters. Only 1 in 3 onshore wells finds enough oil or gas to produce profitably; in deep water, only 1 in 5 wells is commercial. Thus, only a small percentage of the leased acres end up producing oil.

This is important because it means most of those 68 million acres Messrs. Bingaman and Rahall want to force oil companies to drill actually don’t have enough oil to make it worth drilling. Either they know that, and are trying to deceive us; or they don’t know it, because they haven’t done their homework.

Third, if a commercial discovery is made, more wells must be drilled, to delineate the shape and extent of the deposit. Production facilities and pipelines must be designed, built, brought to the site and installed. Only after oil or gas is actually flowing does the lease become “producing.”

In one example, Shell Oil and its partners leased an area in 7,800 feet of water 200 miles off the Texas coast. They spent five years exploring and evaluating the area, punched several “dry holes,” and finally drilled a discovery well in 2002. Three appraisal wells (at $100 million apiece) confirmed a major field, and in 2006 the company ordered a huge floating platform and pipeline system that will initiate production in 2010. Total investment: more than $3 billion.

That’s hardly “sitting on their leases.” But those leases will be “nonproducing” until 2010. Clearly, a “use it or lose it” law will not change these hard realities.

The Shell story the Times uses is an example of why Democrats have argued that opening new areas for leasing won’t pay dividends for 10-15 years. But while the Markeys and Menendezes and Salazars of the world are happy to decry the long process involved in bringing a prospect to production as a justification for “we can’t drill our way out of this problem,” today’s gambit shows the argument is versatile enough to twist almost 180 degrees to claim oil companies spending millions on lobbyists and PR campaigns attempting to resuscitate drilling – don’t actually want to drill.



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