The ExxonMobil-Julia Field Lawsuit Doesn’t Make Sense, Unless You Understand What Obama Wants

I’ve tried since the BP/Macondo Incident to resist the urge to accuse the Obama administration of an all-out assault on domestic energy production.

Tried, that is. I haven’t always been successful.

There’s a good deal of evidence behind such an assertion, of course. There’s the administration’s imposition of a drilling moratorium in direct contravention of the advice it received from its panel of experts, with evidence of an effort to doctor a report to suggest otherwise, for example. There’s the refusal until recently to hold lease sales in federal territories. There’s the failure to approve the Keystone XL pipeline. There’s the EPA’s assault on hydraulic fracturing, which threatens the development of shale gas and the revolution it could mean for the country’s economy.

And on and on.

But the idea that the administration is totally hostile to domestic energy and is attempting to shut down all of our hydrocarbon production is one we’re a little squeamish about. Political differences aside, we don’t want to believe that the people in charge of the country want to keep us in the dark.

And then there’s this business of the Julia field, which stands as one of the greatest discoveries of Gulf oil ever and is now the subject of a major lawsuit between ExxonMobil and the Obama administration.

The Houston Chronicle’s Loren Steffy had a good piece yesterday setting the scene.

Even by conservative estimates, the Julia field could be the largest since BP found the Thunder Horse field in 1999. At stake are billions of dollars in oil production, and Exxon Mobil itself has already spent hundreds of millions developing the leases.

In 2008, it applied for a suspension of production so that it could tie the Julia wells it had drilled into a production unit that Chevron planned to build about eight miles away.

The government, though, denied the request because at the time, Exxon Mobil had no agreement with Chevron, and it hadn’t committed to building its own production unit for the Julia field, regulators found.

The government rules require a company justify a lease extension by proving it’s committed to producing oil from the lease, which the Mineral Management Service found Exxon Mobil failed to do.

Exxon Mobil is accusing MMS, now the Bureau of Ocean Energy Management, Regulation and Enforcement, of a money grab.

The Obama administration has been cracking down on unused offshore leases, which cost the Treasury royalty revenue.

Word is the field contains at least a billion barrels of recoverable oil. That’s a figure equal to the proven reserves of long-time oil exporters Brunei and Romania – just in one field.

There is an alternative explanation for the administration’s actions – in other words, you could say what’s going on here isn’t a conspiracy to shut down offshore drilling.

You might be relieved to hear that. Except the alternative is even worse. Steve Maley explains

This Administration would make Hugo Chavez proud.

Disclaimer: I have only reviewed Exxon’s complaint. DOI has yet to reply, so I have the benefit of only one side of the story. But the Exxon complaint is clear, well composed and well documented.

In the late 1990s, with oil prices averaging less than $20 per barrel, Congress instituted the Royalty Relief Act (RRA) which was designed to encourage exploration of deepwater leases that might be deemed economic with their standard 12.5% deepwater royalty rate. The RRA would allow the oil company to pay zero royalty until its costs were recovered. The RRA was supposed to phase out once oil reached $35 per barrel.

But for two years’ worth of leases, Interior screwed up. The $35 cap language was inexplicably left out of the leases. I blogged about the issue last February, in a post titled A Deal’s a Deal (Unless You’re the Government).

In a deal between private parties, the plain language of the lease, and not its “intent”, would govern. Interior felt that different rules should apply, and sued. They lost, and the Supreme Court refused to hear its appeal.

Deepwater Royalty Relief remains stuck in the craw of Congressional Democrats. There have been several attempts to reimpose an effective royalty, styled as a surtax, on the “offending” leases. President Obama’s attempt to “close the loopholes” on energy producers includes language that would impose such a surcharge on those deepwater leases.

The upshot here is that under the terms of ExxonMobil’s original lease, the company wouldn’t pay royalties on Julia crude until it recovers the $1 billion or so in costs it will incur to develop the property – and then the royalty rate would be 12.5 percent. But if BOEMRE gets away with cancelling the lease, they’ll reissue it at an auction – which provides a windfall because who wouldn’t pay top dollar for a lease on a field that has a billion barrels of oil? – and get an 18.75 percent royalty on the first drop of crude the field produces.

So in that explanation it isn’t that this administration is trying to kill domestic oil production – instead it’s about greed and lawlessness.

Which one is worse?

But while there might be more gold at the end of the rainbow by stealing the lease from ExxonMobil, there also might not. Steffy explains that this is a bureaucratic and legal Charlie Foxtrot in the making, with lots of potential unintended consequences…

The government, meanwhile, seems so eager to show it’s become a tougher regulator that it may have lost sight of the big picture.

It says it wants drilling to move forward in the Gulf, and it wants it done safely. Yet it would deny a routine lease extension to a company that last year’s presidential spill commission cited as the gold standard for safe offshore operations.

The ocean energy agency now faces the prospect of a lengthy court battle, and even if it prevails, finding another leaseholder could potentially cost more in lost royalties and production than granting the extension.

Worse, it will only add to the confusion over the new regulatory scheme in the Gulf, potentially creating further delays for other projects as well. The dispute implies that companies should rush development of new fields or risk losing their leases.

Guess what one of the major causes of BP’s Macondo spill was? Rushing to complete a well on a deadline and cutting corners to meet it.

Everything about this stinks. ExxonMobil, as Steffy says, is the gold standard for offshore oil development and they’re sitting on a billion-barrel find. The right company, with the right technology and the capability to bring the oil to market faster than anyone else since they’re already there. And through ideologically-driven machinations or crass lawless money-grubbing, the Obama administration is acting to delay that oil coming to market and American job creation the effort to do so will entail.

Our readers are welcome to provide excuses for the government here. The guess is you’d be hard-pressed to do so.

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