Every few years, it seems one politician or another tries to deflect attention from the importance of opening up access to new U.S. resources by incorrectly accusing the oil and gas industry of withholding commercial production in existing leases.
We’ve just seen this tactic used again. Yesterday, Senators Bill Nelson and Robert Menendez introduced what they’re calling the “use it or lose it” bill in the Senate. The premise of this bill is that oil companies are letting their oil and gas leases lay idle in the United States – and therefore the U.S. doesn’t need to grant more access to offshore and onshore energy resources, but rather just force oil companies to produce resources on tracts they already have leased.
If only it were that easy. The supporters of this legislation aren’t stating the facts correctly – and the truth is that a few important facts undermine their argument:
1. “Use it or lose it” is already the law. Oil and gas companies are already required to develop their properties within specific timeframes as set out in lease terms. Rents on the leases increase in later years to encourage faster development. In general, leases not producing by the end of their term are relinquished back to the government, which can then re-lease them.
And in addition to pointing out that this law is already on the books, I would also say what many in my industry are saying – companies like ExxonMobil cannot develop existing leases without drilling permits issued by the government. Given the delays on drilling permits we have seen recently, that is certainly a point worth noting.
2. Oil and gas companies have every motivation to develop leases because of the large up-front investments they require. Here’s how it works: First, companies pay a bonus bid – which can total millions of dollars – to the federal government to acquire a lease, which can last anywhere from five to 10 years. On top of that, we then make annual rent payments to the government to maintain the leases. And, it’s not like your apartment complex when you get your deposit back after you move out – if we don’t find oil or gas, we’ve lost that money.
After acquiring leases, we invest many millions more on seismic surveys, environmental studies, technology development and exploratory drilling to find the oil and gas, if we have reason to believe it exists. For example, one deepwater exploration well in the Gulf of Mexico can cost in excess of $125 million to complete. That’s a huge investment, especially when the chances of not finding oil or gas in an individual well are greater than the chances that we do find oil and gas. So, the only way to recoup the millions spent would be to produce oil or gas. In a highly competitive industry like ours, letting potentially productive leases lay idle would make no economic sense.
3. You can’t change geology. We spend a lot of fiscal and human capital to analyze and identify high-potential leases. But in some ways, it’s like buying raffle tickets at a school function – sure, you have a chance of winning the prize with one ticket, but your chances are greater the more tickets you buy.
For example, over a 10-year span starting in the late 1990s and continuing to the late 2000s, ExxonMobil evaluated more than 100 federal lease blocks in the deepwater Gulf of Mexico. By the end of that decade, only one of those leases was actually producing commercial quantities of oil and gas. I think the president of the National Ocean Industries Association said it best last week: “Political pressure cannot change simple geology. Not every lease actually yields oil.”
The fact is that the oil and natural gas exploration and production process cannot be turned on and off in a matter of days or even months. It can take a decade or more to evaluate and produce just one well – so what may appear to be an “idle” lease may actually be under development but not yet ready to produce. Or, the geology may be such that it may not contain oil and gas at all.
The reality is that, while the U.S. is endowed with substantial oil and natural gas resources, not every lease that the government provides results in new energy production. Justifying bans on accessing new areas simply because existing leases may not yield energy production is no way to secure America’s energy needs.
I spent a few years in the advertising industry, and for the life of me I can’t understand why the oil companies don’t spend some of their “ill-gotten gains” (as the anti-oil fanatics would say) on getting their message out…
Exxon should realize that hiding in the weeds, rather than sticking their necks out, actually plays into the hands of their opoponents because they can say anything and it goes largely unanswered… you NEED to answer it…
We AREN’T running out of supply… we have been saying this since the 1920′s
It DOESN’T take 10 years to bring new supplies to the pump
The GOVT Makes more money taxing us all than we make drilling and bringing the product to you… so who should we be screaming at about illicit profits?
It doesn’t make any SENSE to cut off production for the nebulous concept of alternative energy sources that the “no-drill” crowd don’t like either… they don’t like ANYTHING!
The US Govt lets OTHER countries like Cuba and China and Brazil drill in our waters, but NOT US companies? IS… read more »
…this fair? Is anything any cleaner for it? Who is the country that does everything cleaner than anyone else? US!!!
You should be shouting all of this from the rooftops, not hiding in the weeds!!! I would gladly help you write the ad copy!!!
In reference to you blog about the Us goverment missing out on trillions of dollars in revenue by not exploring the oil site off our coast isn’t true that the majority of the oil already drilled is being sold in foreign markets not US so what would the poit of drilling if it isn’t the American citizens reaping the benefits?
Talk about being ignorant. Your closed narrow minded viewpoint absolutely boggles the mind. Talk about not seeing the forest for the trees, your still focused on a single leaf.
Paul, nothing is as worthless as firing of a string of epithets. If you have some facts to share, or a thoughtful policy statement, by all means go ahead. But your comment above is little more than a tantrum.
Mark, let me just respond to your comment. I am a seasoned oil and gas worker who also grew up in the international oil business, living overseas with my petroleum engineer parents in places like Libya, The Netherlands, UK and Norway.
Firstly, the US peaked on its petroleum supply around 1970, just as the famous (or infamous) M. King Hubbert had predicted. The reason we are importing nearly 50% of our oil is because we have gradually, over the decades, depleted our available reserves — we do NOT have limitless supply (of Oil) here in the US, onshore or off. In fact, the total amount of oil the US produces comprises about 3% of the total world petroleum supply.
Now, if we were able to 1) find a major discovery in the GoM or elsewhere in the continental US, and 2) ramp up production so we could be lifting this lovely light sweet crude and shipping it off to the refineries to become gasolene, etc., we would be doing so by now.
The fact is, we haven’t had any major discoveries in the USA in many years – and we have had to import increasing amounts of our petroleum from four major supplier… read more »
…countries — Canada, Mexico, Venezuela and Nigeria.
The fact is, we are not able to ramp up quickly once we do make a solid discovery – it takes years, as Exxon’s blogger states, and a huge capital investment over many decades.
And finally, if we were able to suddenly find a whole lot more oil and produce it quickly and bring it to market — this would still add only a marginal amount of supply to the global petroleum outlook. It would maybe amount to about 1 percent more on the market…
So the ol’ “Drill baby Drill!” mantra is not exactly a policy. And the US Government is not making a ton of profit on the oil industry either — it gives the industry a tax subsidy which amounts to massive tax breaks, and this is under some scrutiny because our industry is well established – and companies like ExxonMobil, just for example, are making record profits in recent years as we approach peak oil and as demand starts to outstrip supply — globally.
what we need to be concentrating on is an alternative to the use of oil for the thousands of products that require oil in their production, gasoline only amounts to about 10% of the oil this country uses. Home heating oil is a huge consumption of oil that we waste needlessly. While people scramble to develop wind, solar, and bio-fuel energies, they disregard the fact that EVERYTHING is made of, or with, oil in some form.
As to those record profits that oil companies posted last year?
How come their tax bill was near zero?
Kudus! I sat through a year-long seminar on oil and gas development in a masters program, which included a chain of industry guest speakers. To a man, they repeated the exact same points you made above.
If Ken Cohen was my PR guy, I’d fire him so fast his hair would ignite.
If anything, I’d rather subsidize the purchase of more foreign oil, because in doing so we maintain a strategic bargaining chip versus global competitors, like China, and can further buffer ourselves from the kind of predictable commodity price swings we’ve seen since 9/11.
Who knows — we might even save money by cutting domestic oil and gas subsidies — money we can spend on alternative fuel research or, if nothing else, educating the next generation of engineers.
I spent a few years in the advertising industry, and for the life of me I can’t understand why the oil companies don’t spend some of their “ill-gotten gains” (as the anti-oil fanatics would say) on getting their message out…
Exxon should realize that hiding in the weeds, rather than sticking their necks out, actually plays into the hands of their opoponents because they can say anything and it goes largely unanswered… you NEED to answer it…
We AREN’T running out of supply… we have been saying this since the 1920′s
It DOESN’T take 10 years to bring new supplies to the pump
The GOVT Makes more money taxing us all than we make drilling and bringing the product to you… so who should we be screaming at about illicit profits?
It doesn’t make any SENSE to cut off production for the nebulous concept of alternative energy sources that the “no-drill” crowd don’t like either… they don’t like ANYTHING!
The US Govt lets OTHER countries like Cuba and China and Brazil drill in our waters, but NOT US companies? IS… read more »
…this fair? Is anything any cleaner for it? Who is the country that does everything cleaner than anyone else? US!!!
You should be shouting all of this from the rooftops, not hiding in the weeds!!! I would gladly help you write the ad copy!!!
In reference to you blog about the Us goverment missing out on trillions of dollars in revenue by not exploring the oil site off our coast isn’t true that the majority of the oil already drilled is being sold in foreign markets not US so what would the poit of drilling if it isn’t the American citizens reaping the benefits?
Talk about being ignorant. Your closed narrow minded viewpoint absolutely boggles the mind. Talk about not seeing the forest for the trees, your still focused on a single leaf.
Paul, nothing is as worthless as firing of a string of epithets. If you have some facts to share, or a thoughtful policy statement, by all means go ahead. But your comment above is little more than a tantrum.
Mark, let me just respond to your comment. I am a seasoned oil and gas worker who also grew up in the international oil business, living overseas with my petroleum engineer parents in places like Libya, The Netherlands, UK and Norway.
Firstly, the US peaked on its petroleum supply around 1970, just as the famous (or infamous) M. King Hubbert had predicted. The reason we are importing nearly 50% of our oil is because we have gradually, over the decades, depleted our available reserves — we do NOT have limitless supply (of Oil) here in the US, onshore or off. In fact, the total amount of oil the US produces comprises about 3% of the total world petroleum supply.
Now, if we were able to 1) find a major discovery in the GoM or elsewhere in the continental US, and 2) ramp up production so we could be lifting this lovely light sweet crude and shipping it off to the refineries to become gasolene, etc., we would be doing so by now.
The fact is, we haven’t had any major discoveries in the USA in many years – and we have had to import increasing amounts of our petroleum from four major supplier… read more »
…countries — Canada, Mexico, Venezuela and Nigeria.
The fact is, we are not able to ramp up quickly once we do make a solid discovery – it takes years, as Exxon’s blogger states, and a huge capital investment over many decades.
And finally, if we were able to suddenly find a whole lot more oil and produce it quickly and bring it to market — this would still add only a marginal amount of supply to the global petroleum outlook. It would maybe amount to about 1 percent more on the market…
So the ol’ “Drill baby Drill!” mantra is not exactly a policy. And the US Government is not making a ton of profit on the oil industry either — it gives the industry a tax subsidy which amounts to massive tax breaks, and this is under some scrutiny because our industry is well established – and companies like ExxonMobil, just for example, are making record profits in recent years as we approach peak oil and as demand starts to outstrip supply — globally.
what we need to be concentrating on is an alternative to the use of oil for the thousands of products that require oil in their production, gasoline only amounts to about 10% of the oil this country uses. Home heating oil is a huge consumption of oil that we waste needlessly. While people scramble to develop wind, solar, and bio-fuel energies, they disregard the fact that EVERYTHING is made of, or with, oil in some form.
As to those record profits that oil companies posted last year?
How come their tax bill was near zero?
Kudus! I sat through a year-long seminar on oil and gas development in a masters program, which included a chain of industry guest speakers. To a man, they repeated the exact same points you made above.
If Ken Cohen was my PR guy, I’d fire him so fast his hair would ignite.
If anything, I’d rather subsidize the purchase of more foreign oil, because in doing so we maintain a strategic bargaining chip versus global competitors, like China, and can further buffer ourselves from the kind of predictable commodity price swings we’ve seen since 9/11.
Who knows — we might even save money by cutting domestic oil and gas subsidies — money we can spend on alternative fuel research or, if nothing else, educating the next generation of engineers.