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.