DOI’s “Use It or Lose It” report: Politics trumps common sense

The Department of Interior’s so-called “use it or lose it” report was delivered to the White House yesterday. Rather than being an unbiased analysis of the status of oil and natural gas leases in the United States, the report sadly perpetuates the misguided charge that the oil and gas industry is not developing its existing leases.

For the record, ExxonMobil is actively producing or working 93 percent of its federal leases. Of the remaining 7 percent that are currently inactive, the majority of those leases expires this year and will be returned to the U.S. government.

Back to the report. It claims that “more than two-thirds of offshore leases in the Gulf of Mexico and more than half of onshore leases on federal lands remain “idle.”

A sensational charge – until you read the fine print.  To support the claim that the leases are “idle,” the DOI defies common sense to define “inactive leases” as follows:

“Inactive leases,” or leased areas that are not producing nor currently covered by an approved exploration or development plan. These areas may be subject to certain ancillary activities such as geophysical and geotechnical analysis, including seismic and other types of surveys.

Did they just call a seismic survey – one of the most fundamental activities of finding oil and natural gas – ancillary? Meaning it’s not essential, secondary in nature, or extra activity?

Yes, they did. And that proves my point. You don’t have to be an industry expert to know that seismic surveys – along with a whole host of other activities – are among the most essential activities in oil and gas exploration, and anything but a sign of “inactivity.”

It is hard to escape the conclusion that this study, along with the “use it or lose it” legislation, is a thinly veiled political ploy – not only for the discrepancy that I just pointed out, but also because there’s already a “use it or lose it” law on the books.  Politicians who don’t want to open up access to U.S. energy resources also don’t want to be blamed for high gas prices – so trying to convince Americans that oil companies are sitting on precious oil resources is their strategy. We’ve seen this before, and we’re seeing it again now.

If you read my post on this topic on March 17, then you know this is not a rational argument. Oil companies have a financial responsibility to make investments that produce a return for shareholders. Spending millions of dollars to obtain a lease, and many millions more to study it – and then not producing it if it contains economic amounts of oil and gas supplies – would be a waste of shareholder money.

But even if we set aside the fact that “use it or lose it” is redundant and doesn’t make economic sense – we can’t ignore the fact that this report misrepresents what is considered “activity” in oil and gas exploration.

The timeline from acquiring a lease to actually producing oil or gas takes years. Just because you have a lease doesn’t mean it has oil or gas on it. And even if it does have oil and gas on it, it doesn’t mean production can start right away. Companies spend millions of dollars finding out if the resource is there, and many hundreds of millions more – and several more years – to build the infrastructure to produce it and get it to consumers IF it exists.

So what exactly do we do? Here’s just a short list of all the activities that take place on a lease before it’s producing – and many of these would be considered “inactive” by the DOI’s definition:

  • Mapping and surveys
  • Surface and subsurface geological/geophysical examinations
  • Investigations and studies (including acquisition, reprocessing, and interpretation from seismic, gravity, or magnetic surveys)
  • Obtaining and analyzing well data via trading, purchasing and/or drilling of well (including wildcat and appraisal wells)
  • Land activities such as negotiating farmouts, joint ventures, acreage trades
  • Regulatory activities such as permitting, evaluation of archaeological and biological suitability for well locations

And we do much more. But the fact is that you can’t change geology – sometimes the oil just isn’t there. The DOI claimed in the study that since March 2009, it has offered 90 million acres of offshore oil and gas leases, but that only 5 million were actually leased. That statistic says nothing about the “activity” levels of oil and gas companies – it only says that the government is not leasing land that’s worth exploring.

In fact, the U.S. government has continually prohibited access to the majority of America’s offshore acreage, as well as significant onshore acreage as well. That’s a decision that has implications for the U.S. economy and energy security. One recent study found that opening up federal lands that Congress has kept off-limits for decades could generate $1.7 trillion in government revenue over the life of the resource, create 160,000 jobs by 2030, and increase U.S. oil output by as much as 2 million barrels a day in 2030. Yet for the most part, access to U.S. resources is often denied.

Read more in my previous blog post on this subject, “Let’s lose the ‘use it or lose it’ rhetoric.” Or, take a look at the typical timeline for onshore and offshore leases, as provided in these fact sheets from the American Petroleum Institute.


2 Comments

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  1. Zach Shoher says:

    DoI gives a definition for their use of ‘inactive lease’, and that’s fine, since even if it means exactly what you call an ‘active lease’, it allows transforming the terminology, and a conversation to go on. They then throw in the ‘ancillary’ comment, which, it appears, you interpret to be about ‘ancillary to the industry-standard work process of getting a well online’. That’s one possible interpretation. Another is that ‘ancillary’ applies to their specific definition of ‘active lease’. I’d be interested to hear DoI’s explanation, and I expect I will.

    More to the point of your post, is there a Federal policy that should be in place for how long a lease should be retained without becoming, in DoI’s use of the term, ‘active’? I think so. I agree that companies exist to maximize shareholder value, and that gives management latitude, as it better, to keep resources out of current production and available for future production, if management thinks that’s a smarter, i.e., more strategic, course of action. From a shareholder value perspective, that may be absolutely correct. From a lease grantor perspective, in this case, the US government’s perspective, that may be an absolutely incorrect course of action.

    Long-winded, way too complex way of saying, different interests, different expectations of activity.

    My personal interest is in seeing renewable technologies developed, and the faster the better. Some of the approaches that I’ve seen ExxonMobil communicate about – controlled-growth algae, for instance – sound interesting as either an intermediate or even a long-term target, if the cybernetics of the production / usage cycle isn’t bad. Or put another way, I can have a great time with an energy date that isn’t Marilyn Monroe, as long as I keep my eye on what I really want.

    • Zach Shoher says:

      Correction to my submission:

      At the beginning of paragraph 2, I said “More to the point of your post, is there a Federal policy that should be in place for how long a lease should be retained without becoming, in DoI’s use of the term, ‘active’?

      What I meant to say was “More to the point of your post, is there a Federal policy that should be in place for how long a lease should be retained without becoming, in DoI’s use of the term, ‘inactive’?

  2. Zach Shoher says:

    DoI gives a definition for their use of ‘inactive lease’, and that’s fine, since even if it means exactly what you call an ‘active lease’, it allows transforming the terminology, and a conversation to go on. They then throw in the ‘ancillary’ comment, which, it appears, you interpret to be about ‘ancillary to the industry-standard work process of getting a well online’. That’s one possible interpretation. Another is that ‘ancillary’ applies to their specific definition of ‘active lease’. I’d be interested to hear DoI’s explanation, and I expect I will.

    More to the point of your post, is there a Federal policy that should be in place for how long a lease should be retained without becoming, in DoI’s use of the term, ‘active’? I think so. I agree that companies exist to maximize shareholder value, and that gives management latitude, as it better, to keep resources out of current production and available for future production, if management thinks that’s a smarter, i.e., more strategic, course of action. From a shareholder value perspective, that may be absolutely correct. From a lease grantor perspective, in this case, the US government’s perspective, that may be an absolutely incorrect course of action.

    Long-winded, way too complex way of saying, different interests, different expectations of activity.

    My personal interest is in seeing renewable technologies developed, and the faster the better. Some of the approaches that I’ve seen ExxonMobil communicate about – controlled-growth algae, for instance – sound interesting as either an intermediate or even a long-term target, if the cybernetics of the production / usage cycle isn’t bad. Or put another way, I can have a great time with an energy date that isn’t Marilyn Monroe, as long as I keep my eye on what I really want.

    • Zach Shoher says:

      Correction to my submission:

      At the beginning of paragraph 2, I said “More to the point of your post, is there a Federal policy that should be in place for how long a lease should be retained without becoming, in DoI’s use of the term, ‘active’?

      What I meant to say was “More to the point of your post, is there a Federal policy that should be in place for how long a lease should be retained without becoming, in DoI’s use of the term, ‘inactive’?