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Not-so-idle leases

The Interior Department recently published a report suggesting that the oil and gas industry is sitting on leases and limiting production of U.S. oil and natural gas resources.

If that sounds familiar, it’s because the administration issued essentially the same report about a year ago.

The numbers released this year are a little different, but unfortunately it’s hard to escape the same conclusion that many drew from last year’s report – that is, it exists to offer a rationale as to why more U.S. land should not be opened up to responsible energy development.

I explained last year why the administration’s line of reasoning is flawed:

  • “Use it or lose it” already is the law of the land; if production doesn’t occur within the terms of the lease, the company holding the lease loses it and it reverts back to the government.
  • Because of large up-front investments – often totaling millions of dollars – oil and gas companies have a huge incentive to develop leases that show promise. Furthermore, in a time of relatively high global crude oil prices, there’s more than enough motivation for companies to produce any economic amount of oil they can find.
  • Because of the vagaries of geology, not every lease will prove a winner (although the government gets paid its fees and rents whether a lease produces or not).
  • And, the administration’s definition of “inactive” plainly misrepresents what is considered “activity” in oil and gas exploration, such as conducting critical seismic surveys.

Here’s a graphic from the American Petroleum Institute that helps illustrate the long process of exploration.

The Myth of Idle LeasesIt shows that one oil or natural gas discovery is the result of studies done on dozens or even hundreds of leases that may or may not contain oil and natural gas.

It takes time for geoscientists and engineers to run 3-D seismic tests, build computer simulations, drill appraisal wells and conduct other exploration activities to determine if oil and natural gas even exist in economic quantities on the leases. Yet according to the DOI’s definitions, some of this activity could be going on, and the leases would be considered “idle.”

But we’re in a business where a single deepwater well can cost more than $100 million – which means that companies do all of the testing and technological development necessary, taking all the time that is necessary, to increase the chances that resources can be safely explored and developed. The Energy Tomorrow blog has a good description of the entire process from leasing to production if you’re interested.

The real issue is that oil and gas companies only have access to a small share of the most promising federal acreage, both onshore and off. The federal government continues to keep the Atlantic Coast, Pacific Coast and nearly all of the Eastern Gulf of Mexico closed to new oil and gas development – meaning that about 85 percent of all U.S. offshore areas remain off-limits. The DOI’s proposed 2012–2017 Five-Year Outer Continental Shelf Oil and Gas Leasing Program came in November 2011 after two years of deliberation. It only includes portions of the Gulf of Mexico where industry has been allowed to lease and explore for many years, as well as portions of Alaska. The DOI reneged on an earlier plan to open up portions of the Atlantic and potentially the eastern Gulf of Mexico.

Last year I called out this approach, writing, “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 one year later, we’re seeing it yet again.

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