Thursday, May 17, 2012

The Myth of "Idle Leases" for Oil on Federal Land

100 oil leases might produce 1 profitable discovery.
What sense would it make for profit-maximizing oil companies like Exxon Mobil to pay the federal government millions of dollars every year for offshore and onshore oil leases on federal land, and then leave those thousands or millions of acres idle? Especially today when oil prices are close to all-time historical inflation-adjusted highs? If you said "No sense at all," you can go the head of the class, as Professor Walter E. Williams would say. And yet that is exactly what Team Obama is saying:

WASHINGTON – "The White House pushed back against the oil and gas industry’s claims that the Obama administration is blocking domestic energy development, releasing a new analysis showing that 46 million acres of federal lands and waters leased for drilling are sitting idle.

“We continue to make millions of acres … available for safe and responsible domestic energy production on public lands and in federal waters,” said Interior Secretary Ken Salazar in a statement. “We also want companies to develop the tens of millions of acres they’ve already leased but have left sitting idle.”

According to the Department of Interior report, oil and gas companies are actively drilling or have launched development on less than a third of the 36 million acres they have leased offshore, and on just over half of their onshore leases. That includes leases where the companies have not yet filed exploration and development plans with the federal government, and ones where companies have received drilling permits but haven’t launched the work. According to the report, the government has issued about 7,000 permits for exploration not yet under way on federal and Indian lands."

Here's how API President and CEO Jack Gerard responded this week:

“If you look at their [the Administration's] characterization of idle leases, normally they include in that leases where we’re trying to get permits, we’re trying to get permission to develop this land. For example, there was a permit approved just last week in Utah, which Secretary Salazar took great credit for. We’ve been waiting for four and a half years for that approval. In the administration’s previous analysis they would have concluded that was an idle lease, while we’re waiting for Uncle Sam to give us permission to produce these resources, to identify resources on public lands. … The industry last year alone invested $200 billion in the United States, so we’re hardly sitting on anything.”

As Mark Green explains on the Energy Tomorrow blog:

"It’s important to remember that a lease isn’t a guarantee that an area will contain any oil or natural gas. Most of them don’t have enough oil or gas in quantities sufficient to produce or in formations that are accessible. The graphic above that puts the search for resources in context [MP: An oil company might pay for 100 leases, but that typically only leads to one actual profitable discovery].  

The administration has defined as “idle” leases that aren’t idle at all. They might not be producing for a number of reasons: because of ongoing seismic work, because government permits haven’t been issued, because the rigs and supporting resources are being put in place so drilling can begin – or because drilling is occurring. It’s just misleading to say a company is sitting on a lease when it is waiting for a government-issued permit to start drilling."


At 5/18/2012 6:31 AM, Blogger Larry G said...

let me relate about a lease that was purchased recently from a relative who owns land in Texas.

The company that took out the lease and paid money said that it had "no plans" to drill the land and that it was in acquiring leases "for the future". Apparently the gathering and holding of leases is a competitive business itself.

Having seem the actual letters of solicitation from more than one company I think it's not uncommon apparently even on private lands.

so do companies acquire leases on private land and just hold them and not develop them?

how does this practice of "holding" leases on private lands compare to "holding" leases on public lands?

At 5/18/2012 7:29 AM, Blogger Pulverized Concepts said...

Here's the story of an offshore lease on which Shell spent $2.1 billion.

At 5/18/2012 7:31 AM, Blogger Rufus II said...

It's all about "Share Price," and share price is driven by "RESERVES."

At 5/18/2012 9:46 AM, Anonymous Anonymous said...

Let me get this straight. The government blocks the private sector from being productive, then removes those blocks and preens how necessary government is for development and productivity. I'm shocked, SHOCKED.

At 5/18/2012 5:31 PM, Blogger juandos said...

"It's all about "Share Price," and share price is driven by "RESERVES.""...

Just reserves rufus or is it 'proven' reserves?

At 5/18/2012 9:31 PM, Blogger arbitrage789 said...

Obama is very good at getting on both sides of this issue.

He's betting that most people are too dumb to figure it out. I'm betting that Obama is right.

At 5/18/2012 10:21 PM, Blogger Mkelley said...

The best way to increase domestic oil production in the country would be to fire a bunch of Democrat and RINO politicians. Here's one, although CNN predictably leaves out his party affiliation (Democrat):


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