About Those “Inactive” Oil Leases

The Democrats have answered the “drill here, drill now” crowd by saying that 80+% of the leases presently owned by oil companies are non-producing.

As usual, their answer is clueless legislation – they would, by law, compel the oil and natural gas companies to produce from the federal lands they’re presently leasing before talking about any additional leases. And since they’re obviously not doing that at present, or so the reasoning goes, there’s no need for more leases or opening more territory for leases.

Now, anyone with the IQ of a hamster can see through the absurdity of that position. It assumes two things. One is that all of those leases will produce oil and gas and the oil companies just aren’t doing anything to produce it. Naturally, that posits that oil and gas is everywhere and all you have to do is drill. If that were the case, I’d have an oil rig in my backyard pumping out crude right now. The fact is, you’re more likely, by a lot, not to find enough recoverable oil and gas on a lease than you are.

Red Cavaney of API covers the second part of why this is absolute nonsense in a WSJ article:

A company bids for and buys a lease because it believes there is a possibility that it may yield enough oil or natural gas to make the cost of the lease, and the costs of exploration and production, commercially viable. The U.S. government received $3.7 billion from company bids in a single lease sale in March 2008.

However, until the actual exploration is complete, a company does not know whether the lease will be productive. If, through exploration, it finds there is no oil or natural gas underneath a lease – or that there is not enough to justify the tremendous investment required to bring it to the surface – the company cuts its losses by moving on to more promising leases. Yet it continues to pay rent on the lease, atop a leasing bonus fee.

In addition, if the company does not develop the lease within a certain period of time, it must return it to the federal government, forfeiting all its costs. All during this active exploration and evaluation phase, however, the lease is listed as “nonproducing.”

Obviously, companies want to start producing from active fields as soon as possible. However, there are a number of time-consuming steps to be taken before they can do so: Delineation wells must be drilled to size the field, government permits must be obtained, and complex production facilities must be engineered and installed. All this takes considerable time, and during that time, the lease is also listed as “nonproducing.”

Because a lease is not producing, critics tag it as “idle” when, in reality, it is typically being actively explored and developed. Multiply these real-world circumstances by hundreds or thousands of leases, and you end up with the seemingly damning but inaccurate figures our critics cite.

And to get to the literal bottom-line point of all of this, Richard Ranger, a senior policy advisor with the API gives you that side of the story:

[C]ompanies in the industry are in the business of producing oil and natural gas and their products for profit. … [T]he companies bid on these leases, they lay down risk capital often, and in many cases, offshore in the tens of millions of dollars. … [T]here?s every expectation in the marketplace, every expectation from their shareholders that when they?re putting that capital down front-end and then they’re continuing to invest new capital at risk in the seismic work which can cost a couple hundred grand a day for offshore seismic program, it can take several months.

Drilling operations, which in the Gulf deep water, can exceed, $100 (million), $200 (million), $300 million of wealth. There?s every expectation that at the earliest possible point, those capital dollars invested at risk generate revenues.

And that?s even more the case for the independent sector of the oil and gas industry and a lot of the integrated majors are API members. But particularly out west … the independents are responsible for drilling some 80 percent of the wells that are drilled out there. And a lot of them are funded by venture capital. So if anyone who knows anything about the expectations of the contemporary marketplace in every other line of business, there is that expectation that you turn investment into returns as quickly as possible. So the idea that companies are sitting on these leases is simply a basket of red herring.

Follow the money. Money that is invested by public companies and venture captialists is not going to be invested into something which is not going to produce revenue. And that means oil and gas. Anyone who doesn’t take the time to figure that reality into the rhetoric, to include a whole lot of ignorant congress people, are engaged in the lowest level of red fishmongering.

The fact is the leases which show promise are being worked and are in one of phases of development that Cavaney lists in his article. And playing rhetorical games with the language to suit a political position doesn’t help anyone solve the imminent energy crisis we face.

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