Monday, March 21, 2011

"Use It or Lose It" Political Mindset

[Editor's note: I don't like to inject politics into this blog, but as the government chooses to inject politics into science and the marketplace, it is necessary in this case.]

In recent years, when gasoline and crude oil prices have risen sharply (due to more than one reason - including the lack of a firm, coherent national energy policy), some politicians have attempted to scapegoat the oil (and gas) companies by suggesting that oil companies are "sitting on X million acres of leased Federal Land", inferring to the public that American oil and gas firms are sitting on millions of acres of proven oil/gas resources and all that is necessary is for the firms to drill.

They further infer that the companies are not drilling in order to "jack up" crude prices to benefit themselves (and also deliberately under-utilizing refinery capacity for the same reason). The refinery issue is for another time.

From the mouths of at least some of these politicians (and the compliant MSM), this inference is to; 1) Deflect responsibility away from the Federal Government's policies; and 2) Perhaps plant a seed of justification in any future attempt to nationalize American oil and gas firms (in a cited Emergency, by suggesting that said firms were not doing everything they could to bring down prices by increasing production). 

What they do not say is that there is already a "use it or lose it" clause in each Federal Lease.

From this particular source, an API Fact Sheet:

"If companies do not produce oil or gas on leases then the leases must be returned to the government.

•Companies are required under government leasing regulations to develop a lease expeditiously (between five- and 10-year terms, depending on the area) or return it to the government. In general, leases not producing by the end of their term are relinquished back to the government,..."

There are already incentives to produce from these properties, aside from market prices:

"•In addition, companies already pay a rental fee during the pre-production phase of development. Rental fees on leases can now exceed $100,000 annually on some leases. Rental rates increase in the later years of the lease to encourage diligent development.
•Companies invest billions of dollars to acquire and maintain their leases. In addition to rental payments during the pre-production period, companies also pay a bonus bid to acquire leases.
Oil companies holding leases are in the business of finding and producing oil and natural gas, but a lease is only the first step."

Before drilling can commence, there have to be permits issued.  The permitting process can be held up by bureaucratic inefficiencies and/or by deliberate, agenda-driven delays:

"•In many cases, the administration itself is preventing the industry from developing leases by not issuing permits to drill on them. Companies cannot develop existing leases without drilling permits."

When Federal lands go "up for lease", it is in a competitive atmosphere, in which companies may believe that if they don't bid, they may be left out.  Sometimes, due to particular tax laws, companies may feel compelled to spend the money on leases that might pay out in the future, rather than have the money lost to taxation.

"Exploratory drilling occurs only when the geological formation shows potential, which is often unknown until after the lease has been purchased and studied.

•When companies bid on a lease, there may be minimal information available to evaluate its resource potential. Because of the competitive nature of the domestic oil and gas industry, companies are willing to risk capital to capture leases while speculating on the resource potential these leases may contain.
•Before drilling an exploratory well, companies may conduct seismic studies which require permitting to determine if commercial quantities of hydrocarbons are likely. If they believe commercial quantities exist, they will seek another permit for an exploratory well. Developing a lease can be a complicated process. Detailed planning, permitting timetables and regulatory and safety requirements must be met before development can occur."...
As drilling and completion costs can easily run into the millions, especially in offshore wells, it is cheaper to use seismic surveys to "narrow down" the areas to be targeted.  But even expensive seismic surveys prove nothing.  They just provide some more evidence of where oil and/or gas MIGHT BE.  Again, the seismic permitting process is subject to the same delays as the drilling permitting process.

Another issue not considered in the article, some of those companies might have leases on State or private lands to consider at the same time.  The offshore parcels, while much more expensive to drill and complete, hold the hopes of "the next new large discovery", i.e., the next new giant oil/gas field.  The conventional wisdom is that "all" of the large/giant onshore oil/gas fields have already been discovered, but if money is tight, onshore efforts might be more attractive though the payoff will be smaller.
Back to the API Fact Sheet:

"Production will only occur if resources are found, and found in commercial quantities.

•Not all leases contain hydrocarbons. Accumulations of natural gas and oil occur on only a small number of leases. It is not uncommon for a company to spend $100 million to drill a well and find no oil or gas. Companies drill more wells that have no oil or gas than wells that actually do.
•Not all leases will have enough hydrocarbons present to make development commercially viable."

Regardless of how much money is spent on geologic studies, geophysical studies, hunches, etc., the only way to ultimately KNOW what is "down there" - is to drill.

"In the OCS deepwater, costs can exceed $2 billion for a platform alone. Some factors a company will consider include:
  • Amount of recoverable hydrocarbons;
  • Technology restrictions; and
  • Availability of critical infrastructure needed to bring hydrocarbons to market.
Some leases go undrilled because their potential can be determined by exploratory wells drilled by the company at nearby leases.

•Given the relatively small size of an OCS lease, and the fact that many geologic formations and trends can cover a large geographical area, companies often bid on several contiguous leases in a geographical area it believes will have underlying oil and natural gas resources. A strategically placed exploratory well on a single lease may give the company enough data to determine the hydrocarbon potential of many leases."

As for the infrastructure issues, that applies to onshore drilling, too.  At least once, Bakken Fm. wells have been "shut in" because of a lack of a pipeline or insufficient capacity in a nearby pipeline.
[When work permits, I may come back and refine this a bit more.]

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