Saturday, June 21, 2008
The "idle lease" canard
One of the claims of people who oppose drilling for oil and gas offshore and in ANWAR is that extraction companies have already been given access to 68 million acres of federal land that they are not exploiting. True, but irrelevant:
Anyone with even the most basic understanding of how oil and natural gas are produced – and this should include many members of Congress – knows that claims of "idle" leases are a diversionary feint.
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.
Our companies have made tremendous strides in developing cutting-edge exploration technology. But they are not magicians. They cannot produce oil or natural gas where it does not exist. A significant percentage of federal leases simply may not contain oil and natural gas, especially in commercial quantities.
As I've often said, the first step in our business is called "exploration" for a reason. Exploration is time consuming, very costly and involves a great deal of risk. Importantly, you see neither a drop of usable oil nor a cubic foot of natural gas while it is going on. But it is absolutely essential, and there is nothing "idle" about it. Without the exploration that took place years ago, less domestic oil and natural gas would be available today to meet consumer demand.
In reality, a lease is simply a block on a map, with no guarantee that it contains any resources. If all of them did, one could simply pay for the lease, haul in equipment and start pumping oil. But that only happens in fiction.
And it happens in the minds of those who use the undeveloped-lease argument as a smokescreen to mask their intent to keep America's vast energy resources locked up underground, despite increasingly strong consumer demand for oil and natural gas. For exploration to take place, our companies need access to the areas – offshore and onshore – that we know have the potential to produce the oil and natural gas consumers will need, if ours is to remain a viable economy in an increasingly competitive global marketplace.
I trust we have dealt with that issue. Drill here, drill now.
6 Comments:
By 
, at
Sat Jun 21, 11:13:00 AM:
That would make sense if there was actually significant oil to be gotten here. Using the president's speculative numbers for ANWR, there are 21B barrels of oil to be gotten, perhaps more. Let's engage in an absurdly charitable thought experiment. Instead of the companies responsible for drilling taking a hefty profit if ANWR were opened up, the oil would be made spontaneously available, for free, as part of a gigantic BUY X GET Y FREE sale. Numbers I have found
http://www.nationmaster.com/graph/ene_oil_con-energy-oil-consumption
indicate that this oil would have hilariously minimal impact. If you wanted to make this magic free oil available on a basis that allowed for $3 oil again, that would be 3 parts other oil to 1 part new free oil. (Paying the $3 gets you the same amount as before, when you were paying $4 here.) This would last for approximately 4 to 5 days. Even if you try and lower prices by a nickel, months would be a charitable time horizon, and then we're back where we started. Repeat as necessary with all the domestic oil production areas. Further, observe that we assumed no cost in retrieving said oil, and no profit to the drillers. When incorporating these real world factors, the impact starts to appear microscopically small.
So how do we solve this problem in the long run, rather than fruitlessly pursuing local oil reserves in ways that will create profits for the few and no price change for the many? (Privatize gains and socialize losses is still a bad plan.) Well, how about providing market incentives for A) adoption of more efficient cars and such, B) usage of mass transit, C) research into cleaner tech, and as a subset D) engine makers using the efficiency improvements of the last few years to improve mpg rather than horsepower.
Quick observation before people break out the general "government sucks" argument: Fine. Then revoke all oil subsidies to remove all government intrusions into the market. Or apply free market theory to the choice of political candidates to provide basis for the "you get what you deserve" conclusion.
By , at
Sat Jun 21, 07:13:00 PM:
Fine, let’s engage in some “absurdly charitable thought experiment “. Oil production does not work like that. It is available over a period of time. Your argument against developing oil resources is illogical and attempts to make development seem meaningless in comparison to WHAT? You never tell us WHAT you propose to substitute for oil.
In one paragraph you propose government subsidies to a group of concepts that “will not be available for 10 years or more” and then in the next you propose to revoke oil subsidies.
Guess what, I totally agree with revoking government subsidies for all energy systems. That includes ethanol, solar, wind and bio.
By the way, here is a plan. Drill for oil, dig for coal and build nuclear.
By , at
Sat Jun 21, 07:36:00 PM:
Anonymous-
You left out stopping illegal immigration. Illegal immigrants use oil, gasoline, natural gas, water, electricity generated by coal, open space and dozens of other scarce natural resources. I rode a bicycle to work for 15 years, and every drop of oil I conserved was used by an illegal immigrant. I believe his name was Eduardo.
As I told my Senator, Barbara Boxer, it is not the wisest path to rail against me for "wasting" natural resources when the culture of corruption in the Federal government has allowed our population to grow illegally by the tens of millions.
By the way, Senator Boxer has not responded to my email, yet.
By , at
Sat Jun 21, 08:20:00 PM:
Disingenuous argument for tyree: but the free market demands cheap labor, tyree. I know my area and many others would be unable to survive without it. Why are you impeding the free market?
Actual argument: Immigration reform is a good idea for purposes of national security, but I find the argument of "those damned illegals" unpersuasive. The illegals I see work 14 hour days during the on-season, as much as possible during the off, usually doing backbreaking labor. Their contributions are valuable too. We should prevent our borders from being porous so as to mitigate the potential for controlled substances (explosives, drugs, uranium, criminals, etc) but to go further without elaborate to "deport them all" smacks of Know-Nothingness (political party, not aspersion on one's character.) Until we find a way to get by without cheap labor, we''ll have illegal immigrants or a busted economy in many sectors. Or a mix and match, your choice.
@ Stan: Of course development works nothing like that, I was waving a magic wand to caveat out all the good arguments about prohibiting drilling. The aim was to show that the "But things will be cheap!" argument is bogus, because our President's own numbers are wildly insufficient in face of US DAILY consumption. When we take a real world stance, including the time lag, cost of drilling, profit from sale, etc, the cost reduction plan is only riddled with more holes. I gave arguments for a plan in TH's next post on the topic, and I won't repeat them here. As for the observation, it was meant to show that the arguments brought up cut both ways, some of which in directions that their proponents ignore.
We have to switch to another form of power eventually, so we might as well start researching what it is now. And nukes aren't a solution, again for reasons brought up in the other post.
By , at
Sun Jun 22, 01:00:00 AM:
Sorry, I must have missed something? What resons were put forward against nuclear?
By , at
Mon Jun 23, 09:06:00 PM:
Complaining about underutilized oil leases is like leasing Manhattan to a logging company, then complaining that you never see loggers anywhere but Central Park.
