Wednesday, June 18, 2008

The Truth About Leasing on the Outer Continental Shelf

Capitol Hill’s opponents of domestic energy production took to the stage yesterday to decry “Big Oil” again, not for its profits, but for “stockpiling” energy leases instead of producing them. In reality, it’s the government that is stockpiling leases.

This group of politicians stated that oil companies hold the rights to millions of acres of federal leases that are not currently producing energy. This is certainly true, but not because of the sinister reasons they would have you believe. The following may help provide the insights the Members of Congress neglected to provide yesterday.

The Claim: “Increased domestic drilling activity has not led to lower gasoline costs”

This may sound compelling at first, but “drilling activity” has nothing to do with the price at the pump. Supply - or actual energy production - is what influences the price at the pump. While it’s true that exploratory and development drilling has increased across the board since 2000, the important fact is that actual domestic energy production has fallen to levels not seen since 1947 during the same period.

The Claim: “Energy companies are not using federal lands already open to energy development”

Some lawmakers state that oil companies currently hold millions of acres of leases that are not producing. This is true, but not for the reasons politicians would have you believe. It seems the lawmakers would have us believe that oil and gas exist beneath every acre of every lease the government issues; that obtaining a lease was a virtual guarantee that the lease holder would strike oil and gas, or both.

Obviously, that’s absurd. If it weren’t, I’d be on line at the Department of Interior trying to buy an acre or two for myself.

Unfortunately, there are no guarantees. Oil and gas might be found during the exploration phase of the lease, or it might not. This process, and those that involve satisfying all of the government requirements, defending against frivolous environmental lawsuits, and preparing to drill if energy is found can take a long as a decade.

The Truth & The Laws

Energy companies cannot “stockpile” leases (even the ones that are found to contain no oil or gas) in order to drive up prices:

• The Mineral Leasing Act (for onshore production): Section 17(e) stipulates that an oil company must have a producing well within 10 years or surrender the leases. Source: 30 U.S.C. 226(e)
• The Outer Continental Shelf Lands Act: (for offshore production): Stipulates that an oil company must produce energy between 5 to 10 years (in the government’s discretion) or surrender the lease. Source: 43 U.S.C. 1337(b)

The Hard Facts:

• 97 percent of Federal offshore areas are not leased.
• 94 percent of Federal onshore areas are not leased.

Getting Blood From a Turnip

After the offshore drilling moratorium was implemented in 1982 the Department of Interior could only issue leases for areas that had already been offered/leased before, or those areas with little or no economic energy potential. The exception was when Congress provided incentives to invest in Ultra Deep Waters in 1995 to stimulate production in areas that were previously too deep for our technology to reach.

Interest in American energy leasing declined after the moratorium. It remains low for the same reasons. If Congress were to open new areas to production, leasing would increase and so would domestic supplies of energy. Until then, the U.S. will simply be continuing its attempt to squeeze blood from a turnip.