Oil industry says new offshore lease terms will discourage bids

Oil industry leaders and their Capitol Hill allies complained Tuesday that the Obama administration’s plan to hike the minimum bid for offshore drilling leases and shorten the duration of those contracts will discourage companies from making bets on marginal fields in the Gulf of Mexico and ultimately curb domestic energy production.

At issue is the Interior Department’s decision to boost the minimum bid companies must offer for deep-water tracts from $37.50 per acre to $100, while simultaneously shrinking the length of most of those leases from 10 to seven years. The move is designed to spur companies to diligently develop any offshore areas they lease.

But the combination of shorter leases and higher bids could discourage oil and gas companies from pursuing areas where the potential returns are low, said Erik Milito, the upstream and industry operations group director for the American Petroleum Institute.

“There’s a lot of resources out there that are at the margins,” Milito said. “The industry is able to produce those in the current scheme, but we’re not sure we’re going to be able to do that (going forward). It’s ultimately going to lead to less production.”

Sen. Lisa Murkowski, R-Alaska, said the lease term changes make them less attractive and “risk reducing returns for taxpayers in the long term,” if fewer bids roll in.

The first test of that calculus will come on Dec. 14, when the administration auctions off 21 million acres of drilling leases in the western Gulf of Mexico. A sale of leases in the central Gulf — widely viewed as more attractive tracts — is slated for next spring.

The nation’s top offshore drilling regulator, Tommy Beaudreau, insisted Tuesday that the administration is rightly trying to spur companies to launch exploration instead of letting leases sit idle.

In his first public appearance as director of the Interior Department’s Bureau of Ocean Energy Management, Beaudreau said the higher bid requirement was rooted in an “incredibly robust analysis that showed acreage that had been sold for less than $100 per acre (over 15 years of lease sales) had experienced virtually no drilling whatsoever.”

“Not a single exploration well had been drilled in those areas. Companies had simply — because it was cheap — bought that acreage and done nothing with it,” Beaudreau told the Platts Energy Podium. Those tracts “had simply been bought too cheap and warehoused.”

Beaudreau noted that companies can get three-year extensions of seven-year offshore drilling leases when they prove there has been activity at the site.

“These terms are really designed to help spur production,” Beaudreau said. “It’s really a pro-development measure to encourage exploration and development early in leases so that discoveries can be made (and) production can be brought online.”

The shorter lease terms first applied during an auction of drilling rights in the Gulf in March 2010. But the administration is now applying them to all future offshore sales, including those proposed in a leasing plan for 2012 to 2017.

Interior Secretary Ken Salazar is set to defend the five-year offshore leasing plan during a House Natural Resources Committee hearing on Wednesday.

The proposal paves the way for 15 sales of offshore drilling leases, including a dozen auctions for tracts in the Gulf of Mexico and three for Arctic waters near Alaska. But the administration ruled out selling drilling leases for the Pacific and Atlantic coasts and an area of the eastern Gulf of Mexico where a congressional moratorium bans exploration.

API’s Milito insisted that it was shortsighted for the administration to leave out the eastern Gulf sale, given some lawmakers’ recent pushes to scrap the ban. If Congress were to lift the moratorium, it could take more than a year to complete required environmental studies to add an eastern Gulf sale to the 2012-2017 schedule.

“There’s no reason you can’t include a robust schedule of sales in this plan” — even for currently off-limits areas — and delay or cancel those auctions if desired later, Milito said.

In creating the offshore leasing blueprint, the Interior Department relied on 1970s-era geological data about potential oil and gas lurking off the East Coast.

The API argued in a letter to congressional leaders on Monday that seismic companies won’t have any incentive to do fresh research in the region without the promise of leases there that will lure energy companies to pay for the data.

Beaudreau dismissed that argument on Tuesday. The administration is on track to release an environmental impact statement assessing the effects of seismic research this summer.

“Our intention is not to take the mid and south Atlantic off the table in perpetuity,” Beaudreau said. “Quite the opposite, this is a considered strategy to develop information about the resource potential in the area.”

Beaudreau said he is confident that companies that have expressed interest in doing the seismic research will go forward with that work — and be able to market it to oil and gas producers that plan their exploration programs decades into the future.

API letter to Reid and Boehner on 5-year OCS plan