Industry: No such thing as ‘idle leases’

In his speech Wednesday outlining a broad national energy strategy, President Obama cited an Interior Department report that says the oil and gas industry has vast numbers of leases sitting idle.

The study says 70 percent of federal Gulf of Mexico leases and 57 percent of federal onshore leases “are not producing or not subject to approved or pending exploration or development plans.”

The oil and gas industry has heard this before and was ready with the reply: There really is not such thing as an idle lease.

In a press call this week the American Petroleum Institute chief lobbyist Erik Milito depicted the report as blind and deaf to how companies go about exploring for oil and gas.

“The administration’s report assumes that oil and natural gas are spread uniformly across the lease acreage – suggesting that 70 percent of idle leases equates to 70 percent idled resources. As if finding oil was no more difficult than sticking a pipe in the ground,” Milito said.

Percentage of federal lease acres producing oil and/or gas, by state (March 2011, U.S. Department of the Interior)

Rather, when the government puts up many hundreds of thousands of acres at a time in lease sales, there’s no way all of that acreage will actually get drilled – onshore wells can cost tens of millions of dollars to drill and offshore wells hundreds of millions. And even after spending millions shooting and analyzing seismic data, there’s no guarantee a drilled well will be a successful one.

Knowing exactly where the good spots are takes a lot of work, so the practice is to use the varying amounts of pre-lease data available to put bids on as many of the acres as you believe/hope/pray will have a high probability of success.

Over on Exxon Mobil’s company blog, Ken Cohen notes that the DOI report defines “inactive leases” as areas that “may be subject to certain ancillary activities such as geophysical and geotechnical analysis, including seismic and other types of surveys.”

Did they just call a seismic survey – one of the most fundamental activities of finding oil and natural gas – ancillary? Meaning it’s not essential, secondary in nature, or extra activity?

Yes, they did. And that proves my point. You don’t have to be an industry expert to know that seismic surveys – along with a whole host of other activities – are among the most essential activities in oil and gas exploration, and anything but a sign of “inactivity.”

Exxon has more like 93 percent of its leased acreage under production or being studied and analyzed in some form, Cohen said.

Industry also finds it a bit ironic that the Department of Interior would criticize it for a lack of Gulf drilling activity given the recent drilling moratorium and the slow resumption of permitting.

“This is like leasing an apartment from the government for $20 million dollars and the government refuses to give you the keys to the apartment – then the government proceeds to complain because you are not occupying the premises,” API’s Milito said.

In all likelihood the Department of Interior knew all this already. But in the always heated/politicized war of words over energy policy, the numbers in the lease report look damning at first blush and provide good fodder for firing up the faithful.

Now before you go jumping up and down about regulators injecting politics and deceptive information into the debate, don’t forget that’s a two-way street.

Mentioning drilling permits and current pump prices in the same breath is misleading, as a permit issued today won’t really affect the supply/demand balance for months or years.

And API has no problem dropping mentions of Brazil into its talking points to whip-up the grassroots frenzy over the Obama/George Soros/Petrobras conspiracy. It lacks context (the $2 billion Ex-Im Bank loan from a few years ago was to have Brazilians buy U.S. equipment and services) and avoids the notion that increased Brazilian oil production has been touted by government and industry alike as a friendlier alternative to Middle Eastern oil.

Don’t forget: no one – not the feds or the industry – is really talking about U.S. “energy independence,” as in self-sufficiency. That ship has sailed and it’s widely accepted we’re not going to produce all the energy we consume.

The language instead is all about “energy security,” meaning we should not be held hostage to hostile sources.