Idle Leases and Yogi Berra, Again

Mark Green
Posted October 22, 2012

It’s tempting – while contemplating a rebuttal to the latest claim that oil companies pay billions of dollars to “sit” on federal oil and natural gas leases in the Gulf of Mexico – to simply refer to previous rebuttals when the claim was made in 2009 and again last year. But then we wouldn’t get to summon our colorful Yogi Berra image from the bullpen:

Yeah, it really is déjà vu all over again on this one – some House Democrats claiming oil companies are sitting on huge energy reserves while asking for more areas to be opened up for drilling. Here are some big reasons why the claim is as absurd as some of the beloved Yankee catcher’s truisms:

• Capital expenditures: The oil and natural gas industry spent more than $230 billion in 2010 and more than $260 billion in 2011 and is on track to spend more than $275 billion on energy exploration and development. Companies answer to shareholders – including millions of Americans with pension funds, individual investments, mutual funds and IRAs, the true owners of Big Oil – who wouldn’t be happy about spending billions on leases just to keep them idle.
• “Use it or lose it” already exists: If companies don’t produce oil or natural gas on a federal lease the lease must be returned to the government. Companies are required under leasing regulations to develop the lease expeditiously – between five- and 10-year terms, depending on the area – or return it to the government. Generally, leases that don’t produce by the end of their term are relinquished to the government, which can re-lease them.
• Rental fees: Companies pay these during the pre-production phase of development, and they can exceed $100,000 a year on a number of leases. Rental rates increase in the later years of a lease to encourage diligent development. Again, think shareholders.

Now, a little Oil and Natural Gas Leasing 101:

• Exploratory drilling occurs only when a geologic formation shows potential, which often is realized after a lease has been bought. Remember, leases represent millions of dollars to acquire and maintain yet, because of competition, a company may spend money to capture a lease without knowing its full resource potential.
• Before drilling, seismic studies often are ordered to help determine whether a commercial quantity of oil and/or natural gas is present. Even so, it’s not unusual 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. We’ve called on the infographic below, like Yogi, before: 
  
  
• Some leases aren’t drilled because their potential can be determined by exploratory wells drilled by the company at nearby leases. Companies often bid on several contiguous leases in a geographic area they believe will have oil and natural gas. A strategically placed exploratory well on a single lease may provide enough data to determine the resource potential of many leases.
• Most importantly, in a number of cases leases aren’t being drilled because the government hasn’t approved an exploration plan – yet those leases are still listed as “idle.”
• Also classified as “idle”: Leases that are undergoing seismic testing or that are awaiting the arrival of drilling equipment.

The Houston Chronicle’s Loren Steffy:

"Obama’s 'use it or lose it policy' has always been more political show than effective policy. Most companies lease federal lands for 10 years or less, and leasing land doesn’t mean there’s oil or gas there that can be economically produced. A company leases the land because it believes it can produce oil or gas there in commercial quantities. There aren’t any guarantees. The lease, though, is a contract, so it really is up to the companies to decide, within the term of the lease, when it wants to drill. And it’s in companies’ best interests to drill when it would be most profitable for them. In the meantime, they’re still paying rent on the land and adhering to the terms of their contract."

Some of the folks raising this canard probably know these things. Yet they would rather run out a phony issue than increase access to U.S. energy resources – which is what we need to create jobs and strengthen our energy security. That’s fine. It’s why we keep Yogi warmed up and loose in the bullpen.