Why are oil companies sitting on idle leases?
If you’ve been following the energy debate, you’ve probably heard politician cries of “Use it or Lose it.” These claims allege that the oil and natural gas industry is “sitting on” approximately 60 million acres of oil and gas leases that are going unused.
A few key points to note:
- Companies pay millions of dollars to acquire leases as well as fees for renting the leases― and the leases have a finite term. Each lease costs at least $250,000 and some have gone for more than $100 million. If a company does not produce oil or gas from a lease then they are required to return it to the government. In other words, "use it or lose it" is already the law.
- The level of industry capital expenditures to develop these leases demonstrates their commitment to find oil and gas. For example, the industry spent more than $37 billion to develop deepwater Gulf leases issued between 1996 and 2000. In addition, they paid more than $4 billion in bonus bids to obtain those leases in the first place. With that level of investment, it is hard to argue that the industry is not working hard to develop the leases it owns.
- Companies purchase leases for the right to explore for the resources. Companies don't know if a lease actually contains oil or natural gas until they drill an exploratory well. Companies purchase a large portfolio of leases to give them the greatest opportunity to find oil and natural gas. They work hard to survey and study leases with the hope that they can narrow the list down to a subset that have the best likelihood of actually containing oil or natural gas. However, it is not uncommon for a company to spend $100 million to drill a well and find no oil or natural gas. In fact, companies drill more wells that have no oil or natural gas than wells that actually do.
- Finally, these arguments simply ignore the basics of the oil and natural gas industry. Production with both onshore and offshore leases is a time-consuming process. In general, from lease purchase to first production can take anywhere from seven to 10 years in areas that have existing infrastructure.
As you can see in the timelines above, current U.S. production gains date to a process that began a decade ago―or more. This has implications for future production, given current federal data that shows leasing acreage on federal lands at its lowest point since 2001―declining from 47 million acres in 2008 to 38 million acres in 2011―and the number of leases has also declined. In short, the fewer leases the oil and natural gas industry is granted today means less energy available to us tomorrow.
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