‘Drill It or Lose It’ a Losing Proposal
From the unsuccessful Responsible Federal Oil and Gas Lease Act, or H.R. 6251: “To prohibit the Secretary of the Interior from issuing new federal oil and gas leases to holders of existing leases who do not diligently develop the lands subject to such existing leases or relinquish such leases, and for other purposes.”
As the argument continues on the national scene over whether to open up more American-owned acreage to drilling, there’s been no lack of political rhetoric calling for the companies to drill instead on the “idle” leases already in their inventory.
"Drill it or lose it” misunderstandings abound, including such rhetoric as:
- The federal government gave the leases to the companies.
- Companies intentionally let blocks go idle.
- Companies are paid by the government to not drill their leases.
Etc., etc., etc.
“All these statements are made by people who do not understand the exploration/exploitation/development process we go through,” said Charles Goodson, chairman, CEO and president at PetroQuest Energy. “It’s like asking why don’t you build a rocket and go to Mars tomorrow.”
In fact, the industry already operates in a use-it-or-lose-it system for all practical purposes, according to AAPG member Greg Simmons, manager of deepwater Gulf at Devon Energy.
“After we lease something in the Gulf of Mexico, we have five years on the shelf and 10 years in the deepwater to get our prospects to a mature, drill-ready status,” Simmons said. “Then we have to get exploration permits, appraise our discoveries and then plan for development.
“Our current exploration costs exceed $100 million per well,” Simmons said, “so we need to be diligent that first of all we’re drilling the very best prospects in our inventory and, second, that we’re drilling them in the right place.”
It’s not unusual for companies to lack the capital and the drilling rigs to drill all projects in inventory before the leases expire. In fact, there are only about 30 deepwater rigs working in the GOM, with another 20 scheduled for delivery over the next few years.
The lack of resources to drill all the prospects is the reason the last few lease sales have been such large events, according to Simmons.
“In the four sales since August 2007, over 1,600 blocks were leased,” he said. “That’s about 10 million acres leased in the Gulf of Mexico over the last calendar year. That was at an industry cost of $7 billion we paid to lease those acres.
“The vast majority of that entailed leasing acreage that was available for the first time in a lease sale since it had either expired or been relinquished voluntarily,” Simmons noted. “Given the choice, I’m sure the previous leaseholders would have loved to have hung on to the acreage, but they had no choice.
“It was very valuable to them, but they had to let it go back into the MMS inventory of acres that could be leased,” Simmons said. “In many instances, the companies re-leased acreage they previously held, but only if they were successful in the competitive bidding forum – it’s a sealed competitive bidding.”
Simmons emphasized that the federal treasury already has collected money on any expired acreage turned back to the MMS. The treasury collects again each time the acreage is re-leased.
Currently, there are 40 million acres under lease in the GOM, according to Simmons. Last year, about 25 percent of this amount, or 10 million acres, was acreage that had been turned over and re-leased.
“There’s a perception that much of the acreage is being held as inactive leases,” Simmons said. “For all those leases being held by industry, there are annual payments required, royalty payments if producing and rentals prior to acreage becoming productive.
This is not chump change.
“The most recent information I have is for the fiscal year 2006 from a Congressional Research Service report, which notes federal revenues from all U.S. offshore leases in 2006 was $7.6 billion,” Simmons said, “which is a combination of both royalties and rental payments.
“So if you think of it from a fiduciary responsibility we have to our shareholders, it doesn’t make sense we would hang on to acreage at a high cost if we have no future plans for that acreage,” Simmons said. “That’s why we go through an annual or semi-annual process of periodically looking at our acreage, and we voluntarily give back leases to the MMS if we have no plans for them because it lets us manage the expense we have for annual rental payments.
“Really, the whole idea of inactive leases is a misunderstanding.”