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.

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.

Explaining Exploration and Production Timelines (Offshore)
http://api.org/Newsroom/upload/51073205_Explaining_Exploration_and_Production_Timelines_Offshore1.pdf

A lease is only a rental agreement with no guarantee that the leased area contains any oil or The time line from lease to production in the OCS can vary from four to ten years depending on water depth at the lease location, the drilling depth needed to reach the target reservoir, the distance from shore and from infrastructure, the geological characteristics of the reservoir and complexity of production facilities design. Capital costs can be considerable for OCS projects, particularly those in deepwater. Marine seismic surveys can cost upwards of $200,000 per day.

The cost of offshore exploratory wells can range from $25 million to more than $100 million for some deepwater prospects. It is not unusual for a company to spend more than $100 million on an exploratory well only to come up empty with a “dry hole.” If a company actually finds commercial quantities of oil or natural gas, the subsequent design and installation of the deepwater production facilities may cost in excess of $1 billion to design and install.natural gas. In fact, most leased areas do not contain oil and gas in commercial quantities.

In this context, the timeline for OCS exploration and production can include:

• Six months to a year for MMS administration and execution of lease sales in unleased areas.

• One year for preliminary geological investigation and selection of areas of interest for additional seismic data acquisition.

• One year to two years to acquire and to process 3D (and new wide azimuth) seismic data, and to identify drillable prospects from this data.

• As much as a year or more to contract and schedule a drilling rig.

• Six to 10 months for drilling and completion of an exploratory well.

• Six months to a year for follow up evaluation of drilling results, which can include drilling a sidetrack well.

• Another two to three years for additional delineation drilling, and formulation of a plan for reservoir development if the exploratory well proves successful. During this time, the company also is working on pre-permit studies, permitting, and design and procurement for production facilities, including surface and subsurface equipment and systems,

• One year or more for facilities installation, followed by development drilling, which may take from one to two additional years. During this period, the company is involved in design, permitting, engineering, procurement and installation of a pipeline or offshore mooring system to bring the production to market.

One recent example is Anadarko’s Independence Hub, a natural gas facility located in 8,000 ft of water about 120 miles from Mississippi. The lease was purchased in the Sale 181 area in December 2001. The first exploratory well was drilled in 2003, with first production seen in mid-2007.

Way ahead of y’all:

Two-thirds of oil and gas leases in Gulf inactive
Tuesday, March 29, 2011 12:37:05 PM · 3 of 3
Uncle Miltie to safetysign
Three points:

1) The Administration has illegally (according to several judges) stopped issuing permits to drill or work in the gulf since the BP spill.

2) Some leases are for unproductive sites and will never be worked.

3) Other leases are for sites that have not completed an assessment of where to drill, or plan to do so. They are getting ready, but are not ready yet.

The left always drags out this “nobody’s drilling where we let them” canard when gas prices rise.

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