Among the issues most commonly discussed are individuality, the rights of the individual, the limits of legitimate government, morality, history, economics, government policy, science, business, education, health care, energy, and man-made global warming evaluations. My posts are aimed at intelligent and rational individuals, whose comments are very welcome.

"No matter how vast your knowledge or how modest, it is your own mind that has to acquire it." Ayn Rand

"Observe that the 'haves' are those who have freedom, and that it is freedom that the 'have-nots' have not." Ayn Rand

"The virtue involved in helping those one loves is not 'selflessness' or 'sacrifice', but integrity." Ayn Rand

15 August 2008

68 million acres of non-producing oil leases

One of the most common arguments tossed at voters as the reason why Congress should continue to disallow the production and exploration of oil and gas on federal lands and off-shore areas is that the oil companies already have 68 million acres of non-producing oil leases. This number seems to present implications to the uninformed similar to the statement that 47 million Americans are uninsured. It begs an examination by anyone of intelligence or mental diligence.

I was particularly suspicious of the implications because I worked on two seismic exploration crews, in a Red River oilfield, and for a pipeline company during my summers in college. I had retained an interest in the oil industry and read about it in business magazines and other publications over the years since.

Congress does not allow drilling in 60% of onshore federal oil and gas prospects or in 85% of the Outer Continental Shelf prospects, according to a commentary by Newt Gingrich and Roy Innis that appeared on 13 August 2008 in the Washington Times. Some Democrats have pointed out that the oil companies are drilling record numbers of holes and more and more of them are coming up dry, so why let them drill in these off-limits areas? We are supposed to think that the oil companies would then just drill dry holes in all of the opened new areas also. In fact, a wee bit of thought might suggest that the oil companies have been working very hard against uphill odds to find every little bucket of oil they can in highly explored areas, when they should be allowed to find and develop larger and more economical oil and gas in those areas that have been kept off-limits. In some cases, we actually know that there is probably a great deal of oil in some of those now off-limit locations. They certainly should be thoroughly explored.

Now, if oil companies have been scouring those other areas they can drill in so hard, why wouldn't they do the same in the 68 million acres of non-productive oil leases? First, when an oil company is offered a chance to bid for an oil lease, the lands are very often not even close to adequately explored for oil. Companies have to make educated guesses on less than adequate information. If they win the oil lease, they have to use seismic, magnetic, and other techniques to map out the geological formations underground. Then they will drill a $1 to $5 million well if the land is on-shore or a $25 to $100 million well if in deep water, which they will only do if the geological formations look really favorable. Gingrich and Innis note that one in three on-shore and one in 5 deep water exploratory wells give promising results. For those few which are promising, more work is required before oil is produced. The extent of the field has to be determined with more wells being drilled. Production facilities must be built, brought to the site, and installed. While all of this is going on, the seismic and drilling operations are protested and legal actions launched to stop the work. While these obstructionist tactics continue, the oil company is paying leasing fees and commonly incurring many other expenses owing to the delays.

Is it any wonder that 86 million acres of oil leases are non-producing. Much of that land has no economically recoverable oil. Some of it is still in the long process of exploration and development. The oil companies who hope to develop an oil field face many inscrutable risks. There may be oil, but there may not be enough of it. The oil may be loaded with sulfur, rather than the more valuable sweet crude oil. Huge storms may damage the facilities they are building in off-shore sites. A court may order them to stop working, causing them to lose everything already invested. A field that is judged economical when oil is selling at over $100 per barrel may not be if the future price of oil falls below that. If Saudi Arabia ramps up its production for a few years, the oil company developing the new field might lose tons of money. Or, Congress might choose to slap a so-called windfall profits tax on the oil companies. If so, the money invested in the field may be lost or at least become a bad investment. Congress can also change the tax laws in other respects at any time and that may upset the oil companies' calculations on what oil fields can justify their investment. Prudence dictates that they do a thorough job of exploring any oil field before committing huge sums of further money to bring the field to production.

Gingrich and Innis give an example. Shell Oil and partners leased an area 200 miles off the Texas coast with 7,800 feet of water over it. For 5 years they evaluated the area and then drilled several dry holes, before hitting an oil pool in 2002. At a cost of $100,000,000 each, three appraisal wells were drilled and confirmed that the field was a major find. In 2006, a huge floating platform and drilling system was ordered and production is expected in 2010. This lease is classified as non-producing, despite the fact the oil companies have spent more than $3 billion on it. The Democrats make them appear to be inactive on this oil lease. Now, is that disgusting or what?

The Democrats who oppose Americans having reasonably priced and available energy are masters of demagoguery. They play fast and furious upon people's ignorance and they are very good at planting false suggestions. They do this with the 47 million Americans uninsured and they are doing this with the 68 million acres of non-producing oil leases. We must not let them play us for fools! Fight back and demand that they respect your intelligence. Tell them that you expect them to stop lying games and get out of the way and off the backs of the producers in America!


Miss Breeziness said...

Hi Charles, sorry for the lack of writing for a while. But this was a good post. Yeah, I totally agree with the part about getting off the backs of the oil producers (AND EVERY KIND OF PRODUCER IN GENERAL, DARN IT.)

I hope the new Shell oil field becomes a success. It's due to start up around the same time I'll become a teacher, hopefully. :) Yeah, I've applied to do a one-year course that will let me become a science teacher. That is, if the politically correctness of the lessons don't drive me NUTS first. :D

The trouble with liberals is that the best of them don't understand economics, and the worst of them don't even care. (e.g. that politician you mentioned who would oppose more domestic drilling until prices hit $10 a gallon!) Darn it, loads of them literally don't understand why people charge money for their work in the first place.

Ironically I've written a post about big oil companies and windfall taxes ages ago. You probably won't agree with everything in it, and I may have made a few economical mistakes of my own. But the article had made me angry, so I had to write a reply to it.

Charles R. Anderson, Ph.D. said...

Hi Miss Breeziness,

Thanks for your comment. A version of this post has now become a
at The Atlasphere and has generated quite a few comments over there. Because I have taken time to respond to many of them in individual e-mails, I have written less here than I have intended.