Investments in non-producing leases

Energy Tomorrow:

The facts about non-producing federal leases:

CLAIM: Oil and natural gas companies are given leases by the government and purposely don’t produce from them to increase prices.

FACT: Companies pay billions of dollars for the right to explore on federal lands. If the company does not produce within the lease term, it must give the lease back to the government, and the company does not recover the billions of dollars it may have invested.

CLAIM: Companies let many of their leases sit idle and don’t produce them

FACT: Companies actively develop their leases – but not every lease contains oil or natural gas in commercial quantities. In many cases, the so-called “idle leases” are not idle at all; they are under geologic evaluation or in development and could be an important source of domestic supply. However, this does not mean all leases have the potential to produce. Companies can evaluate leases for several years only to determine that they do not contain oil or natural gas in commercial quantities. The road to bring the oil and natural gas to market -- obtaining the lease, evaluation, exploration and production -- is a long and complicated one.

CLAIM: If the lease doesn’t contain oil or natural gas, then the company shouldn’t have bought it.

FACT: There are tremendous risks and challenges involved in finding and producing oil and natural gas. There is no guarantee that a lease will even contain hydrocarbons. It is not unusual for a company to spend in excess of $100 million only to drill a dry hole. A company usually has only has limited knowledge of resource potential when it buys a lease. Only after the lease is acquired, will the company be in the position to evaluate it, usually with a very costly seismic survey followed by an exploration well.

CLAIM: There’s absolutely no reason for a company not to produce if it finds oil or gas on the lease.

FACT: If the company finds resources in commercial quantities, it will produce the lease. But there can sometimes be delays – often as long as seven to 10 years – for environmental and engineering studies, to acquire permits, install production facilities (or platforms for offshore leases) and build the necessary infrastructure to bring the resources to market. Litigation, landowner disputes and regulatory hurdles can also delay the process.

CLAIM: The vast majority of federal and gas resources are already available for development.

FACT: In the Lower 48 states, about 85 percent of the Outer Continental Shelf and 67 percent of onshore federal lands are off-limits or facing significant restrictions to development. There is no way, at this stage, to determine exactly the extent of the resources off-limits because many of these areas have not been subject to inventory studies in decades.

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There is more.

I recently posted on my own experience with a non-producing lease on my own property. While I was paid for the opportunity to see if there were commercial quantities of oil or gas under my property, the companies who paid me for that opportunity were at least equally disappointed that they did not discover commercial quantities of oil and gas. It is a business risk they take with all leases and it is amazing that Democrats show so little comprehension of such a vital industry.

It makes no sense not to make all federally controlled areas available for exploration and development. With the changes in the price of oil some properties that were not commercially feasible may now be feasible. We need to overcome this irrational hatred of energy by Democrats. It is important to our national security and to our financial security.

If these areas that are now off limits were found to have commercial quantities of oil and gas the royalties and increased income taxes paid on it would substantially increase the revenues to the government. Some have estimated the amount at over $2 trillion at current prices. Even if the new supply drove down prices the revenue would still be too significant to ignore because of hydrocarbon paranoia.