API: Calls for 'use it or lose it' distract from real issues

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Mar. 25 -- Charges by some congressional Democrats and members of the Obama administration that the oil and gas industry is not aggressively developing the federal leases it holds are a distraction from the real issues of government-imposed delays and obstacles, an American Petroleum Institute official said.

“The system is in place. There’s no need to change it,” API Upstream Director Erik Milito told reporters in a Mar. 24 teleconference. “We think this is just a distraction. The main focus should be producing oil. The administration is talking out of both sides of its mouth. It says that it wants us to produce on leases we own, but submits our companies to delays.”

US Sens. Robert Menendez (D-NJ) and Bill Nelson (D-Fla.) said on Mar. 16 that they would introduce a bill requiring oil and gas producers to report on how they plan to explore and develop millions of already leased federal acres, or pay an extra $4/acre yearly for land or water that wasn’t used. Less than 25% of the federal acreage already held by oil and gas companies actually is producing, they maintained.

Charging a fee for nonproducing federal onshore and offshore leases to encourage timelier production also is part of the Obama administrations proposed fiscal 2012 budget for the US Department of the Interior. US President Barack Obama also referred to this so-called “use it or lose it” concept during his Mar. 11 press conference.

The idea’s basic problem is that it does not recognize the time necessary for a well to start producing after a lease has been issued, Milito said. “If you look at production, particularly offshore, it can take at least 10 years before it begins. Ultimately, a company may drill a $100 million dry hole,” he explained. Calls for shorter leasing periods offshore also don’t make sense for this reason, he added.

‘Still important’
Onshore, rental and royalty rates need to be low enough to be competitive, he said. “Very small companies are trying to operate, create opportunities, and provide jobs, particularly in the [Rocky Mountains],” he noted. “When we see what they’ve had to take on with permit delays, leases withdrawals, and new policies, it’s remarkable that they’ve remained active. These won’t be the kind of discoveries which are occurring offshore, but they still are important.”

The fact that a lease is not producing does not necessarily make it idle, he continued. It may be because seismic work is still under way, because government permits have not been issued, because rigs and supporting resources still are being put into place, or because drilling is still going on, Milito said. Companies also turn in leases they consider potentially unproductive under an already existing “use it or lose it” law, and the government subsequently re-offers the tracts, he added.

“Real steps need to be taken, and that means issuing permits,” he declared. “Until companies see some action, companies will consider shifting their investments out of the United States to other parts of the world. Taking consideration of potential resources off the Atlantic and Pacific Coasts and eastern Gulf of Mexico off the table until 2017 is a significant decision.

“Onshore, there’s a lot of uncertainty,” Milito said. “It’s been more than a year since [the US Bureau of Land Management] announced there would be a new policy, and we still haven’t seen it. The administration also has created a new wild lands policy which is confusing.”

He said that the Government Accountability Office reported recently that 91% of federal onshore oil and gas leases aren’t being issued in a timely manner. “All of these decisions and discussions which are restricting and stopping development are frustrating. People in the Rockies want the jobs,” Milito said.

Contact Nick Snow at nicks@pennwell.com.

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