GINGRICH/INNIS: Idle leases - or addled minds?

COMMENTARY:

Sen. Jeff Bingaman, Rep. Nick Rahall, House Speaker Nancy Pelosi and other members of Congress who oppose producing more American oil are in a bind.

They know voters are hurting from high gas prices and overwhelmingly want the government to allow more American oil production. But they can’t side with the American people and risk upsetting their left-wing base. So they needed a way to make us think they support more drilling - while effectively preventing us from ever drilling a single new well.

They think they’ve found a solution: a proposed “use it or lose it” law on federal leases for energy exploration. Messrs. Bingaman, Rahall and fellow drilling opponents accuse the oil industry of “sitting on” 68 million acres of “nonproducing” leased land. They want to force energy companies to “use” this leased land within 10 years - or lose all exploration and drilling rights.

America can only hope the proposed law is Mr. Bingaman and Mr. Rahall’s clumsy attempt at political jujitsu. The alternative is that the politicians in charge of committees that determine U.S. energy policy are confused and ludicrously disconnected from reality.

First, lease agreements already require timely use of leased land. The 1992 Comprehensive Energy Policy Act requires energy companies to comply with lease provisions, and explore expeditiously, or risk forfeiture of the lease. So the Bingaman-Rahall “solution” effectively duplicates current law.

Second, and more disturbingly, Mr. Bingaman and Mr. Rahall’s groundless accusation and proposed legislation rely on the absurd assumption that every acre of land leased by the government contains oil. Obviously, that’s not the case.

The truth is, finding oil is a long, complex, cumbersome, expensive process. It starts with an idea - about what kinds of geologic structures are likely to hold this vital resource. Based on that idea, companies purchase leases: agreements that allow them to test their ideas, and hopefully find and produce oil and gas from leased properties.

Then geologists look at existing data and conduct seismic, magnetic and geophysical tests of the leased areas. They create detailed 3-D computer models of what subsurface rock formations look like, and whether there might be any “traps” that could hold petroleum.

Most of the time, all this painstaking, expensive initial analysis concludes that the likelihood is too small to justify drilling an exploratory well, since the cost of a single well can run $1 million to $5 million onshore, and $25 million to $100 million in deep offshore waters. Only 1 in 3 onshore wells finds enough oil or gas to produce profitably; in deep water, only 1 in 5 wells is commercial. Thus, only a small percentage of the leased acres end up producing oil.

This is important because it means most of those 68 million acres Messrs. Bingaman and Rahall want to force oil companies to drill actually don’t have enough oil to make it worth drilling. Either they know that, and are trying to deceive us; or they don’t know it, because they haven’t done their homework.

Third, if a commercial discovery is made, more wells must be drilled, to delineate the shape and extent of the deposit. Production facilities and pipelines must be designed, built, brought to the site and installed. Only after oil or gas is actually flowing does the lease become “producing.”

In one example, Shell Oil and its partners leased an area in 7,800 feet of water 200 miles off the Texas coast. They spent five years exploring and evaluating the area, punched several “dry holes,” and finally drilled a discovery well in 2002. Three appraisal wells (at $100 million apiece) confirmed a major field, and in 2006 the company ordered a huge floating platform and pipeline system that will initiate production in 2010. Total investment: more than $3 billion.

That’s hardly “sitting on their leases.” But those leases will be “nonproducing” until 2010. Clearly, a “use it or lose it” law will not change these hard realities.

Further complications often stymie energy companies from obtaining and using leased land. Every step in the process must be preceded by environmental studies, oil spill response plans, onsite inspections, and permits. The process takes years, and every step is subject to delays, challenges - and litigation.

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