Ignorant of how petroleum exploration is conducted, and apparently taking its lead from the anti-development Wildnerness Society, the Associated Press misinterprets what's going on with oil and gas leases on federal land.
Despite soaring oil and gas prices, oil companies and individuals who own nearly 30 million acres of nonproducing federal oil and gas leases have made little effort to transform them into energy producers, federal records show.An analysis of Bureau of Land Management records obtained under the Freedom of Information Act found that 98 percent of the more than 33,000 leases still considered nonproducing by the BLM have never had an exploratory well drilled.
Ninety-seven percent have never had a single application for a permit to drill filed with the BLM.
Industry officials argue that those numbers are misleading because many nonproducing leases have been joined with other leases into larger production units where active exploration is under way, and in many such cases the units are producing.
But even after discounting such leases, there is no indication in BLM records of any oil or gas exploration on 26 million acres of federal land under lease, or two-thirds of all federal leased acreage. A little more than 10 million acres of federal oil and gas leases are listed as producing; another 4 million acres have been explored to some degree but still are not producing.
Environmentalists say the lack of exploration belies the Bush administration's push to open even more federal land to oil and gas development, particularly in environmentally sensitive areas. A recent Wilderness Society analysis of new BLM management plans in Utah, Wyoming, Montana and New Mexico concluded that 80 percent of the 6 million acres of environmentally sensitive land covered by the plans would be opened to oil and gas leasing.
The greens can't help but look for the nefarious conspiracy behind the scenes.
Pete Morton, a Wilderness Society economist, said the administration's push for more oil and gas leasing of federal lands is more about boosting the financial prospects of oil companies than producing more oil and gas."Share prices are based on rational expectations of future earnings potential," Morton said. "If companies can increase that potential, the expectations, and hence share price, by leasing more acres, then it may make economic sense to lease more acres regardless of whether the wells will ever be drilled and/or whether the wells drilled become economically viable."
AP does at least allow the industry to reply.
Oil and gas companies "don't make money and profits by sitting on leases," said William F. Whitsett, president of the Domestic Petroleum Council. "They go after their best prospects. The acreage drilled first is a function of expectation of what they believe they can discover and produce."Oil companies and other owners of nonproducing leases are paying the government more than $40 million a year in rent.
"They're actively studying those leases and trying to determine the best course of action in terms of timing to develop those leases," said Mark Smith, executive director of the Independent Petroleum Association of the Mountain States. "You wouldn't spend that kind of money just to hold on to them. It doesn't make sense."
In fact, the overwhelming majority of all land leased for exploration will never be drilled or produced. Leases have to be assembled before the industry can justify the cost of detailed geologic and geophysical studies, most of which will end of negative.
Oddly, AP and the Wilderness Society would seem to be calling for more aggressive exploitation of federal lands, rather than industry benignly sitting on the leases. Perhaps the industry response should be a pledge to conduct dramatically more aggressive drilling.
Unfortunately such a pledge would be hard to fulfill. The domestic industry has suffered since the 1980s; millions of jobs have been lost. A recent article in World Oil magazine shows that rig capacity is tight. (Note that the rig count was over 4,000 in the early 1980s.)
As in 1997 and 2001, this latest drilling cycle is characterized by increased waiting-on-rig availability, rising prices for drilling services, and an anticipated decline in rig efficiency, as marginal labor and equipment is pressed into service to meet high drilling services demand.Using RigData numbers, the US land market had 1,587 rigs that drilled one or more wells in the last few months of 2003. In January 2004, the average rig count was 1,231, yielding a utilization of 77.6%. At the end of May, the number of rigs that had drilled one or more wells in the preceding months rose to 1,672 units. Average rig count for May was 1,379 units, or utilization of 82.5%.
An old industry rule of thumb suggests that day rates begin to rise when utilization reaches 80%. This appears to be confirmed in the current market. Utilization rose above 80% in late March and early April 2004. US rig rates moved up early in the second quarter, increasing $500 a day by the end of June.
Trends point to an impending collision between rising demand and a finite supply of drilling units, further hampered by the first inklings of labor shortages in the US land market. The cap on rig availability - and rig count - resides with the two largest publicly held land drilling contractors, who now control essentially all remaining rig capacity. As a result, expect rig rates to accelerate, moving up from daily increases that ranged from $250 to $500 during second quarter 2004, into the $500 to $1,000 per day range by the 4th quarter 2004, particularly as the year-end approaches and operators begin tax-influenced spending or face lease-stipulated deadlines.
Related:
Response from the Domestic Petroleum Council
Baker Hughes rig count statistics
Bureau of Land Management
The Wilderness Society