Ken Salazar's Offshore Charade Continues

The Interior Department’s lease sales this week in the Central Gulf of Mexico received the highest bids to explore for oil and gas there in at least three decades. This result seemed to surprise Secretary of Interior Salazar. But it should not come as a shock. Under Secretary Salazar’s leadership, the Department of Interior (DOI) has cancelled and delayed lease sales in the Gulf since the beginning of the Obama Administration, resulting in fewer opportunities to purchase leases, so demand has been backed up waiting for a sale.

An analogy is if chicken farmers didn’t sell chickens for nearly two years, and then suddenly opened a sale on them, you would expect a lot of chickens to be bought.  With petroleum representing 36 percent of our energy consumption, oil and gas companies purchased leases in the central Gulf that will help supply future petroleum demand. We now need to see how quickly the DOI can move the next stages of paperwork so that drilling can begin.

The 2007 to 2012 Lease Plan

The Outer Continental Shelf Lands Act (OCSLA) of 1953 provided the Secretary of the Interior with the authority to administer mineral exploration and development off our nation’s coastline. The Act empowers the Interior Secretary to provide oil and gas leases to the highest qualified bidder and establishes guidelines for implementing an oil and gas exploration and development program in the outer continental shelf (OCS). The program as later amended by the OCSLA of 1978 requires a series of 5-year plans that provide a schedule of oil and gas lease sales that the Secretary determines will best meet national energy needs for the 5-year period following its approval.[i]

The last approved 5-year plan for lease sales in the OCS was developed for the 5-year period between 2007 and 2012 during the Bush Administration. That plan called for 21 lease sales in the OCS, of which all but 6 would take place during the next administration.  Nine of those 15 planned to be held between 2009 and 2012 were cancelled by the Obama Administration as shown in the table below.  As a result of postponements and cancellations, FY 2011 contained no lease sales.

Table A: Proposed Final Program for 2007-2012—Lease Sale Schedule

Source: Proposed Final Program Outer Continental Shelf Oil and Gas Leasing Program 2007-2012

DOI’s first lease sale since the Deepwater Horizon accident in April 2010 took place in December 2011. That sale was for leases in the western Gulf of Mexico. It made available 21 million acres, had 20 companies participating, and received more than $337 million in high bids encompassing more than a million acres off Texas.[ii]

Its second lease sale after the April 2010 accident from the 2007 to 2012 plan was held on June 20, 2012, and combined a lease sale that was delayed for a year and another that had been originally scheduled to take place in 2012. The sale allowed bids in 39 million acres that included over 7,200 lease areas located from 3 to 230 statute miles off the coast with water depths ranging from 10 to 11,200 feet. The DOI received 593 bids for 454 lease areas covering more than 2.4 million acres from 56 companies. The bids totaled more than $2.6 billion, including $1.7 billion of high bids

Statoil bid $157 million[iii] to explore an area of the Mississippi Canyon portion of the central Gulf that is the highest bid in a central Gulf lease sale since 1983. BP’s Macondo well was drilled in roughly 5,000 feet of water in Mississippi Canyon block 252, about 41 miles off the Louisiana coast. BP submitted high bids on 43 lease blocks; Shell submitted the highest total amount in bonus bids, $406.5 million, on 24 lease areas. If fully developed, the government estimates that these leases could result in the production of up to 1.6 billion barrels of oil and six trillion cubic feet of natural gas. [iv]

The total raised by the winning bids was the fourth-largest for a lease sale in the central Gulf, which includes the waters off the coast of Louisiana, Mississippi and western Alabama. The previous auction in the central Gulf, about a month before the April 2010 accident, raised $949.3 million.[v] However, analysts with Simmons & Co. International believe that this most recent lease sale was “less than robust,” noting that just 6 percent of the tracts available for lease received bids, which compared with 7 percent in a 2010 central Gulf lease sale, and an average of 9 percent over the previous five central Gulf sales.

Besides paying for the leases, companies will make royalty payments based on the oil and gas they produce, as well as pay corporate taxes while providing jobs for Americans who will in turn pay taxes.

The Obama Administration’s Lease Plans

When oil prices spiked in July, 2008, President Bush responded by lifting the presidential moratorium initiated by his father and extended by President Clinton.  Congress lifted its own moratorium later in the year, reopening the 85 percent of the lower 48 state OCS that had been embargoed from use by Americans for 27 years. President Bush developed a new 5-year plan covering 2010 to 2015 that included the new offshore areas which had previously been under the Congressional and Executive Moratoria. That draft plan was ready for the Obama Administration in January 2009 and included 4 areas off Alaska, 2 areas off the Pacific coast, and 3 areas off the Atlantic coast.[vi]

In February 2009, shortly after taking office, President Obama’s Department of Interior announced that it was delaying that lease plan for 6 months. Secretary Salazar began a public tour soliciting opinion which had already been done when President Bush announced the plan. In November 2009 and again in March 2010, Secretary Salazar announced that a new lease plan for the OCS would not occur until 2012.

In March, 2010 – less than 1 month before the Macondo well blowout — President Obama announced his plans for future OCS exploration through the end of 2012 and the guidance that would be used to develop the new 2012 to2017 plan.   This plan was actually a huge step backward from the proposed 2010 to 2015 plan, in that it dropped numerous areas from consideration for leasing.  Still, it did include some small additions to leasing in areas that were previously off limits due to the moratoria. This plan was abandoned quietly after the Macondo blowout, leading to the cancellation of the leases mentioned earlier.

On November 8, 2011, the Obama Administration announced its new lease plan for 2012 to 2017 that closes the majority of the outer continental shelf to new energy production only allowing lease sales in areas that were already open to drilling. It includes lease sales in the Central and Western Gulf of Mexico, but leaves out the entire Atlantic and Pacific coasts and the vast majority of OCS areas off Alaska. In the past, lease plans for OCS development averaged five lease sales a year. The proposed 2012 to2017 plan cuts those lease sale offerings in half, requires higher minimum bids and shorter lease periods, and reduces lease terms to 5 or 7 years.[vii]  The plan is designed as if the moratoria lifted by President Bush and Congress in 2008 would be in place through 2017, because no areas are included for exploration that had been off limits throughout the decades of the moratoria.

For maps that compare the areas that can be leased to those that are in the proposed plan, click here.

Conclusion

Secretary Salazar is touting that the Gulf is back, when in essence lease sales have been few and far between in the Gulf of Mexico while President Obama has been in office. His administration cancelled as many as nine out of the 15 lease sales that were part of the 2007 to 2012 plan put in place by the Bush Administration and that covered the period that President Obama was in office.  While oil companies have purchased leases both in this most recent sale in the central Gulf and in the one last December in the western Gulf, it remains to be seen how soon DOI will move forward with the necessary permits so that drilling can actually begin.  Lastly, with the 2012 to 2017 OCS plan, the moratorium that was lifted for the vast majority of the OCS is back in place.  America’s energy policy under Secretary Salazar continues to be embargoing its own energy from its own people.