Rep. Markey's Many Myths: Report Much Ado About Nothing

The report is new, but the content is not.  This week, Representative Ed Markey (D-Mass.) released a report rehashing old claims that oil and gas companies are “stockpiling” federal energy leases, ostensibly as part of a conspiracy to manipulate prices by keeping supply low.  Markey, who is Ranking Member of the House Natural Resources Committee, argues that the “Use it or Lose It” report shows that new energy-rich areas like Alaska should not be opened for drilling, because oil and gas companies already have enough idle leases that are not being utilized.  The report, however, fails to make a key distinction: that some leases are more valuable than others, and that the most valuable areas of the federal land estate all aren’t being offered for lease.  An analysis of the report’s central claims is below.

MARKEY’s MYTH: We don’t need to open more areas for exploration, because companies already have enough leases.

FACT: Just because a lease is bought, doesn’t mean it will yield oil and gas.

Companies often purchase leases for millions of dollars without knowing what their full resource potential will be.  It is usually only after seismic mapping and exploratory drilling that the company is able to determine whether a commercial amount of oil and gas may be present.  Even in these circumstances, past data shows that companies have drilled more wells that have no oil or gas than wells that do.

As such, odds favor purchasing larger quantities of leases that hopefully result in one discovery with a big payoff.  The graph below illustrates this:

FACT: The government leases less than 2.2 percent of federal offshore areas [1] and less than 6 percent of federal onshore lands for oil and natural gas production.[2]

FACT: Many of the most energy-rich lands the federal government owns are off-limits to domestic energy production.

• 85% of the Outer Continental Shelf, which is estimated to hold 86 billion barrels of oil, was placed off-limits under the Department of Interior’s offshore drilling plan for 2012-2017.[3]
• Offshore Alaska has about 24 billion barrels of oil in unleased federal waters.[4]
• Under a 2011 Department of Interior directive, 75 percent of Western oil shale under federal lands was closed off to commercial energy development. There is an estimated 1.4 trillion barrels of Western oil shale, almost 70 percent of which is under federal lands.[5]

MARKEY’s MYTH: We need a “Use it or Lose It” policy to spur companies to produce, and we should penalize companies for sitting idle on leases.

FACT: A “Use it or Lose It” policy already exists (see below).  And if the companies do not produce within the lease term, they must relinquish the lease and do not recover the millions—or billions—they spent to acquire the lease. 

• The Mineral Leasing Act (for onshore production): Section 17(e) stipulates that an oil company must have a producing well within 10 years or surrender the leases. Source: 30 U.S.C. 226(e)
• The Outer Continental Shelf Lands Act: (for offshore production): Stipulates that an oil company must produce energy between 5 to 10 years (in the government’s discretion) or surrender the lease. Source: 43 U.S.C. 1337(b)

FACT: The Obama administration has already increased penalties on producers for “idle” offshore leases. 

Under new Department of Interior policies, rental rates escalate over time, the minimum required bid in offshore lease auctions was nearly tripled, and lease times for drilling in shallower water were shortened.[6]

MARKEY’s MYTH: Half of deepwater leases in the Gulf of Mexico have been idle for 5 years or more.

FACT: The term “idle” erroneously suggests that nothing is being done with the leases.

In cases where an exploration has been submitted but not yet approved by the federal government, those leases are still listed as “idle.” The same goes for leases that are undergoing seismic testing or awaiting the arrival of drilling equipment.

FACT: It takes a year on average to obtain approval for an exploration plan.

As of May 2012, the average wait time between the time an exploration plan for offshore drilling is submitted and the time it is approved is 367 days (160 days on average for an application to be “deemed submitted” and 207 on average for a plan to be approved).[7]

FACT: Each offshore lease takes years and millions or billions of dollars to fully develop.

Companies must undertake a lengthy and costly process involving geological mapping, testing, and drilling exploratory wells before production can begin.[8] This process can also be significantly delayed by environmental litigation.

MARKEY’s MYTH: Idle leases covering more than 20 million acres in the Gulf of Mexico are estimated to hold as much at 18 billion barrels of oil—therefore, each lease should be produced on.

FACT: Each lease doesn’t contain a uniform amount of oil and gas.

According to the National Ocean Industries Association, Interior seems to be arguing that each and every lease block holds the same potential for oil and natural gas production.  In reality, oil and gas reservoirs are not consistently, evenly distributed under every square mile of the Gulf—or any area—and they do not conform to man-made partitions.  As such, companies do not drill wells in every lease block that is offered. NOIA reinforces this point, saying, “commanding oil and gas companies to drill a well in every lease block would not necessarily lead to greater production overall; it would only create a lot of unnecessary dry wells.”[9]