13-08-04

Despite soaring oil and gas prices, oil companies and individuals who own nearly 30 mm acres of non-producing 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 % of the more than 33,000 leases still considered non-producing by BLM have never had an exploratory well drilled. Some 97 % 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 non-producing leases have been joined with other leases into larger production units where active exploration is under way, and in many such cases the units already are producing oil and gas.

But even after discounting such leases, there is no indication in BLM records of any oil or gas exploration on 26 mm acres of federal land currently under lease, or two-thirds of all federal leased acreage.A little over 10 mm acres of federal oil and gas leases are listed as producing; another 4 mm acres have been explored to some degree, but are still 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 % of the 6 mm acres of environmentally sensitive land covered by the plans would be opened to oil and gas leasing.

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."

Industry officials contend that large inventories of undeveloped leases are normal and necessary to protect their investment in energy exploration. And they dismiss suggestions that unproductive leases boost their financial standing.

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."

Federal leases are good for 10 years and require an annual rent of $ 1.50 an acre during the first five years, and $ 2 an acre after that. If the lease is not producing paying quantities of oil and gas by the end of 10 years, it reverts back to the government, unless the owner assigns it to a larger block of leases that include some with productive wells.

Oil companies and other owners of non-producing leases are paying the government more than $ 40 mm 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."

Smith said the lack of development is caused by permitting delays, a shortage of skilled labour and equipment, and pipeline infrastructure deficiencies that make it uneconomical to explore in some areas.

Under the Bush administration, however, processing of drilling permit applications has sped up significantly. It took the BLM just 61 days on average to make a final decision on drilling permits filed this year, according to BLM records, compared with 104 days in 2003, 167 days in 2002 and 215 days in 2001. Some oil and gas analysts say soaring oil prices may dampen exploration because increased production would tend to drive down prices.

"Why should the industry go and risk more capital, bring more oil and gas to the market and risk the much lower price?" said Fadel Gheit, an oil and gas analyst for Oppenheimer & Co.

Michael Scialla, an oil and gas analyst with A.G. Edwards and Sons, said he doesn't think the high prices are stalling exploration on federal leases. But he said a large inventory of unexplored leases can make a company a more attractive takeover target, particularly if the leases are near areas that already are producing.

Source: PetroEnergy Information Network