This week the Department of the Interior grandly announced plans for its March oil and gas lease sale in the Central Gulf of Mexico, off Louisiana, Mississippi and Alabama. The announcement might have been more fitting for Groundhog Day.
To follow through with President Obama’s all-of-the-above energy strategy to expand domestic energy production, the U.S. Department of the Interior announced that the upcoming Central Gulf of Mexico Lease Sale 227 will offer 38.6 million acres offshore Louisiana, Mississippi and Alabama for oil and gas exploration and development. …
“The Obama Administration is fully committed to developing our domestic energy resources to create jobs, foster economic opportunities, and reduce America’s dependence on foreign oil,” said Secretary of the Interior Ken Salazar in a released statement. “Exploration and development of the Gulf of Mexico’s vital energy resources will continue to help power our nation and drive our economy.”
Why is this not news?
Lease sales just like this one have occurred nearly every single year since the current area-wide leasing scheme was put in place by President Reagan’s Interior Secretary, James Watt, in 1982. (I say “nearly” because the Obama Administration cancelled regularly-scheduled offshore lease sales in a regulatory overreaction to the BP oil spill in 2010.)
That means that virtually every single acre of the 38.6 million offered has been available before. Some of them have been available every year for 30 years and have never received a bid.
Other blocks have been leased before, but never drilled. The leases expired after their “primary term” of five to ten years.
Some others have been leased, only to have dry holes drilled on them.
Still others may have been successfully drilled and produced to depletion.
Interior likes to tout the statistical estimate of reserves it says may be discovered on the available leases: 1 billion barrels of oil and 4 trillion cubic feet of gas. They also like to beat up the oil and gas industry for not drilling the leases they already have in inventory.
Here is the way offshore leasing works: the offshore area is subdivided into “blocks”. A typical block is square, roughly 3 miles by 3 miles. Any currently-leased blocks are unavailable for leasing at the upcoming sale.
Interior, through the Bureau of Ocean Energy Management (BOEM) establishes bidding rules for each block. Currently, the royalty due on production is 18.75% of value, and the minimum acceptable bid is $25 per acre. Thus for about $150,000, an operator can own the exclusive right (but not the obligation) to explore for hydrocarbons for the term of the lease.
Interior can and does set higher values for leases which have strong hydrocarbon potential based on seismic indications or nearby drilling activity. Those higher values are not published, so if none of the sealed bids for one of these prime leases exceeds its assessed value, all the bids on that block are rejected.
Some highly prospective blocks receive bids from multiple operators. High bids for these blocks run to seven, eight, or sometimes even nine figures. The vast majority of blocks, however, receive a single bid, often at or near the $25/acre minimum value.
So why would anyone want to own a block with little demonstrable exploration value? Remember that a lease is an option, not an obligation to drill. Over the term of the lease, economic conditions can change dramatically. Prices received for oil and gas may increase. Nearby developments or new technologies may make a marginal accumulation feasible to develop.
Democratic policymakers, including President Obama, Sec. Salazar and the execrable Rep. Ed Markey (D-MA) never seem to understand that all leases are not of equivalent value. They frequently quote the factoid that industry’s undrilled lease inventory totals 68 million acres, as if all leases are equivalent. They are not. The value of a majority of offshore leases is speculative at best.
It is important that leasing continue in the Gulf of Mexico, but from the standpoint of hydrocarbon exploration, we should be opening new areas. The potential of the Gulf is relatively well understood; the shallow waters in particular are very mature. It’s like an orchard on its third or fourth harvest of the season: still profitable but limited in potential. Our current energy policy, which is satisfied to explore the known regions of the Gulf, is ridiculously short-sighted.
Cross-posted at stevemaley.com.