The durability of bone-headedness shows why fighting political battles over oil and gas with facts and figures, while necessary, often is insufficient.
Bone-headedness distinguishes energy initiatives of the administration of Barack Obama and Democratic leaders in Congress. Much of what the president and his legislative allies propose on energy is grievously expensive. Some of it is physically impossible. And some bears no relationship with the world of real work.
In that last category belong proposals to stimulate production of hydrocarbons from supposedly idle leases of federal land. The coercion, known as "use it or lose it," emerged early in the Obama administration as an excuse not to make new acreage available for leasing. Pointing to a large-sounding number of leases from which no oil or gas flowed, officials scoffed at the need to offer new ones for auction. The implication was strong of deliberate foot-dragging by leaseholders.
Easy refutation
Facts and figures easily refute the argument. In the real world of exploration and development, an inventory of nonproducing leases is inevitable. "Nonproducing" does not necessarily mean "idle."
Operators often lease blocks in clusters hoping to develop aerially extensive plays, expecting to drill on some leases but not on others. They can't drill as soon as they win leases. They must secure permits and acquire seismic data. Where drilling is warranted, they usually must wait on rigs, supplies, and crews. Discoveries require appraisal drilling. Development involves new permitting and further delays. A dry hole on one lease can condemn other tracts nearby or otherwise change drilling priorities.
According to the American Petroleum Institute, the time between lease purchase and first production can be 7-10 years in offshore areas near existing processing and transportation facilities. Onshore, the lag can vary from a few to nearly 10 years.
Operators have all strong incentive to work quickly. They commit cash to bonuses when they acquire leases and pay rent until production begins. The compulsion to start production and cash flow promptly is strong, tempered only by concerns for safety and effective reservoir management. Leases have terms. Those not made part of a development scheme eventually must be relinquished. When that happens, the government doesn't return the bonus and rental money it has collected.
For all these reasons, operators do not buy then deliberately do nothing with leases for which development makes geologic and economic sense. Implications to the contrary are absurd.
Yet in the world where politicians think they can engineer energy supply and use, facts yield to persistence—at least for a while. Use-it-or-lose-it, which should have died long ago, thus lives on. It appears anew in Obama's proposal last month for cutting the runaway federal deficit.
A $4/acre fee on nonproducing federal land, onshore and off, would, the administration says, "provide the financial incentive for oil and gas companies to either get their leases into production or relinquish them so that the tracts can be leased to and developed by new parties." Applied to all new leases, the measure would "save $1 billion over 10 years," the proposal says.
Actually, it would do no such thing. Instead, it would discourage leasing. It therefore would cut bonus and rent receipts by the government and suppress future production, cutting royalty payments. Over a decade, the real costs would greatly exceed $1 billion.
Larger package
What's more, the proposed fee is part of a package that would raise producers' taxes even more on several other fronts. The added costs would further crimp leasing and drilling, tightening the squeeze on production and related payments to the government. And it all fits an explicit strategy "to transition to a 21st Century energy economy" by displacing commercial energy from hydrocarbons with low-yield alternatives needing high taxpayer subsidies. This is no way to restore economic and fiscal health.
So far, facts and figures have instructed US officialdom with too little effect on energy. Maybe name-calling will work. Or is "bone-headed" too nice?
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