PLANNED FLORIDA OCS LEASE BUYBACK AT ISSUE

Oil companies say they have $500 million invested in leases off Southwest Florida the federal government is considering for buyback.

President Bush, in a decision on offshore leasing, ordered the Minerals Management Service to begin procedures to cancel the leases and buy them back (OGJ, July 2, p. 26).

Ten oil companies acquired the leases at sales in 1984 and 1986 for $107.6 million in bonus bids. They since have paid another $4.8 million in delay rental. The largest lessees are Chevron, which invested $36 million, and Mobil, $33 million.

The House merchant marine committee explored the issue of repurchasing the leases in hearings. The Outer Continental Shelf Lands Act (Ocsla) outlines a lease repurchase method, but it never has been used.

Rep. Larry Smith (D-Fla.) has filed a bill that would allow the government to cancel leases more easily and issue credits to lessees, usable in future sales, in place of cash payments when buying back a lease. MMS opposes that bill.

DRILLING ISSUES

Ann Whitfield of the Florida Public Interest Group said the leases, all south of 26 N. Lat., threaten the Everglades, the nation's only subtropical ecosystem.

She said, "A lease is never a guarantee of a right to drill. However, this is particularly true in the case of the 73 Florida leases which included a no-drilling stipulation. The oil companies knew that drilling might never be permitted."

Barry Williamson, MMS director, said under Ocsla leases have to be suspended for 5 years before they can be canceled. That deadline will not occur until October 1993.

The law requires the lessee to be paid the lesser of the fair value of the canceled lease, taking into account anticipated revenues and costs, or all consideration paid for the lease and direct expenditures for exploration and development plus interest.

Williamson estimated buying the leases might cost the government about $200 million.

INDUSTRY'S POSITION

Ray Galvin, Chevron U.S.A. Inc. senior vice-president for exploration, land, and production, testified for the American Petroleum Institute, National Ocean Industries Association, International Association of Geophysical Contractors, and International Association of Drilling Contractors.

He called canceling offshore leases "a major change in policy" that will affect not only lessees but also a host of service companies.

"The ripple effect of this proposal has far reaching implications for the future of our domestic industry, the nation's energy security picture, and the federal budget," Galvin said.

He said cancellation is motivated by unfounded fears of environmental harm rather than by danger to human life or the environment.

" We are particularly stunned by the suggestion that leases in the Pulley Ridge area be canceled. In our view, there is no environmental study which supports lease cancellation.

"Prior to the last lease sale in this area, MMS conducted extensive environmental studies in advance of the sale, which resulted in a report that authorized the lease sale decision and contemplated exploratory drilling subject to appropriate safeguards."

Galvin said cancellation cannot be justified under criteria outlined in the Ocsla. There is no threat of serious harm to life or the environment, any harm is not long term, and cancellation does not outweigh the advantages of continuing the leases.

He said the $113 million the industry has paid the government so far on the leases does not take into account the hundreds of millions of dollars companies have spent to gather data and evaluate the leases before and after the lease sale.

"I would estimate the figure to be at least $500 million in terms of lease bonuses, rents, and other pre and postlease evaluation expenses," Galvin said.

"This estimate does not include the value of lost business opportunities, which certainly are sizable. Nor does this estimate reflect either the millions of dollars invested by the geophysical exploration contractors or the work that might flow to suppliers and drilling contractors if exploration is allowed to go forward."

Galvin said Unocal has testified that a 10 by 30 mile portion of the Pulley Ridge area has potential resources of 1 billion bbl of oil and 10 tcf of gas, and Chevron's estimates are similar.

"If the resource potential is as great as we believe, and the federal government cancels these leases, leaseholders could lose hundreds of millions of dollars in earnings and the federal government could lose similar amounts of revenue."

He said canceling leases represents a breach of contract on the part of the federal government and will chill enthusiasm for leasing.