Deepwater leases pumped billions into US economy, studies for API say

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Apr. 22 -- The $3.1 billion that oil and gas producers paid the federal government for leases under the 1995 Deep Water Royalty Relief Act was only the beginning of the law’s benefits for the US economy, two studies commissioned by the American Petroleum Institute said.

Leaseholders also spent $37 billion to develop the deepwater Gulf of Mexico tracts, paid billions of dollars more in production-related taxes, created thousands of jobs, and pumped billions of dollars into the domestic economy, the studies indicated.

“While this act was primarily intended to encourage oil production at a time when the nation was in desperate need of new oil supplies, these studies show that they were also a boon to US taxpayers and a great stimulus to the nation’s economy,” API Upstream Director Erik Milito said on Apr. 21 as the studies were released.

The first study, by Advanced Resources International (ARI), studied the number of leases awarded under the law from 1996 to 2000, and the production volumes and expenditures related to them. It found producers paid $3.1 billion in lease bonuses, spent $37.4 billion to develop the tracts, and paid more than $5 billion in taxes.

ARI’s report also found that more than 400 million bbl of crude oil and 3 tcf of natural gas were produced from the leases during that time.

The second study, by IHS Global Insight, looked at the impact on the US economy of production from US Outer Continental Shelf leases awarded under the act. It determined that this production increased real gross domestic product by an average $4.5 billion/year and increased employment in 2005 by 91,000 jobs.

Alleged windfall
The law was designed to encourage oil and gas production in what were then economically risky deep waters in the gulf by temporarily providing relief from federal royalties. That provision subsequently came into congressional fire when it was discovered that price thresholds were missing for a few years. Critics said this amounted to a windfall for producers as oil and gas prices rose.

API released the studies nearly 2 weeks after US Rep. Edward J. Markey (D-Mass), who chairs the House Select Committee on Energy Independence and Global Warming, announced that he would reintroduce his bill to compel these deepwater producers to pay royalties or be prohibited from bidding for leases in newly opened OCS areas. “When the price of oil is above $80/bbl, subsidizing oil companies [to drill without paying royalties] is like subsidizing fish to swim: You don’t need to do it,” he said on Apr. 8.

Markey noted that the US Department of the Interior is having to refund more than $2.1 billion of royalty payments from production from the deepwater gulf because of Kerr-McGee Corp.’s successful legal challenge and the missing price thresholds in 1998 and 1999. The Government Accountability Office also has estimated that the federal government could lose another $53 billion over the next 25 years as a result of royalty-free drilling when oil prices are high, he said.

“Last week, [US President Barack Obama] announced that he was going to open a new swath of land stretching from Delaware to Florida, and in the eastern Gulf of Mexico, to oil and gas drilling,” Markey said. “However, if oil companies want to access these newly opened areas, my legislation would ensure that the American taxpayers get the money they are rightfully owed.”

Milito said on Apr. 21 that federal courts have ruled there was nothing ambiguous about the 1995 Deepwater Royalty Relief law. “Those who would require the companies that took Congress at its word to pay royalties retroactively are engaging in a dangerous game of bait-and-switch—and destroying domestic jobs,” he maintained.

Situation in 1995
When the law was passed, API recognized that it would be a smart legislative move in terms of creating jobs and generating economic activity, Milito told reporters during a teleconference. “When this act was passed, we were looking at significant imports, low crude oil prices, and a situation where the country needed to head in a new direction to develop more domestic oil and gas resources,” he said.

“It’s very clear that this is one of the best pieces of energy policy ever passed in the United States, if not the best,” added API Chief Economist John C. Felmy, who also participated. “In 1995, deepwater offshore energy production was not economic, with prices which were very low compared to recent prices. This law jump-started exploration and production of an area where we found a significant amount of oil.”

Milito said producers returned 91% of the 3,391 deepwater leases awarded from 1996 to 2000 as part of the exploration process. “It’s part of the exploration process. A company buys a large pool of leases, based on research that they may contain oil and gas. After it gets them, it starts to do seismic work and looks at results of adjoining exploration. So at the beginning, it may have had a large pool but at the end, only a few were economically produced.”

ARI’s report said the federal government subsequently re-leased 1,613, or 52%, of the returned leases. “According to the [US Minerals Management Service], the record-setting lease sales in 2007 and 2008 were due in part to the expiration of the primary terms of leases issued in 1997 and 1998,” it added.

Milito said more than 900 deepwater wells costing $100 million each were drilled as a result of the law, about half of which were produced. “We see now that this has been a hugely successful program,” he said. “The other part of the story is that [gulf] deepwater has taken off overall. At that time, there were about 17 leases in deep water. There are now about 140. Without this law, the companies couldn’t have stepped up. In the future, we should be able to look in other areas as well because this one will mature.”

Economic impacts
In its study, IHS Global Insight found that production from leases issued under the act between 1996 and 2000 accounted for 0.06% of total domestic production in 1999, increasing to a peak of 2.56% by 2004. The historical value of production from the leases equaled $7.4 billion in 2006, and $7.4 billion in 2008, or about 0.05% of nominal GDP, it said.

“By 2008, the real GDP impact of oil and gas production from the OCS leases is $3.5 billion,” it continued. “Indeed, during the preceding years, additional investment spending and energy production increased the economy’s productive capacity—and therefore the potential level of GDP.”

Production from the leases also gradually increased consumer spending to a peak of $6.1 billion in 2005, the study said, adding that it remained at $3.5 billion in 2008. Reliance on imported energy declined, meanwhile, with real petroleum import cost reductions hitting a $4 billion peak by 2006, it said.

Employment gains associated with the GDP increases reached a peak of 91,000 jobs in 2005, when production from the leases also was at its highest level, according to the study. The positive employment impact retreated to 31,000 jobs in 2008 as the production declined, it said.

IHS Global Insight’s study also estimated that by 2011, real GDP growth from the leases’ production would peak at $9.41 billion, while consumer spending growth would peak at $3.95 billion in 2012. The two economic benefits, along with reductions in US petroleum import costs, would be reduced subsequently as production from the leases declined, it said.

Contact Nick Snow at nicks@pennwell.com.

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