Rahall bill would hamper US resource development, House panel told

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Sept. 18 -- A bill that aims to make federal oil and gas leasing more effective and efficient would have the opposite effect instead, two oil and gas industry officials told the US House Natural Resources Committee on Sept. 17.

“We believe that it is important to develop policies that provide more access to federal lands and remove barriers that delay the development of these resources,” said Doug Morris, group director for upstream and industry operations at the American Petroleum Institute. “We should not be erecting additional obstacles to development which, unfortunately, would be the unintended consequence of this legislation.”

Alex B. Campbell, vice-president of Denver independent Enduring Resources LLC and a board member of the Independent Petroleum Association of Mountain States, said HR 3534, which committee chairman Nick J. Rahall (D-W.Va.) introduced on Sept. 8, would create delays with new layers of bureaucracy and regulations.

The measure also would institute policies that would make markets less efficient and leasing less transparent, significantly increase oil and gas production costs on federal lands, and fundamentally change the US public lands’ multiple use concept to an approach that would further restrict renewable as well as conventional energy development, he warned.

Morris said API and its members are concerned about Rahall’s bill because it would create more layers of bureaucracy that could slow leasing down. “For example, it has the potential to interfere with the [US Outer Continental Shelf] 5-Year Leasing Plan process that has worked well for 30 years,” he said.

Several components
“This process includes three separate public comment periods, two separate draft proposals, development of an environmental impact statement, and the final proposal. Even after the [Interior] secretary approves a final program, there is a lengthy public comment period for each lease sale that includes consultation with stakeholders at several stages and additional environmental analysis,” Morris said.

Unfortunately, HR 3534 would create new regional planning councils, which apparently mirror many activities already being performed as part of MMS’s development process for each 5-year OCS plan, he continued. “Furthermore, these council have the potential to interfere with OCS development since leasing cannot occur if regional plans do not identify an area as being suitable for oil and gas leasing,” the API official said. “By vesting this authority within regional councils, the bill could very well put areas effectively under moratoria for years to come.”

He also questioned provisions in the bill eliminating the US Minerals Management Service’s royalty-in-kind program (which US Interior Secretary Ken Salazar said he would phase out when he appeared before the committee on Sept. 16) and categorical exclusions from auditing requirements authorized under the 2005 Energy Policy Act.

“Problems with the management of these programs, whether perceived or actual, can and should be addressed by the Interior Department,” said Morris. “Elimination of programs that have so much potential to increase efficiency is both unnecessary and unwise.”

He and Campbell separately questioned the bill’s diligent development requirements. “This provision displays a lack of understanding of the oil and gas exploration and production business,” the Denver independent said. “Vast differences in geology, topography, reservoir characteristics, composition of the resource, environmental considerations, market conditions, transportation of the resource to market, and many other factors make each oil and gas lease unique.”

Acquiring capital
The business’s financial aspect also is critical in determining when, where, and how a property is developed, he continued. Acquiring the necessary capital to develop properties is a never-ending activity for upstream independents, he explained.

Observers from outside the oil and gas industry sometimes confuse nonproducing and inactive wells, Morris said. “Even if a well isn’t producing, companies may be committing significant amounts of money for geophysical studies and other evaluations,” he said.

When House Natural Resources Committee member Michael Coffman (R-Colo.) asked if lease protests were common, Campbell said that all the tracts which the federal government sold last year in Utah attracted protests. “I have one Utah lease, the Rock House project south of the already existing Natural Buttes field, where I’ve spent $30 million since 2004 while it has been tied up in litigation,” he said.

The bill contains a provision that would require producers to notify not just surface landholders directly involved in split estate situations but also possibly adjacent surface land owners, he indicated. “This provision would create serious title uncertainty risks. While oil and gas producers are accustomed to evaluating the geologic and engineering risks of drilling a well, they are not willing to invest millions of dollars to purchase a lease or drill a well in the face of clouds on the title,” he said.

In an interview after the hearing, Campbell said he was aware of the US Bureau of Land Management’s effort to have producers provide surface landholders’ names when proposing tracts for possible inclusion in future federal lease sales. He conceded that it would be additional work to look up the information, but added that most producers try to develop a good working relationship with surface landholders before applying for drilling permits.

Typical cost
“A typical well in Utah will cost me $3-4 million for leasing, surface preparations, drilling, completion, fracturing, and connection to a pipeline,” he told the committee. “If I have to choose between leasing a private property and one on federal land with too many restrictions, I’ll choose the private property.”

Other hearing witnesses said the bill attempts to address problems that need to be corrected. Danielle Brian, executive director of the Project on Government Oversight, said that HR 3534 attempts to end a requirement for federal auditors and other compliance and enforcement personnel to report to officials whose responsibilities also include leasing and development, “and who may be more inclined to make the royalty management program look successful rather than be successful.”

The bill also would end heavy reliance on compliance reviews instead of audits and try to get MMS to improve its computer system so it could identify instances where producers fail to report revenue or royalties at all, she noted.

Stephen B. Smith, the mayor of Pinedale, Wyo., said that while the measure does not fully address socioeconomic impacts from a major energy development such as the Jonah natural gas field near his community, it would require federal lessees to use best management practices. “The use of best available technologies should be required for all energy development on federal lands,” he said.

“Producers in our area are currently moving in that direction, using some natural gas-burning engines for drilling and introducing a liquid gathering system on the Pinedale anticline,” he continued. “These are two examples of voluntary and proactive steps taken by some operators. We hope they will continue.”

Contact Nick Snow at nicks@pennwell.com.