'Use it or lose it' bill could do more harm than good, AAPG president warns

Enactment of legislation to compel federal oil and gas lessees to develop their leases could increase instead of reduce prices, the president of a leading association of energy professionals warned US House leaders.

Enactment of legislation to compel federal oil and gas lessees to develop their leases could increase instead of reduce prices, the president of a leading association of energy professionals warned US House leaders.

"US consumers are burdened by high crude oil prices. Conservation and efficiency improvements are necessary responses, but equally important is increasing long-term supply from stable parts of the world, such as our very own federal lands and Outer Continental Shelf," American Association of Petroleum Geologists Willard R. (Will) Green said.

"As Congress considers measures to deal with high crude oil prices, I urge caution. Policies that increase exploration costs, decrease the available time to properly evaluate leases, and restrict access to federal lands and the Outer Continental Shelf do not provide the American people with short-term relief from high prices and undermine the goal of increasing stable long-term supplies," he said in a June 23 letter to House Speaker Nancy Pelosi (D-Calif.), Majority Leader Steny H. Hoyer (D-Md.) and Minority Leader John Boehner (R-Ohio).

The letter is significant because AAPG and its leaders rarely take public positions on political issues. It is an apparent response to H.R. 6251, which House Natural Resources Committee Chairman Nick J. Rahall (D-W.Va.) introduced on June 12. Formally called the Responsible Federal Oil and Gas Lease Act of 2008, the legislation has become known as the "use it or lose it" bill because it would require federal oil and gas leaseholders to promptly develop or relinquish their leases. Republicans are concerned that it could reach the House floor this week without hearings or a markup.

Report suggests potential

Pelosi and other congressional Democrats have cited the committee majority staff's June 4 report, "The Truth About America's Energy: Big Oil Stockpiles Supplies and Pockets Profits," which said that "68 million acres of leased but currently inactive federal land and waters could produce an additional 4.8 million bbl of oil and 44.7 billion cubic feet of natural gas each day." This would nearly double total US oil production and increase gas production by 75%, cut US oil imports by more than one third and be more than six times the estimated peak production from the Arctic National Wildlife Refuge, the report said.

Republicans on the Natural Resources Committee said the majority staff's report does not clarify how the numbers were developed or what source was used to conclude that the leases contain commercially producible oil and gas deposits. Minority staff members "requested information about this extrapolation and were told it is based on an 'internal analysis' of data from the Bureau of Land Management and the Minerals Management Service. It is unclear what, if any, input either of these agencies had in the extrapolation found in this report," Ranking Minority Member Don Young (R-Ak.) said in a June 20 letter to Rahall.

H.R. 6251's assumption is flawed, Green suggested in his letter. "The process of leasing, evaluating, drilling and developing an oil or natural gas field typically takes 5-10 years. Some fields come on-line sooner. Others are delayed by permitting or regulatory delays or constraints in the availability of data acquisition and drilling equipment and crews. Large projects and those in deep water may require a decade or more to ramp up to full production," he said.

A lease block's grid map "makes it tempting to think of exploration as a process of simply drilling a well in each grid block to determine whether it contains oil. But because of the natural variation in regional geology, one cannot assume that oil and natural gas are evenly distributed across a given lease or region. Rather, exploration is about unraveling the geologic history of the rock underneath that grid block, trying to understand where oil or natural gas may have formed and where it migrated. If the geology isn't right, you won't find oil or natural gas," Green explained.

'Intensive assessment'

Geologists began an intensive assessment once a lease is awarded, he continued. They collect new geological, geophysical and geochemical data to better understand the lease area's geology. If they see no evidence of a suitable trap, the producer will relinquish the lease. But if they see a trap that looks interesting, the lessee will hire a drilling rig to find out if the geologists are right.

"Drilling is the true test of the geologists' model, and it isn't a decision to be made lightly. Drilling costs for a single well can range from $500,000 for shallow onshore wells to over $25 million for tests in deep water offshore," Green noted.

Geologists continually collect and evaluate data as the well is being drilled to determine whether it conforms to their expectations based on the geological model. Eventually, they reach the rock layer where they think the trap is located. If there is no oil or gas at that point, the lessee has drilled a dry hole. "At this point, the explorers will evaluate why the hole is dry: Was there never oil and gas here? How was the geological model wrong? Can it be improved based on what they know from the drilled well? Depending on the results of this analysis, they may tweak the exploration idea and drill another well or decide the idea failed and relinquish the lease," Green said.

If oil and/or gas is found, the well will be tested to see what volumes flow from it. Sometimes, those are so low that further expenditures are not justified and the well is abandoned. If the results are promising, several additional wells are drilled to better define the trap's size and shape, the AAPG president said in his letter. "Based on this revised geological model, engineers plan how to develop the new field (e.g., number of production wells to drill, construction of oilfield facilities and pipelines). Using complex economic tools, they must decide whether the revenue from the oil and natural gas sales will exceed the past and continuing expenses to decide whether it is a commercial discovery," he said.

'It also requires access'

"As you can see, oil and natural gas exploration is not simple and it is not easy. It requires geological ingenuity, advanced technologies and the time to do the job right. It also requires access to areas where exploration areas can be tested  the greater the number of areas available for exploration, the higher the chance of finding oil and gas traps," Green told the House leaders.

Democrats did not respond to the letter immediately. Boehner, the House's minority leader, said in a statement that it shows that Rahall's bill "is nothing more than a hoax designed to provide political cover to rank-and-file Democrats caught between their constituents who strongly support more American energy production and their liberal Democratic leaders beholden to radical environmentalists who want oil and gas prices to rise even higher."

"For Democrats advancing the claim that American energy producers, and not they, themselves, are the ones responsible for preventing the millions of barrels of American oil and billions of cubic feet of natural gas from coming to market, today's letter from a respected organization of international geologists couldn't have come at a less convenient time," added Minority Whip Roy Blunt (R-Mo.).

"That's because the more and more the American people learn about the real causes of our current energy crisis  they're already aware of the effects  the less and less the majority's straw man platform on energy makes sense. Later this week, we'll see the latest iteration of that strategy when Democratic leaders attempt to pass a 'use of lose it' bill that's already the established law of the land," he maintained.

Independent producers who would feel the impact of a "use it or lose it" bill expressed their concern on June 20. "With the regulatory hurdles that are already in place, most companies are in an all-out sprint to develop the energy on a lease within a 10-year period. If H.R. 6251 were to become law, the resulting burden on domestic energy producers would make it difficult for them to meet our nation's long-term energy needs," said Marc W. Smith, executive of the Independent Petroleum Association of Mountain States in Denver.

Contact Nick Snow at nicks@pennwell.com

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