Getting a lease for oil drilling just the start

Posted: Monday, July 21, 2008

HOUSTON - The national debate over opening more offshore areas to oil and gas exploration has begged the question: Just what are the companies doing with the tens of millions of acres they're already leasing from the federal government?

In particular, congressional Democrats who oppose President Bush's plan to expand offshore drilling point to 68 million acres of federal land and offshore sites now leased by oil companies that sit idle.

It's part of nearly 2 billion acres overseen by two federal agencies - the Bureau of Land Management and the Minerals Management Service - that have potential for oil and gas exploration, the bulk of which is strictly off limits.

The acreage includes vast stretches of land that spread out over Nevada and reach north and east over the Rockies, thinning as they stretch toward Canada to disparate specs on the map.

There are smaller and more isolated patches to the east along the mountain ridges of Appalachia and further to the south above the Gulf of Mexico, and huge chunks of northern Alaska and lesser stretches on its southern banks.

The 68 million acres under lease to oil companies has potential reserves to nearly double U.S. oil production and increase natural gas output by 75 percent, the Democrats claim.

So why the lack of activity, particularly when oil prices are at historic levels? It depends on your definition of "activity."

An oil company can spend several years after it negotiates a lease securing the permits and other approvals it needs to begin actual production.

Some of the non-producing leases under scrutiny are in thousands of feet of water in the Gulf of Mexico, where a decade can pass between finding and tapping a new reservoir. The winning bid for such leases can encompass tens of thousands of acres and cost $100 million or more.

"I think it gives you a good idea why our leases are arranged in 5-, 8- and 10-year terms," said Randall Luthi, director of the Minerals Management Service, the arm of the Interior Department charged with overseeing offshore drilling in federal waters.

"If a company gets to the end of those terms and they're not making significant progress - and I do mean significant progress toward actually producing - those leases come back and we sell them again," he said.

Leases also can get tied up in court, often over environmental concerns. Or companies can determine that developing a particular tract doesn't make economic sense. Either way, they're listed on the federal government's books as "non-producing."

Shell Oil Co., for example, is involved in a legal dispute in Alaska that prompted it to abandon a proposed course of exploratory drilling in the Beaufort Sea this summer. Shell has said it remains committed to offshore drilling in Alaska, but production is likely as far as 12 years off.



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