Why is the majority of leased federal offshore waters not producing? | Rigzone

According to the Department of the Interior (DOI), of the more than 11 million acres of federal offshore waters already under lease in the United States, 75.58%, or 8.29 million acres, are non-productive. .

When asked why this is the case, National Ocean Industries Association President Erik Milito told Rigzone that it takes time and capital to develop an offshore oil and gas lease and said that there was no guarantee that a lease block would contain commercially viable quantities of hydrocarbons.

“Oil and gas discovery is a prospective business and companies must tap into a large network of lease blocks to identify and develop commercially viable discoveries. Non-performing leases are not “inactive”. Just because there’s no surface activity in a rental block doesn’t mean it’s ‘inactive,’” Milito said.

“Companies routinely bid on and win many leases based on a single concept or geological model, but underground geological structures rarely exactly match surface lease blocks on the map. Energy companies may have to re-examine their seismic data or develop a new geological model during the term of the lease, which takes time,” Milito added.

“Under no circumstances is the Lease Block idle and the more Lease Blocks a company has to explore, the greater the likelihood that it will find commercially viable quantities of hydrocarbons which it can then produce for the benefit of our nation. Internationally, data shows that offshore companies continue to drill dry holes during the exploration of new resources, costing tens of millions of dollars, sometimes exceeding $100 million, with each well failing,” a- he continued.

When asked the same question, Leslie Beyer, chief executive of the Energy Workforce and Technology Council, told Rigzone that not all leases are guaranteed to be productive and pointed out that offshore is much more capital intensive and takes more time to move from investment to construction. go out and produce.

Also responding to the question, Dominika Rzechorzek, oil and gas analyst at Fitch Solutions, said securing an offshore lease is one of the first steps in developing an upstream project.

“Additional studies and exploratory work on the area of ​​the lease, after it has been secured, are common before determining other future investments. Typically, the time to first production after getting a lease takes years rather than months for offshore acreage, so…many leases may be in the early stages,” Rzechorzek told Rigzone .

“Our federal acreage analysis for the last three licensing years (2018-2020) places approximately 4.6 million acres in the very early stages of exploration, or about half of the 8.29 million acres of non-performing leases … mentioned [above]added Rzechorzek.

The Fitch Solutions analyst also noted that exploration and production projects in the United States, including offshore, are subject to strict regulatory and environmental standards and, therefore, must obtain a number of permits. various agencies and regulators before actual drilling or full-scale production can begin.

Another group of active, non-performing leases are leases that see owners delay exploration and production activities in response to factors such as market conditions and/or changing corporate strategies, pointed out. Rzechorzek.

“Offshore exploration and production projects tend to be capital intensive and time consuming, making them susceptible to changes in market sentiment, changes in the regulatory or legal framework, including tougher environmental standards “said the analyst.

How do companies use their list of federal offshore leases?

According to Milito, a whole symphony of companies, engineers, scientists and experts are embarking on the sorting, valuation, exploration and development of offshore lease blocks.

“It takes time and significant investment to explore and develop an offshore lease block. Investment costs for offshore exploration and development are significant, with total project costs routinely running into the billions of dollars,” he said.

“Typically, it takes years of development, including several years of seismic exploration, a year or more to contract and schedule a drilling rig for an exploration well, and then up to 10 months to complete. the exploration well, then another two to three years for other drilling, then a few more years for the installation of the facilities,” Milito added.

“However, leases near existing production facilities can be put into production quite quickly – perhaps within 12 months – due to known geology and reserves, and the ability to drill the well of safe and efficient way and link it to the existing installation. ,” he continued

All the while, in addition to bidding potentially millions of dollars for each rental block, companies are paying rent to the federal government on non-performing leases, Milito said.

“Annual rental rates can cost hundreds of thousands of dollars per rental block. Companies are also required under federal lease regulations to develop a lease quickly or return it to the government,” Milito added.

“Rental fees are essentially fees paid for having a non-productive lease. In general, leases that do not produce at the end of their term are returned to the government, which can then re-let them and generate additional revenue. The resources invested by the company to acquire and maintain the lease are lost if the lease is returned to the government,” he continued.

Rzechorzek pointed out that exploration and production companies are pursuing strong seismic studies and exploration work to determine the potential of each lease.

“If the company encounters hydrocarbons during the exploration phase, the company further assesses the commercial viability of the discovery. Concessions adjacent to existing fields or sharing a similar geological structure are likely reduced by existing development projects , but would still require significant exploration effort to confirm commercial reserves,” the analyst said.

“Leases adjacent to existing generation infrastructure could offer the possibility of connections if the distances involved were both technically and commercially viable. On the other hand, frontier acreage, with little to no existing exploration and infrastructure, could offer higher return and riskier opportunities and could provide first mover advantage,” Rzechorzek said.

“Companies seek either ‘risk-free’ leases or more frontier opportunities depending on a number of things including market sentiment, oil price forecasts and specific company strategy, among others,” the analyst continued.

Rules and regulations

A White House fact sheet last month pointed out that President Biden was calling on Congress “to make companies pay royalties on wells in their leases that they haven’t used in years.”

According to the fact sheet, businesses that produce from their leased acres and existing wells will not face higher fees, but businesses that “continue to sit on non-producing acres will have to choose to start producing or pay a fee for each inactive”. well and unused acre”.

Although Rigzone asked both the DOI and the Department of Energy whether the rule would apply to offshore federal waters, it is unclear at the time of writing whether or not it would.

When asked how a rule requiring companies to pay fees on wells from offshore federal leases they haven’t used in years would impact production in U.S. offshore federal waters in the short and In the long term, Rzechorzak said Fitch Solutions would need more details to assess the impact of such a rule.

“In our view, however, tighter regulations for U.S. oil and gas producers would further weaken investor sentiment and could lead to lower capital spending across the board, both on land and in federal waters,” the analyst said.

“It would likely impact long-term production, given the time it takes to bring a well online. In the short term, production could see some increase, if producers had a number of wells in the later stages of the development process, which could be expedited to avoid fines,” Rzechorzak added.

“However, the overall impact depends on the details of such a rule, including the costs of fees associated with abandoning the well or restarting production,” Rzechorzak continued.

When asked the same question, Milito noted that some of the budget items announced by the Biden administration could dramatically change the country’s offshore energy outlook.

“They include punitive tax measures that would fundamentally weaken one of the United States’ most important economic, energy, emissions, and national security assets. By increasing the cost of operating in the United States, you encourage investment dollars to go elsewhere and you will end up moving energy production away from the United States,” Milito said.

“Time and time again we have seen how moving production out of the United States does not address energy demand and reducing emissions, it is just a gift to the growers most emitters, not to mention bad actors like Russia which uses its energy resources as geopolitics. tool,” he added.

“Given the dire geopolitical situation highlighted by the Russian invasion of Ukraine, policymakers must bring the conversation and decision-making back to reality and collaborate on policies that promote national security through oil production and of gas in the United States, while advancing technologies to continually reduce emissions,” Milito continued.

Responding to the question, Beyer said, “Instead of calling on Congress to create new taxes and levies targeting energy production in the United States and release additional oil from our emergency reserves, we urge the president to direct the DOI to immediately restart the federal leasing program, as already required by law, and to sit down and have a constructive discussion with U.S. energy producers about steps we can take to work together to provide America and our allies with true energy security”.

Rigzone showed this article to the DOI asking if the organization would like to send a comment for inclusion. The DOI has chosen not to provide comment.

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