Industry pans rent hike on shortened offshore leases

11 16, 2011 by Houston Chronicle

WASHINGTON - Industry leaders and their congressional allies complained Tuesday that the administration's plan to hike the minimum bid for offshore drilling leases and shorten their duration will discourage companies from making bets on marginal fields in the Gulf of Mexico and curb domestic energy production.

At issue is the Interior Department's decision to boost the minimum bid for deep-water tracts from $37.50 per acre to $100, while shrinking the length of most such leases from 10 to seven years. The move is designed to spur companies to develop offshore areas they lease.

But Erik Milito, the upstream and industry operations group director for the American Petroleum Institute, said the combination of shorter leases and higher prices could discourage oil and gas companies from pursuing areas where the potential returns are low.

"A lot of resources out there are at the margins," Milito said. The industry can produce those under the current structure but might not be able to under the new one, he said.

"It's ultimately going to lead to less production," Milito added.

Sen. Lisa Murkowski, R-Alaska, said the proposed changes make leases less attractive and could reduce returns for taxpayers.

The first test of that calculus will come on Dec. 14, when the administration auctions 21 million acres of drilling leases in the western Gulf of Mexico. Leases in the central Gulf that are considered more attractive are scheduled for a lease sale next spring.

The nation's top offshore drilling regulator, Tommy Beaudreau, insisted Tuesday that the Obama administration is rightly trying to spur companies to launch exploration instead of letting leases sit idle.

In his first public appearance as director of the Interior Department's Bureau of Ocean Energy Management, Beaudreau said the higher bid requirement was rooted in an analysis of 15 years of lease sales that showed virtually no drilling on acreage leased for less than $100 per acre.

'It was cheap'

"Not a single exploration well had been drilled in those areas. Companies had simply - because it was cheap - bought that acreage and done nothing with it," Beaudreau told the Platts Energy Podium.

He noted that companies can get three-year extensions of seven-year offshore drilling leases when they prove they're conducting activity at the site.

"These terms are really designed to help spur production," Beaudreau said. "It's really a pro-development measure to encourage exploration and development early in leases so that discoveries can be made" and "production can be brought online."

The shorter -lease terms first applied during an auction of drilling rights in the Gulf in March 2010. But the administration is now applying them to all future offshore sales, including those proposed in a leasing plan for 2012 to 2017.

Interior Secretary Ken Salazar is set to defend that five-year plan during a House Natural Resources Committee hearing on Wednesday.


The proposal paves the way for 15 sales of offshore leases, including a dozen auctions for tracts in the Gulf of Mexico and three for Arctic waters near Alaska. But the administration ruled out selling drilling leases for the Pacific and Atlantic coasts and an area of the eastern Gulf of Mexico where a congressional moratorium bans exploration.

The API's Milito argued it was shortsighted for the administration to leave out the eastern Gulf sale, given some lawmakers' recent pushes to scrap the moratorium. If Congress were to lift the ban, it could take more than a year to complete required environmental studies to add an eastern Gulf sale to the 2012-2017 schedule.

Milito said the government could schedule sales in areas that now are off-limits, and delay or cancel the auctions later if warranted.

In creating the offshore leasing blueprint, the Interior Department relied on 1970s-era geological data about potential oil and gas off the East Coast.

The administration is on track to release an environmental impact statement assessing the effects of seismic research this summer, which could pave the way for new geological surveys in the area.

API argued in a letter to congressional leaders that seismic companies won't have any incentive to do fresh research without the prospect that leases there will lure energy producers to pay for the data.

Beaudreau dismissed that argument on Tuesday.

"Our intention is not to take the mid- and south Atlantic off the table in perpetuity," Beaudreau said. "Quite the opposite, this is a considered strategy to develop information about the resource potential in the area."

Beaudreau said he is confident companies that have expressed interest in doing the seismic research will go forward with that work and market it to oil and gas producers that plan their exploration programs decades into the future.