This week the Department of the Interior grandly announced plans
for its March oil and gas lease sale in the Central Gulf of
Mexico, off Louisiana, Mississippi and Alabama. The announcement
might have been more fitting for Groundhog Day.
To follow through with President Obama’s all-of-the-above energy
strategy to expand domestic energy production, the U.S.
Department of the Interior announced that the upcoming Central
Gulf of Mexico Lease Sale 227 will offer 38.6 million acres
offshore Louisiana, Mississippi and Alabama for oil and gas
exploration and development. …
“The Obama Administration is fully committed to developing our
domestic energy resources to create jobs, foster economic
opportunities, and reduce America’s dependence on foreign oil,”
said Secretary of the Interior Ken Salazar in a released
statement. “Exploration and development of the Gulf of Mexico’s
vital energy resources will continue to help power our nation
and drive our economy.”
Why is this not news?
Lease sales just like this one have occurred nearly every single
year since the current area-wide leasing scheme was put in place
by President Reagan’s Interior Secretary, James Watt, in 1982.
(I say “nearly” because the Obama Administration cancelled
regularly-scheduled offshore lease sales in a regulatory
overreaction to the BP oil spill in 2010.)
That means that virtually every single acre of the 38.6 million
offered has been available before. Some of them have been
available every year for 30 years and have never received a bid.
Other blocks have been leased before, but never drilled. The
leases expired after their “primary term” of five to ten years.
Some others have been leased, only to have dry holes drilled on
Still others may have been successfully drilled and produced to
Interior likes to tout the statistical estimate of reserves it
says may be discovered on the available leases: 1 billion
barrels of oil and 4 trillion cubic feet of gas. They also like
to beat up the oil and gas industry for not drilling the leases
they already have in inventory.
Here is the way offshore leasing works: the offshore area is
subdivided into “blocks”. A typical block is square, roughly 3
miles by 3 miles. Any currently-leased blocks are unavailable
for leasing at the upcoming sale.
Interior, through the Bureau of Ocean Energy Management (BOEM)
establishes bidding rules for each block. Currently, the royalty
due on production is 18.75% of value, and the minimum acceptable
bid is $25 per acre. Thus for about $150,000, an operator can
own the exclusive right (but not the obligation) to explore for
hydrocarbons for the term of the lease.
Interior can and does set higher values for leases which have
strong hydrocarbon potential based on seismic indications or
nearby drilling activity. Those higher values are not published,
so if none of the sealed bids for one of these prime leases
exceeds its assessed value, all the bids on that block are
Some highly prospective blocks receive bids from multiple
operators. High bids for these blocks run to seven, eight, or
sometimes even nine figures. The vast majority of blocks,
however, receive a single bid, often at or near the $25/acre
So why would anyone want to own a block with little demonstrable
exploration value? Remember that a lease is an option, not an
obligation to drill. Over the term of the lease, economic
conditions can change dramatically. Prices received for oil and
gas may increase. Nearby developments or new technologies may
make a marginal accumulation feasible to develop.
Democratic policymakers, including President Obama, Sec. Salazar
and the execrable Rep. Ed Markey (D-MA) never seem to understand
that all leases are not of equivalent value. They frequently
quote the factoid that industry’s undrilled lease inventory
totals 68 million acres, as if all leases are equivalent. They
are not. The value of a majority of offshore leases is
speculative at best.
It is important that leasing continue in the Gulf of Mexico, but
from the standpoint of hydrocarbon exploration, we should be
opening new areas. The potential of the Gulf is relatively well
understood; the shallow waters in particular are very mature.
It’s like an orchard on its third or fourth harvest of the
season: still profitable but limited in potential. Our current
energy policy, which is satisfied to explore the known regions
of the Gulf, is ridiculously short-sighted.
Cross-posted at stevemaley.com
Are you obligated as an armed civilian, to defend unarmed
liberals while you are both under fire by foreign agents of the
outlaw Obama administration?
No. Shoot the liberals immediately so they can't stab you in
the back while you are defending yourself, then return a
controlled rate of aimed fire.