Under the new rule, lease-term extensions are possible, if drilling has commenced on an individual tract. And MMS said the traditional 10-year leases will remain in place for waters deeper than 5,249 feet. In justifying the move, MMS Director Liz Birnbaum said “advances in technology have decreased the time necessary for exploration and development in some water depths, while frontier conditions still exist in the deepest waters of the Gulf. The reduction of some initial lease periods with possible extensions is a way to expedite development.”
The new lease-term rule is clearly making API and its members nervous, along with other possible Obama initiatives, such as increasing fees for undeveloped leases and royalty hikes on production. “What other rules are going to change to the extreme? We are strongly opposed to this,” API spokeswoman Cathy Landry told Offshore Source in an interview.
API, while outraged over the leasing rule change itself, is perhaps more concerned about investment risk and the long-term effects of the change.
“In and of itself it may not be a huge ... deal immediately. But you gotta look at the future of the offshore,” Landry said, noting that while today the deepwater Gulf is a “huge success story,” all fields and regions eventually mature, forcing industry to search for new, often more challenging areas to explore and develop.
Rule changes create risk
“And that is going to happen in the deepwater Gulf of Mexico,” she added. “By changing the rules of the game and making it more difficult for companies, you run the risk of companies saying, ‘I don’t know if I can do that, and I’m not going to take the risk. I’m going to go to Angola. I’m going to go to Brazil. I’m going to go elsewhere because this just doesn’t make sense’.”
Industry was never consulted before MMS adopted the rule change, Landry said. Moreover, API and the “entire industry” find Obama’s “diligent development thing kind of offensive,” she noted, saying that it reflects the administration’s lack of knowledge and understanding when it comes to the oil and gas business and how industry actually operates in the U.S. Gulf.
She explained: “This is a long-lead-time industry. You need to do so much work before you even drill a well. You have to do evaluations, do seismic studies. You have to do months of evaluating those seismic studies, maybe you have to do a third seismic study. The reason is because you don’t want to be punching holes in the ground. You want to be making good decisions. You want to be making environmental decisions, you want to be making good economic decisions. And you would hope that they would be encouraging people to make these good decisions. Instead, they seem to want production the next day. There’s no guarantee that there is production on any of these leases. I just think it shows that they don’t understand the nature of the oil and gas industry.”
Three days before the new rule was adopted API President Jack Gerard cautioned Interior Secretary Ken Salazar in a letter that the administration “has set up a series of roadblocks that discourage the investment necessary to increase domestic energy supplies, create well-paying American jobs, and provide additional government revenues at a time when we desperately need all of them.”
On the day the rule was adopted, Gerard told MMS that shortening of lease terms “does nothing to guarantee more discoveries but rather takes away from companies the flexibility necessary to operate in an extremely challenging and risky environment.”
