Memo to President Obama: ‘If it ain’t broke, don’t fix it’

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Ray Tyson - Offshore Source
The U.S. offshore leasing program is arguably the federal government’s most successful natural resource initiative, especially when it comes to deepwater Gulf of Mexico. Back in the mid-1990s, promised royalty suspension on initial production from new discoveries and reasonable term limits on exploration leases played a major role in molding this challenging, high investment risk region into one of the most attractive and prolific producers on our globe. Without question, this demonstrates that when industry and politicians work hand-in-hand, good things can happen.
 
Father was right all along

Whenever I attempted to improve on something I knew little or nothing about, my more knowledgeable and experienced father used to blurt out, “Son, if it ain’t broke, don’t fix it!” As we all know, it didn’t take a rocket scientist to figure out that Pop was on the right path to the moon. So why is the Obama administration trying to “fix” critical components of the federal leasing system, in particular the recent shortening of term limits on deepwater leases, that for years have worked exceptionally well? Beats me!  
The U.S. Department of the Interior evidently believes that significantly reducing the initial period a company can hold a lease in water depths ranging from 1,312 feet to 5,249 feet will somehow quicken the pace of exploration and development in the Gulf. I guess the idea is that  this would help offset declining American oil production; and, of course, bring much-needed additional taxes and royalties to a hemorrhaging U.S. treasury. Details and reaction to this latest Obama initiative are covered in our page one lead story: “Backlash. Industry assails rule change for Lease Sale 213.”   

The ‘diligent development’ theory

From a political viewpoint, all of this makes perfect sense and looks good on paper, right? All you do is decrease by an average 34% the initial time to work a lease, and presto! Company X is forced to immediately hire a driller and begin punching holes in the ground, instantly producing gobs of new oil to help keep America’s motor  running. Naturally, the administration has concluded that advances in deepwater technology justifies this “diligent development” scenario.
Frankly, I was shocked to learn from the 400-member American Petroleum Institute (API) that the Obama administration never consulted industry prior to adopting the rule. To me, this is the same as a junior high automotive shop student attempting to rebuild a complex car engine without first talking over the details with the teacher.
Aside from the incentives already in place, industry really doesn’t need additional help (or interference) from the government when it comes to finding and developing deepwater oil and gas fields in a timely fashion. The record clearly shows that industry, due in large part to new and improved technologies and other tools it developed on its own, already has dramatically reduced the time from discovery to production. But locating commercial quantities of hydrocarbons is still a risky business and doesn’t happen overnight, requiring a great deal of flexibility to follow exploration leads across various leases that often do not pan out. The arbitrary reduction of lease terms, particularly in the midst of bad economic times when exploration dollars for many companies are limited, makes no sense and only aggravates an already challenging situation for industry.

Pouring gasoline on an open fire

On top of shortening lease terms on deepwater tracts to be offered in upcoming Central Gulf Lease Sale 213, the Obama administration wants to increase rental fees on non-producing leases and  royalties on production. One wonders what else is in store for the offshore industry. The big risk in all of this is continuing flight from the United States to more tax and regulation-friendly nations. In the drilling sector alone, Transocean, Ensco International, and Noble Corp. have moved their corporate offices abroad, and Rowan is considering a similar move as it looks to expand its fleet overseas.