Quest For Oil: Where To Look Is The Question

(The Wall Street Journal via Dow Jones Newswires), Jun 16, 2008

The oil industry is turning up the heat on Congress to open up more federal land to oil and natural-gas drilling, arguing that will do more to cut energy prices than new taxes on industry profits. But environmentalists and Congressional Democrats opposed to that tack are firing back with a new challenge: Drill what you have.

For years, political and environmental obstacles have limited the oil industry's access to large swaths of U.S. territory, most notably the Arctic National Wildlife Refuge in northern Alaska.

Democrats have tended to support restrictions on access to sensitive lands and focused on other ways to drive down prices: reining in speculators; punishing the OPEC oil cartel; and funding research on alternative-energy sources, possibly via a windfall-profits tax on oil companies.

Industry backers, including many Republicans, say the answer to high prices is increased supply and that the way to do that is to drill in areas now off-limits.

Now, voter anger over soaring gasoline prices is shoving this perennial dispute to the top of Washington's energy agenda. On the New York Mercantile Exchange, benchmark crude for July delivery fell $1.88 Friday to settle at $134.86, near its all-time high. Last Monday, the average retail price for a gallon of regular unleaded was $4.039, according to the Energy Information Administration.

A recent Gallup poll shows 57% of Americans support opening up new territories to drilling, while a Wall Street Journal-NBC News poll conducted this month shows 59% of Americans saying Congress should take the lead on responding to high gas prices.

Although high prices are giving the oil industry a new opportunity to make its case for greater access to domestic petroleum, the industry's allies in the Democratic-controlled Congress have so far had little success. Last week, a House panel voted against lifting a decades-old ban on drilling in the outer continental shelf.

Complicating matters, Sen. John McCain of Arizona, the presumptive Republican presidential nominee, has broken with many members of his party, including President Bush, in saying he would oppose drilling in the Arctic National Wildlife Refuge. He has indicated he would defer to the wishes of coastal states on drilling in the outer continental shelf.

Democrats are looking to shift the terms of the debate by arguing it is possible to increase domestic oil production without opening up new lands. The government, they point out, has leased some 91.5 million acres of land and waters for drilling, but federal data show only about a quarter of that is producing oil and gas. Moreover, the portion is shrinking; about 27% of the onshore acres were producing oil and gas in 2007, down from an average of 30.5% in production over the preceding decade.

The industry and its backers say such arguments reflect a fundamental misunderstanding of the oil industry. Companies don't know how much oil is under the lands they lease, so they buy up large swaths in the hope that a fraction will work out. Much of the area that isn't producing, they say, doesn't have oil or gas in commercially viable quantities.

Moreover, bringing a new field into production can require years of mapping, testing, drilling and construction -- during which time the land would show up in statistics as being "not in production," even as companies spend millions or even billions of dollars to bring it online.

"I guarantee you, anybody who's got a commercial discovery today in the United States has got it under development. They'd be silly not to at these prices," Exxon Mobil Corp. Chief Executive Rex Tillerson said in an interview.

Such explanations aren't winning over skeptical Democrats on Capitol Hill. "Why should we expect oil-and-gas companies to rush into new areas to begin production when they are sitting on literally millions and millions of acres of existing leases without doing any production on those?" Sen. Jeff Bingaman, a New Mexico Democrat who is chairman of the Senate Committee on Energy and Natural Resources, said in a speech last month.

Mr. Bingaman added in an interview, "If there have been a lot of leases let that are not producible, that's information we need to have to determine whether we should renew those leases. There's no reason to renew leases if they're not producible."

Some lawmakers are mulling ways to change the industry's incentives. Wall Street increasingly values oil companies -- especially the smaller ones that dominate onshore U.S. production -- based on their reserves, not just their production. That gives companies an incentive to snap up land even if they won't be able to drill it for years.

On Thursday, House Democrats introduced legislation that seeks to compel energy companies to either produce or give up the federal onshore and offshore leases they are holding, by barring them from obtaining any more leases unless they can demonstrate that they are producing oil and gas, or are "diligently developing" the leases they hold.

Currently, companies must give up nonproducing leases after a set period of time -- usually five or 10 years -- but they can often get extensions, and there is no limit on the number of leases a company can hold at a given time.

The bill is modeled on a 1976 law that attempted to discourage speculation on federal coal as a result of the energy crises of the 1970s.

"If they're bidding on these leases, we're assuming they're bidding on them because they believe there's a high-percentage likelihood that there is oil there. And if they don't, then they should not have bid on them," says Rep. Edward Markey, a Massachusetts Democrat who is chairman of the House Select Committee on Energy Independence and Global Warming.

Red Cavaney, president of the American Petroleum Institute, a trade group, called Mr. Markey's remarks, "naive."

"They call the first step in the oil business 'exploration.' If every bit of land had oil and gas, you wouldn't need to explore," he said.

High prices have driven new interest in fields that weren't economical when oil was selling for less than $60 a barrel three years ago. If prices stay high, Mr. Cavaney said, the percentage of leased land in production will rise.

Even if the lands are opened to drilling, however, most experts don't expect immediate relief from high prices. The more-accessible reserves off the coasts of California and Florida would take several years to bring into production, and the remote Arctic refuge would take a decade or more. Even once those fields did come online, their impact on prices would likely be limited. The largest field in the Arctic National Wildlife Refuge is believed to contain about 1.4 billion barrels of oil -- roughly half what Saudi Arabia exports in a single year.

As oil prices have hit records, proponents of drilling in new areas have increased pressure on Congress. A group led by the former House Speaker Newt Gingrich said Wednesday that its "Drill Here, Drill Now, Pay Less" petition drive had netted half a million signatures.

Industry supporters say they can't be sure how much oil exists in areas they haven't explored. But they say there are good reasons to think large reserves exist in areas now closed to drilling. Closed areas in the Gulf of Mexico and off the coast of California, for example, abut areas that have been drilled successfully for years.

The industry also complains that efforts to produce on leased land are sometimes slowed by environmental groups. In the West Tavaputs field in Northeastern Utah, Denver-based Bill Barrett Corp. is producing natural gas on only 30% of the more than 40,000 acres of federal land it owns the rights to there. The company says its progress has been stymied by legal challenges from environmental groups.

Steve Bloch, an attorney for the Southern Utah Wilderness Alliance, says his group and others have been trying to slow drilling in the area but they have often been unsuccessful. State-wide, he adds, his group has objected to only a small fraction of drilling-permit applications.

Copyright (c) 2008 Dow Jones & Company, Inc.


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