Use it or Lose It: OK Taunt, Bad Energy Policy

By June 23, 2008Energy

Speaker of the House Nancy Pelosi says that among the four energy-related bills the House will consider this week is “use it or lose it,” requiring oil companies to produce from federal lands they’re leasing or lose their paid-for rights. Rep. Nick Rahall (D-WV) included the legislation when he gave the weekly Democratic radio response on Saturday. 

The legislation is clearly an effort to distract the public from arguments in favor of expanding domestic production on the Outer Continental Shelf, the Alaska wildlife refuge, and other federal lands not blocked from development.  It’s certainly not a meaningful contribution to the public policy debate over energy security.

As Red Caveny of the American Petroleum Institute explains in today’s Wall Street Journal, “The ‘Idle’ Oil Field Fallacy“:

These lawmakers ask why oil and gas companies want more access to federal lands to drill if they aren’t using all of the 68 million acres they already have? Anyone with even the most basic understanding of how oil and natural gas are produced – and this should include many members of Congress – knows that claims of “idle” leases are a diversionary feint.

A company bids for and buys a lease because it believes there is a possibility that it may yield enough oil or natural gas to make the cost of the lease, and the costs of exploration and production, commercially viable. The U.S. government received $3.7 billion from company bids in a single lease sale in March 2008.

However, until the actual exploration is complete, a company does not know whether the lease will be productive. If, through exploration, it finds there is no oil or natural gas underneath a lease – or that there is not enough to justify the tremendous investment required to bring it to the surface – the company cuts its losses by moving on to more promising leases. Yet it continues to pay rent on the lease, atop a leasing bonus fee.

In addition, if the company does not develop the lease within a certain period of time, it must return it to the federal government, forfeiting all its costs. All during this active exploration and evaluation phase, however, the lease is listed as “nonproducing.”

Etc. It’s complicated enough that a politician can dismiss it all with an attack line, “The greedy oil companies are sitting on these leases, watching the profits roll up.”

It seems like this year has featured populist, anti-business tablepounding in Congress every week before the members leave on a recess. Given the many breaks Congress takes, all that time adds up, time that could be put to more constructive purposes.

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