Shell game of the Oilmen

Last Friday the Bureau of Ocean Energy Management (BOEM) released their 2024-2029 Outer Continental Shelf (OCS) oil leasing plan. Released every five years, this plan lets the oilmen strategize on their long-term efforts to develop their hydrocarbon extraction operations.

There is probably something similar for onshore leases, given that leasing deeply figures into oil company’s financial profiles. But the investment differences between onshore and offshore extraction are magnitudes apart; on land you can drive a drilling rig up to a site, poke hole into the ground and drill until you hit a play – or not.  In the ocean, even just exploring requires a huge investment.

Exploration for hydrocarbon deposits requires exciting the substrate with seismic-level vibration signals, and reading the acoustical return. On land this involves heavy shaker trucks that drive across the landscape, and every few meters, lifting up and shaking the ground across the landscape – which has previously been manually spiked with strings of seismometers.

In the ocean you need a big ship that drags seismic airguns that pulse every few seconds, and long streamers of hydrophones that record the acoustical energy echoing back from the substrate geology. I don’t know what the cost multiplier is, but I would not be surprised if marine exploration and extraction is 100 times more costly than terrestrial extraction – from exploration to oil play. 

So this brings us to last Friday’s OCS leasing plan. While Joe Biden promised us that there would be no more oil leasing in his administration, his “Inflation Reduction Act” (IRA) was held hostage by hydrocarbon Democrat Joe Manchin over four OCS leases – three in the Gulf of Mexico, and one in Alaska.

Without getting into the specifics of these particular leases, it is important to excavate the industry’s “lease economy,” and why they are always looking for new leases – even while they are not working any more than 40% of the federal leases they hold.

When asked directly, they mumble some mushy response about “unpredictable productivity” or something… But what we taxpayers are getting from the leases is $1 an acre (a price that was set in the 1950s). To “incentivize development,” the Department of Interior (DOI) jacks the price up to $2 an acre after 5 years. So land leasing is not a huge burden on the industry.

Another element in this favorable equation is that unlike every other business in America, oil industry stock value is not tied to productivity; rather it is tied to “reserves,” so the more “reserves” they have on the books, the more they can ditz with their stock prices.

It is important to know that industry tradition is to overestimate the reserves on the books, and then under-report productivity once the leases get to that stage (if they ever do). This was what DOI Secretary Ken Salazar tried to break up when he became the “new sheriff in town” during the Obama administration.

The obvious problem with this shell game is that it is driven by the ongoing need for new leases to justify their speculations on the projected “reserve value” of the leases.

There are a lot of other accounting shenanigans in the industry, but the specter facing the industry right now is that between the Climate Catastrophe, and the rude recent profits that the US industry has been raking in, the public is starting to get wise.

While we in the conservation business are disappointed with the presence of any oil leases on the current 5-year OCS leasing plan, the Alaska lease was pulled. I suspect the oil industry is getting anxious that at some point their stock value may soon hinge on their productivity, and not on their reserve ‘speculations.’