Obama Shocks Oil Industry by Cancelling Exxon Mobil and Statoil Leases

Whatever one might think of the Obama presidency and the progress of the country or the direction the country is headed, the question is coming up more and more on whether the President has the best interests of the country in mind or serves his ideology first – a way to describe one kind of disruptive governing.

The administration has cancelled oil leases held by an Exxon Mobil and Statoil partnership.  The Interior Department, which regulates offshore drilling, says three of partnership’s five leases have expired and the companies haven’t met the requirements for an extension.  The confusion begins where the Obama administration has made an issue of unused leases, which deprive the U.S. Treasury of valuable taxes and as regulators being careful not to be seen as lax in their dealings with large energy companies after last year’s BP Deepwater Horizon spill.

With recent news of poll results showing that only 11% of Americans thinking the country is headed in the right direction combined with the administration’s new barriers to oil exploration and production from the Gulf of Mexico, the firmament behind the question is getting quite solid.  There are billions of dollars in investment, hundreds of thousands of jobs, tens of billions of dollars in royalties that could offset taxes and new supplies to pressure down the price of oil at stake.  Country and economy first doesn’t seem to be in the administration thoughts – yielding disruptive governing.

The administration’s choice seems capricious.  The partnership’s plans for the Julia field were revealed in October 2008, about a month before the 10-year leases expired, when it applied for a customary five-year “suspension of production.”  In February of 2009 the government denied Exxon’s request for an extension and after a brief appeal denied it again that April. Exxon said in a letter at the time that it was “committed” to producing the oil, but the government said it didn’t present a specific plan. The government contended this didn’t meet legal requirements and denied the application. More appeals followed, but Exxon lost its final appeal in May 2009. This date is well before the Deepwater Horizon blowout.

Julia Oil Field Location in the Gulf of Mexico.

The hard facts are Exxon Mobil and Statoil of Norway (who is doing a magnificent job worldwide of petroleum discovery) partnered to lease a block in the Gulf of Mexico now called the Julia Field over ten years ago.  In 2007 the exploratory drilling followed what had certainly been a long and careful review of the geology under the seafloor.  Keep in mind that seismic work is getting better every day and more computing power only improves the data.  Seven years only looks like a long time.

Yet the Julia Field lies in 7,000 feet of water.  This is far deeper than the Deepwater Horizon blowout spill, Exxon’s own Thunderhorse, and Chevron’s Blindfaith.  Seawater pressure in psi equals depth times 15 divided by 33.  A mile down equals about 2,400 psi and 7000 feet, about a quarter mile further down gets to almost 3,200 psi.  Another quarter mile deeper gets you a third again more pressure.

Driving costs higher is the Julia is about 200 miles out at sea.  Production in per barrel cost isn’t known with any accurate sense even yet, but both Exxon Mobil and Statoil understand the risks well enough to file suit to keep the leases.

Elmer P. Danenberger III, a former federal official who oversaw U.S. offshore-drilling rules until he retired in 2009 told the Wall Street Journal such extensions are “fairly common.” 

Danenberger likely knows much more than he’s saying, but offered, “I can honestly say that people who manage that program are really strict, which they need to be or it will be abused. If you don’t have a commercial discovery and a plan for moving ahead at the end of the lease term…that’s it.”

But the Partners have a commercial discovery and probably have sunk over a billion dollars in the leases already with geology and an exploratory well bought and paid for.  The spark in this is early estimates have the recoverable reserve at over a billion barrels.

Developing in these conditions is going to take extensive engineering, incredible sums of money and quite a long while.  Much of the equipment involved is going to be first time builds.  Having a plan for production is going to be an exercise of cost estimation measured against the price of oil.

The nub of the problem is the bureaucrats don’t buy the plan of the Partners.  The Partners likely have “plans” by the boxful of spreadsheets, forecasts and other documents, which the court will likely have to wade through.  Finding a billion barrels will set off quite a paper blizzard.

The government’s last split of the hair is the Office of Hearings and Appeals at the Interior Department’s final decision hinged on whether Exxon had a concrete “commitment” to produce the oil when its lease expired in December 2008.

Producing oil by the billions of barrels 200 miles out to sea in 7,000 feet of water isn’t something done by an entrepreneur.  These kinds of projects need experience and special skill sets with billions of dollars backing them up.  There aren’t many places to go for that – and without doubt one of the best if not the best choice is Exxon Mobil – Statoil.

It bewilders the mind to think what the administration could be thinking.  A re leasing of the area someday?  Jerking the rug out sends an incredibly childish message into an industry where the risks run into 10 digit numbers.  The bids for leases in the future have just been cut way way back – damaging government revenue.

The Wall Street Journal spoke with Amy Myers Jaffe, associate director of the Energy Program at Rice University in Houston on the shock delivered to the oil industry who said, “This is unprecedented. The question is: Do our offshore rules allow for flexibility? You don’t want to let companies sit on a discovery…We definitely don’t want to send the industry a message that you need to be in a rush or we’ll take the oil away from you.”

This is a grim story of choices in government.  It’s clear that Obama leads with oil production in great distain, but as source of money for spending on the programs that same leadership supports.

The result is disruptive governing.  It can be seen now with great clarity, with damaging effects across the whole economy.

By. Brian Westenhaus

Source: Disruptive Governing