Oil and Gas Leasing
Interior Could Do More to Encourage Diligent Development Gao ID: GAO-09-74 October 3, 2008In 2007, the Department of the Interior (Interior) collected about $10.5 billion in revenues from companies that hold federal oil and gas leases. Interior's Minerals Management Service manages offshore leases, while its Bureau of Land Management manages onshore leases and leases in the National Petroleum Reserve in Alaska. Acquiring a federal lease gives the lessee the rights to explore for and develop the oil and gas resources under the lease. Development entails many tasks, including drilling wells and building pipelines that may lead to oil and gas production. GAO agreed to (1)describe Interior's efforts to encourage development of federal oil and gas leases and compare them to states' and private landowners' efforts, (2)examine trends in leasing and factors that may affect development, and (3) describe development on a sample of leases. GAO reviewed data on about 55,000 leases and spoke to officials at Interior and in eight states with leasing experience, among others.
Interior does less to encourage development of federal oil and gas leases than some state and private landowners. Interior officials cited one lease provision that may encourage development--escalating rental rates. For example, the rental rates for 10-year onshore federal leases increase from $1.50 per acre per year for the first 5 years to $2 per acre per year for the next 5 years. Compared to Interior, the eight states we reviewed undertook more efforts to encourage development on their oil and gas leases, using increasing rental rates as well as shorter lease terms and escalating royalty rates. Some states also do more than Interior to structure leases to reflect the likelihood of oil and gas production, which may encourage faster development. Specifically, while Interior uses varying lengths for offshore leases, with deeper waters receiving longer lease terms, this provision is not explicitly related to the expected productivity of the lease. On the other hand, five of the states that GAO reviewed--Alaska, Louisiana, Montana, New Mexico, and Texas--vary lease lengths or royalty rates to reflect the likelihood that the lease will produce. GAO also found that private landowners have used various leasing methods to encourage faster development, including lease terms as short as 6 months. Over the past 20 years, the total number of oil and gas leases Interior issued has varied each year but generally increased in recent years, as has the amount of development activity, and industry officials told GAO that a range of factors influence their decisions to acquire and develop leases. The number of offshore leases issued annually from 1987 through 2006 had two large peaks--in 1988 and 1997--and has generally been increasing since 1999. Onshore leases peaked in 1988 and then declined until about 1992, remaining at these lower levels until about 2003 when they increased, coinciding with rising oil and historically higher natural gas prices. Drilling and production activity on federal leases has been higher over the last 10 years than from 1987 through 1996, but the increase has been more dramatic for onshore leases. Industry officials told GAO that several factors influence their decisions to acquire and develop federal oil and gas leases, including oil and gas prices; the availability and cost of equipment; the geology of the land underlying the lease; and regulatory issues, such as limitations on when drilling can occur. GAO's review of data on about 55,000 offshore and onshore federal leases issued from 1987 through 1996--those that have exceeded their primary 10-year lease terms--identified three key findings regarding development. First, development occurred on about 26 percent of offshore and 6 percent of onshore leases issued during the sample period. Production was less frequent, with about 12 percent of offshore leases and 5 percent of onshore leases ultimately achieving production. Second, shorter leases were generally developed more quickly than longer leases, but not as frequently during the term of the lease. Finally, for those leases that eventually produced oil or gas a substantial amount of the initial drilling activity--about 25 percent onshore-took place after the scheduled expiration of the lease, following a lease extension.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-09-74, Oil and Gas Leasing: Interior Could Do More to Encourage Diligent Development
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
October 2008:
Oil And Gas Leasing:
Interior Could Do More to Encourage Diligent Development:
GAO-09-74:
GAO Highlights:
Highlights of GA0-09-74, a report to congressional requesters.
Why GAO Did This Study:
In 2007, the Department of the Interior (Interior) collected about
$10.5 billion in revenues from companies that hold federal oil and gas
leases. Interior‘s Minerals Management Service manages offshore leases,
while its Bureau of Land Management manages onshore leases and leases
in the National Petroleum Reserve in Alaska. Acquiring a federal lease
gives the lessee the rights to explore for and develop the oil and gas
resources under the lease. Development entails many tasks, including
drilling wells and building pipelines that may lead to oil and gas
production.
GAO agreed to (1)describe Interior‘s efforts to encourage development
of federal oil and gas leases and compare them to states‘ and private
landowners‘ efforts, (2)examine trends in leasing and factors that may
affect development, and (3) describe development on a sample of leases.
GAO reviewed data on about 55,000 leases and spoke to officials at
Interior and in eight states with leasing experience, among others.
What GAO Found:
Interior does less to encourage development of federal oil and gas
leases than some state and private landowners. Interior officials cited
one lease provision that may encourage development––escalating rental
rates. For example, the rental rates for 10-year onshore federal leases
increase from $1.50 per acre per year for the first 5 years to $2 per
acre per year for the next 5 years. Compared to Interior, the eight
states we reviewed undertook more efforts to encourage development on
their oil and gas leases, using increasing rental rates as well as
shorter lease terms and escalating royalty rates. Some states also do
more than Interior to structure leases to reflect the likelihood of oil
and gas production, which may encourage faster development.
Specifically, while Interior uses varying lengths for offshore leases,
with deeper waters receiving longer lease terms, this provision is not
explicitly related to the expected productivity of the lease. On the
other hand, five of the states that GAO reviewed”Alaska, Louisiana,
Montana, New Mexico, and Texas”vary lease lengths or royalty rates to
reflect the likelihood that the lease will produce. GAO also found that
private landowners have used various leasing methods to encourage
faster development, including lease terms as short as 6 months.
Over the past 20 years, the total number of oil and gas leases Interior
issued has varied each year but generally increased in recent years, as
has the amount of development activity, and industry officials told GAO
that a range of factors influence their decisions to acquire and
develop leases. The number of offshore leases issued annually from 1987
through 2006 had two large peaks”in 1988 and 1997”and has generally
been increasing since 1999. Onshore leases peaked in 1988 and then
declined until about 1992, remaining at these lower levels until about
2003 when they increased, coinciding with rising oil and historically
higher natural gas prices. Drilling and production activity on federal
leases has been higher over the last 10 years than from 1987 through
1996, but the increase has been more dramatic for onshore leases.
Industry officials told GAO that several factors influence their
decisions to acquire and develop federal oil and gas leases, including
oil and gas prices; the availability and cost of equipment; the geology
of the land underlying the lease; and regulatory issues, such as
limitations on when drilling can occur.
GAO‘s review of data on about 55,000 offshore and onshore federal
leases issued from 1987 through 1996––those that have exceeded their
primary 10-year lease terms––identified three key findings regarding
development. First, development occurred on about 26 percent of
offshore and 6 percent of onshore leases issued during the sample
period. Production was less frequent, with about 12 percent of offshore
leases and 5 percent of onshore leases ultimately achieving production.
Second, shorter leases were generally developed more quickly than
longer leases, but not as frequently during the term of the lease.
Finally, for those leases that eventually produced oil or gas a
substantial amount of the initial drilling activity”about 25 percent
onshore”took place after the scheduled expiration of the lease,
following a lease extension.
What GAO Recommends:
GAO recommends that the Secretary of the Interior develop a strategy to
evaluate options to encourage faster development of its oil and gas
leases. Interior generally agreed with the recommendation, but
questioned whether some actions could have potentially adverse impacts.
GAO maintains that Interior should study these options and report on
the results to Congress.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-74]. For more
information, contact Frank Rusco at (202) 512-3841 or ruscof@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Interior Does Less to Encourage Development of Federal Leases Than Some
States and Private Landowners:
Annual Federal Oil and Gas Leases Issued and Pace of Development Have
Generally Increased in Recent Years; Industry Cites Several Factors
That Influence Development:
Development Activity in a Sample of Leases Issued from 1987 through
1996 Varied Considerably:
Conclusions:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of the Interior:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Percentage of Offshore and Onshore Leases Issued (1987 through
1996), Drilled and Produced through 2007:
Table 2: Offshore Leases Issued (1987 through 1996), Drilled and
Produced through 2007:
Table 3: Percentage of 5-Year and 10-Year Onshore Leases Issued (1987
through 1996), Drilled and Produced through 2007:
Table 4: Onshore Leases Issued (1987 through 1996), Drilled and
Produced by State through 2007:
Table 5: Development and Production during and after the Primary Term:
Figures:
Figure 1: Offshore Oil and Gas Leasing Activity in Federal Waters, 1987
through 2006:
Figure 2: Onshore Oil and Gas Leasing Activity on Federal Lands, 1987
through 2006:
Figure 3: Offshore Oil and Gas Drilling in Federal Waters, 1987 through
2006:
Figure 4: Onshore Oil and Gas Drilling on Federal Lands, 1987 through
2006:
Abbreviations:
AFMSS: Automated Fluid Mineral Support System:
APD: application for permit to drill:
BLM: Bureau of Land Management:
DWRRA: Deep Water Royalty Relief Act:
LR 2000: Legacy Rehost 2000 (database):
MMS: Minerals Management Service:
NPR-A: National Petroleum Reserve in Alaska:
PDS: Premier Data Services:
TIMS: Technical Information Management System:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
October 3, 2008:
The Honorable Jeff Bingaman:
Chairman:
Committee on Energy and Natural Resources:
United States Senate:
The Honorable Nick J. Rahall, II:
Chairman:
Committee on Natural Resources:
House of Representatives:
The Honorable Steve Pearce:
Ranking Member:
Subcommittee on Energy and Mineral Resources:
Committee on Natural Resources:
House of Representatives:
The Honorable Mary L. Landrieu:
United States Senate:
Oil and natural gas production from federal lands and waters is
critical to meeting our nation's energy needs. This production provided
about 31 percent of all oil and 29 percent of all natural gas produced
in the United States in fiscal year 2007 and was valued at over $72
billion. The Department of the Interior (Interior) manages oil and gas
resources on federal lands and waters and offers leases to oil and gas
companies that may develop these resources. In 2007, Interior collected
on behalf of the federal government about $10.5 billion in bonuses,
rents, and other revenues from companies leasing federal lands and
waters for oil and gas exploration, development, and production.
Interior's Minerals Management Service (MMS) manages offshore leases,
while Interior's Bureau of Land Management (BLM) manages onshore leases
in the lower 48 states and the National Petroleum Reserve in Alaska
(NPR-A), a 23-million acre onshore area on Alaska's North Slope that
was set aside in 1923 as an emergency oil supply.
Interior's processes for issuing federal leases vary depending on
whether they are offshore, onshore, or in the NPR-A. Leases are issued
in some cases using a competitive process, where companies bid on
leases and in other cases can be issued noncompetitively to interested
parties. Leases are issued for a fixed period generally ranging from 5
to 10 years, which is referred to as the primary term of the lease.
Once leases are issued, lessees begin paying rent, depending on whether
the lease is offshore, onshore, or in the NPR-A, and may take actions
to explore for oil and gas and develop the lease. Exploratory
activities include analyzing available geologic information and seismic
and other testing to identify if economically viable oil and gas
reservoirs exist underground.[Footnote 1] If companies believe that
economically viable reservoirs exist, they may begin efforts to prepare
for development, such as completing the environmental studies required
to apply for permits to begin development activities. Once the permits
are approved, the company may begin development activities, including
building roads to the well site, drilling wells, and constructing
platforms and any additional pipeline transportation necessary to
transport the oil and gas to market.[Footnote 2] Both MMS and BLM
require "reasonable diligence" in developing and producing oil and gas
on federal leases, but neither agency has precisely defined the
activities or time frames that constitute reasonable diligence. In the
event that a federal lease begins producing, the lessee pays royalties
on the oil and gas it produces in lieu of paying rent.
Nonproducing leases expire at the end of their primary terms, but can
be extended in certain cases. One such case is where actual drilling
operations are being conducted at the end of the lease's primary term
or the leases become part of a unit--an administratively combined set
of contiguous leases that draw upon the same oil or gas reservoir. An
area developed under a unitization agreement may provide for more
efficient development of the reservoir, resulting in fewer wells being
drilled and reducing disruption on the surface and impact on the
surrounding environment for access roads and pipelines.
Like the federal government, state governments and private landowners
also lease land to companies for the development of oil and gas
resources. Several states, including Alaska, Colorado, Louisiana,
Montana, New Mexico, Texas, Utah, and Wyoming, have significant
experience offering such leases. Similar to federal leasing processes,
states offer various lease terms, accept bonus bids, and charge rent
and royalties--some of which are set by law and some that state
officials negotiate. However, state and private leases may be subject
to fewer restrictions on development than federal leases. For example,
federal laws, such as the National Environmental Policy Act--which
requires analysis of the potential environmental impact of federal
actions--do not apply to state or private leases. Private leases may be
subject to even fewer restrictions on how leases may be structured;
while both the federal and state governments have certain statutory and
regulatory requirements that affect leases they issue, private
landowners are free to individually negotiate the size and length of
leases, bonus bids, rents, and royalty rates.
In recent years, oil and gas activities on federal lands have drawn
increased attention. Some have advocated increased leasing of federal
lands that are currently unavailable for leasing, particularly in the
Alaskan National Wildlife Refuge and off the coasts of Florida and the
eastern and western United States. Others are concerned about the
environmental implications of opening more areas to oil and gas
exploration, and believe that lessees could more quickly develop the
millions of acres of federal land that are already available and leased
to bring oil and gas to market, thereby increasing the nation's energy
supply. In this context, we agreed to (1) describe Interior's efforts
to encourage development of federal oil and gas leases and compare them
to states' and private landowners' efforts; (2) examine trends in the
number of leases and amount of acreage leased on federal lands and
waters, the amount of development activity on active federal leases,
and factors that may affect the development of these leases; and (3)
describe how development occurred on a sample of leases that have
expired or been extended beyond their primary terms.
To describe Interior's efforts to encourage development on federal oil
and gas leases, we reviewed federal laws and regulations and
interviewed knowledgeable officials with BLM, MMS, states, and industry
groups. To compare states' and private landowners' efforts to encourage
development on lands they lease, we collected selected information
about state leasing of land for oil and gas in eight states with
significant oil and gas resources and oil and gas leasing experience--
Alaska, Colorado, Louisiana, Montana, New Mexico, Texas, Utah, and
Wyoming--and a private landowners' association. We did not conduct
detailed examinations of states' laws and related regulations. To
examine trends in leasing and development, we collected leasing
statistics from Interior's Public Land Statistics and obtained leasing,
and production, information from MMS's Technical Information Management
System. To identify factors that affect development, we interviewed
knowledgeable officials with BLM and MMS, representatives from the
eight states with significant oil and gas leasing experience that we
examined, representatives from industry with experience developing
federal oil and gas leases, and officials from an association of
private landowners involved with leasing land for oil and gas
development. To describe how development occurred on a sample of
leases, we selected a sample comprising nearly all federal oil and gas
leases issued during a period spanning 1987 through 1996--leases that
had expired or been extended beyond their primary terms. We used BLM
and MMS information systems that contain data on leases and wells to
track their development through 2007. For onshore leases, we included
federal leases issued in six states--Colorado, Montana, New Mexico,
Nevada, Utah, and Wyoming--which together accounted for 82 percent of
federal onshore leases issued during this time frame. We examined if
and when drilling or production occurred on each lease issued during
the sample period and whether the lease expired or was extended. We did
not analyze trends for the NPR-A because only 411 leases have been
issued and 30 wells have been drilled there since BLM began issuing
leases there in 1999--too few to establish any clear trends.
To evaluate the reliability of the data used in this review, we
performed electronic and logic testing, traced a sample of lease
records to the source documents, and interviewed knowledgeable
officials about the data elements and systems. Based on this work, we
determined that the data were sufficiently reliable for our reporting
purposes. We conducted this performance audit from January 2008 to
August 2008 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives. Appendix I
contains additional information on our scope and methodology.
Results in Brief:
Interior does less to encourage development of federal leases than some
state and private landowners. According to Interior officials, federal
oil and gas leases contain one provision--escalating rental rates--
which may encourage development. For example, the rental rates for
onshore federal leases increase from $1.50 per acre per year for the
first 5 years to $2 per acre per year, or 33 percent, for years 6
through 10. Compared to Interior, states undertake more efforts to
encourage faster development of land leased for oil and gas production.
Specifically, state officials in the eight states that we reviewed told
us that in addition to using escalating rental rates, states undertake
additional efforts, including shorter primary lease terms and
escalating royalty rates. For example, to provide a greater financial
incentive, the state of Texas allows lessees to pay a 20 percent
royalty rate for the life of the lease if production occurs in the
first 2 years of the lease, as compared to 25 percent if production
occurs after the fourth year. In addition, some states do more than
Interior to structure leases to reflect the likelihood of oil and gas
production, which state officials told us may also encourage faster
development. For example, while Interior uses varying primary terms for
offshore leases, depending on water depth, with leases in deeper waters
receiving longer primary lease terms, this is not explicitly related to
the expected productivity of these leases. Five of the states that we
reviewed--Alaska, Louisiana, Montana, New Mexico, and Texas--vary lease
lengths or royalty rates to explicitly reflect the state's view of the
likelihood of discovery of economic oil and gas resources. For example,
officials in New Mexico can issue shorter leases and can require
lessees to pay higher royalties for properties that are in or near
known producing areas, and allow longer leases and lower royalty rates
in areas believed to be more speculative. We also found that private
landowners can do more than Interior to encourage development on oil
and gas leases. According to an official from an association of private
landowners involved in leasing land for development of oil and gas
resources, private landowners have also used various leasing methods to
encourage faster development, including using lease terms as short as 6
months.
Over the past 20 years, the total number of oil and gas leases Interior
issued competitively and noncompetitively each year has varied but
generally increased in recent years, as has the amount of development
activity, and industry officials told us that a range of factors
influence their decisions to acquire and develop leases. The annual
number of offshore leases issued from 1987 through 2006 had two large
peaks--in 1988 and 1997--and has generally been increasing since 1999.
During this same time frame, the number of onshore leases issued
annually peaked in 1988, then declined until about 1992 and remained at
these lower levels until about 2003. From 2003 through 2007, the annual
number of onshore oil and gas leases increased, coinciding with rising
oil and historically higher natural gas prices. Drilling and production
activity on an annual basis on federal leases has been higher over the
last 10 years than from 1987 through 1996, but the increase has been
more dramatic for onshore leases. Industry officials told us that
several key factors influence their decisions to acquire and develop
federal oil and gas leases, including business considerations, such as
prices of oil and gas; the availability and cost of equipment; the
geology of the land underlying the lease, including the location and
access to known oil and gas resources; and relevant regulatory issues,
such as limitations on when drilling can occur. These sources also
noted that improvements in technologies in recent years have improved
their ability to develop resources that are harder to access.
Our review of detailed data on about 55,000 offshore and onshore
federal leases issued from 1987 through 1996--those that have exceeded
their primary terms--identified three key findings regarding
development. First, we found that development occurred on about 26
percent of offshore and 6 percent of onshore leases issued during the
sample period, either during their primary terms or during periods in
which they had been extended. A smaller proportion of leases, about 12
percent of offshore leases and 5 percent of onshore leases, ultimately
achieved production. Some of these leases may have no wells located on
them but were considered to be producing because they were part of a
unit that was producing. Second, leases with shorter primary terms were
generally developed more quickly than longer leases, but not as
frequently, during the primary term of the lease. Specifically, we
found that competitively issued leases with 5-year primary lease terms
were associated with faster development than competitively issued
leases with 10-year primary terms, but shorter leases were also
associated with different overall development rates for offshore and
onshore leases. In particular, for offshore leases, we found that
shorter leases--issued for shallow waters, which are considered to be
easier to explore--were developed faster and more frequently. In
contrast, competitively issued onshore leases with 5-year terms--which
were issued from 1987 through 1992--were generally developed faster but
less often than competitively issued leases with 10-year terms--which
were offered from 1992 through 1996. Noncompetitively issued leases,
all of which have 10-year primary terms and were issued over the entire
period of our sample, 1987 through 1996, were the least likely to be
developed in either period. Third, for those leases that eventually
produced oil or gas, a substantial amount of the initial drilling
activity--about 7 percent for offshore and about 25 percent for
onshore--took place after the scheduled expiration of the lease,
following a lease extension or suspension.
We recognize that federal leases may have important restrictions on
development activity that do not apply to the same extent for state or
private leases. Nonetheless, the general lack of variation from the 10-
year statutory primary lease term for federal onshore leases,
regardless of the perceived likelihood of significant oil and gas
deposits, as well as the lack of other efforts to encourage faster
development of federal leases raise the question of whether some of the
measures used by states or private landowners could effectively be used
to encourage faster development of some federal leases. Therefore, we
are recommending that the Secretary of the Interior develop a strategy
to evaluate options to encourage faster development of oil and gas
leases on federal lands, including determining whether methods to
differentiate between leases according to the likelihood of finding
economic quantities of oil or gas and whether some of the other methods
states use could effectively be employed, either across all federal
leases or in a targeted fashion. In so doing, Interior should identify
any statutory or other obstacles to using such methods and report the
findings to Congress. Interior generally agreed with the
recommendation, but questioned whether some actions could have
potentially adverse impacts. GAO maintains that Interior should study
these options and report on the results to Congress.
Background:
Interior, created by Congress in 1849, oversees and manages the
nation's publicly owned natural resources, including parks, wildlife
habitat, and crude oil and natural gas resources on millions of acres
offshore in the waters of the Outer Continental Shelf and onshore. The
Outer Continental Shelf Lands Act and the Deep Water Royalty Relief Act
(DWRRA),[Footnote 3] as amended, give Interior responsibility for
leasing approximately 1.76 billion acres offshore and collecting
royalties associated with both onshore and offshore oil and gas
production. The Mineral Leasing Act of 1920 charges Interior with the
responsibility for oil and gas leasing on federal and private lands
where the federal government has retained mineral rights. Interior's
BLM is responsible for managing approximately 700 million mineral
onshore acres, which include the acreage leased for oil and gas
development.[Footnote 4] BLM is also responsible for managing the
approximately 23 million acres of land in the NPR-A in the North Slope
of Alaska. The Naval Petroleum Reserve Protection Act of 1976 governs
federal oil and gas leasing in the NPR-A. Together these statutes are
the basis for the current leasing framework for oil and gas leasing.
Interior's processes for issuing federal leases vary depending on
whether they are offshore, onshore, or in the NPR-A. Specifically:
* For offshore leases, every 5 years, Interior selects the areas it
will offer for leasing and establishes a schedule for individual lease
offerings. These leases are offered for competitive bidding, and all
eligible companies are invited to submit written sealed bids, referred
to as bonus bids, for the rights to explore, develop, and produce oil
and gas resources on these leases, including drilling test wells. These
rights last for a set period of time, referred to as the primary term
of the lease, which may be 5, 8, or 10 years, depending on the water
depth. After the bids are received, MMS estimates the fair market value
of each lease, and this estimate becomes the minimally acceptable bid.
The bidder that submits the highest bonus bid that meets or exceeds
MMS's estimate of the fair market value of a lease is awarded the
lease. In the event that no bid is received or no bids equal or exceed
the fair market value estimate, MMS may choose to withdraw the lease--
possibly offering it again at a future date.
* For onshore leases, BLM offers parcels of land nominated by industry
and the public as well as some it identifies. Like MMS, BLM offers
leases through a competitive bidding process; however, bonus bids are
received in an oral auction rather than in a sealed written form, and
BLM does not separately estimate a minimally acceptable bid for each
lease. Instead, by law, it requires a uniform national minimum
acceptable bid of $2 per acre.[Footnote 5] If BLM receives any bids on
an offered lease, the lease is awarded to the highest qualified bidder.
Onshore leases that do not receive any bids in the initial offer are
offered noncompetitively the day after and remain available for leasing
for a period of 2 years after the competitive lease sale. Any of these
available leases may be acquired noncompetitively on a first-come,
first-served basis. Prior to 1992 BLM offered primary terms of 5 years
for competitively sold leases and 10 years for leases issued
noncompetitively. Since 1992, BLM has been required by law to only
offer leases with 10-year primary terms whether leases are sold
competitively or issued noncompetitively.[Footnote 6]
* For leases in the NPR-A, BLM oversees this process and offers leases
competitively, with bonus bids submitted in a written, sealed bid form.
Like offshore leases, they are subject to an economic evaluation of
fair market value, which is also completed by MMS personnel who have
experience developing such analyses for offshore leases. Leases that do
not receive acceptable minimum bids may be offered in future
competitive sales but cannot be acquired noncompetitively as can other
onshore leases. NPR-A leases have 10-year primary terms.
For all competitively issued leases, the winning bidder becomes the
lessee and must pay Interior the amount of the bonus bid. The lessee
then pays a fixed amount of rent each year until the lease begins
producing or the lease expires. For leases issued noncompetitively,
lessees do not pay a bonus bid but do pay rent. Once issued, lessees
may take actions to explore for oil and gas and develop the lease.
Exploratory activities include analyzing available geologic information
and seismic and other testing to identify if economically viable oil
and gas reservoirs exist underground.[Footnote 7] If companies believe
that economically viable reservoirs exist, they may begin efforts to
prepare for development, such as completing the environmental studies
required to apply for permits to begin development activities. Once the
permits are approved, companies may begin development activities,
including building roads to the well site, drilling wells, and
constructing platforms and any additional pipeline transportation
necessary to transport the oil and gas to market.[Footnote 8]
Both MMS and BLM require "reasonable diligence" in developing and
producing oil and gas on federal leases, but neither agency has
precisely defined the activities or time frames that constitute
reasonable diligence. If lessees want to develop leases, some
requirements apply. For example, for offshore leases MMS requires
lessees to submit exploration and development plans for approval. As
such, federal oil and gas leaseholders, in general, are not required to
take actions to develop a lease during the primary term. The only
specific development requirement that Interior officials identified is
that Interior requires lessees of 8-year leases in the Gulf of Mexico-
-those in water depths from 400 to 800 meters--to drill before the end
of the fifth year; otherwise, the lease terminates.
In the event that a federal lease begins producing, the lessee pays
royalties on the oil and gas it produces in lieu of paying rent.
Royalty rates for leases issued in 2007 were 16.67 percent for
offshore, 12.5 percent for onshore, and 12.5 percent or 16.67 percent
for NPR-A.[Footnote 9] A productive lease remains in effect and the
lessee can continue to produce oil and gas until the lease is no longer
capable of producing in paying quantities, regardless of the length of
the primary term.
Federal leases generally expire after the primary term unless the
lessee is currently drilling a well or is producing oil and gas in
commercial quantities. After companies establish production, the lessee
can continue to produce oil and gas from the lease beyond the primary
term until the lease is no longer productive. If production ceases
after the end of the primary term, the lease generally terminates;
however, under certain conditions, nonproducing leases may be
temporarily extended while lessees perform actions such as drilling
additional wells, treating the underground geologic formation to
improve flow of oil or gas, and performing repairs needed to resume
production. By regulation, offshore leases are held automatically for
180 days after last production or any other lease-holding operation
ceases.[Footnote 10] For onshore leases, regulations state that if
actual drilling operations began prior to the end of the primary term
and are being diligently pursued, the lease may be extended for up to 2
years. Under certain conditions, nonproducing leases may be extended
past their primary terms.
* Nonproducing leases that are part of a unit that is actively being
drilled or producing can be extended. Lessees can request that BLM or
MMS administratively combine contiguous leases in a single grouping
called a unit for the purposes of jointly exploring and developing an
underlying oil or gas reservoir. Unitization can help companies more
efficiently explore and develop oil and gas as they then share access
roads and pipelines and may drill fewer wells. This also reduces the
disruption on the surface and the impact on the surrounding
environment. BLM and MMS require geological justification for combining
these leases. According to officials, BLM may also require holders of
contiguous leases to unitize to reduce environmental impact. In 2007,
BLM reported more that 1,393 active units onshore and MMS reported 215
active units offshore. For leases that were extended because they were
unitized, Interior generally establishes drilling requirements. For
offshore leases, lessees must receive MMS approval of a drilling
schedule. For onshore leases, BLM generally requires that a well be
drilled somewhere on the unit every 6 months until the extent of the
producing reservoir is fully known or the unit is terminated. If
drilling does not occur on this schedule, Interior terminates the unit
agreement and leases that were in the unit are extended for up to 2
years past their primary term.
* Nonproducing leases can be extended if the lease is being actively
drilled prior to the expiration date. For offshore leases, regulations
require that lessees must be conducting operations on the lease at the
end of the primary term to receive an extension. If the lease is
extended past the end of its primary term for this reason and drilling
operations cease without achieving production, Interior can immediately
terminate the lease. For onshore leases, regulations require that if
actual drilling operations were commenced prior to the end of the
primary term and are being diligently pursued, the lease may be
extended for up to 2 years.
* Nonproducing leases can be suspended if the company needs to
temporarily cease operations under circumstances beyond its control,
for example, during hurricanes that force operators to stop drilling
operations for safety reasons. However, while a suspension does not
extend the lease but rather stops the clock on the primary term, it
does extend the period during which the company has exclusive access to
the lease area. To obtain a suspension, operators must provide
sufficient proof of need to Interior.
* Nonproducing leases in the NPR-A can be renewed or extended. NPR-A
leases may be renewed for 10 years with a onetime $100 per acre fee and
if Interior determines that the lessee has diligently pursued
exploration that warrants further exploration or future development
success, or all or a part of the lease remains as part of a unit
agreement covering a lease that qualifies for renewal. NPR-A leases can
be extended further if BLM determines that the lease is capable of
producing or if the operator is conducting BLM-approved drilling or
reworking operations. Nevertheless, NPR-A leases may only be held for a
maximum of 30 years without production unless BLM suspends the lease
because the operator failed to produce oil or gas because of
circumstances beyond its control, such as severe weather or drilling
equipment being unavailable.
Interior Does Less to Encourage Development of Federal Leases Than Some
States and Private Landowners:
Interior does less to encourage development of federal leases than some
states and private landowners. Federal leases contain one provision--
increasing rental rates over time for offshore 5-year leases and
onshore leases--to encourage development. State governments also use
escalating rental rates, but undertake additional efforts to encourage
lessees to develop oil and gas leases more quickly, including shorter
lease terms and graduated royalty rates. In addition, compared to
limited federal efforts, some states do more to structure leases to
reflect the likelihood of oil and gas production, which may also
encourage faster development. Based on the limited information
available on private leases, private landowners also use similar tools
to encourage development.
Interior Uses Escalating Rental Rates to Encourage Development on Some
Leases:
According to Interior officials, federal leases allow for holders to
determine which, if any, leases to develop, and whether to develop them
during the primary term. However, these officials also noted that
leases issued by Interior contain one key provision--escalating rental
rates--that may encourage development. For example, for some offshore
leases in shallow waters--those less than 400 meters in depth and
issued with 5-year primary terms--the rental rates can escalate and, in
some cases, eventually double.[Footnote 11] For some of these shallow
water leases--those in water depths up to 200 meters--rental rates rise
per acre per year from $6.25 in the first five years to $12.50 in the
sixth year of the lease, $18.75 in the seventh year, and $25 in the
eighth year. For other shallow water leases--those in water depths from
200 meters to less than 400 meters--rental rates per acre per year rise
from $9.50 for the first five years of the lease to $19 for the sixth
year, $28.50 in the seventh year, and $38 in the eighth year. Interior
also uses this same approach for onshore leases, though it is applied
differently. Onshore federal leases increase from $1.50 per acre per
year for the first 5 years to $2 per acre per year, or 33 percent, for
years 6 through 10. Therefore, lessees that do not reach production
during the first 5 years must pay the federal government more in annual
rent to retain the lease beyond the initial 5 years of the 10-year
primary term.
States Undertake More Efforts to Encourage Faster Development of Leases
of State Land Than Interior and Structure Leases to Reflect the
Likelihood of Finding Oil and Gas:
Like Interior, four of the eight states we reviewed also use escalating
rental rates, to encourage faster development of land leased for oil
and gas production. However, unlike Interior, states undertake
additional efforts, including using shorter lease lengths and graduated
royalty rates to encourage faster development of land leased for oil
and gas production.
Escalating rental rates. State officials in four of the eight states we
reviewed--Alaska, Montana, New Mexico, and Texas--said that they
increase rental rates to encourage exploration and development. We
found that all eight states' rental rates varied widely, generally
ranging from $1 to $25 per acre per year, as did their methods for
setting rental rates. State officials in the four states with graduated
rental rates told us that they increase the rental rates--in some cases
dramatically--at certain intervals. Officials in these four states said
that they usually initially charge from $1 to $5 per acre per year and
increase the rates generally after the third or fifth year of the
lease. In two of these states, New Mexico and Texas, the amount of the
increase in the rental rates significantly exceeds the increases
imposed on federal onshore leases. New Mexico doubles the rental fee
for the second 5 years of leases issued under 10-year primary terms if
the leases have not begun producing within the first 5 years. Texas
increases the rental rate for onshore leases from $5 per acre per year
to $25 per acre per year if the lease is not developed by the end of
the third year--a 500 percent increase compared to Interior's 33
percent increase. Of the eight states we reviewed, five stop charging
rental fees on leases after production is achieved; however, Colorado,
New Mexico, and Wyoming charge a rental fee throughout the life of the
lease.
Shorter lease terms. Officials from all states we reviewed told us that
these states use primary lease terms that are similar to, or shorter
than, federal leases. State officials told us that they believed that
shorter lease terms encourage lessees to develop oil and gas resources
more quickly. All of the states we examined allow shorter leases than
the federal government does for onshore leases. For example, Louisiana
and Texas issue 3-year onshore leases versus the federal government's
10-year onshore lease term.
Graduated royalty rates. One state we reviewed, Texas, uses graduated
royalty rates to encourage quicker development of leases it issues.
Specifically, Texas charges a 20 percent royalty rate for the life of
the lease if production is achieved within the first 2 years of the
lease. If development occurs in the third or fourth years of the lease,
rates increase to 22.5 percent. If development occurs after the fourth
year, royalties rise to 25 percent. This lease provision allows a
lessee to "earn" a lower fixed royalty rate for the life of lease by
more rapidly developing it.
Some States Do More to Structure Lease Lengths and Royalty Rates Based
on the Likelihood of Oil and Gas Production Than Interior:
Compared to limited federal efforts, some states do more to structure
lease lengths and royalty rates based on the likelihood of oil and gas
production, which may also encourage faster development. Interior's
efforts to structure federal leases to reflect the perceived likelihood
of discovering oil and gas are limited to three key provisions. First,
Interior's estimate of the fair market value of a lease and the minimum
acceptable bid reflects Interior's knowledge of the oil and gas
resources underlying the lease and costs of producing them. Second,
offshore lease terms vary by water depth, although this is not
explicitly related to the expected productivity of these leases.
Specifically, offshore leases are issued for 5 years for areas less
than 400 meters in depth, 8 years for areas 400 to 800 meters, and 10
years for areas greater than 800 meters, whereas all onshore leases are
issued for 10 years. According to Interior officials, shallower waters
are more mature and have already been thoroughly explored, and as a
result, more is known about the likelihood of discovering oil and gas.
Officials also noted that many shallow water areas may be easier to
drill and may be near existing pipeline infrastructure and therefore
can reach production more quickly. However, by law Interior cannot vary
lease lengths to reflect the perceived likelihood of finding oil or
gas. Third, in the NPR-A, Interior uses higher rental rates and higher
royalty rates in areas where Interior has determined that there is a
high likelihood of finding oil and gas. Specifically, rental rates in
areas considered highly likely to contain oil or gas are $5 per acre
per year, compared to $3 per acre per year for other NPR-A leases. In
addition, royalty rates in these areas that are more likely to produce
are 16.67 percent compared to the standard rate of 12.5 percent.
Some states do more to structure lease lengths and royalty rates based
on the likelihood of oil and gas production, which may also encourage
faster development. Five of the eight states we reviewed--Alaska,
Louisiana, Montana, New Mexico, and Texas--structure leases to
explicitly reflect the state's view of the likelihood of discovery of
economic oil and gas resources. For example, New Mexico links its view
of the likelihood of discovering oil and gas on the lease to variations
in primary lease term and the royalty rate. Specifically, New Mexico's
current oil and gas leasing program identifies oil and gas lands as
restricted--known to have oil and gas resources located on them, or
unrestricted--not known to have oil and gas resources. Oil and gas
leases are further divided into categories ranging from the most
speculative to the most likely to have economic production,
specifically:
1. Exploratory leases: Ten-year leases issued for exploration outside
of the restricted area, and 5-year exploratory leases issued for
exploration within the restricted area, with both leases having a 12.5
percent royalty rate.
2. Discovery leases: Five-year leases issued for drilling within the
restricted area with a 16.67 percent royalty rate.
3. Development leases: Five-year leases issued for development drilling
inside the restricted area along established, productive trends, with
either an 18 percent or 20 percent royalty rate.
Utah also structures lease terms depending on its view of the potential
of discovering oil and gas. One Utah state official told us that while
the state has 12.50 percent as the statutory minimum royalty rate, they
typically incorporate a minimum 16.67 percent royalty rate into leases
of land within 1 mile of known oil or gas production. In addition, the
state has the option to lease land outside its normal competitive
leasing process--which could result in even higher returns for the
state--if a lessee proposes to pay a higher royalty rate or a higher
bonus.
Officials in several states told us that they vary the lease lengths to
reflect the perceived likelihood of discovery of oil or gas. For
example, Louisiana and Texas allow 3-year and even shorter leases; all
eight states allow 5-year leases; Alaska allows 7-year leases; and
Alaska, Montana, and New Mexico also use 10-year leases--based on their
perception of the likelihood of discovery of oil or gas. Louisiana uses
a unique approach, allowing companies to propose the lease terms, which
the state either accepts or rejects based on what state officials
believe is most advantageous to the state. A Louisiana official stated
that they sometimes receive and accept proposals for lease terms that
are shorter than 1 year. Meanwhile, Texas typically uses 3-to 5-year
leases for onshore leases, including leases of land under rivers, at 3
years, and 5 years for offshore leases. However, the lease lengths can
be as short as 3 months. Officials told us that areas they consider
most likely to contain oil and gas are generally leased for shorter
periods.
State officials noted that state leases may be easier to develop more
quickly than federal leases because the land may not be subject to as
many requirements. For example, state leases may have fewer
restrictions on development activity, simpler permitting requirements
for development, and fewer restrictions on when companies can operate
on a lease related to wildlife preservation or environmental
considerations.
Limited Information Available Indicates That Private Landowners Use
Several Approaches to Encourage Development of Leases on Private Land:
Information about leases on private lands is proprietary and therefore
generally not publicly available, but officials from one private
landowners' association told us that they too are using shorter lease
terms, ranging from as little as 6 months to 3 years, to ensure that
lessees are diligent in developing any potential oil and gas resources
on their land.[Footnote 12] These officials told us that nationally,
landowners' leases average 3 years but may range from 6 months to 5
years, generally 3 years in more active areas and 5 years with the
option of a 5-year extension in less active areas or new areas of
exploration. Some owners are also including an option in the leases to
break them if they feel that the lessees are not diligent about
drilling. In addition, one official stated that landowners in western
Colorado have begun dividing leases into smaller sections and leasing
them on an incremental basis to ensure that lessees can or will drill.
Private landowners may be subject to some federal or state regulatory
requirements that put constraints on how and when companies can develop
these private lands. For example, the Endangered Species Act applies to
all U.S. lands, and private landowners are generally required to take
appropriate steps to avoid significant habitat modification of an
endangered species.
Annual Federal Oil and Gas Leases Issued and Pace of Development Have
Generally Increased in Recent Years; Industry Cites Several Factors
That Influence Development:
Over the past 20 years, the annual number of leases issued on federal
lands and waters for oil and gas and development has varied but
generally increased in recent years. Furthermore, development of
federal leases has generally increased. Oil and gas industry officials
indicate that several factors influence their decisions regarding
development of federal leases, including business considerations,
geologic properties of the land, and regulatory requirements.
Leasing of Federal Land for Oil and Gas Development Has Varied Both
Offshore and Onshore, but Both Have Modestly Increased in Recent Years:
The number of federal oil and gas leases issued has generally increased
in recent years, but offshore and onshore leasing have followed
different historical patterns. Specifically, offshore leases issued, as
shown in figure 1, peaked in 1988 and 1997 and have generally been
rising since 1999.
Figure 1: Offshore Oil and Gas Leasing Activity in Federal Waters, 1987
through 2006:
[See PDF for image]
This figure is a combination line and vertical bar graph depicting the
following data:
Offshore Oil and Gas Leasing Activity in Federal Waters, 1987 through
2006:
Year: 1987;
Offshore leases issued: 640;
Offshore acres issued (in millions): 3.45 million.
Year: 1988;
Offshore leases issued: 1,621;
Offshore acres issued (in millions): 8.84 million.
Year: 1989;
Offshore leases issued: 1,049;
Offshore acres issued (in millions): 5.58 million.
Year: 1990;
Offshore leases issued: 825;
Offshore acres issued (in millions): 4.26 million.
Year: 1991;
Offshore leases issued: 676;
Offshore acres issued (in millions): 3.41 million.
Year: 1992;
Offshore leases issued: 204;
Offshore acres issued (in millions): 1.02 million.
Year: 1993;
Offshore leases issued: 336;
Offshore acres issued (in millions): 1.71 million.
Year: 1994;
Offshore leases issued: 560;
Offshore acres issued (in millions): 2.78 million.
Year: 1995;
Offshore leases issued: 835;
Offshore acres issued (in millions): 4.34 million.
Year: 1996;
Offshore leases issued: 1,556;
Offshore acres issued (in millions): 8.25 million.
Year: 1997;
Offshore leases issued: 1,782;
Offshore acres issued (in millions): 9.65 million.
Year: 1998;
Offshore leases issued: 1,185;
Offshore acres issued (in millions): 6.43 million.
Year: 1999;
Offshore leases issued: 333;
Offshore acres issued (in millions): 1.77 million.
Year: 2000;
Offshore leases issued: 555;
Offshore acres issued (in millions): 2.93 million.
Year: 2001;
Offshore leases issued: 942;
Offshore acres issued (in millions): 5.01 million.
Year: 2002;
Offshore leases issued: 804;
Offshore acres issued (in millions): 4.19 million.
Year: 2003;
Offshore leases issued: 9,557;
Offshore acres issued (in millions): 5.03 million.
Year: 2004;
Offshore leases issued: 888;
Offshore acres issued (in millions): 4.69 million.
Year: 2005;
Offshore leases issued: 989;
Offshore acres issued (in millions): 5.24 million.
Year: 2006;
Offshore leases issued: 763;
Offshore acres issued (in millions): 4.12 million.
Source: Department of the Interior.
[End of figure]
The annual number of onshore leases issued, as shown in figure 2,
peaked in 1988, then rapidly declined until about 1992, and remained at
these lower levels until about 2003, when it began to increase
modestly.
Figure 2: Onshore Oil and Gas Leasing Activity on Federal Lands, 1987
through 2006:
[See PDF for image]
This figure is a combination line and vertical bar graph depicting the
following data:
Onshore Oil and Gas Leasing Activity in Federal Waters, 1987 through
2006:
Year: 1987;
Onshore leases issued: 7,247;
Onshore acres issued (in millions): 7.43 million.
Year: 1988;
Onshore leases issued: 9,234;
Onshore acres issued (in millions): 12.22 million.
Year: 1989;
Onshore leases issued: 8,352;
Onshore acres issued (in millions): 7.81 million.
Year: 1990;
Onshore leases issued: 6,552;
Onshore acres issued (in millions): 5.51 million.
Year: 1991;
Onshore leases issued: 5,465;
Onshore acres issued (in millions): 4.44 million.
Year: 1992;
Onshore leases issued: 3,999;
Onshore acres issued (in millions): 3.18 million.
Year: 1993;
Onshore leases issued: 4,040;
Onshore acres issued (in millions): 3.18 million.
Year: 1994;
Onshore leases issued: 4,159;
Onshore acres issued (in millions): 3.81 million.
Year: 1995;
Onshore leases issued: 4,520;
Onshore acres issued (in millions): 3.87 million.
Year: 1996;
Onshore leases issued: 3,375;
Onshore acres issued (in millions): 2.52 million.
Year: 1997;
Onshore leases issued: 4,180;
Onshore acres issued (in millions): 3.47 million.
Year: 1998;
Onshore leases issued: 4,105;
Onshore acres issued (in millions): 3.60 million.
Year: 1999;
Onshore leases issued: 3,075;
Onshore acres issued (in millions): 3.60 million.
Year: 2000;
Onshore leases issued: 2,909;
Onshore acres issued (in millions): 2.65 million.
Year: 2001;
Onshore leases issued: 3,289;
Onshore acres issued (in millions): 4.00 million.
Year: 2002;
Onshore leases issued: 2,384;
Onshore acres issued (in millions): 2.81 million.
Year: 2003;
Onshore leases issued: 2,022;
Onshore acres issued (in millions): 2.06 million.
Year: 2004;
Onshore leases issued: 2,699;
Onshore acres issued (in millions): 4.16 million.
Year: 2005;
Onshore leases issued: 3,514;
Onshore acres issued (in millions): 4.31 million.
Year: 2006;
Onshore leases issued: 3,746;
Onshore acres issued (in millions): 4.39 million.
Source: Department of the Interior.
[End of figure]
According to MMS officials, these trends, in part, reflect changes in
oil and gas prices. Specifically, the officials told us that at the
beginning of our time frame, 1987 through 1988, onshore and offshore
leasing typically reflected both oil and gas prices. However, offshore
trends have since come to more closely reflect oil prices, while
onshore trends have come to more closely reflect natural gas prices.
Development of Federal Leases Has Generally Increased:
Annual drilling and production activity has been generally higher over
the last 10 years than from 1987 through 1996 for both offshore and
onshore leases. As shown in figure 3, annual drilling activity in
offshore leases has been highly variable but has generally increased
since 2002, a period during which oil prices rose significantly.
Offshore drilling activity increased significantly from 1991 through
1997, had fallen significantly through 2002, and then began to increase
again. The initial increase in wells with an active drilling status in
1996 coincides with increased oil and gas drilling in deep waters of
the Gulf of Mexico. The increase in wells completed after 2002 occurred
during a period of generally increasing oil and gas prices.
Figure 3: Offshore Oil and Gas Drilling in Federal Waters, 1987 through
2006:
[See PDF for image]
This figure is a line graph depicting the following data:
Year: 1987;
Number of wells in active drilling: 142.
Year: 1988;
Number of wells in active drilling: 116.
Year: 1989;
Number of wells in active drilling: 123.
Year: 1990;
Number of wells in active drilling: 120.
Year: 1991;
Number of wells in active drilling: 64.
Year: 1992;
Number of wells in active drilling: 104.
Year: 1993;
Number of wells in active drilling: 129.
Year: 1994;
Number of wells in active drilling: 117.
Year: 1995;
Number of wells in active drilling: 124.
Year: 1996;
Number of wells in active drilling: 212.
Year: 1997;
Number of wells in active drilling: 268.
Year: 1998;
Number of wells in active drilling: 175.
Year: 1999;
Number of wells in active drilling: 219.
Year: 2000;
Number of wells in active drilling: 230.
Year: 2001;
Number of wells in active drilling: 153.
Year: 2002;
Number of wells in active drilling: 143.
Year: 2003;
Number of wells in active drilling: 204.
Year: 2004;
Number of wells in active drilling: 197.
Year: 2005;
Number of wells in active drilling: 242.
Year: 2006;
Number of wells in active drilling: 209.
Source: Department of the Interior.
Note: Annual data on applications to drill and well completions are not
available for offshore leases.
[End of figure]
However, as shown in figure 4, the increase has been more dramatic for
onshore leases. Since 1999, a rapid increase is evident in applications
for permits to drill (APD) wells, in wells started, and in wells
completed.
Figure 4: Onshore Oil and Gas Drilling on Federal Lands, 1987 through
2006:
[See PDF for image]
This figure is a multiple line graph depicting the following data:
Year: 1987;
Number of Onshore APDs approved: 1,486;
Number of Onshore wells started: 1,023;
Number of Onshore wells completed: 1,112.
Year: 1988;
Number of Onshore APDs approved: 1,772;
Number of Onshore wells started: 1,526;
Number of Onshore wells completed: 988.
Year: 1989;
Number of Onshore APDs approved: 1,851;
Number of Onshore wells started: 1,231;
Number of Onshore wells completed: 1,006.
Year: 1990;
Number of Onshore APDs approved: 2,617;
Number of Onshore wells started: 1,827;
Number of Onshore wells completed: 1,263.
Year: 1991;
Number of Onshore APDs approved: 1,969;
Number of Onshore wells started: 1,783;
Number of Onshore wells completed: 1,588.
Year: 1992;
Number of Onshore APDs approved: 1,947;
Number of Onshore wells started: 1,214;
Number of Onshore wells completed: 2,213.
Year: 1993;
Number of Onshore APDs approved: 1,631;
Number of Onshore wells started: 1,541;
Number of Onshore wells completed: 1,481.
Year: 1994;
Number of Onshore APDs approved: 2,113;
Number of Onshore wells started: 1,630;
Number of Onshore wells completed: 1,283.
Year: 1995;
Number of Onshore APDs approved: 1,807;
Number of Onshore wells started: 1,452;
Number of Onshore wells completed: 1,359.
Year: 1996;;
Number of Onshore APDs approved: 1,959;
Number of Onshore wells started: 1,410;
Number of Onshore wells completed: 824.
Year: 1997;
Number of Onshore APDs approved: 2,580;
Number of Onshore wells started: 1,736;
Number of Onshore wells completed: 934.
Year: 1998;
Number of Onshore APDs approved: 3,148;
Number of Onshore wells started: 2,363;
Number of Onshore wells completed: 2,106.
Year: 1999;
Number of Onshore APDs approved: 1,923;
Number of Onshore wells started: 1,537;
Number of Onshore wells completed: 1,749.
Year: 2000;
Number of Onshore APDs approved: 3,413;
Number of Onshore wells started: 2,623;
Number of Onshore wells completed: 2,341.
Year: 2001;
Number of Onshore APDs approved: 3,863;
Number of Onshore wells started: 3,114;
Number of Onshore wells completed: 2,741.
Year: 2002;
Number of Onshore APDs approved: 3,727;
Number of Onshore wells started: 2,772;
Number of Onshore wells completed: 2,922.
Year: 2003;
Number of Onshore APDs approved: 3,759;
Number of Onshore wells started: 2,878;
Number of Onshore wells completed: 1,105.
Year: 2004;
Number of Onshore APDs approved: 6,051;
Number of Onshore wells started: 3,696;
Number of Onshore wells completed: 2,384.
Year: 2005;
No data available from Public Land Statistics for 2005.
Year: 2006;
Number of Onshore APDs approved: 6,738;
Number of Onshore wells started: 4,708;
Number of Onshore wells completed: 3,693.
Source: Department of the Interior.
[End of figure]
Companies Consider Various Factors before Acquiring and Developing
Federal Oil and Gas Leases:
Industry officials we spoke with said that business, geological, and
regulatory factors influence companies' decisions to lease and develop
oil and gas leases, and that they cannot always achieve production
during the primary terms and therefore seek extensions. Specifically:
* Business factors. Industry officials told us that companies purchase
leases knowing that it will not be economically feasible to drill every
lease; however, they maintain an inventory of leases in various stages
of development so that they may plan their business to develop leases
when it is most profitable to do so. Industry officials emphasized that
the oil and gas business is inherently speculative; therefore commodity
prices and other market conditions determine whether it is economical
to drill. For example, some wells may not be economical to drill while
oil and gas prices are lower, but companies may keep inventories of
leases that could become profitable to develop at higher oil and gas
prices. In addition, industry officials told us that if their producing
leases are not part of a unit agreement, their companies need to
maintain undeveloped leases surrounding their producing leases so that
other lessees do not tap into the same reservoir. They also told us
that the development of oil and gas leases requires time-consuming and
costly research to determine which leases to develop, including
exploratory, geological, and seismic studies. Lease terms and
stipulations can also influence companies' decisions. For example,
industry officials told us that if a company is reasonably confident
that a lease will produce relatively quickly, a 3-or 5-year lease term
may be sufficient, but that it may need a longer lease in areas that
are considered less certain and, hence, more speculative. In addition,
they told us that companies consider the location and the availability
of equipment, such as drilling rigs, as well as the infrastructure to
deliver the oil and gas to market centers. Officials also noted that
building additional connecting pipelines requires a critical mass of
leases, which may take time to acquire.
* Geological factors. Industry officials told us that oil and gas
resources are becoming more difficult to find and develop, and said
that identifying the exact location or extent of subsurface oil or gas
deposits may require them to collect and analyze seismic data and drill
multiple wells, which is time-consuming and costly.
* Regulatory factors. Industry officials cited increasing federal
regulations and the withdrawal of lands for wildlife and environmental
protection as having the greatest negative impact on their ability to
develop oil and gas at a faster pace since the 1990s. For example, in
parts of Wyoming, drilling cannot occur during the spring to protect
the sage grouse and is limited during the winter because elk live and
forage for food in the area. They also told us that the development of
oil and gas leases requires federally mandated studies to protect the
environment, wildlife, and cultural and historic resources and
development plans that Interior must approve before the leaseholder can
begin development activities, which can take about 2 years. Because of
the various studies that are required and the workload at the agencies,
permits to drill can require long lead times. They also noted that
historically, the time to receive an approved application to drill
varied widely across different Interior regional offices and, as a
result, led to uncertainty and unexpected delays.
New advances in technology have helped oil companies address some of
these factors. For example, advanced techniques for identifying oil and
gas underground can help companies more readily find new reservoirs.
Similarly, advances in drilling techniques and materials have allowed
companies to drill multiple wells from a single portion of a lease to
access distant resources that were previously too costly to access.
However, for both of these, advanced equipment is expensive, and
training staff to use it adds to personnel costs.
Development Activity in a Sample of Leases Issued from 1987 through
1996 Varied Considerably:
Our review of detailed data on about 55,000 offshore and onshore leases
issued from 1987 through 1996 identified three key findings. First, a
majority of leases expired without being drilled or reaching
production. Second, shorter leases were generally developed more
quickly than longer leases but not necessarily at comparable rates.
Third, a substantial percentage of leases were drilled after the
initial primary term following a lease extension or suspension.
Many Leases Expired without Having Been Drilled:
As shown in table 1, of the leases issued from 1987 through 1996,
offshore leases were substantially more likely than onshore leases to
have been developed up through 2007. Specifically, about 1,891 leases,
or about 26 percent of the 7,285 offshore leases were drilled, and
about 888 leases, or about 12 percent of the offshore leases achieved
production. By comparison, about 2,904 leases, or 6 percent of the
nearly 47,925 onshore leases issued, were drilled during the sample
period, and about 2,386 leases, or 5 percent of the total leases,
produced oil and gas by 2007.
Table 1: Percentage of Offshore and Onshore Leases Issued (1987
through 1996), Drilled and Produced through 2007:
Location: Offshore;
Number of leases issued: 7,285;
Number of leases drilled: 1,891;
Percentage of leases drilled: 25.96;
Number of producing leases[A]: 888;
Percentage of producing leases: 12.19.
Location: Onshore;
Number of leases issued: 47,925;
Number of leases drilled: 2,904;
Percentage of leases drilled: 6.06;
Number of producing leases[A]: 2,386;
Percentage of producing leases: 4.98.
Source: GAO analysis of data provided by the Department of the Interior
and Premier Data Services.
[A] These totals reflect production occurring on the lease and
production occurring within a unit that may be allocated to the lease.
[End of table]
In our sample of onshore leases, about 5,300 leases participated in at
least one unit agreement, and 18 percent of these leases were drilled
during the time frame of our review--a percentage much higher than the
percentage for onshore leases that never participated in a unit
agreement. In addition to the production occurring on leases, some
leases were considered by Interior to be producing because they were
part of a unit that was producing--meaning that drilling and production
occurred elsewhere within the unit. Specifically, for offshore leases
we identified 15 leases of the 888 leases identified as producing that
had not been drilled but that were considered to be producing because
they were part of a producing unit. Drilling and production occurring
in units was even more frequent for onshore leases. Specifically, we
identified 569 onshore leases of the 2,386 leases that had not been
drilled but that were considered to be producing because they were part
of a unit that was producing. Both offshore and onshore leases are
deemed to be producing because they are part of a unit, are receiving a
share of production from the unit, and pay royalties on that share to
the federal government even though no drilling has occurred on the
lease itself.
Shorter Leases Were Generally Developed More Quickly Than Longer
Leases:
We found that for offshore leases, all of which were issued
competitively, shorter leases--issued for shallower waters that are
generally easier to explore and develop--were generally more likely to
be developed and were generally developed more quickly. Specifically,
we found that shallow water leases, those for waters less than 400
meters deep, which were issued under 5-year primary lease terms, were
the most likely to have been drilled and to have produced oil or gas
during the sample period and were developed most quickly. Moreover,
about one-third of shallow water leases were drilled and about one-
sixth achieved production during the primary term. These leases were
drilled in about 2.4 years and achieved production in about 4.3 years.
The industry has more experience exploring and drilling in shallower
waters and development is generally easier. In particular, it is
generally less costly to explore and drill leases in shallower waters
and easier and less costly to connect a well to the pipeline
infrastructure used to transport the oil or gas to onshore markets. In
contrast, deepwater leases, issued for waters deeper than 800 meters
and under 10-year primary lease terms, were the least likely to have
been drilled and to have produced. Specifically, we found that about 10
percent of leases were drilled and about 2.9 percent of leases achieved
production during the sample period. These leases also took more time,
on average, to be developed. Specifically, it took about 7.6 years for
these leases to be drilled and nearly 13 years for these leases to
achieve production. It is important to note, however, that deepwater
leases had only begun to be developed in the later years of the sample
period as technology has evolved to allow such development. Development
of deepwater leases can also involve very specialized equipment and
staff for exploration and drilling, which can be difficult to obtain.
As a result, development of deepwater leases, including developing the
pipeline infrastructure needed to deliver oil and gas from these leases
to onshore markets, can be more costly and take more time. To encourage
deepwater development, royalty relief was granted for these leases
issued from 1996 through 2000.[Footnote 13] The data on leasing and
development of 5-, 8-, and 10-year leases are shown in table 2.
Table 2: Offshore Leases Issued (1987 through 1996), Drilled and
Produced through 2007:
Shallow water 5-year leases;
Number of leases issued: 4,794;
Number of leases drilled: 1,605;
Percentage of leases drilled: 33.48;
Average number of years to first drilling: 2.42;
Number of leases that produced: 782;
Percentage of leases that produced: 16.31;
Average number of years to first production: 4.31.
Mid-depth 8-year leases;
Number of leases issued: 634;
Number of leases drilled: 95;
Percentage of leases drilled: 14.98;
Average number of years to first drilling: 3.62;
Number of leases that produced: 38;
Percentage of leases that produced: 5.99;
Average number of years to first production: 7.62.
Deepwater 10-year leases;
Number of leases issued: 1,857;
Number of leases drilled: 191;
Percentage of leases drilled: 10.29;
Average number of years to first drilling: 7.62;
Number of leases that produced: 53;
Percentage of leases that produced: 2.85;
Average number of years to first production: 12.94.
Total;
Number of leases issued: 7,285;
Number of leases drilled: 1,891;
Percentage of leases drilled: 25.96;
Average number of years to first drilling: [Empty];
Number of leases that produced: 873;
Percentage of leases that produced: 11.98;
Average number of years to first production: [Empty].
Source: GAO analysis of data provided by the Department of the
Interior.
[End of table]
Development of onshore leases was slightly different--shorter lease
terms were developed more quickly, but were also less likely to be
developed. In particular, those competitive leases with 5-year primary
lease terms--leases issued from 1987 through October 1992--were more
likely to expire without having been drilled, but the drilling that did
occur took place faster than for the competitive leases having 10-year
primary lease terms--those in the sample from October 1992 through
1996. For example, while 5-year competitively issued leases were
generally only developed about half as frequently as 10-year
competitively issued leases, they were generally drilled about 3 years
earlier.[Footnote 14] Noncompetitive leases--all of which had 10-year
primary terms--were the least likely of onshore leases to be developed
during the entire sample period. The data on leasing and development of
5-year competitive, 10-year competitive, and 10-year noncompetitive
leases are shown in table 3.
Table 3: Percentage of 5-Year and 10-Year Onshore Leases Issued (1987
through 1996), Drilled and Produced through 2007:
Competitive 5-year leases (1987-1992);
Number of leases issued: 13,424;
Number of leases drilled: 864;
Percentage of leases drilled: 6.44;
Average number of years to first drilling: 4.39;
Number of leases that produced: 528;
Percentage of leases that produced: 3.93;
Average number of years to first production: 4.92.
Competitive 10-year leases (1992-1996);
Number of leases issued: 10,804;
Number of leases drilled: 1,395;
Percentage of leases drilled: 12.91;
Average number of years to first drilling: 7.09;
Number of leases that produced: 978;
Percentage of leases that produced: 9.05;
Average number of years to first production: 7.74.
Noncompetitive 10-year leases (1987-1996);
Number of leases issued: 23,697;
Number of leases drilled: 645;
Percentage of leases drilled: 2.72;
Average number of years to first drilling: 7.70;
Number of leases that produced: 311;
Percentage of leases that produced: 1.31;
Average number of years to first production: 9.55.
Total;
Number of leases issued: 47,925;
Number of leases drilled: 2,904;
Percentage of leases drilled: 6.06;
Average number of years to first drilling: [Empty];
Number of leases that produced: 1,817;
Percentage of leases that produced: 3.79;
Average number of years to first production: [Empty].
Source: GAO analysis of data provided by the Department of the Interior
and Premier Data Services.
[End of table]
In addition, for onshore federal leases, the proportion of sample
leases that were drilled varied a great deal across the states. This
variation could be the result of many factors, including the amount and
accessibility of oil and gas resources in these different states, as
well as potential differences in factors that affect the relative cost
or ease of development. Table 4 lists information on federal leases
issued in the six states having the highest numbers of federal leases
issued during the sample period.
Table 4: Onshore Leases Issued (1987 through 1996), Drilled and
Produced by State through 2007:
State: Colorado;
Number of leases issued: 5,122;
Number of leases drilled: 281;
Number of leases that produced: 147;
Percentage of leases drilled: 5.49;
Percentage of leases that produced: 2.87.
State: Montana;
Number of leases issued: 2,921;
Number of leases drilled: 111;
Number of leases that produced: 69;
Percentage of leases drilled: 3.80;
Percentage of leases that produced: 2.36.
State: New Mexico;
Number of leases issued: 5,470;
Number of leases drilled: 564;
Number of leases that produced: 425;
Percentage of leases drilled: 10.31;
Percentage of leases that produced: 7.77.
State: Nevada;
Number of leases issued: 4,067;
Number of leases drilled: 69;
Number of leases that produced: 2;
Percentage of leases drilled: 1.70;
Percentage of leases that produced: 0.05.
State: Utah;
Number of leases issued: 5,127;
Number of leases drilled: 323;
Number of leases that produced: 225;
Percentage of leases drilled: 6.30;
Percentage of leases that produced: 4.39.
State: Wyoming;
Number of leases issued: 25,218;
Number of leases drilled: 1,556;
Number of leases that produced: 949;
Percentage of leases drilled: 6.17;
Percentage of leases that produced: 3.76.
State: Total;
Number of leases issued: 47,925;
Number of leases drilled: 2,904;
Number of leases that produced: 1,817;
Percentage of leases drilled: 6.06;
Percentage of leases that produced: 3.79.
Source: GAO analysis of data provided by the Department of the Interior
and Premier Data Services.
[End of table]
Many Leases Were Not Developed until after the End of the Initial
Primary Term Following Lease Extensions or Suspensions:
A substantial percentage of leases that were drilled were not first
drilled until after the end of the initial primary term following lease
extensions for drilling, unitization, or suspension.[Footnote 15] This
varied between offshore and onshore leases. Specifically, of the total
1,891 leases that were drilled offshore, 139 leases, or about 7 percent
of offshore leases, were first drilled after the primary term. In
addition, about 751 leases, or 26 percent of the total 2,904 onshore
leases that were drilled, were first drilled after the primary term. An
even larger percentage of producing leases started producing after the
end of the primary term. Specifically, 395 leases, or 45 percent of the
total 873 producing offshore leases, and 741 leases, or 41 percent of
the total 1,817 producing onshore leases, realized first production
after the primary term of the lease. See table 5 for offshore and
onshore drilling and production after the primary term of the lease.
Table 5: Development and Production during and after the Primary Term:
Offshore;
Number of leases drilled: 1,891;
Number of leases drilled after primary term: 139;
Percentage of leases drilled after primary term: 7.35;
Number of producing leases: 873;
Number of leases that first produced after primary term: 395;
Percentage of producing leases that first produced after primary term:
45.25.
Onshore;
Number of leases drilled: 2,904;
Number of leases drilled after primary term: 751;
Percentage of leases drilled after primary term: 25.86;
Number of producing leases: 1,817;
Number of leases that first produced after primary term: 741;
Percentage of producing leases that first produced after primary term:
40.78.
Source: GAO analysis of data provided by the Department of the Interior
and Premier Data Services.
[End of table]
Conclusions:
The national debate about whether, when, and how to develop additional
federal oil and gas resources is complex and ongoing. A key element of
the debate centers on the extent to which existing federal leases are
being developed. Given the relative absence of incentives in federal
leases to encourage faster development and to reflect the likelihood of
finding oil and gas, we are concerned that Interior may not have
considered the full range of options. For example, Interior could
benefit from some of the efforts states and private landowners use to
encourage development and to differentiate leases based on the
likelihood of finding oil and gas. While there may be valid reasons
that federal leases differ from state leases, it appears to us that
some of the efforts states use could be used more widely and
consistently in federal leases to the benefit of the country and the
federal government. To the extent that the efforts states use to
encourage development could also be effective for Interior leases, the
country could benefit from increased oil and gas production sooner, and
the federal government could realize higher revenues through royalties
and rent. We recognize that the applicable federal laws and regulations
are complex and that determining which of the efforts used by states,
if any, are appropriate for Interior to apply or whether additional
efforts would be helpful will require careful consideration and study.
Recommendation for Executive Action:
To better ensure that federal land leased for oil and gas exploration
and development provides financial and energy benefits as soon as
possible, we recommend that the Secretary of the Interior develop a
strategy to evaluate options to encourage faster development of oil and
gas leases on federal lands, including determining whether methods to
differentiate between leases according to the likelihood of finding
economic quantities of oil or gas and whether some of the other methods
states use could effectively be employed, either across all federal
leases or in a targeted fashion. In so doing, Interior should identify
any statutory or other obstacles to using such methods and report the
findings to Congress.
Agency Comments and Our Evaluation:
We provided a draft of this report to Interior for comment. Interior
provided us with a formal written comment letter.
In its comment letter, Interior generally agreed with our
recommendation, but stated that specific suggestions in our report
could have potentially adverse consequences that we did not discuss in
our report. Interior also stated that it is pursuing expedited
development of oil and gas leases and is already assessing many aspects
of leasing to determine if there are adjustments that could be
beneficial. While we applaud Interior for being receptive to our
recommendation, we disagree with the characterization of our report
discussed below and continue to believe that Interior's efforts to
promote diligent development are in need of a broader reexamination
than the agency currently has under way.
With regard to Interior's comment that some of our specific suggestions
could have adverse consequences, we believe that this statement
mischaracterizes our report. To be clear, we recommended that Interior
evaluate methods to differentiate between leases according to the
likelihood of finding economic quantities of oil or gas, to encourage
faster development of oil and gas leases on federal lands, and to
determine whether some of the methods states use could effectively be
employed on federal leases, but made no specific suggestions for which
if any of these practices Interior should adopt. Further, Interior
provided no specific examples or evidence of how our recommendation
could result in adverse consequences. Our recommendation stated that
Interior should identify any statutory or other obstacles to using
methods to encourage faster development of oil and gas leases and
report the findings to Congress. If any adverse consequences of
adopting more stringent methods for encouraging development of federal
oil and gas leases are found by Interior as it studies this issue, we
believe it would be appropriate for Interior to make that case clearly
and with supporting evidence.
We do not agree that Interior is pursuing expedited development of oil
and gas leases. We found that Interior has not clearly defined
diligence, nor is it using all the tools that other resource owners use
to encourage more rapid development. While two of Interior's practices-
-escalating rental rates and the requirement for 8 year offshore leases
that drilling occur within the first 5 years of the lease--have the
effect of encouraging faster development, we do not believe this is
sufficient to rule out using other or more stringent means to encourage
faster development of some federal leases. Neither we, nor Interior,
can know which, if any, of these other means should be adopted without
first evaluating the options in a comprehensive way.
Finally, we applaud Interior for taking the initiative to evaluate
leasing practices, but do not believe that these efforts are
sufficient. The assessment Interior refers to is a contracted study of
policies affecting the pace of areawide leasing and revenues in the
central and western Gulf of Mexico. This study may well result in
findings that are applicable elsewhere in the Gulf of Mexico, other
offshore regions, or onshore. However, as Interior states in its
comments, oil and gas properties differ significantly across and within
regions. This is precisely why we have recommended that Interior study
what other resource owners do to see if they are applicable to federal
oil and gas leases. To the extent that some of these practices are
applicable to federal leases, we believe it unlikely that they would
apply equally to all federal leases. We modified the language of our
recommendation to make it clearer that a specific practice that may be
applicable and beneficial for one set of oil and gas leases may not
necessarily apply equally to all leases.
Interior's full letter commenting on the draft report is reprinted in
appendix II, and our detailed response to several points not covered
above follows. In addition, Interior made technical comments, which we
have addressed as appropriate.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of this report
to interested congressional committees, the Secretary of the Interior,
and other interested parties. We will also make copies available to
others upon request. In addition, the report will be available at no
charge on the GAO Web Site at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributions to
this report are listed in appendix III.
Signed by:
Frank Rusco:
Acting Director, Natural Resources and Environment:
[End of section]
Appendix I: Scope and Methodology:
We agreed to (1) describe Interior's efforts to encourage development
of federal oil and gas leases and compare them to states' and private
landowners' efforts; (2) examine trends in the number of leases and
amount of acreage leased on federal lands and waters, the amount of
development activity on active federal leases, and factors that may
affect the development of these leases; and (3) describe how
development occurred on a sample of leases that have expired or been
extended beyond their primary terms.
To describe Interior's efforts to encourage development of federal oil
and gas leases and compare them to states' and private landowners'
efforts, we reviewed federal laws and regulations and interviewed
knowledgeable officials with Interior's Bureau of Land Management (BLM)
and Minerals Management Service (MMS), selected states, industry
groups, and a landowners' association. To compare Interior's efforts to
the efforts of selected states to encourage development of state and
private land oil and gas leases, we collected selected information
about state leasing of land for oil and gas from knowledgeable
officials from eight states with experience in oil and gas leasing:
Alaska, Colorado, Montana, New Mexico, Louisiana, Texas, Utah, and
Wyoming. We also conducted a literature search for any studies states
might have conducted and found only a study by the state of Montana on
royalty rates. To compare Interior's efforts to the efforts of private
landowners, we collected selected information from an association of
private landowners involved in leasing land for oil and gas
development; however, much of this information is proprietary and was
limited and not consistently available to us.
To examine trends in the number of leases and acreage leased on federal
lands and waters, the amount of development activity on active federal
leases, and factors that may affect the development of these leases, we
collected leasing statistics from Interior's Public Land Statistics and
obtained leasing, production, and reserve information from MMS's
Technical Information Management System (TIMS). To identify factors
that affect development, we interviewed knowledgeable officials with
BLM and MMS, representatives from the eight states with significant oil
and gas leasing experience that we examined, representatives from
industry with experience developing federal oil and gas leases, and
officials from an association of private landowners involved with
leasing land for oil and gas development.
To describe how development occurred on a sample of leases, we selected
a sample comprising all federal oil and gas leases issued during a
period spanning 1987 through 1996 and tracked development on those
leases through 2007. We selected this time period because leases would
have already passed the 10-year primary term. Our review included the
following:
* We obtained data on (1) all onshore leases issued from 1987 through
1996 from BLM's automated case recordation system, the Legacy Rehost
2000 (LR2000); (2) onshore drilling and production activity from BLM's
Automated Fluid Mineral Support System (AFMSS); and (3) all offshore
leases issued along with drilling and production activity from MMS's
TIMS. Given that all onshore leases issued after 1992 were for 10-year
terms, the time frame of our sample of leases allowed us to evaluate
development and production activity from 10 through 20 years after the
leases were issued.
* We focused on onshore federal leases issued in six states (Colorado,
Montana, New Mexico, Nevada, Utah, and Wyoming), which account for 82
percent of leases issued during this time frame, because collecting and
assessing the reliability of data from each state was extremely
resource intensive. We also limited our analysis to include only
competitively or noncompetitively issued leases, and to exclude a small
number of other leases issued under special legal provisions because
the lease terms and provisions vary significantly and are not
consistent with the lease terms and provisions applicable to the
majority of onshore leases issued. From 1987 through 2006, these types
of leases represented less than half of 1 percent of the total leases
issued.
* We defined development to include any drilling activity--with or
without production in paying quantities. We identified drilling
activity by merging all leases in our time frame with 20 years of AFMSS
or TIMS drilling and production data. Matched cases indicated that
drilling activity had occurred at some point within or after the
primary term of the lease. Although our definition of development
rested on the presence of drilling, it should be noted that drilling
and production data collected by Interior represent only the final
decision of oil and gas companies to proceed with development. These
drilling decisions do not measure the extent of exploration leading up
to the decision to drill, and before any decision is made, there is
often substantial exploration that can involve a host of factors, such
as management, economic, geologic, regulatory, and technological
evaluations. BLM does not, and is not specifically required to, collect
data on the exploration activities of lessees.
To determine the timing of drilling and production, we used system
documentation--specifically LR2000, AFMSS, and TIMS--to identify action
codes that indicated drilling and production. We isolated and confirmed
these codes with knowledgeable Interior officials. We created
categories of producing leases based on these codes. We then calculated
the timing of development, and whether the activity took place within
or after the initial primary term of the lease based on lease terms and
lease issuance date.
We did not identify the reason(s) that drilling occurred after the
initial primary term of the lease based on Interior data because the
information systems do not contain enough information to make this
distinction. For example, we found that the LR2000 database did not
consistently record the beginning and ending of approved suspensions.
We also found that AFMSS does not readily show the unit leases that are
held by drilling or production on a different lease within the same
unit. However, the systems did enable the analysis of all wells drilled
and all leases produced regardless of unit participation.
To determine the reliability of the LR2000 data we used, we interviewed
officials responsible for the data and data systems, reviewed system
documentation, compared data for a sample of 200 leases to source
documents, and performed logic and electronic tests on the data. To
determine the reliability of the AFMSS data we used, we interviewed BLM
officials and others responsible for the data, reviewed system
documentation, and performed logic and electronic tests on the data.
Additionally, we obtained LR2000 lease data sets and the linking keys
to the AFMSS well data through an independent contractor--Premier Data
Services (PDS)--that has worked with these data for many years. PDS
obtains LR2000 data from BLM on a monthly basis, conducts a variety of
system and audit checks to identify data errors, and then reports
errors to BLM for correction. Based on our assessment, we concluded
that the LR2000 and AFMSS data we used in this report were sufficiently
reliable for our purposes. To determine the reliability of TIMS data,
we interviewed responsible officials, reviewed system documentation,
compared our results to published agency data, and performed electronic
and logic tests of the data. Based on our assessment we determined that
the TIMS data we used were sufficiently reliable for our purposes.
We did not analyze trends for the National Petroleum Reserve in Alaska,
a 23-million acre area on Alaska's North Slope that was set aside in
1923 as an emergency oil supply, because only 411 leases have been
issued and 30 wells drilled there since BLM began issuing leases there
in 1999--too few for a trend analysis since none of the leases have
exceeded the primary terms.
We conducted this performance audit from January 2008 to August 2008 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the Department of the Interior:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
United States Department of the Interior:
Office Of The Secretary:
Washington, DC 20240:
September 24, 2008:
Mr. Frank Rusco:
Acting Director, Natural Resources and Environment:
Government Accountability Office:
441 G Street, NW:
Washington, D.C. 20548:
Dear Mr. Rusco:
Thank you for the opportunity to review and comment on the Government
Accountability Office draft report entitled, "Oil and Gas Leasing:
Interior Could Do More to Encourage Diligent Development" (GAO-08-986).
Although the Department of the Interior generally concurs with the
GAO's recommendation to evaluate lease terms to ensure diligent
development, some of the specific suggestions offered by GAO have
potentially adverse consequences not discussed in the report. Extensive
technical comments have been provided by the Minerals Management
Service and the Bureau of Land Management. [See comment 1]
As noted in the draft report, the total number of oil and gas leases
the DOI issued in recent years has generally increased. The DOI is
pursuing expedited development of oil and gas leases. The leases
themselves are designed with diligence in mind. For example. the terms
of offshore leases (5, 8, or 10 years) were chosen because they are
reasonable lengths of time for a diligent party to explore and develop
oil and gas leases at the respective water depths associated with the
lease terms. [See comment 1]
The report draws comparisons between leases administered by various
State governments as well as private landowners. It is important to
understand that the regulatory requirements to drill for oil and gas on
Federal land differ from State and private landowners' requirements.
The report does not detail these important requirements. More time,
effort and investment is needed to drill on Federal land. For example,
in many instances an environmental impact statement must be completed
after a lease has been issued. This alone can take 24 months. [See
comment 1]
Also, not all properties are alike; the physical location and geology
vary among leases affecting the time and investment needed to develop
the lease. As your report states, not all leases result in the
discovery of economically recoverable resources. The length of time
before exploration, development and production is a function of the
risk and investment necessary to bring a lease into production. A
prudent operator needs time to evaluate a lease before making the
significant investment required to explore and develop a lease. For the
Outer Continental Shelf, the difference between State and Federal areas
is substantial. [See comment 2]
We agree with the GAO regarding the importance of lease management
policies that foster diligent development. The DOI has carefully
implemented such policies, while also ensuring that diligent
development incentives or requirements do not compromise safety or
environmental achievements, do not significantly reduce the ultimate
recovery of oil and gas, and do not unduly reduce the revenue derived
from oil and gas leasing.
The DOI evaluates lease terms, including requiring escalating rents in
leases, prior to lease sales. For example, both the royalty rates and
rental rates have been changed for offshore sales this year and those
scheduled for next year. The DOI does differentiate among tracts
offered for lease based on indicators, such as nearby or past drilling.
However, the substantial expense and effort required to analyze tracts
in advance of lease sales in order to create different terms among
leases does not appear to be justified, as there is no evidence that
such an effort will result in faster exploration and development. [See
comment 2]
The DOI is currently assessing many aspects of leasing to help
determine if there are adjustments that could be beneficial. The
completion of this assessment should provide additional tools to
evaluate oil and gas leasing in the Outer Continental Shelf and other
Federal lands and determine if encouraging more rapid development will
benefit the Nation. Well-conceived diligence strategies would need to
increase the acreage leased, increase the amount of oil and gas
produced, and increase the bonus bids that help to fund important
national needs.
Extensive substantive comments have been provided separately. Please
contact Andrea Nygren, MMS Audit Liaison Officer, at (202) 208-4343, or
LaVanna Stevenson, BLM Audit Liaison Officer, at (202) 785-6580, if you
have any questions.
Sincerely,
Signed by:
C. Stephen Allred:
Assistant Secretary:
Land and Minerals Management:
The following are GAO's responses to the Department of the Interior's
Letter dated September 24, 2008.
GAO Comments:
1. We acknowledged, in our draft report, that development of state
lands may be simpler than for federal land leased for oil and gas
development, and identified several such differences. We made no change
in response to this comment.
2. We note that Interior's comments appear internally inconsistent
regarding leased lands and leases. On one hand, Interior acknowledges
that some lands are more likely to contain economic quantities of oil
or gas. On the other hand, it appears unwilling to reflect these
differences in the terms of leases that it issues. We believe, as we
have recommended, that Interior should consider whether it is feasible
and beneficial to differentiate lease terms to reflect the likelihood
of finding oil and gas as some other resource owners appear to do. We
modified the recommendation language to better reflect that this is one
of several factors Interior should consider as part of its efforts to
determine which measures could be useful in encouraging development of
federal oil and gas leases.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Frank Rusco, (202) 512-3841 or ruscof@gao.gov:
Acknowledgments:
In addition to the individual named above, key contributors to this
report included Jon Ludwigson, Assistant Director; Ron Belak; Glenn
Fischer; Alison O'Neill; Rebecca Shea; Dawn Shorey; Barbara Timmerman;
Maria Vargas; and Jacqueline Wade. Important assistance was also
provided by Robert Baney, Casey Brown, Kristen Massey, and Mary Welch.
[End of section]
Footnotes:
[1] In some cases, particularly for offshore leases, where other
activities may be less effective, exploratory activities may include
drilling wells.
[2] For purposes of this report, we considered drilling to be primarily
a developmental activity.
[3] Royalty relief waived or reduced the amount of royalties that
companies would otherwise be obligated to pay on the initial volumes of
production from certain deepwater leases (deeper than 200 meters),
which are referred to as royalty suspension volumes. DWRRA also
authorized the Secretary of the Interior to provide royalty relief to
promote oil and gas development or to increase production from leases
in the Gulf of Mexico.
[4] Federal mineral acres include federal surface and split estate
mineral acres, which are acres where private landowners own the surface
and the federal government owns the subsurface.
[5] The Secretary of the Interior has the authority to raise the
uniform national minimum acceptable bid for all leases, but has not
done so.
[6] The Energy Policy Act of 1992 required BLM to offer all competitive
and noncompetitive leases with 10-year primary terms.
[7] In some cases, particularly for offshore leases, where other
activities may be less effective, exploratory activities may include
drilling wells.
[8] For purposes of this report, we considered drilling to be primarily
a developmental activity.
[9] The royalty rate for all new leases in the Gulf of Mexico was
increased to 18.75 percent for newly issued leases starting with the
first 2008 lease sale. Once a lease is producing, lessees pay the
higher of either the royalty percentage or a minimum royalty payment
equal to the applicable rental rate.
[10] If operations cease during the last 180 days of the primary term,
the leases will automatically expire unless lease-holding operations
are resumed or an approved extension is obtained before the end of the
180th day after operations ceased.
[11] This provision only applies to leases starting with Sale 204 in
2007, which occurred in August, and only to leases that were extended
past their original 5-year primary term. Lessees can avoid these
increases, in some cases, by drilling additional wells.
[12] According to knowledgeable officials from an owners' association,
oil and gas lease information on privately owned land is proprietary
and not consistently captured.
[13] In 1995, the federal government enacted the DWRRA, which provided
royalty relief on new production from certain deepwater leases. See
GAO, Oil and Gas Royalties: Litigation over Royalty Relief Could Cost
the Federal Government Billions of Dollars, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-08-792R] Washington, D.C.: June
5, 2008.
[14] It is important to note that while our sample included leases with
both 5-and 10-year primary terms, these leases were not concurrently
available and were issued in different years. As a result, several key
factors, such as oil and gas prices and drilling technologies, which
could have influenced development, differed when these leases were
issued and developed. In addition, because the data reflect all leases
issued over this period it is possible that some land was leased more
than once. As such, it is possible that some of the 5-year leases could
have expired, been reissued, and actually produced during the sample
period as 10-year leases.
[15] We could not identify all the reasons that drilling occurred after
the initial primary term of the lease based on Interior data because
the information systems do not contain enough information to make this
distinction. For example, we found that the information systems did not
consistently record the beginning and ending of approved suspensions
for onshore leases. In addition, the systems did not allow for the easy
identification of wells drilled under offshore and onshore unit
agreements.
[End of section]
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