Death of the US Oil and Gas Industry

Ten years from now, when you are paying $10 for a gallon gasoline and there is no domestic production, you will look around and wonder, “What happened to the US oil industry?” The House Committee on Natural Resources is drafting a bill that will start us on the process of killing the domestic oil and gas industry. The public wont even know it is happening because the cause of its demise will be buried in legislative verbiage. A good summary of the situation can be found here.

Here is my take on a couple of the issues.

Merging the BLM and MMS - They are two separate organizations that have unique requirements. Offshore oil and gas, which the MMS regulates, requires specific knowledge of a technology that doesn’t exist for onshore wells. There is no economy of scale to be gained by merging them. Merging them is a bad idea. It’s a classic case of “if it ain’t broke, don’t fix it”.

Shortening the lease period to 5 years – This totally ignores the hurdles that companies have to jump in order to start drilling or construction of a production facility. It is possible to take 5 years just to get the permits required. Offshore leases are even worse given the fact that often the technology to drill in deep water may not exist when the lease is purchased. The technology and procedures have to be developed at a tremendous expense. I think companies will just stop buying leases if they are restricted to a 5 year lease term.

No discharge offshore – The offshore industry has been subjected to ever tightening environmental regulations. Numerous studies have been done, at industry expense, to measure the effects of the discharge of produced water on marine life. There have not been any findings showing that these discharges have a deleterious effect on benthic organisms. The EPA monitors this issue very closely. Going to zero discharge will increase the cost of development to the point where a marginal lease will not be economic.

Production Incentive Fee – It sounds like this is a fee (spell that TAX) imposed late in a field’s life to encourage production. The problem is that there may not be any production to encourage. That’s why they call it DEPLETED. As production from a field decreases, it reaches what is called the “economic limit”. This is when it costs more to produce it that it is worth. A well that reaches this status will be shut in. When that happens depends upon the price of oil, of course. Sometimes, a major company will sell nearly depleted fields to smaller producers who may have lower lifting costs. But when its dead, its dead, and no amount of incentive fee will bring it back to life. To believe that oil companies operate otherwise is to buy into the Big Oil Conspiracy Theory.

Oil companies want to reduce risk. One of the risks they measure is the risk of changing regulations. If they think the rules are going to change, or become more onerous, they will go elsewhere. The good intentions of the Obamabots will surely send oil companies overseas and kill domestic production.

Why would they want to do that? I suspect they are doing this to force us to renewable energy. If they take away domestic oil and gas production, we will have no choice but to rely upon wind, wave and solar sources for our energy. It will cost too much to drive a large car, so we will have to buy the tin cans built by Government Motors. If I sound paranoid, maybe I am, but am I paranoid enough?