Trust the people with the oil facts, not the politicians

By popular demand I will augment the discussion about offshore drilling  and the the oil business generally so everyone can reach their own conclusion and not rely upon the spoon fed information of some of our more verbose politicians.  We need to examine a bit about exactly how the oil leasing  and production business operates in the real world as opposed to the implications offered on news shows and the steps of Congress during interviews with politicians who wouldn’t  know a toolpusher from a toothbrush.  A toolpusher by the way is usually the lead boss on a drilling rig operation.   There are many good “hornbooks” on the  oil business and I strongly recommend you read one.  You should be knowledgeable about this vital American industry and not rely on the opinions of others, including me.   Get some facts and make up your own mind.

Off shore drilling leases are obtained by the oil companies in competitive bidding with the US govt.  They pay for them.  The Gulf of Mexico is segmented into “blocks” and they are auctioned off to the highest bidder on a regular basis.  The oil companies are constantly updating their research on the areas and evaluating the data to determine the likelihood of produtive results.  It isn’t really that hard to find oil under the ground but it is damn difficult to find it in commercially produceable quantities that can be extracted at reasonable costs.   Many of the “dry holes” actually did have a “show” as they say in the industry but the prospects of getting enough to recover the costs of completing the well are too problematic to continue with development.   An oil well is drilled to a specified depth and then testing is done to determine if is  commercially viable.   This all cost money–lots of money.

At these auctions the oil companies bid against one another and it is quite a gamble.  They have all done their research but there is no sure thing in the business.  Even though science is used, I.e. geology, physics and engineering, the fact is that there is a lot of art still involved in finding the oil in quantities that you can extract at a cost to make a profit.   The companies bid regularly on these blocks for future development.  Most of themare not envisioned for immediate use until more research and evaluation is done.   As a side note you should be aware that these auctions are by the US govt. although there was serious litigation over who had jurisdiction of the Gulf waters a half century ago.  It was called the Tidelands case during the Eisenhower Administration.   It was between all the States that bordered the Gulf and the US.  Naturally the suit was over money.   The States wanted control and jurisdiction over the leases so they could get the tax and royalty revenue from them and likewise so did the US.  The Supreme Court ruled for the US and thus it controls the leases in the Gulf to this day.

An oil company has to pay several different ways and times to obtain and operate a lease.  Most production companies have what are called “landmen”.  It is their job to locate possible oil or gas production sites and then to negotiate with the landowner to acquire the mineral rights to the land.  This is usually done by a lease.   In almost all the States where there is any significant production at all it is not uncommon for the mineral rights to have been sold seperately from the suface rights.   I live in Texas and I haven’t looked at my deed in years but I wouldn’t be surprised to see that the mineral rights have been reserved to some earlier owner years ago.   You can have fee simple ownership of the surface rights to the land in one person and the mineral rights in another; it is quite common in many States.

The landman negotiates with the mineral righs owner which may or may not be the owner of the surface rights (the person occupying the land with a house, etc.) and if they reach an agreement then a lease to the mineral rights will be signed.  Normally the oil producer will have to pay a signing bonus.  It is a matter of negotiation and how “hot” both sides think the area is for future production.   Sometimes there is no bonus.   In a normal situation the lease will provide that drilling and development must commence by a certain date.  Again that is a matter of negotiation.   A typical deal would provide for a few years time but at the anniversary of the lease the oil producer will usually have to pay what is called a “delay rental”.  That is a payment due because the oil or gas producer has not started drilling yet and to keep the lease alive he has to pay additional sums to the mineral rights owner.  

The mineral rights owner also will get a royalty payment for each barrel of oil produced or MCF of gas produced.  (MCF, is a thousand cubic feet of gas).  A barrel is 44 gallons for those who snored through their high school classes.  Historically, the royalty has been 1/8 but it has been higher and lower depending again on how good or medicore the area is deemed to be for commercially  producible petroleum products.   An oil or gas well is developed in two stages.  First you drill to a specified depth–that is the modern way.    In the old days the leases usually didn’t designate a particular depth but many do today.   So the well is drilled to a specific depth with testing all along the way.  Then if the various tests look good and the odds appear favorable for substantial production you “complete” the well.  The completion costs are often about as much these days as the drilling costs. 
That is the stage where all the pipe is set and the fracturing or other treatment is utilized to enhance production.   Then if everything has worked out right and your guesstimates are good you get production.  Of course you have to install the infrastucture to deliver the oil or gas to the refinery or processing plant.   I haven’t even talked about the “red tape” part of the process but it is substantial in all the States and with the Feds.    You have to report everything essentially that occurs on the site and the well and get the appropriate permits to take each step along the way.    

Many wells can also cause real heartache to the oilman with a “flush” and fade.  That is a situation where the well after completion looks very good and might be producing a 100 barrels a day–great well.  But then after a few days or weeks it drops off to maybe 10 barrels a day or even less.  Then you are faced with the choice of more treatment, at a big cost, or abandoning the well as not commercially feasible.   Oilmen for decades have tried to figure out why that occurs sometimes.  Obviously, they have not solved the puzzle yet or they wouldn’t complete those wells.  It just happens, a hazard of the business.

I offer all this info only to rebut the implication that the oil and gas companies are taking advantage of the Government or the people.  They have paid for those leases and made gambles on whether production is even viable.  They continue to do so through the delay rentals.

Like our aircraft industry the  oil and gas industry is something we as Americans should take pride in and recognize as an essential ingredient to our national security.   

Driving home tonight remember an old song with your first love or chasing fireflies when you were six.

1 Comment

Filed under Economics

One response to “Trust the people with the oil facts, not the politicians

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s