Why Pay Millions of Dollars and Not Drill on Federal Lands Approved for Drilling?

Every day, we hear about 9,000 approved drilling permits on federal land where the Petroleum Industry is not yet drilling. I decided to find out why and learn something about the Petroleum Industry simultaneously. Here are my findings. Enjoy!

The Bureau of Land Management (BLM) has released the application for a permit to drill report for 2021. The report states that the Application for Permission to Drill (APD) approved and available to drill is 9,173.? The BLM cannot approve an application for a permit to drill until the operator meets the requirements of specific laws and regulations, including the National Environmental Policy Act (NEPA), the National Historic Preservation Act, and the Endangered Species Act. Upon receiving an APD, BLM typically conducts an onsite inspection with surface and/or mineral estate owners, resource specialists, the operator, and when applicable, other Surface Management Agencies (or SMAs, such as states, tribal representatives, or other Federal agencies like the USDA Forest Service). After completing these inspections, the BLM and any other relevant SMAs conduct a NEPA analysis and then approves with modifications, denies, or defers action on the Application.

?

Permits to drill on 9,000 leases represent about 25 percent of all the Federal Leases.

?

The number of newly approved leases dramatically dropped in FY20 because of COVID.

?

However, the total number of new acres leased spiked in FY19 and FY20. BLM has not yet released the FY21 numbers.

?

The average number of acres per lease spiked in FY20 to about 2,000 acres per lease.

Using these numbers provided by BLM, the 9,000 acres not being drilled represent about 18 million acres. They can easily represent up to 100-million-dollar investment by the Petroleum Industry, so why not start drilling and get a return on this investment??

Here is my analysis:

Litigation: One article mentioned 2,200 pending litigations on Federal leased land. Petroleum companies won’t drill if there is a pending lawsuit.

Permits for storage and transportation: Just like a farmer not milking his cows and leaving the milk on the ground, Petroleum companies need to get permits and approvals for storage and transportation of the oil to refineries before drilling.

Test and Exploratory Well Failure: A test well cannot be drilled until APD approval. If the test well shows that no oil exists or is cost prohibitive, then the leased land won’t be put into production even if it is available to drill.

Labor Shortage: One-third of Petroleum Company employees were laid off during COVID. Like other industries, there is a slow return to full staffing.

Equipment Shortage: Supply chain problem have also impacted the Petroleum industry.

Increased Cost of Capital: Bloomberg article mentioned that increased regulations had increased the cost of capital for drilling from 8 percent to 20 percent.

Pipeline Capacity: Multiple Petroleum Industry articles complain about the lack of pipeline capacity. Trucking the oil to refineries increases carbon emissions and costs.

Value Stream Buffer: Readers familiar with manufacturing and software development can relate to the concept of a value stream. There are about six drilled but uncompleted wells (DUCs) for every drilled and completed well. Similarly, there is an industry ratio of approved APD but not being drilled to total leased land. Some analysts state that the current ratio of about 25 percent is aligned with past Industry averages, but I have not been able to verify this.

High gas prices will remain until the Government, and the Petroleum Industry work together to rapidly increase U.S oil production to pre-COVID levels. We are currently about 1.5 million barrels a day below pre-COVID levels. Europe imports about 3 million-barrels-a-day from Russia. Perhaps some of this oil can be made up by US production.

Government and Industry need to reach a consensus on clear, realistic targets for domestic oil production, identify obstacles to meeting those targets, and work together to address the barriers in the framework of a competitive capitalistic system.