OIL AND GAS:

Two-thirds of federal drilling permits sat idle in 2010

Oil and gas companies drilled fewer new wells on public lands in 2010 than in any other year over the past decade, leaving nearly two-thirds of their drilling permits unused, according to federal records obtained by Greenwire.

The Bureau of Land Management issued 4,090 drilling permits in fiscal 2010, but oil and gas operators drilled 1,480 new wells, using about 36 percent of permits issued.

BLM's permitting data refute industry assertions that the Obama administration is blocking oil and gas development to protect Western landscapes and wildlife, said Dave Alberswerth of the Wilderness Society, a former Interior Department official in the Clinton administration.

"The downturn in drilling on public lands is purely a function of internal corporate decisions and declining natural gas prices, not [Interior Secretary Ken] Salazar's oil and gas policies," Alberswerth said.

But industry representatives say the numbers tell another story. Kathleen Sgamma, government affairs director for the Denver-based Western Energy Alliance, said the Obama administration's regulations have discouraged new drilling in the West, where BLM controls some 250 million acres.

"We were surprised," Sgamma said, "to see just how much the additional regulatory burden has discouraged drilling in the West."

Companies used more permits in previous years. On average, they drilled new wells on roughly 75 percent of new permits issued over the last decade, according to permit records.

The 1,480 new wells drilled in 2010 are less than half the average number of new wells begun on public land over the past 10 years, records show.

The BLM numbers come with caveats. Permits -- known as "applications for permit to drill," or APDs -- are good for two years, so wells drilled in any given year may not correspond to APDs issued that year.

Operators postpone drilling some permitted wells until they can acquire enough APDs to support a viable business plan, Sgamma said.

"It's important to note that operators don't base their decision to drill just on getting an APD, but rather the cost to drill that well," Sgamma said.

Sgamma's group has criticized changes to BLM's oil and gas program under the Obama administration that include leasing reforms, the withdrawal of leases issued under the George W. Bush administration and an out-of-court settlement requiring the agency to conduct reviews of likely greenhouse gas emissions from oil and gas development.

Taken together, the policies have scared away investment and sent drillers to nonfederal lands such as the Marcellus Shale in Pennsylvania and the Haynesville and Barnett shales in Louisiana and Texas, Sgamma said.

If prices were truly to blame for the downturn in drilling on federal lands, one would expect a similar decline in other parts of the country, Sgamma said.

"In the same commodity price environment, we're seeing less activity in the West than in the rest of the country," Sgamma said. Industry can endure lower prices, she added, but "if your regulatory costs are higher in one area of the country, then you just can't make the economics of it work."

Price plays a role

Jack Coleman, a managing partner at EnergyNorthAmerica LLC and former Interior attorney under the George W. Bush administration, said a number of factors could have caused the discrepancy between drilling permits and new wells. Among them: gas prices, geology and business strategy.

"No one ever drills all the permits that they get, nobody has ever done that in the history of oil and gas," Coleman said. "They drill the prospects that are best to them based on the geology they know at the time."

Oil and gas companies typically need to reserve APDs in case there is a sudden bump in the price of commodities, Coleman said. In other cases, companies want to have APDs in hand in case a competitor's neighboring well becomes suddenly flush with oil or gas.

"It's called the law of drainage," Coleman said. "If he starts producing before you do, he can drain the field and you won't have anything left to produce."

The cost of drilling a well can also vary substantially and can sometimes prevent a firm from utilizing all of its permits. That could also be a function of natural gas prices, Coleman said, echoing Alberswerth's claim.

For example, recent demand for drill rigs in oil plays such as North Dakota's Bakken field could have led to a dearth of available rigs in the Rocky Mountain West to drill for comparatively less valuable natural gas, Coleman said.

"Certainly in the last two years natural gas has gone down in favor," Coleman said.

"That doesn't mean they stop getting permits for the gas plays," he added, "because, believe me, oil and gas companies are eternally optimistic. They want to have those permits in place when the price of natural gas bumps up a little bit and they can make more money."

Prices are also to blame for a steep drop in leases issued on federal lands in 2010 compared to 2009, BLM said. The bureau issued about 1,300 new leases in 2010, down substantially from the more than 2,000 leases it issued the year before.

"In response to falling oil and natural gas prices, oil and natural gas development companies have scaled back energy development and leasing activities," BLM said in a posting on its website last month in response to an industry report warning of leasing declines, "a downward trend that is reflected in decreased leasing nationally, not just on federally-managed lands."

The Western Energy Alliance report found that BLM in fiscal 2010 issued 79 percent fewer leases in Colorado, Montana, New Mexico, North Dakota, Utah and Wyoming than in fiscal 2005 (Greenwire, Dec. 17, 2010).