Obama's Dry Hole

The Wall Street Journal
June 30, 2008; Page A12

"I want you to think about this," Barack Obama said in Las Vegas last week. "The oil companies have already been given 68 million acres of federal land, both onshore and offshore, to drill. They're allowed to drill it, and yet they haven't touched it – 68 million acres that have the potential to nearly double America's total oil production."

Wow, how come the oil companies didn't think of that?

Perhaps because the notion is obviously false – at least to anyone who knows how oil and gas exploration actually works. Predictably, however, Mr. Obama's claim is also the mantra of Nancy Pelosi, Barbara Boxer, John Kerry, Nick Rahall and others writing Congressional energy policy. As a public service, here's a remedial education.

Democrats are in a vise this summer, pinned on one side by voter anger over $4 gas and on the other by their ideological opposition to carbon-based energy – so, as always, the political first resort is to blame Big Oil. The allegation is that oil companies are "stockpiling" leases on federal lands to drive up gas prices. At least liberals are finally acknowledging the significance of supply and demand.

To deflect the GOP effort to relax the offshore-drilling ban – and thus boost supply while demand will remain strong – Democrats also say that most of the current leases are "nonproducing." The idea comes from a "special report" prepared by the Democratic staff of the House Resources Committee, chaired by Mr. Rahall. "If we extrapolate from today's production rates on federal lands and waters," the authors write, the oil companies could "nearly double total U.S. oil production" (their emphasis).

In other words, these whiz kids assume that every acre of every lease holds the same amount of oil and gas. Yet the existence of a lease does not guarantee that the geology holds recoverable resources. Brian Kennedy of the Institute for Energy Research quips that, using the same extrapolation, the 9.4 billion acres of the currently nonproducing moon should yield 654 million barrels of oil per day.

Nonetheless, the House still went through with a gesture called the "use it or lose it" bill, which passed on Thursday 223-195. It would be pointless even if it had a chance of becoming law. Oil companies acquire leases in the expectation that some of them contain sufficient oil and gas to cover the total costs. Yet it takes years to move through federal permitting, exploration and development. The U.S. Minerals Management Service notes that only one of three wells results in a discovery of oil that can be recovered economically. In deeper water, it's one of five. All this involves huge risks, capital investment – and time.

If anything, the Democrats ought to be dancing in the streets about "idle" leases. It means fewer rigs. The days of hit-or-miss wildcatting have been relegated to the past by new, more efficient technologies, such as seismic imaging, directional drilling (wells that are "steered" underground) and multilateral drilling (multiple underground offshoots from a single wellbore).

At the same time, finding new reservoirs has become far more complex. Except for a few very large fields discovered decades ago like Prudhoe Bay, most recent discoveries have been smaller, deeper and less concentrated. The U.S. needs a continuous supply of discoveries to replace declining wells.

Yet companies are not allowed to explore where the biggest prospects for oil and gas may exist – especially on the Outer Continental Shelf. Seven of the top 20 U.S. oil fields are now located in analogous deepwater areas (greater than 1,000 feet) in the Gulf of Mexico. In 2006, Chevron discovered what is likely to be the largest American oil find since Prudhoe, drilled in 7,000 feet of water and more than 20,000 feet under the sea floor. The Wilcox formation may have an upper end of 15 billion barrels of recoverable oil and should begin producing by 2014 – perhaps ushering in a new ultradeepwater frontier.

Likewise, in April, the U.S. Geological Survey revised its estimate for the Bakken Shale, underneath the badlands of North Dakota and Montana. The new assessment – as much as 4.3 billion barrels of oil – is a 25-fold increase over what the Survey believed in 1995. Such breakthroughs confirm that very large reserves exist, if only Congress would let business get at them.

All of which has Democrats sweating bullets. The leadership is desperate to avoid debating a Department of Interior spending bill, because they know Republicans will offer amendments lifting the drilling moratorium that may peel off some Democrats. Last week, Chairman David Obey shut down the Appropriations Committee rather than countenance more domestic energy production. Given Democratic energy illiteracy, this is a fight the GOP can win if it keeps up the pressure.