Loophole gives fodder to offshore drilling foes

WASHINGTON (Reuters) - Oil and gas companies that have leased millions of offshore federal acres are not required to produce the energy supplies those tracts may hold, the Interior Department’s Inspector General told Congress on Tuesday.

An offshore supply ship (R) departs an oil rig, March 8, 2004. REUTERS/Janet Kimber

The IG’s finding could help support the argument made by environmental groups and many U.S. lawmakers that the government should not open new offshore areas to drilling when companies are not using some 68 million acres they have already leased.

“With respect to nonproducing leases, we found that oil and gas companies that own federal drilling leases have little obligation to actually produce,” IG Mary Kendall told a House subcommittee conducting a hearing on the issue. “The Department has no formal policy to compel companies to bring these leases into production.”

Kendall said existing regulations and policies promote energy exploration, but production activities are not required to occur during the life of the leases.

To spur production, the Obama administration has proposed levying a $4 per acre annual fee on leases in the Gulf of Mexico that are designated as nonproducing. The fee is expected to raise $1.2 billion from 2010 to 2019.

However, Kendall warned that requiring companies to actually produce oil and gas supplies could backfire if companies become less interested in federal leases.

Oil companies point out that not every acre they lease will result in actual production as they focus on exploring the most likely areas to result in oil and gas discoveries.

“Seismic data for oil and gas inform industry as to the size of a potential reservoir,” Kendall said. “Once exploration starts and the reservoir is better defined, the leases on the outer edges of the reservoir may not be developed and therefore remain nonproducing.”

Kendall also criticized the department for its poor tracking of the status of leases.

“From the beginning of our planning efforts for the evaluation, we were confronted with lease data availability and reliability issues that hindered our progress,” she said.

For example, the IG found almost 7,200 nonproducing leases with no expiration date, when only leases that produce oil and gas should have no expiration dates.

Likewise, there were 528 producing leases that had expiration dates.

Other data errors included leases that had a life of 8,000 years, with an expiration date of January 1, 9999, the IG said.

Reporting by Tom Doggett; editing by Jim Marshall