Oil & Gas Leases: Drill or Drop

Regarding the recent Interior Department report that two-thirds of Federal offshore oil and gas leases are idle, as are 45 percent of onshore leases (see article), the Administration is correct to call on the oil and gas industry to drill what they have before complaining about permitting as the major hindrance. More to the point, the US needs to change its leasing system for exploiting public lands. It should adopt a system for hydrocarbon leasing similar to those in the UK or Norway. There, a lessee not only pays for the lease, but includes with the bid a work program of evaluation (usually seismic) for 3-5 years. At the end of the term, if the lessee has not carried out the work specified or if the lessee deems the lease unproductive, the acreage automatically reverts back to the government. If the lessee finds the lease potentially productive, it enters into a further 3-5 year work program of exploratory wells. Again, the lease expires if the lessee fails to complete the exploration program or if the lessee deems the tract unproductive. If potentially productive, the lessee then enters into a long-term agreement for development and production from the lease. This would insure that companies cannot simply buy up and sit on leases, but must expeditiously exploit the public's lands (and pay the public royalties for the oil and gas produced) or return them to the public.

PetroChina Pushes Shale Gas

Further to my post below, Bloomberg is reporting that PetroChina President Zhou Jiping yesterday pledged to accelerate his company's oil and gas development, noting that "The nuclear plant closure in Japan will boost its demand for oil and gas. That will have a pretty big impact as Japan is the world's largest liquefied natural gas importer." Read full article here.

Japan Disaster to Spur Asian Shale Gas

The Financial Times Monday noted that as Tokyo Electric Power Co. (TEPCO) lost 9,700 megawatts of nuclear power from Friday’s earthquake and tsunami—nearly 20 percent of Japan’s total electricity generating capacity—British LNG (liquefied natural gas) import prices spiked 12 percent. Even if Japanese authorities do not shut down other nuclear facilities, the loss of these facilities means Japanese electric utilities will have to find additional oil, coal and LNG to generate power. Perhaps for an extended period.
An earthquake at TEPCO’s Kashiwazaki-Kariwa nuclear plant in July 2007 forced a nearly two-year-long shutdown, sending TEPCO scrambling to increase its purchases of crude, fuel oil and LNG. While the 2008 recession lowered TEPCO customer power demand in 2009, the 2008 spike in world oil prices greatly boosted the price of crude, fuel oil and LNG, which in Japan’s contracts is linked to oil. The additional annual cost for these fuel purchases was estimated at the time at more than 70 billion yen (US$ 900 million).
China and India have just begun major LNG import programs. Since 2006, China has constructed four LNG receiving terminals, pushing LNG imports to nearly 10 percent of total Chinese gas supplies. Chinese companies are building another four terminals, and several more are under consideration, as are expansions of existing terminals at Shenzen, Fujian and Shanghai. Shell and Petronet operate LNG receiving terminals in India’s Gujarat State. Additional terminals at Dahbol and Kochi are expected on stream in 2011 and 2012, with plants and Ennore, Mudra, Mangalore and Dighi Port possible.
Both China and India also have stepped up their pursuit of domestic shale gas. State-owned China National Offshore Oil Corp. and PetroChina have made mutli-billion dollar buys of shale gas properties in Canada and the U.S. India’s privately owned Reliance Industries has purchased substantial shale gas assets in the Marcellus and Eagle Ford shale gas basins in the U.S. Additionally, both China and India have begun to explore their domestic shale gas resources and plan to auction domestic shale gas leases this year.
China and India both control the price of domestic natural gas—well below the current LNG import price. A step increase in LNG import prices, caused by TEPCO’s sudden and sustained need for alternative generation fuels, will force both China and India to reconsider LNG's role in their energy mix and propel both to accelerate their domestic shale gas programs.