FACT SHEET
March 2011
1220 L Street, NW | Washington, DC 20005-4070 www.api.org
NON-PRODUCING LEASES
The fact is "use it or lose it" already is the law. If companies do not produce oilor gas on leases then the leases must be returned to the government.
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Companies are required under government leasing regulations to develop a leaseexpeditiously (between five- and 10-year terms depending on the area) or return it to thegovernment. In general, leases not producing by the end of their term are relinquishedback to the government, which can then re-lease them.
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In addition, companies already pay a rental fee during the pre-production phase ofdevelopment. Rental fees on leases can now exceed $100 thousand annually on someleases. Rental rates increase in the later years of the lease.to encourage diligentdevelopment.
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Companies invest billions of dollars to acquire and maintain their lease inventories. Inaddition to rental payments during the pre-production period, companies also pay abonus bid to acquire leases.
Oil companies holding leases are in the business of finding and producing oil andnatural gas, but a lease is only the first step.
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In many cases, the administration itself is preventing the industry fromdeveloping leases by not issuing permits to drill on them. Companies cannot developexisting leases without drilling permits.
Exploratory drilling occurs only when the geological formation shows potential,which is often unknown until after the lease has been purchased and studied.
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When companies decide to bid on a lease, there may be minimal information available toevaluate the resource potential of that lease. Because of the competitive nature of thedomestic oil and gas industry, companies are willing to risk capital to capture leaseswhile speculating on the resource potential these leases may contain.
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Before drilling an exploratory well, companies may conduct seismic studies—whichrequire permitting—to determine if commercial quantities of hydrocarbons are likely. Ifthey believe commercial quantities exist, they will seek another permit for an exploratorywell. Developing a lease can be a complicated process. Detailed planning, permittingtimetables and regulatory and safety requirements must be met before development canoccur.
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It is not uncommon for a company to spend $100 million to drill a well and find no oil orgas. Moreover, companies drill more wells that have no oil or gas than wells thatactually do.
Production will only occur if resources are found in commercial quantities.
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Leases: “Use it Or Lose It”
A criticism of the oil and natural gas industry is that it seeks greater access to our nation's resources under federal lands when companies already own many leases that are allegedly sitting there, undeveloped and producing…
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