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March 2011

The fact is "use it or lose it" already is the law. If companies do not produce oil
or gas on leases then the leases must be returned to the government.

• Companies are required under government leasing regulations to develop a lease

expeditiously (between five- and 10-year terms depending on the area) or return it to the
government. In general, leases not producing by the end of their term are relinquished
back to the government, which can then re-lease them.

• In addition, companies already pay a rental fee during the pre-production phase of
development. Rental fees on leases can now exceed $100 thousand annually on some
leases. Rental rates increase in the later years of the encourage diligent

• Companies invest billions of dollars to acquire and maintain their lease inventories. In
addition to rental payments during the pre-production period, companies also pay a
bonus bid to acquire leases.

Oil companies holding leases are in the business of finding and producing oil and
natural gas, but a lease is only the first step.

• In many cases, the administration itself is preventing the industry from

developing leases by not issuing permits to drill on them. Companies cannot develop
existing 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.

• When companies decide to bid on a lease, there may be minimal information available to
evaluate the resource potential of that lease. Because of the competitive nature of the
domestic oil and gas industry, companies are willing to risk capital to capture leases
while speculating on the resource potential these leases may contain.

• Before drilling an exploratory well, companies may conduct seismic studies—which

require permitting—to determine if commercial quantities of hydrocarbons are likely. If
they believe commercial quantities exist, they will seek another permit for an exploratory
well. Developing a lease can be a complicated process. Detailed planning, permitting
timetables and regulatory and safety requirements must be met before development can

• It is not uncommon for a company to spend $100 million to drill a well and find no oil or
gas. Moreover, companies drill more wells that have no oil or gas than wells that
actually do.

Production will only occur if resources are found in commercial quantities.

1220 L Street, NW | Washington, DC 20005-4070


• Not all leases contain sufficient quantities of hydrocarbons. Accumulations of natural gas
and oil occur on only a small number of leases.

Not all leases will have enough hydrocarbons present to make development commercially
viable. In the OCS deepwater, costs can exceed $2 billion for a platform alone. Some factors a
company will consider include:
o Amount of recoverable hydrocarbons,
o Technology restrictions,
o Availability of critical infrastructure needed to bring hydrocarbons to market.

Some leases go undrilled because their potential can be determined by

exploratory wells drilled by the company at nearby leases.

• Given the relatively small size of OCS leases, and the fact that many geologic
formations and trends can cover a large geographical area, companies often bid on
several contiguous leases in a geographical area it believes will have underlying oil and
natural gas resources. A strategically placed exploratory well on a single lease may give
the company enough data to determine the hydrocarbon potential of many leases.


1220 L Street, NW | Washington, DC 20005-4070

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