$1 Million per Day Investment

Jane Van Ryan
Posted April 13, 2010

The U.S. Interior Department yesterday announced that it will launch a nine-month study into royalty payments in other countries to determine whether U.S. royalty rates should be changed.

Royalties are the payments made to the government for oil and natural gas produced on U.S. federal lands.

Minerals Management Service's (MMS) Liz Birnbaum said in a statement that "the return from federal oil and gas leases is lower than what other resources owners worldwide are receiving," according to a Government Accountability Office study. In February, the Interior announced that it will increase royalty rates for onshore development by $1 billion over the next 10 years.

Already royalties, lease purchases, rental payments and other development fees are among the top funding mechanisms for the federal government. In 2008, energy companies paid $22.1 billion to the federal government, including royalties of $12.2 billion. If Interior were to increase payments, energy companies would have less money to invest in future energy resources.

Oil and natural gas companies invest a lot of time, money and technological ingenuity into exploring for and producing energy resources before knowing whether a leased tract even contains oil or natural gas.

Last week, a Houston Chronicle article and blog post illustrated the risks and challenges involved in finding and producing energy resources. They focused on Transocean's high-tech drill ship, the Discoverer Inspiration, 190 miles southeast of Houston in the deep waters of the Gulf of Mexico where Chevron is currently spending $1 million per day to explore the area.

The post briefly describes how an advanced rig is helping to find energy more efficiently:

"...companies are looking to get one of these new wave ultra-deepwater drilling rigs that have more power, speed and automation to the drilling process and more ways to track in real-time what's happening in the well."

A particular rock formation in the Gulf, the Lower Tertiary, is a main focus of several energy companies. It's believed to contain oil fields comprising one of the largest U.S. oil discoveries in generations.

Last month, Shell's Perdido platform began producing oil there. As the Chronicle mentions, finding oil in the deepwater Gulf isn't easy:

"The region also presents huge technical and cost challenges. Not only are fields often found in waters 2 miles deep, but oil and gas deposits, buried under think salt layers, are hard to detect in geologic surveys. Also, extreme temperatures and pressures in reservoirs test equipment."

The road to bringing oil and natural gas to market--obtaining the lease, evaluation, exploration and production--is a long, complicated, and expensive one.

For more information on the oil and natural gas leasing, technology and the development process, check out these facts about leases, the Energy Tour and our Interactive Leasing Timeline.