Magazine | June 17, 2013, Issue

United American Emirates

Don’t credit the government for increased oil production

In the past half-decade, the United States has seen a spectacular hydrocarbon boom: Oil-and-gas production has risen to levels not seen since the 1990s, and is expected to continue rising, making the U.S. the world’s largest oil producer by 2017.

Our emerging emirate status has been a private phenomenon. Despite the huge swaths of land owned by the federal government, most of the increased production has happened on private land. Overall, the federal share of onshore oil production dropped from 33 percent in 2009 to 26 percent in 2012.

Why? The answer is some blend of dumb luck, the federal government’s lackadaisical land-management policies, and the Obama administration’s intransigence and countervailing priorities.

The luck part: Most of the boom in production has come from new reserves opened by hydraulic fracturing, which releases natural gas and what’s known as “tight oil” by cracking shale rock. The two most fracking-friendly areas, it turns out, are almost entirely privately held — the Bakken formation, mostly in North Dakota (4 percent federally owned), and the Eagle Ford shale in Texas (1.8 percent federally owned) — as are other fertile areas in states such as New York and Pennsylvania.

But it isn’t just a matter of increased private production; natural-gas production on federal lands has actually dropped about 8 percent since 2009. Michael Levi, an energy fellow at the Council on Foreign Relations, suggests that the two trends “match quite closely,” with private production replacing federal production. Private gas replaces public gas, rather than adding to it, for a variety of reasons: The U.S. government seriously constrains natural-gas exports, our stores are filling quickly, prices are dropping, and there is still not a massive consumer market for it. The equation will change over time, but the fundamental issues will remain.

Thus, much of the boom in private production relative to federal can be chalked up to the competitive nature of oil-and-gas development — the best tracts right now happen to be private, so the boom happens there, and federal production suffers. Further, government land has always been a less competitive product and harder to develop (in part inevitably so). Yet rather than attempting to narrow the gap, the federal government has done quite a good job of widening it.

The federal leasing and permitting process is, no surprise, tortuous and slow. It involves a herd of federal agencies, for one: The lease-making Bureau of Land Management (BLM), but also the EPA, the Fish and Wildlife Service, the Forestry Service, the National Park Service, etc. And once a developer has a lease, he still needs permission under the 1970 National Environmental Policy Act (NEPA), a process that currently has a substantial backlog. Finally, a developer has to obtain a permit to drill, for which the wait time in 2011 was 307 days, up from 218 in 2006. (Needless to say, the federal government’s glacial pace of permitting is especially problematic for small developers.)

For a project on private or state-owned land, by contrast, permits appear with great alacrity: A permit to drill takes an average of ten days in North Dakota and a fortnight in Ohio. Even for federal-land projects, the needed state-level permits take an average of 30 days — incidentally, the same period of time the Energy Policy Act of 2005 mandated that the BLM’s process should take.

A variety of piecemeal reforms have been proposed. The Bush administration, for instance, launched a pilot program in the Energy Policy Act of 2005 to reform and accelerate the BLM’s processes. The program has since languished, but the Obama administration has promised to reinvigorate it, in part responding to the increasing amount of drilling states have been permitting on non-federal lands. The program is currently used in a number of BLM field offices and has seen lower costs, faster permit times, and better compliance. Western Energy Alliance, a coalition of small energy producers across the West, has also proposed outfitting BLM offices with dedicated NEPA preparers to aid oil-and-gas producers.

But despite the benefits it can provide to businesses and workers, expanding federal leasing is a low-priority issue for lawmakers. The returns for any single district or even state are not obvious; the revenue benefits will be indirect, since the federal treasury gets the royalties when developed land turns out to be profitable. (Jason Chaffetz of Utah, which is 66 percent federally owned, deserves accolades for persevering anyway.)

#page#In 2012, Mitt Romney’s campaign put forth a much more direct, and dramatic, suggestion: Keep the leasing federal, but push permitting to the relevant state agencies, of which there is usually just one. Permits would be granted much more quickly, in part because economic incentives would be properly aligned — the communities whose environments would be impacted and whose economies would be stimulated would be the ones to decide. (Of course, some federally owned land is appealing enough to be of significance to America as a whole, but most is not, which is why the federal government hasn’t been tempted to sell it.) Such a reform is probably not politically feasible: The best developers can hope for is that this proposal will spark reform in the federal government.

Which makes the Obama administration’s attitude toward leasing and exploration especially problematic. Perhaps the most obvious indicator of its priorities came in early May, when the California branch of the BLM announced that it did not have the staff and funding to offer leases for drilling in the Monterey Shale, a rich vein for fracking. They even blamed sequestration — but in March, the same office granted permits for solar and wind projects on federal land. Environmental groups cheered the decision, heralding it as evidence that the BLM would be spending even more time on its already lengthy deliberative process.

Further, in 2010, the Obama administration added a new layer to the permitting process for some lands: “master leasing plans,” or MLPs, a further analysis of concerns about particular tracts after the BLM has already drawn up “resource-management plans” for leasing a given region.

Resource-management plans themselves take years — the process for some federal tracts in Utah took all eight years of the Bush administration — and now, as Kathleen Sgamma of Western Energy Alliance explains, “they’re saying that wasn’t good enough,” and that “now we need to do more intensive study,” including more consultation with environmental groups. Sgamma says that, in theory, these extended reviews aren’t supposed to preclude development, but activity has been halted on lands currently going through MLPs. The Obama administration introduced MLPs under the guise of BLM reform, suggesting that they would reduce the risk of environmental protests and lawsuits later in the permitting and drilling process; it’s hard to tell whether that will succeed, since no MLP has yet been completed.

Exploration of federal lands has languished too: The Bush administration, for instance, commissioned an analysis of the Green River formation in Colorado, Utah, and Wyoming, by the U.S. Geological Survey, which uncovered unfathomable amounts of oil — there could be multiple Arabian peninsulas’ worth. It’s in highly unconventional reserves of “oil shale,” essentially oil in rock form — not to be confused with conventional oil that’s extracted from shale via fracking. This means much of the oil cannot be extracted at a reasonable price unless some new technology is developed for the job. But Obama’s Department of the Interior has significantly delayed the issuance of research leases for the area.

Mark Mills, a senior fellow at the Manhattan Institute, argues that this is one of the worst aspects of the federal government’s land policies: Much federal land simply remains unexplored, and the potential benefits of discovering substantial reserves, immediately recoverable or not, are huge. He points not just to the federal government’s slow leasing and permitting numbers, but also to the amount of land offered for lease, period. A government committed to maximizing the revenues from the land no one claimed “back in the good ol’ days,” Mills suggests, could be doing vastly more to encourage exploration, leasing, and production. (He points to the fact that even tiny Ireland managed to mount huge development efforts upon discovery of natural-gas reserves.) Such initiatives require initial outlays from the government and investment in the BLM and the U.S. Geological Survey, but the potential benefits, Mills explains, make this a “no-brainer” when it comes to the revenue issue.

The Obama administration has done even worse in the moratoria it has imposed on offshore drilling, with little more than panic over the Deepwater Horizon spill to justify its caution, but that is a separate issue.

In some sense, the story of the U.S. government’s relationship with the oil-and-gas industry fits into the larger picture of our economy: Government interference and inertia have not managed to prevent the success of the private sector, but they have been a real hindrance — and there’s no sign it’s getting better.

Patrick Brennan — Patrick Brennan is a writer and policy analyst based in Washington, D.C. He was Director of Digital Content for Marco Rubio's presidential campaign, writing op-eds, policy content, and leading the ...

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