Opening Federal Areas to Oil Production Found Economically Viable

The Congressional Budget Office (CBO), using information provided by the Department of the Interior, estimates lifting the ban on drilling for oil in certain areas could increase U.S. oil reserves by 30 percent. A current proposal to lift certain restrictions on oil and gas drilling on federal land will create a windfall for the U.S. treasury and tap into vast hydrocarbon reserves.

In this space, several months ago, it was reported oil and gas drilling declined in two areas. The current administration has a five-year plan that closes virtually all of the Outer Continental Shelf (OCS) area until 2017 (except mainly the central and western Gulf and northern Alaska). Further, oil and gas production on federal lands has also been restricted, declining by about 11 percent in 2011 and declining almost as much this year.

A proposal to open most federal lands to leasing was recently sent to the CBO for review. The proposal focuses on federal lands and the Arctic National Wildlife Refuge (ANWR).

Currently, there is no statutory prohibition against leasing or drilling on the OCS (with the exception of the eastern Gulf). Access to the OCS is generally an administrative decision based on five-year periods/plans. Of the 175 billion barrels of oil equivalent existing in undiscovered oil and gas reserves on federal lands (excluding most of the natural gas reserves in Alaska, which are currently unavailable to transportation restrictions), the CBO states nearly half of the 175 billion barrels is in the central and western parts of the Gulf of Mexico. Other federal lands contain roughly 60 billion barrels of oil and natural gas equivalent.

If leasing occurs in new areas, additional gross proceeds from federal oil and gas leases on public lands would total about $2 billion over the 2013-2022 time period. Most of this would come from OCS leases in the Atlantic and Pacific oceans, the eastern Gulf and onshore areas where leasing is currently prohibited.

Of course, there are hurdles associated with access to these federal lands. Many states and local communities oppose such activity. Further, some activity on federal land may face opposition. It is likely most would oppose drilling in a national park or scenic area. Thus, these estimates may be reduced based on the ability to obtain access.

ANWR is believed to contain 8 billion barrels of oil. CBO estimates bonus payments from leasing in ANWR would increase gross federal receipts by $5 billion over the 2013-2022 time period. It will take some time to begin production, once authorized. However, although somewhat unpredictable, royalty payments based on the price of oil may total between $25 billion and $50 billion over the 2023-2035 time period.

The economic consequences of removing regulations on oil production are significant. The establishment of proven reserves would keep the market price lower because when the market price rises enough, these reserves will become profitable to put into production. The drilling and E&P of oil are activities that provide good paying jobs and encourage investment in businesses. Oil that was currently feasible to pump and put into production would reduce America’s balance of payments and support the value of the dollar on the global market. Finally, royalties/related revenues would provide income to the federal government without any increase in tax revenues. This is in addition to increased corporate revenue, which is taxed, from the greater profitability of energy companies producing oil and gas from these fields.

Our massive reserves are an untapped resource that provides energy and economic stability to our country while employing hundreds of thousands of workers. While we need to be prepared to advance from fossil fuels in anticipation of the day when the cost of production is prohibitive, it makes sense to prudently open federal lands for E&P.

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