April 3, 2013

Study: BLM Rule Will Drive Up Energy Costs

From: Shopfloor

Chip Yost

Earlier this week Governor Mary Fallin, of Oklahoma,  wrote Jeffrey Zients, the Acting Director of the Office of Management and Budget (OMB)  about the Bureau of Land Management’s (BLM) proposed rule on hydraulic fracturing on Federal and Indian lands.  Governor Fallin sent Mr. Zients a copy of a study done by the Oklahoma City University’s Economic Research & Policy Institute on the “Individual Well Costs from Proposed Rules Changes to Oil and Natural Gas Operations on BLM Lands” The study was commissioned by Devon Energy. The Governor encouraged OMB to review this study and reconsider the proposed rule.

Six weeks ago the BLM determined based on the thousands of comments they received on their proposed rule regulating these activities on federal lands that they needed to take another look at the entire rule. At that time we stated the following:

“This afternoon, in a victory for manufacturers and energy producers the U.S. Department of Interior’s Bureau of Land Management (BLM) announced it would redraft a proposed hydraulic fracturing regulation for wells operated on federal and Indian lands.  The original rule sought to make radical changes to the chemical disclosure and well construction procedures oil and gas drillers must follow before they can receive their permits to drill”.

As we noted in February, BLM’s proposed rule duplicated existing state regulations, its costs significantly outweighed its benefits, and it would almost certainly result in delays to drilling activities. In our comments to BLM the NAM explicitly requested that the rule be withdrawn and that BLM seek to harmonize its efforts with ongoing state regulations. The Oklahoma City University’s Economic Research & Policy Institute’s study reinforcing our concerns and supports our assertions that these proposed rules would increase costs in terms of additional duplicative requirements. Some of the key findings are as follows:

Mean estimates of the various cost components that represent additional costs for a given well include $116,500 for a Surface Cement Evaluation Log (CEL), $174,000 for Intermediate CEL, $360,000 for Surface remediation, $390,000 for Intermediate remediation, and $345,000 for a Type well.

  • Not all wells on BLM lands incur these costs, we calculate the total additional cost averaged across all wells on BLM lands. Our mean estimate of the total additional cost on a per well basis is $129,194 with the high end being $175,654
  • Extrapolated across the 3022 wells started on BLM lands in 2012 suggest industry costs of more than $370 million annually
  • Competitive capital allocation processes to shift production away from states with large allocations of BLM managed lands, effectively shifting the burden of a portion of the costs to local governments and their constituents in the form of foregone sources of non-tax revenue and local employment opportunities.
  • Due to a lower risk adjusted rate of return, these higher additional costs combined with higher uncertainty should lead producers to re-allocate wells from federal lands to non-federal lands reducing royalty payments to states and employment in those states which possess a larger fraction of BLM lands.

There are many interesting points in this study that should be taken seriously by both the OMB and BLM. Let me simple highlight two. First, it is clear, once again, that when government creates uncertainty through regulations that the business community is hesitant to commit resources and will find another venue where there is less uncertainty. Second, states with a large percentage of federal lands with oil and gas potential will not realize the non-tax revenue (royalty payments) they would have had if BLM had not tried to over regulate. In a time where many state and local governments are struggling with shrinking revenues and difficult budget decisions BLM’s proposal seems that much more out of touch with reality.

Chip Yost is assistant vice president of energy and resources policy, National Association of Manufacturers.

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