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Originally Posted by Schneed10
I need some education on that. I keep hearing that there are land leases in place which oil companies are not taking advantage of.
Knowing what I know about business and how a finance department of a major company would allocate its investment dollars, I'd imagine the CFO of ConocoPhillips has a list of all his existing land leases and an expected financial return calculated by his analysts for each one of them. That financial return, I'd imagine, is largely based on how much oil they think they could get from that space, and how efficiently they could deliver it from the oil field to the refinery to the market. He knows he has X number of dollars to invest in exploring all of his leases, so he goes down the list and picks the ones that offer the greatest potential for financial return. Inevitably he's going to run out of budgeted investment dollars before he explores every land lease, and naturally some will go unexplored for a period of time.
I'm guessing this is essentially how the process works, but I'm not sure. Do you know why companies are not exploring their existing land leases?
The potential financial return on exploring them is an important piece of the puzzle. If the land lease won't yield enough oil to offset the cost of setting up drilling operations, or if the land lease won't yield enough oil to offset the cost of needing to build an oil pipeline or build more refinery capacity, then Obama's position insisting that companies explore these existing leases will only serve to drive gas prices higher, not lower them.
If Obama forces oil companies to drill on land leases that cost more than the revenue they generate, then the oil companies will pass along those costs to the consumer.
I'm admitting up front that I don't know if this is the reason or not, but Obama needs to give this some serious thought.
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you're essentially right with how the leases work. the research the leases most likely to provided oil first, and they have a (flexible) budget for doing x leases per year, but some of those leases would cost more to research and drill than the potential oil needed to cover costs and meet their revenue targets.
the offshore stuff is appealing to them because they know with good certainty that the oil is there, and that there's enough of it to be worth setting rigs up immediately.
that said, the amount of oil there isn't amazing, but the intention to drill drives down the rampant oil speculation (see colbert for a GREAT piece on how that worked).