Big Oil Wins Again

I read an article this week stating that Exxon Mobil and its Norwegian partner, Statoil, have finally reached an agreement with the U.S. Government regarding the Julia oil field in the Gulf of Mexico.  Assuming the judge approves this settlement, these companies will once again be permitted to renew their leases in this deepwater oil field (deeper than the Deepwater Horizon well, by the way, which is now infamous for its technology failure and subsequent devastating oil spill).  Apparently, Exxon and Statoil teamed up to sign five leases for this potentially lucrative oil field (3 were signed in 1998 and 2 in 2003) but did nothing to develop the area.  When they requested to renew their leases again in October 2008, the federal government refused, saying that a renewal would not be granted because the companies had not provided a specific production plan, and it was not clear that they intended to develop productive operations.  Exxon and Statoil sued.

Over three years (and numerous costly court appeals) later, the U.S. Government has finally agreed to settle this case and allow Exxon and Statoil to continue their leases – on two conditions:

1. The two companies will be expected to develop these leases in phases, with the goal of initial production starting by June 2016 (No more letting this plot sit around untouched; we want more oil!).

2. The government will get paid a higher amount for these lease extensions.  $11.2 million per year until the three original leases reach at least 87.5 million barrels of total production to be exact.  Plus, the government raised the royalty rates on three of the five leases; rent on the original three leases increased from $7.50 per acre to $11 per acre.

That works out to be a pretty sizeable chunk of change for the federal government.  I hate to sound cynical, but it is not surprising that the U.S. Government continues to support “Big Oil” when it is so profitable for them to do so.  Green technology isn’t paying out like an oil field.  And, while it is perfectly reasonable for the government to expect to make a profit when leasing land that it owns, this situation is one of many examples demonstrating America’s favoritism towards the oil industry.  Subsidies abound, giving oil companies an even greater competitive advantage over fledgling alternative fuels.  Plus, Big Oil brings in big money, and that counts for a whole heck of a lot in the American marketplace.

All in all, I will not be surprised if this settlement is approved.  The U.S. Government can certainly use any extra money it can bring in at the moment, so I can see the motivation to hike up the price on an undeveloped oil field and encourage profitable production.  But, I honestly hope that we will soon stop giving unnecessary advantages to the oil industry.  When we work to artificially make oil more profitable for producers and more affordable for U.S. customers, we take away incentives to develop better, more sustainable alternatives.  And we truly need to commit to these alternative fuels, now more than ever.

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