GEOL 115: The Earth’s Energy Resources

The search for energy resources is a world-wide effort. We therefore took a moment to consider the different types of energy companies that are involved in this process. There are state-owned oil companies that limit their exploration and production activities to a single country and that bear sole responsibility for all exploration and production activities in the country in question. The best known examples of these sorts of companies are Saudi Aramco (oil operations in Saudi Arabia) and PEMEX (operations in Mexico). In class I put PDVSA in this category, it turns out that they are a little different as they don’t bear sole responsibility for production operations in Venezuela. On the other hand there are state-oil companies that are traded publically and have international exploration and production operations. Petrobras (link to their US subsidiary), StatoilHydro, and Gazprom are three examples of the latter. The state has a minority interest in Lukoil.

You can’t produce energy unless you can get access to land. Mineral rights may be administered by private citizens or by public officials on behalf of citizens of states, the USA or sovereign native tribes. In the USA land acquisition works many different ways.

Companies negotiate with private individuals for mineral rights on private land. Often multiple landowners must be approached to acquire all the rights for a specific prospect. Some prospects that are being developed now such as the Barnett Shale or the Bakken are large acreage plays. In the modern world this means that the landowners build websites! The websites are used to organize neighborhoods to cut deals as a single entity, provide info on dealing with oil companies if you have surface rights but not mineral rights, the going rate for acreage, and rumor control.

States and the federal government typically offer acreage though lease sales. There are a variety of mechanisms for this. Typically a governmental agency announces that certain areas will be offered for lease, defines the size and locations of the leases, and announces the terms of the sale. Interested parties nominate specific tracts to be offered in a lease sale. The agency then compiles the tracts of interest, produces a final announcement of the sale, and holds the lease sale. The federal entities that perform that function are the Bureau of Land Management and the Minerals Management Service.

I reviewed the boundary between Federal and State waters. Louisiana is like most other states: the states have control over acreage from the Mean High Water mark ( I said low tide level in class) to a point 3 nautical miles offshore. There are two exceptions: 1)Texas and 2)the Gulf Coast of Florida. Both of these states have control of states from the Mean Low Level Water mark to a point 3 leagues offshore (9 nautical miles). Why is there a difference? Ya got me. I’ll have to check that out in the future.

We started to compare the leasing process in US federal waters with those in foreign countries. Lease blocks in the US are small (3×3 nautical miles) compared to the exploration concessions awarded by most other countries. They are awarded using a sealed bid-bonus system. This means that the lease rental, royalty and other terms of the lease are specified by the Feds up front. The bidding entities then submit a bonus, a onetime payment for the right to acquire the exploration rights to that lease. This system lends itself to a phenomenon known as the Winner’s Curse. The entity that wins the lease is typically the one that ascertains the value of that lease incorrectly by the greatest amount. This is a small thing to you and me but it drives exploration managers nuts. Funds that “they leave on the table” aren’t lost but they do represent funds that could have been used to pursue other ventures if they were better able to value the lease and predict their competitor’s behavior.