Exxon and Statoil Sue Government

Jim Brown
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With one billion barrels of oil up for grabs the oil giant and their partner have taken exception to a new rule change by the BOEMRE.

Exxon (XOM) discovered an estimated one billion barrels of oil deep in the Gulf of Mexico in 2008. The Julia well was drilled in 6,500 feet of water to a depth 31,160 feet. Exxon and Statoil announced the promising discovery in January 2008 with plans to drill additional appraisal wells to further define the extent of the Julia discovery. The size of the discovery was not disclosed at the time.

Exxon filed for an extension of their lease rights in order to make a comprehensive plan on how to best develop the area. The government has granted thousands of lease extensions in the past and NO request for an extension for development has ever been denied.

Unfortunately for Exxon there is a new sheriff in power and this president has a big chip on his shoulder about big oil. Oil companies are evil and they should be heavily taxed and their high paying workers put on unemployment. At least that is the message to the markets from the current administrations policies.

According to Statoil the BOEMRE has never denied an extension application before. In October 2008 Exxon applied for a normal five-year extension so they could determine how to safely and profitably produce this deepwater field. To their surprise it was denied in February 2009. Exxon said the denial was based on legal interpretations the BOEMRE "had never before applied and had never before articulated."

Exxon (50%) and Statoil (50%) appealed the decision and after a brief review it was again denied in April 2009. More appeals followed and Exxon lost the last appeal in May.

Exxon is known for moving slowly in developing plans for offshore production but given the complexity of developing oil fields six miles below the surface that is to be expected.

The government said Exxon did not present a firm plan for producing the oil. Duh! You have to drill it first and one exploratory well does not give you enough information to develop a "firm plan" for producing the oil in an entire lease. Nobody had ever been required to provide a firm plan in the past. This was a new and previously unneeded requirement.

President Obama is taking the hard line against the evil oil companies because it makes a good sound bite in speeches. Ignore the fact that thousands of workers and tens of billions of dollars would pour into this development. Ignore the fact that the federal government would receive roughly $11 billion in royalties off this development. Ignore the fact that by arbitrarily refusing the extension the production of this oil has been setback by a minimum of 5-7 years. If the lease has to go through the auction process again and someone else wins and has to develop the seismic data, drill exploratory wells, etc it could be 10-15 years before the oil is produced. This is mass stupidity at the government level.

It already took Exxon years to do all the preparation just to drill the initial exploratory well. It will take any new bidder those same years to repeat the process.

The BOEMRE claims they have a responsibility now to make sure it is done safely. No problem with that concept but it takes a lot of time and study to plan ultradeep wells with safety in mind. Their complaint with Exxon was the length of time it took them to make the discovery. Do they really want to send the message to exploration companies that they have to rush production to avoid having their leases cancelled? That would be an open invitation for slipshod drilling and increase the potential for another Horizon type oil spill.

Exxon and Statoil have both sued the government individually and I am pretty sure they can keep the suit active until after the 2012 elections. Given the current stump speeches from the president, waiting until after the election may be the only way for Exxon and Statoil to be victorious in this process. Once the president no longer has to run for office he may be more open to settling the dispute. If he is no longer the president in 2013 the new person in charge will probably not be hostile to drilling in the Gulf.

Jim Brown

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