The market knows best: The real story behind drilling on public lands

Posted: Apr 25, 2013

Written by

Mark Squillace, University of Colorado at Boulder Law School

The evolution of horizontal drilling has caused a boom in oil and gas production throughout the United States. Indeed, our success in developing new resources has been so remarkable that the International Energy Association reported late last year that by around 2030, "North America becomes a net oil exporter... "

Yet this success has not quieted some critics of the Obama administration who complain that new leasing and development on our federal public lands has not been sufficiently robust. Industry allies have noted in particular that the current boom is largely occurring on private lands in states like North Dakota, Colorado and Texas. They argue that drilling on federal lands is not keeping pace and they blame the administration for a lackluster leasing record.

But market forces, not federal lands policy are driving oil and gas development. The current market favors oil and other liquid "plays" -- the industry term for areas with known oil or gas resources -- that are found primarily on private lands, over natural gas, which often occurs on public lands in the West.

Natural gas prices are so low that gas producers are unable to make a reasonable profit. It seems that the industry has been the victim of its own success. New drilling and fracking technologies led to more production, which flooded the domestic market and pushed down natural gas prices to the point that many gas fields are simply uneconomical to develop. Oil and gas companies have lost interest in leasing and developing the natural gas deposits that are so often found on Western public lands.

In North Dakota, where the oil-rich Bakken formation is driving a domestic oil boom, the resources underlie primarily private lands. Likewise in Colorado, companies are focused on the Niobrara formation, located largely on private lands in the eastern part of the state. The Niobrara is largely a liquid play. Liquids are the goodies, such as propane, butane and pentane that are profitable under today's market conditions. By contrast, development of the Williams Fork of the Piceance Basin, a natural gas play on Colorado's public land-dense Western Slope, has fallen off dramatically along with the decline in the price of natural gas.

Let's not forget that oil and natural gas are fundamentally different commodities. The price of crude oil is set on a global market. Despite the fact that we currently produce more oil in the U.S. than we have at any time over the past two decades, we have seen no noticeable impact on the price at the pump.

Natural gas, on the other hand, is a regional commodity with prices more easily influenced by sudden changes in domestic supply. That's why as production has surged, the price of natural gas has fallen by more than 66 percent from its 2008 record high.

You won't often hear the oil industry talking about the market dynamics behind the shift to oil and private lands, but they are clear when writing to their investors. As Halliburton's 2012 Annual Report explains: "In North America, the industry has experienced an activity shift from natural gas plays to oil and liquids-rich basins due to low natural gas prices resulting from continued strong natural gas production. As a result, operators have been optimizing their budgets by focusing on basins with better economics." Private land oil plays, of course, are the basins with "better economics."

Policymakers in Washington should welcome this shift to private land development since it offers our public land managers some breathing room to manage our public lands for their many other important public uses. For those of us who live in the West, these precious lands offer so much more than just extractive minerals. They are special places for recreation, protection of freshwater resources, wildlife habitat, and other consumptive uses like forage and timber.

No one is calling for a moratorium on oil and gas leasing on public lands, but our political leaders and the public should know that any softening of leasing activity is due to market forces and not some nefarious attempt by the Department of the Interior to subvert public lands development. Rather than calling into question the rate of government oil and gas leasing, we should welcome the respite from the pell-mell pace of leasing and development activity that we witnessed just a few years ago. Our public lands feed the soul, not just our automobiles.


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