Ban on Offshore Oil Exploration Frustrates Firms : A Moratorium Would Postpone Return on Huge Sums Already Invested

The first thing that an oil company sinks into an offshore drilling project isn’t a metal bit or a seismic probe. It’s money.

Under the best circumstances, a firm can expect to pour millions of dollars and seven to 10 years into a project before seeing any production--or any return on its investment.

For most oil companies, it’s a calculated risk of doing business, particularly when offshore areas promise the best prospects for replacing ever-dwindling domestic supplies of crude.

But now, a sweeping moratorium on offshore drilling is moving quickly through Congress, threatening to throw a major obstacle in the path of industry efforts to tap what officials believe is a potential reserve of as much as 7 billion barrels of oil.

For some companies, the law would even further postpone any return on their already sizable investments in offshore prospecting.

Last week, the House passed to the Senate a proposed law that would postpone until at least October, 1990, any activity on proposed oil lease sales off the California coast. In addition, the measure would ban drilling in areas already leased off the coast of Alaska and Florida and would place about 84 million acres of the country’s outer continental shelf out of the reach of oil companies.

Because the moratorium would delay pre-lease activity in California, oil companies would probably not have a chance until 1992 to bid on three potential lease sales--95 in Southern California, 91 in Northern California and 119 in Central California.

That would place off limits areas where industry officials believe that they have the best hope of finding sizable new reserves.

Last week, some oil company executives argued that a moratorium could cost them money by further delaying projects in which they already have invested millions.

Of course, proponents of the moratorium are less than sympathetic to the costs that oil companies may incur.

“Public policy on offshore drilling should be decided on the merits of the environmental risk, not what it costs a company if they have to wait a little longer to be granted access to it,” said Andy Palmer, director of the Washington office of the American Oceans Campaign, an environmental advocacy group based in Santa Monica.

Besides, he argued, “if you balance it in the California case, on the offsetting side is the billions of dollars in tourist industry, commercial and sport fishing that might be placed at risk by this development.”

In any case, oil companies have sizable investments at stake.

In Alaska, the law would put a stop to exploratory and other drilling in areas already leased in the North Aleutian basin area on the edge of Bristol Bay--where Chevron, Mobil, Unocal and several other companies put down $95.4 million for the rights to drill for oil. Including other development costs, the companies’ total investment in the area is more than $100 million, said Alan Powers, regional director in Alaska of the federal Minerals Management Service, which handles offshore leasing.

Chevron’s share of the rentals and initial investment in the Alaska offshore leases amounts to nearly $18 million, said Richard J. Harris, general manager of the land department of Chevron U.S.A.’s Western Region.

“The other cost, of course, is (from) all those people working on that,” he said. “To be suddenly on hold for a year without knowing whether there will be another extension (of the moratorium) for the year makes it difficult to be organized or efficient at all in our operations,” he said.

The moratorium would direct the Department of Interior to explore compensating the oil companies for their costs and consider buying back the leases.

In Florida, Unocal Corp. and its partners have invested $20 million in leases in the Pulley Ridge area of the eastern Gulf of Mexico, said Unocal spokesman Arthur Bentley.

Mobil Oil Corp. has invested $33.2 million as its share of an investment with other partners in leases in the Pulley Ridge area, not including the costs of administration or seismic and other tests in preparation for drilling, a spokesman said.

Those investments would be put on hold if the moratorium halts exploratory drilling in those areas.

In California, the moratorium would postpone future lease sales until at least October, 1990, but would have no effect on ongoing exploratory or production drilling on existing leases, said Barry Toiv, spokesman for Rep. Leon E. Panetta (D-Monterey), who drafted the bill. After that, the moratorium could be reviewed and extended, he said.

Industry executives are reluctant to discuss their strategies for putting together the highly competitive sealed bids for such lease sales. But they said an oil company generally spends several million dollars on geophysical tests and other studies to evaluate an area before making a bid.

Even without a moratorium, all that money and effort could go for naught if the bid is inadequate. A moratorium simply complicates the matter--when a sale is delayed, the studies may have to be recast in light of new information.

“The biggest headache . . . is spending money and effort and time figuring what to bid for these leases,” said David Adilman, an oil and gas analyst with Data Resources Inc./McGraw-Hill in New York. “When there’s no lease sale, it’s a big drain.”

Atlantic Richfield Co. is one of several major oil companies that may be interested in bidding on the California leases.

“The work could still pay off if the moratorium is lifted next year,” said Arco spokesman Albert Greenstein. “It’s not like it’s wasted effort at this point. . . . It’s always a calculated gamble.”