[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
SHORT-TERM SOLUTIONS FOR INCREASING ENERGY SUPPLY FROM THE PUBLIC
LANDS
=======================================================================
OVERSIGHT HEARING
before the
SUBCOMMITTEE ON ENERGY AND
MINERAL RESOURCES
of the
COMMITTEE ON RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
May 22, 2001
__________
Serial No. 107-30
__________
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COMMITTEE ON RESOURCES
JAMES V. HANSEN, Utah, Chairman
NICK J. RAHALL II, West Virginia, Ranking Democrat Member
Don Young, Alaska, George Miller, California
Vice Chairman Edward J. Markey, Massachusetts
W.J. ``Billy'' Tauzin, Louisiana Dale E. Kildee, Michigan
Jim Saxton, New Jersey Peter A. DeFazio, Oregon
Elton Gallegly, California Eni F.H. Faleomavaega, American Samoa
John J. Duncan, Jr., Tennessee Joel Hefley, Colorado Neil Abercrombie, Hawaii Solomon P. Ortiz, Texas
Wayne T. Gilchrest, Maryland Frank Pallone, Jr., New Jersey
Ken Calvert, California Calvin M. Dooley, California
Scott McInnis, Colorado Robert A. Underwood, Guam
Richard W. Pombo, California Adam Smith, Washington
Barbara Cubin, Wyoming Donna M. Christensen, Virgin Islands
George Radanovich, California Ron Kind, Wisconsin
Walter B. Jones, Jr., North Carolina Jay Inslee, Washington
Mac Thornberry, Texas Grace F. Napolitano, California
Chris Cannon, Utah Tom Udall, New Mexico
John E. Peterson, Pennsylvania Mark Udall, Colorado
Bob Schaffer, Colorado Rush D. Holt, New Jersey
Jim Gibbons, Nevada James P. McGovern, Massachusetts
Mark E. Souder, Indiana Anibal Acevedo-Vila, Puerto Rico
Greg Walden, Oregon Hilda L. Solis, California
Michael K. Simpson, Idaho Brad Carson, Oklahoma
Thomas G. Tancredo, Colorado Betty McCollum, Minnesota
J.D. Hayworth, Arizona
C.L. ``Butch'' Otter, Idaho
Tom Osborne, Nebraska
Jeff Flake, Arizona
Dennis R. Rehberg, Montana
Allen D. Freemyer, Chief of Staff
Lisa Pittman, Chief Counsel
Michael S. Twinchek, Chief Clerk
James H. Zoia, Democrat Staff Director
Jeff Petrich, Democrat Chief Counsel
------
SUBCOMMITTEE ON ENERGY AND MINERAL RESOURCES
BARBARA CUBIN, Wyoming, Chairman
RON KIND, Wisconsin, Ranking Democrat Member
W.J. ``Billy'' Tauzin, Louisiana Nick J. Rahall II, West Virginia
Mac Thornberry, Texas Edward J. Markey, Massachusetts
Chris Cannon, Utah Solomon P. Ortiz, Texas
Jim Gibbons, Nevada, Calvin M. Dooley, California
Vice Chairman Jay Inslee, Washington
Thomas G. Tancredo, Colorado Grace F. Napolitano, California
C.L. ``Butch'' Otter, Idaho Brad Carson, Oklahoma
Jeff Flake, Arizona
Dennis R. Rehberg, Montana
------
C O N T E N T S
----------
Page
Hearing held on May 22, 2001..................................... 1
Statement of Members:
Gibbons, Hon. Jim, a Representative in Congress from the
State of Nevada............................................ 1
Prepared statement of.................................... 2
Kind, Hon. Ron, a Representative in Congress from the State
of Wisconsin............................................... 8
Prepared statement of.................................... 9
Article ``Pipeline leak's a doozy'' submitted for the
record................................................. 50
Article ``Phillips finds NPR-A oil'' submitted for the
record................................................. 51
Article ``Corrosion is constant enemy'' submitted for the
record................................................. 52
Markey, Hon. Edward J., a Representative in Congress from the
State of Massachusetts..................................... 3
Statement of Witnesses:
Fry, Tom, President, National Ocean Industries Association... 41
Prepared statement of.................................... 43
O'Connor, Terry, Vice President, External Affairs, Arch Coal
Company, on behalf of the National Mining Association...... 17
Prepared statement of.................................... 19
Response to questions submitted for the record by Hon.
Nick Rahall............................................ 26
Rubin, Mark, Upstream General Manager, American Petroleum
Institute.................................................. 10
Prepared statement of.................................... 12
Sims, Earl R., President, Sims Consulting, on behalf of the
Independent Petroleum Association of America............... 31
Prepared statement of.................................... 32
Additional materials supplied:
The Geothermal Energy Association, Statement submitted for
the record................................................. 79
Whitsitt, William F., President, Domestic Petroleum Council,
Letter submitted for the record............................ 80
SHORT-TERM SOLUTIONS FOR INCREASING ENERGY SUPPLY FROM THE PUBLIC LANDS
----------
Tuesday, May 22, 2001
U.S. House of Representatives
Subcommittee on Energy and Mineral Resources
Committee on Resources
Washington, DC
----------
The Subcommittee met, pursuant to call, at 10:13 a.m., in
Room 1324, Longworth House Office Building, Hon. Jim Gibbons
[Chairman of the Subcommittee] presiding.
STATEMENT OF THE HONORABLE JIM GIBBONS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEVADA
Mr. Gibbons. The oversight hearing by the Subcommittee on
Energy and Mineral Resources will come to order.
The Subcommittee is meeting today to hear testimony on
short-term solutions for increasing energy supplies on public
lands under Rule 4(g). The Chairman and the ranking minority
member, in this case it will be Mrs. Napolitano, can make
opening statements. If any members have other statements, they
can be included in the record under unanimous consent.
Today's hearing is the seventh in a series of oversight
hearings which the Energy and Mineral Resources Subcommittee is
conducting to examine the issues concerning energy supplies
from our public lands, including the outer continental shelf.
This is the first since President Bush released his
national energy policy report of the task force led by the Vice
President. The administration has said many times since that
our energy woes did not happen overnight, nor can they be fixed
quickly.
The President's plan envisions reductions in energy demands
and increases in supply over the long term, a very sensible
approach.
Today, however, we have asked our witnesses to give us
their ideas for changes in the manner in which onshore and
offshore Federal mineral estates can best contribute to
America's energy supplies within the relatively short-term
period of the next 5 years or less.
For Californians and others suffering through some of the
rolling blackouts, 5 years may seem like an eternity. But there
is an old saying that Rome wasn't built in a day.
Surely, increased natural gas supplies will reach
California sooner than that from other pipelines from the San
Juan basin of New Mexico or from increased production on
existing pipelines.
But for the nation as a whole, where will the gas come from
to meet forecasted demand while at the same time production
from the Gulf of Mexico and existing wells declines at a faster
and faster pace?
Chairman Cubin, who is unable to be here today, asked the
oil and gas and coal and geothermal industries to testify, the
latter of which is submitting written testimony for the record.
Likewise, I understand that an environmental organization
from Chairman Hansen's state will be submitting written
testimony as well.
The President submitted a proposed amendment to Congress on
May 7 for his Fiscal Year 2002 budget for the Department of
Energy. The amendment would increase spending on research and
development of renewable energy resources by nearly $40
million, reflecting a strong commitment to advancing solar,
wind, geothermal, and biomass energy supplies for the future.
But let's be realistic. Renewables can provide but a tiny
fraction of our needs any time soon, with geothermal energy
providing the lion's share when it comes to public lands. By
necessity, we must rely upon fossil fuels and existing nuclear
power to alleviate power shortages.
And let me remind everyone that the nuclear option is
dependent upon finding a solution to nuclear waste, another
problem that will probably not be solved within the 5-year
timeframe that is the subject of this hearing.
So we come back to oil, gas and coal once again to satisfy
our energy appetite for the near term as we starve ourselves.
The hunger pangs we feel today are because we let the pantry
run low before realizing it was time to restock our energy
supplies and staples. The public lands and the OCS, outer
continental shelf, can provide us with a grocery store, but
will the checkout line be express or an interminable delay?
[The prepared statement of Mr. Gibbons follows:]
Statement of The Honorable Jim Gibbons, Vice Chairman, Subcommittee on
Energy and Mineral Resources
Today's hearing is the seventh in a series of oversight hearings
which the Energy & Mineral Resources Subcommittee is conducting to
examine issues concerning energy supplies from our public lands,
including the outer continental shelf.
This is the first since President Bush released his National Energy
Policy report of the task force led by the Vice President. The
Administration has said many times recently that our energy woes did
not happen overnight, nor can they be fixed quickly. The President's
plan envisions reductions in energy demand and increases in supply over
the long-term, a very sensible approach.
Today, however, we have asked our witnesses to give us their ideas
for changes in the manner in which onshore and offshore Federal mineral
estate can best contribute to America's energy supplies within the
relatively short-term period of the next five years or less. For
Californians and others suffering through rolling black-outs, five
years may seem an eternity, but Rome wasn't built in a day. Surely,
increased natural gas supplies will reach California sooner than that
from another pipeline from the San Juan Basin of New Mexico or from
increased compression on existing pipelines. But for the Nation as a
whole, where will the gas come from to meet forecasted demand while at
the same time production from Gulf of Mexico existing wells declines at
a faster and faster pace?
Chairman Cubin, who is unable to be here today, asked the oil, gas,
coal and geothermal industries to testify, the latter of which is
submitting written testimony for the record. Likewise, I understand
that an environmental organization from Chairman Hansen's state will be
submitting written testimony as well.
The President submitted a proposed amendment to Congress on May 7th
for his Fiscal Year 2002 budget for the Department of Energy. The
amendment would increase spending on research and development of
renewable energy resources by nearly $40 million, reflecting a strong
commitment to advancing solar, wind, geothermal and biomass energy
supplies for the future.
But, lets be realistic, renewables can provide but a tiny fraction
of our needs anytime soon, with geothermal energy providing the lion's
share when it comes to public lands. By necessity then we must rely
upon fossil fuels or nuclear power to alleviate power shortages. And,
let me remind everyone that the nuclear option is dependent upon
finding a solution to nuclear waste - another problem not about to be
solved within the five-year time-frame of this hearing.
So, we come back to oil, gas and coal once again to satisfy our
energy appetite for the near-term, or we starve ourselves. The hunger
pangs we feel today are because we let the pantry run low before
realizing it was time to restock our energy staples. The public lands
and the OCS can provide us with a grocery store, but will the check-out
line be express or interminable delay?
______
Mr. Gibbons. With that, I would turn now to Mrs.
Napolitano, if she wishes to make any remarks, or Mr. Markey.
STATEMENT OF THE HONORABLE EDWARD J. MARKEY, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF MASSACHUSETTS
Mr. Markey. Thank you, Mr. Chairman.
Let me begin by just framing this issue: Is there an energy
crisis in the United States? There is an electricity crisis in
California and the states that abut California because of a
unique set of circumstances that center around one of the
stupidest laws ever passed in the history of the United States
and a historic drought in the Pacific Northwest.
If we had a national electricity crisis, we would hear
threats of blackouts and brownouts all across the United
States, which obviously we are not hearing.
So we have a regional electricity crisis that is caused by
a peculiar set of unique circumstances that has only one short-
term remedy, which is the Federal Government moving in to
control exploitive, unfair, and unjust prices being charged by
energy producers because of a dysfunctional marketplace, the
price of electricity rising from $7 billion to $70 billion in
California over the last 2 years. Dysfunctional.
Is there a national oil crisis, refinery crisis? In fact,
there has been a 20 percent increase in refinery capacity over
the last 10 years in the United States.
People say, ``Well, there are fewer refineries today than
there were 15 years ago.'' That is true. However, that's like
saying, ``Well, there are fewer supermarkets today than there
were 15 years ago,'' which is also true, because, more and
more, the supermarkets have 24 checkouts and so they close down
four or five supermarkets in each community.
Does it mean that there is less food because there are
fewer supermarkets? No. There is actually more food.
Does it mean because the large oil industry interests have
consolidated onto larger sites, their refinery capacity, and in
fact increased it by 20 percent over the last 10 years, that
there is less of refined production? Absolutely not. A phony
issue.
What happened was, without question, the industry has been
caught sleeping. One, the auto industry refused to increase the
fuel economy standards of SUVs and automobiles, and, in fact,
had the Republican leadership attach a rider to each years'
appropriations bill for the last 7 years prohibiting the
Federal Government--prohibiting it--from dealing with the fuel
economy standard issue.
Now, we put two-thirds of all oil in the United States into
gasoline tanks. Two-thirds. So if there is an oil crisis, it
relates to gasoline tanks, with a prohibition on dealing with
that issue.
Now, in turn, the Federal land issue is central. But
interestingly, Bill Clinton increased oil and gas production on
Federal lands greater than George Bush and Ronald Reagan did.
They leased more land that led to more production. That is the
Clinton plan on public lands.
But you can only have so much production if it is
unaccompanied by a look at the technologies in the United
States. We only have 3 percent of the world's oil reserves.
OPEC has 75 percent of the oil reserves. We can't compete with
them on that field. We're never going to have energy
independence.
As the Cato Institute said, that is nonsense on stilts. We
can't. It is just a crazy concept.
The question is, are we going to be smart? Are we going to
reduce our consumption? Are we going to use technology?
Every single car in the United States going to a junk yard
today--a junk yard--is more fuel efficient than the vehicle
being replaced by the consumer in the United States. Now, that
can't be a good sign.
These OPEC ministers aren't stupid. They know that we have
a prohibition on our laws that increase the fuel economy
standards for motor vehicles in this country, so they are in
the driver's seat.
But if we did what Gerald Ford did, who deserves the
Kennedy Profiles in Courage award for what he did in 1975,
signing a bill which doubled the fuel economy standards, we
wouldn't have to risk what I think the Republicans are calling
for, which is a compromise of the environmental protections for
the most sensitive American public lands.
Their proposal is a Trojan horse aimed at environmental and
health laws, which the energy industry has always opposed,
vigorously tried to keep off of the books.
And so it is a very small, narrow agenda, which they have
developed, aimed only at one purpose, going into the most
sensitive lands, whether it be the Arctic wildlife, national
monuments, even though President Clinton has proved that you
can dramatically increase the amount of oil and gas production
on public lands without endangering those most precious lands
that should be passed for a 1,000 years to all subsequent
generations, all Americans.
So I thank you for the opportunity, Mr. Chairman, of
speaking here.
Mr. Gibbons. Thank you, Mr. Markey.
Interesting to see that President Clinton was the drill,
drill, drill president.
Mr. Markey. He was, indeed.
[Laughter.]
Mr. Gibbons. Mr. Tauzin?
Mr. Tauzin. Thank you, Mr. Chairman.
There is a guy back in town. We haven't seen him for a long
time. His name is David Freeman. He was around during the
Carter years. He had an interesting theory. In fact, he
propounded one of the most profound energy statements, I think,
this country has ever heard.
His theory was that energy will last forever if we simply
don't use it. And I thought about that, and said, ``Golly, you
know, he's right.''
Unfortunately, we use energy in this country.
Unfortunately, this country depends upon energy. Unfortunately,
we depend upon others to make it for us in all too many cases.
I think one of the greatest ironies today is that we are
buying oil from Iraq to turn it into jet fuel to fly our planes
over Iraq to bomb Iraqi radar sites. It is an incredible irony.
And yet, that is the policy of this country as we receive
it from the past administration.
We have, indeed, a situation with riders on appropriations
in this Congress and in past Congresses. And the riders I think
we ought to most focus on are the riders that say all across
this country that even we know there are abundant energy
resources available for this country in this country, that
riders are attached declaring moratoriums on drilling and
producing on lands that are easily available and easily
producible.
Not only are they easily producible, easily available, but
testimony from various Interior Secretaries in this Committee
room have indicated that they are high in hydrocarbon
potential, low on environmental risk, but we still pass riders
locking them up.
If Mr. Clinton is famous for one thing--and it isn't drill,
drill, drill, which I really question--
[Laughter.]
--it is in locking up access to resources available in
America for Americans.
Now, look, we can argue about how much more we can do with
conservation. And we will have that argument in the Energy and
Commerce Committee this year.
In fact, the first bill I hope to offer to the Full
Committee will be a conservation measure, so we can see as far
as we can see demand reduction in this country, and we can
promote as far as we can promote it.
But when we get through with a conservation measure, I
suspect, as we look toward the energy future for our country,
we are going to see several unassailable facts we have to deal
with.
The first fact is that even with conservation measures
already in place and new ones we are going to propose, this
country's dependence on other people to produce energy for us
will continue to grow, and some of those people are not so
reliable as others.
It was astounding to me to find out that Louisiana sent
more young men and women per capita than any state in America
in the Persian Gulf war to defend those oil fields. I was
astounded by that fact. I couldn't understand it at first until
we examined it a little more thoroughly.
What we found out was that the young men and women of
Louisiana who served in higher numbers per capita than any
other state in America were in the Persian Gulf because they
had lost their jobs in the oil fields in Louisiana. They joined
the National Guard and Reserves for extra money for their
families.
The irony was that because we couldn't put them to work in
America producing needed supplies of fuel for this country in
this country, they were putting their lives on the line
defending somebody else's oil fields, in a very risky corner of
the world.
I don't think that is the kind of policy that sane
Americans would endorse. We have to think about how we provide
access to lands in this country that are producible with new
technologies with all due concerns for the environment and for
the protection of those lands.
In Louisiana, we produce most of our reserve lands. And we
put some of the trust money into preserving those same lands.
We actually produce them, and we use the money developed from
the resources.
I think we have sunk 1,600 wells into preserved wetlands of
our state. And we take revenues from those productions, and we
turn it back into projects to preserve and enhance the quality
of the environment of those wetlands areas in our state.
That is good, sensible policy, using the best technology so
you do as little or no harm as possible in production of its
resources and turning the resources back into preservation and
protection.
That makes good, common sense. This Committee ought to be
thinking about that. And I hope it will as we move forward with
an energy policy that begins to establish some sanity and some
common sense to the needs of this country as we move into this
high-tech economy.
And if you don't think we have a crisis--the first question
I was asked by Bill Press on ``Crossfire'' the other night was,
``You guys are really making up this crisis, aren't you?
There's no real crisis in America?''
Mr. Markey, we have expanded refining capacity in this
country. But our dependence on foreign-refined fuels has
tripled and quadrupled over the same period.
And depending on refined fuels is even more dangerous than
depending upon crude oil. We can get more crude oil, but if you
can't refine it in this country, what are you doing to do with
it?
Every time I hear a call to open up the SPRO (Strategic
Petroleum Reserve) so we can have more gasoline in this country
so prices will come down, I laugh. My question is, where do you
want to send it? To what country are we going to refine it to
bring it back to this county, because our refineries are
operating at 96 percent, 98 percent capacity today, and we
can't keep up with demand.
We haven't licensed a new refinery in America since 1976,
the Marathon refinery built in Garyville, Louisiana, in my
district.
What are we going to do? Just continue to rely upon other
people to refine our products? Are we going to be like
California, relying on price controls and restraints on
production in our country so that we end up depending upon
other people, who we can't control, to set the prices and the
quality of fuel available to us in this country?
I suggest to you the last place we ought to look for
suggestions about improving America's energy future is
California. California has locked up its own resources. It
refused to build pipelines. It hasn't built effective grids to
move energy from one part of the state to the other.
It has put price controls at the retail level. It has put
price controls at the wholesale level. And it had to ignore
those because it found that it didn't work.
And now they find themselves depending upon their neighbors
for the reserve energy. And their neighbors need that reserve
energy. They are not going to give it to California. They are
going to sell it to California; they are going to demand
exactly a huge price for it. And that is terrible.
That is terrible. But why do you expect California's
neighbors would want to sell California energy on a price that
is determined by California, when they need their reserves for
their own growth in their own states?
The head of ISO in California himself testified that price
controls at the wholesale level on imported energy into
California would lengthen and deepen the blackouts in
California. It wouldn't add an ounce of energy. It would
detract energy from California.
But that is the kind of policy we are being told is good
for America, the same policy that has California in the dark
today. No thank you.
Now, we ought to think about a rational policy that gives
real, serious looks and access to hydrocarbon-rich areas in
this country that can be developed in an environmentally
sensitive manner and that plows back some of the resources from
that development into preservation and protection and
enhancement of those areas.
That is the policy we use in our state today in Louisiana.
And I want to say one final thing. Just as it galled me to
think about the young men and women in Louisiana who were
putting their lives on the line in somebody else's oil field,
because they couldn't work in their own, it galls me to hear
folks from other parts of the country continue to talk about
locking up areas around this country and saying, ``Oh, don't
worry. Louisiana and Texas and Oklahoma, those states will
produce it for America.''
There are consequences to production, indeed there are
consequences. I have a port in my district that is growing like
gang busters and it is served by a two-lane road. And it is the
biggest jumping off port right now for the deep drilling that
is occurring, that is producing oil and gas for America.
As a consequence, that road is falling apart. I would like
to see that road built. I wish somebody would help us build it.
There are consequences to us developing in Louisiana. But
this notion that nobody else should develop, lock up everything
in this country and count on a few states to do it, is crazy.
And if ever the people in my state took the attitude some
people around this country took to opening up our lands to
development, what a sick shape this country would be in today.
You better hope we never do. You better hope we continue in
our enlightened view that you can develop with an eye toward
the environment, that you can develop by putting resources back
in the enhancement and protection of areas.
And you had better develop until you depend less on people
you can't depend upon to satisfy your economy's needs for
energy in the future.
Thank you, Mr. Chairman.
Mr. Gibbons. Thank you, Mr. Tauzin.
And let me say that during hearing we held in New Orleans,
I think it was last week, on this very issue, the two-lane road
into Port Fourchon, it was concluded that is what is needed
there is to line and pave that road with some weather-resistant
gold mined in Nevada so that it doesn't wear out.
What we would like to do now is recognize Mr. Kind, the
ranking Democratic member, for his opening statement.
STATEMENT OF THE HONORABLE RON KIND, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WISCONSIN
Mr. Kind. I thank my friend from Nevada for recognizing me.
And I always feel so conflicted, sitting between these two
gentlemen, my friend from Massachusetts and my friend from
Louisiana, listening to their opening statements.
First of all, let me thank the witnesses for coming to give
your testimony. Hopefully, we will be able to have an
enlightened conversation in regard to our short-term energy
needs.
I want to compliment my friend from Louisiana for the
leadership he has shown on certain important conservation
pieces; CARA, namely, the chief one that we vote very closely
on, and I thought was a very good bill that we need to get back
to work on as well.
But I don't think that anyone is suggesting here that
production isn't going to be a short-term issue for this
country. No one is expecting us to turn on a dime when it comes
to our dependence on fossil fuel and the burning of fossil fuel
for our short-term energy needs.
I think the real question though is, what is the answer in
the short term in order to address short-term energy challenge
that we are facing?
We are unquestioningly facing a 21st century energy
challenge. And, hopefully, we are going to have 21st century
response, one that is going to bring balance to this energy
debate, recognizing that there is production going on in this
country right now. We need to find out what restrictions are in
place, inhibiting our ability to meet short-term needs, what
type of regulatory burdens that the private producers are
facing that we might be able to streamline.
But I think we also need to have a conversation in regard
to the balance of this energy debate, one that also recognizes
the values of alternative and renewable energy sources, the
potential of geothermal power, for instance, one that is going
to emphasize the use of modern technology for increased energy
efficiency.
I think all of this is going to have to be a part of the
equation as we move forward in this debate, and that it
shouldn't just be one-sided, and that is drill, drill, drill,
and more access, more access, and more access.
I just want to raise a few quick points before we begin the
testimony.
First, according to sworn testimony that we already have in
one of the eight hearings that we have had in this Subcommittee
in regard to access to our energy resources on public lands,
approximately 110 million acres, or 95 percent of Federal
lands, are already open to energy development.
Secondly, and according to the Department of the Interior,
during the 8 years of the Clinton administration, the Federal
Government operated oil and gas offshore and onshore leasing
programs that exceeded production levels during the previous
Reagan and Bush administrations.
And third, while we can debate what the Clinton
administration did or did not do during those 8 years, the fact
is that oil and gas prices were, by historic standards, very
low during most of the past 8 years, and thus discouraged
energy exploration and investment.
It is one of the questions I am going to pose to the panel
here today, is how much of this is being driven by just
economics and market forces and investment decisions, and how
much of it is dependent on greater access to the public lands,
to an easing of regulatory burdens.
Or is the vice president of Exxon/Mobil correct, that if we
just allow the market forces to play out, that the market
eventually is going to clear it, because investments are being
made on generating capacity and refinery capacity in this
country? And is it really a supply problem that we are facing
right now, especially of OPEC keeping per barrel prices,
recently, within the $25 to $30 range?
And we certainly are not looking at the same type of energy
crisis we had during the 1970's, so I think our response is
going to have to be a little bit different as well.
Obviously, a lot of issues, a lot of questions that need to
be answered, so I look forward to the testimony. And I
appreciate the witnesses' presence here today.
Thank you.
[The prepared statement of Mr. Kind follows:]
Statement of The Honorable Ron Kind, Ranking Democrat Member,
Subcommittee on Energy and Mineral Resources
This will be the eighth oversight hearing conducted by the
Subcommittee on Energy and Mineral Resources this year, including one
held at full committee, to address the availability and need for
additional energy supplies from Federal lands.
The stated purpose of today's hearing is to identify specific
``short-term'' policy options for Congress that would that would
significantly increase the supply of energy resources from Federal
lands, including the Outer Continental Shelf, within the next five
years or less.
Despite the amount of time spent on this issue by the Subcommittee,
the case for opening up additional public lands to energy development
in order to increase the supply of energy resources has simply not yet
been made by those who would benefit most from such a policy.
First, according to sworn testimony to this Subcommittee,
approximately 110 million acres or 95 percent of Federal lands are
already open to energy development.
Second, according to the Department of Interior, during the eight
years of the Clinton Administration, the Federal government operated
oil and gas offshore and onshore leasing programs that exceeded
production levels during the previous Reagan and Bush Administrations.
Third, while we can debate what the Clinton Administration did or
did not do, the fact is that oil and gas prices were, by historic
standards, very low during most of the past eight years, and thus
discouraged energy exploration and investment.
Consequently, the issues of high energy costs or possible supply
shortages do not derive from restricted or diminished access to public
resources, as some would have us believe.
There are two essential issues related to energy that the Federal
government should address. One has to do with the high price of
electricity in California and other Western States. And the other has
to do with high prices at the gasoline pump. Both of these issues are
serious and important to our constituents. However, opening up
protected Federal lands to oil and gas drilling will solve neither of
these problems.
Instead, we see the issue resolving itself in the market place.
According to the New York Times, the latest statistics from government
and industry analysts show that the energy industry is shifting into
high gear, investing heavily in areas that were seen as unattractive
just a few years ago. Even before the government has eased regulations,
the investment boom promises a cyclical increase in supplies that is
expected to stabilize or reduce prices in coming months.
It would appear that if we allow the market to work, as suggested
by a vice president of the Exxon Mobil Corporation, ``the markets will
clear,'' or meet demand.
I look forward to hearing the testimony of our industry witnesses
today.
______
Mr. Gibbons. Thank you, Mr. Kind.
In an effort to move this hearing along, if any of the
members wish to make opening remarks, I would suggest that we
do that in writing, so that we can get to the witnesses. I know
they all have a busy schedule, and they are here today to
graciously help educate us.
Let me, as Chairman, ask that if members wish to make
additional opening remarks, that we leave the record open and
allow for them to submit written testimony.
Let me introduce now the first panel that will come before
us. And in doing so, let me recognize Mr. Mark Rubin, upstream
general manager, American Petroleum Institute; Mr. Terry
O'Connor, vice president, external affairs, for Arch Coal
Company, and he will be testifying on behalf of the National
Mining Association; Mr. Earl Sims, president of Sims
Consulting, and he will be testifying on behalf of the
Independent Petroleum Association of America; and Mr. Tom Fry,
president of the National Ocean Industries Association.
The Chairman would recognize Mr. Mark Rubin.
But before I do, let me introduce you to our traffic light
system that we have here before us. There will be green light,
which will give you approximately 5 minutes to summarize your
testimony.
And for the record, you may submit your complete written
statement. And within that 5-minute time frame, verbally
summarize your statement, if you wish.
When you see the yellow light, you have approximately 1
minute remaining.
And of course, the red light, just like a traffic light,
would indicate that time has expired. Please make every effort
to sum up at that point in time so that we can continue this
hearing in a timely fashion.
With that, Mr. Rubin, welcome. The floor is yours, and we
look forward to your testimony.
STATEMENT OF MARK RUBIN, UPSTREAM GENERAL MANAGER, AMERICAN
PETROLEUM INSTITUTE;
Mr. Rubin. I am Mark Rubin, General Manager of upstream for
the American Petroleum Institute, a national trade association
representing more than 400 companies engaged in all sectors of
the U.S. oil and natural gas industry.
We are gratified that members of the Subcommittee
appreciate the importance of access to Federal lands, and we
applaud the administration for including access in its energy
plan.
Today, we have been asked to comment on measures that might
increase the supply of energy from Federal lands in the next 5
years.
One area that clearly should be a focus of short-term
efforts to increase production is BLM and Forest Service
multiple-use lands in the western U.S. Many of the barriers to
development of these lands involve permitting problems or
regulatory processes that could be streamlined by
administrative action.
Often, getting a lease is not the most significant problem
for oil and natural gas producers on Federal lands. Inadequate
agency resources in many BLM offices and outdated resource
management plans make it difficult to get drilling permits, and
the expediting of the permitting process and updating resource
management plans could produce significant supply effects
within 1 to 2 years.
For example, in Wyoming's Powder River basin, BLM has a
backlog of more than 2,700 drilling permits for coal bed
methane wells that are delayed mainly due to a lack of staff
resources to complete the planning and permitting processes.
Difficulties in acquiring permits to drill on Federal lands
and overly restrictive lease stipulations are responsible for
limiting production. The BLM and Forest Service often dictate
extraordinary lease stipulations as conditions of approval for
exploration and production.
Such stipulations are intended to protect resource values
in conjunction with proposed projects, yet many conditions
required essentially prevent exploration and production.
Relaxing unnecessary restrictions is especially important
for natural gas, which tends to be a North American commodity
and is not easily supplemented by large-scale imports. Almost
half of the untapped natural gas on Federal lands in the
Rockies is in areas that are either off limits or restricted by
these types of stipulations.
The Gulf of Mexico currently supplies around one-quarter of
both the oil and natural gas produced in the U.S. And while the
shallow waters of the outer continental shelf provide the bulk
of supply from the gulf, production from this area is
declining.
Fortunately, as shallow water supply has declined,
deepwater supply has increased enough to keep production
growing. The question of whether this growth will be sustained
may well be decided in the next 5 years.
We must increase deepwater development. Much of the shift
to deepwater has occurred due to the far-sightedness of
Congress in passing the Deepwater Royalty Relief Act in 1995.
This shows the importance of not losing sight of long-term
objectives as we focus on the next 5 years.
We will soon have a great opportunity to sustain this
growth. Outer continental shelf Lease Sale 181 in the eastern
Gulf of Mexico is scheduled for December 2001.
The sale area is based on comprehensive environmental
reviews and consultations with then-Governors Lawton Chiles of
Florida and Fob James of Alabama.
Congress understands the importance of Sale 181 and did not
include it in the area placed off limits by moratoria in the
past appropriations bills. The Sale 181 area is estimated to
contain 7.8 trillion cubic feet of natural gas and 1.9 billion
barrels of oil.
Also, the consistency provisions of the Coastal Zone
Management Act are another matter that should be considered by
Congress when looking to ways to expedites resource
development.
Under the guise of due process and consultation, these
provisions have caused serious, costly delays to Federal OCS
activities.
Regulations issued by NOAA in the last days of the previous
administration add impediments to energy development in the
OCS, contrary to the balancing of competing interests directed
by Congress when it enacted CZMA.
A third area of potential increased production is the NPR-A
area in Alaska, where a Federal lease sale was held in 1999 in
which 133 leases were awarded. There has been significant
exploration activity on these leases over the past two winters.
And just yesterday, Phillips and Anadarko announced that
several of these wells had yielded significant new field
discoveries.
The Department of Interior should of consider broadening
the area leased in NPR-A in order to encourage exploration and
development in the near term.
Finally, it is important to note that in providing more
access to Federal lands for exploration, we do not believe that
we must choose between domestic energy supplies and
environmental protection. We can have both.
Our Federal lands are an asset with multiple values, and
the time has come to recognize that energy values play a
significant role in that mix.
One additional comment: Although my prepared remarks are
focused on public lands, I would add one comment in response to
Congressman Markey's mention of increases in refinery capacity.
I am told by our refining experts that the actual increase in
refining capacity over the last decade has only been 6 percent,
not 20 percent, and that additional capacity additions have
been limited by permitting problems and regulatory
restrictions.
Thank you for this opportunity.
[The prepared statement of Mr. Rubin follows:]
Statement of Mark Rubin, Upstream General Manager, American Petroleum
Institute
The American Petroleum Institute (API) welcomes this opportunity to
present the views of its member companies on the question of short and
intermediate term initiatives to enhance energy development in the
United States. API is a national trade association representing more
than 400 companies engaged in all sectors of the U.S. oil and natural
gas industry, including exploration, production, refining,
distribution, and marketing.
We are gratified that this Committee appreciates the importance of
access to the Federal lands in our nation's future energy supply. We
applaud the Bush Administration for including access to Federal lands
in its review of energy policy by a Cabinet-level task force on the
subject, and we are encouraged that you and other Members of Congress
of both parties are putting access high on your agendas.
Today, we are asked to comment on measures that might be taken to
impact the supply of energy from Federal lands within the next five
years. In fact, while there are some frontier developments in deep
water offshore and on the North Slope of Alaska that require longer
lead times, most of the access issues we have emphasized in other
testimony before this Committee this session could result in positive
supply impacts in a time frame of five years or less. However, as I
will point out, some of the most significant supply developments on
Federal properties over the next five years are the result of
congressional and administrative actions in the mid-90's. As a
consequence, we should be cautious that a focus on the next five years
does not distract us from measures needed today with equally or more
serious consequences for supply 10 or 15 years in the future.
What do we mean by access?
Let me begin by defining carefully what we mean by access to
Federal lands, and just as importantly, what we do not mean. Our
critics characterize our quest for improved access as a call for the
wholesale opening of all Federal lands to resource development, without
regard to environmental impacts. Quite the contrary is in fact the
case. The U.S. oil and gas industry does not ask to drill on parklands
or in wilderness areas set aside by Acts of Congress. Rather, we seek
access to a very selective set of resource-prone areas offshore, and in
the American West that have been designated as ``multiple-use'' by
Congress, and areas of Northern Alaska designated for potential oil and
gas development. What we ask is that on these lands the value of energy
potential be considered along with other values, and that when this
potential can be developed consistent with such values, that
development should be permitted.
Onshore Access in the Western States
The first area, and the area with the greatest potential for short-
term impact, is the multiple use land in the Western states. Most of
the barriers to development on these lands involve regulatory processes
that could be streamlined by administrative action. Most of these
multiple-use areas are simply vast expanses of nondescript Federal
lands. However, because they lack the beauty and grandeur of the Grand
Canyon or the Grand Tetons does not mean that we treat them with less
respect than we do any other lands entrusted to us by the government,
or by private landowners. Most people driving near or hiking in one of
these areas would be hard-pressed to locate one of our facilities once
the drilling rig is removed. Safety and environmental protection are
critical concerns, regardless of the location of drilling.
Yet, despite our record of sound stewardship, President Clinton
used his executive powers under the Antiquities Act to bar oil and gas
exploration and other activities on vast regions of government lands.
For example, the designation of the Grand Staircase-Escalante Monument
in Utah in 1996 summarily withdrew promising valid oil and gas leases
on state lands without even notice to or consultation with state and
local authorities, or affected communities. Likewise, the U.S. Forest
Service recently banned our companies from exploring for oil and
natural gas on promising government lands when it published rules to
bar road building on nearly 60 million acres in the Forest System that,
according to a Department of Energy study, could hold 11 trillion cubic
feet of natural gas. Furthermore, the roadless rule case illustrated
the cavalier disregard with which energy potential is dismissed in
Federal land use actions. In the Rocky Mountains, access to about 83
percent of the affected gas resource could have been preserved by less
than a 5 percent reduction in the roadless acreage. It was not.
In the lower-48 states, a study by the Cooperating Associations
Forum found that Federal lease acreage available for oil and gas
exploration and production in eight Western states (California,
Colorado, Montana, Nevada, New Mexico, North Dakota, Utah and Wyoming)
decreased by more than 60 percent between 1983 and 1997--and that does
not count the major land withdrawals, such as Monument designations,
since 1997.
Approximately 205 million acres of Federal lands in these states
are under the control of two Federal agencies with broad discretionary
powers. The Bureau of Land Management (BLM), whose land management
planning authority is derived from the FLPMA of 1976, and the U.S.
Forest Service (USFS), whose jurisdiction is derived from the National
Forest Management Act, administer these Federal, non-park lands. Both
agencies are required to manage most of these lands under the
congressionally mandated concept of multiple use. Yet, BLM and USFS
discretionary actions have withdrawn Federal lands from leasing, and
long delayed other leasing decisions and project permitting.
Congress has directed the BLM and Forest Service to allocate non-
wilderness lands for resource use, identify areas that are available
for oil and gas leasing, identify important wildlife habitat areas, and
inventory wilderness candidate lands among other uses. Each agency has
completed land resource management plans for the lands they administer,
including lands that are candidates for wilderness designation. Yet,
some lands found unsuitable for wilderness designation are, however,
managed as ``wilderness study areas,'' effectively removing
approximately 28 million acres inappropriately from consideration for
resource development. Further, these agencies often dictate
extraordinary lease stipulations as conditions of approval for
exploration and production. Stipulations are intended to protect
resource values in conjunction with proposed projects, such as
exploratory wells, yet many conditions required, such as ``no surface
occupancy,'' essentially preclude exploration and production from
occurring.
Relaxing these restrictions is particularly important if we are to
address the immediate problem of natural gas supply in the U.S. Unlike
oil, gas tends to be a North American commodity, not supplemented
easily by large scale imports from outside of North America. Gas is
also critical to a serious transition currently underway in the manner
we are going to satisfy the already burgeoning demand for new
electrical generating capacity. Since natural gas markets are regional,
rather than global, 86 percent of the natural gas consumed in the
United States is produced domestically. The Rocky Mountains are one of
the areas of the U.S. with the greatest potential, containing an
estimated 346 TCF of remaining technically recoverable gas. Moreover,
it is an area where development can occur quickly, if allowed, so that
it offers the real potential of substantial supply effects within a 1
to 2 year window. In the Foreland region, for instance, supply is
estimated by the NPC to rise by about 38 percent between 2000 and 2005.
Often, getting a lease is not the most significant problem for
producers. Difficulties in acquiring permits to drill wells on onshore
government lands and overly restrictive lease stipulations are
responsible for limiting natural gas production. These are
restrictions, such as ``no surface occupancy'' or seasonal
stipulations, which go above and beyond the normal environmental
stipulations and can prevent economic development of the lease without
commensurate environmental benefit.
Almost half of the untapped natural gas on multiple-use government
lands in the Rockies is in areas either off limits or restricted by
this type of stipulation laid down by one Federal agency or another.
This information is important because the facts are often ignored
and often distorted by those who do not believe greater access to
government lands is needed by our industry. In recent testimony before
this subcommittee, for instance, we heard material distortions by the
witness for the Wilderness Society. In particular, the Wilderness
Society witness, in his testimony and in the study submitted for the
record, concluded that only a small percentage of BLM lands in five
western states is off limits to leasing and development.
Those conclusions gloss over the most significant point: the
percentage of government lands available for leasing is a meaningless
figure without knowing whether the leases can be developed. In many
instances, lessees cannot obtain the permits needed to develop leases.
In others, development is rendered uneconomic by unnecessarily
restrictive operating stipulations.
The Wilderness Society witness surgically selected certain data,
and omitted other significant data to attempt to prove their inaccurate
assertions. For example, while the numbers presented by the Wilderness
Society do show that only about 3.5 percent of the BLM lands in
Wyoming, Utah, New Mexico, Montana, and Colorado is strictly off limits
to development, oil and gas resources in those states are not
distributed uniformly across BLM lands. Specifically, while the
Wilderness Society says only 3.5 percent of BLM lands are off-limits,
the NPC study identifies another 3.2 percent that are subject to No
Surface Occupancy. The NPC study indicates that this 6.7 percent of BLM
lands represents 15 percent of the BLM natural gas resources, which are
either off-limits or significantly impinged.
More important, however, is the role of non-standard lease
stipulations. The Wilderness Society's data show that seasonal and
other non-standard stipulations restrict access to an additional 32
percent of BLM lands. However, this impacts access to 47 percent of the
natural gas resources estimated to exist on BLM lands in the Rockies.
When all of these restricted and off-limit BLM lands are combined they
total 38.7 percent, affecting 62 percent of the natural gas resources.
Further, BLM is not the only Federal land management agency making
such restrictions. These witnesses omitted the U.S. Forest Service, the
Bureau of Indian Affairs and the departments of Defense and Energy in
their computation of Federal multiple-use lands that are restricted to
oil and gas development. In total, the National Petroleum Council
estimates that some 137 TCF of natural gas resources lie beneath
Federal land in the Rockies that is either off limits to exploration,
or heavily restricted. This is 48 percent of the natural gas on Federal
land in the region. This does not include the more than 11 trillion
cubic feet (TCF) of natural gas that was summarily placed off limits
late last year alone by the USFS ``Roadless'' rule, as mentioned above.
But stipulations are not the only impediments to bringing the oil
and natural gas to America's consumers. Inadequate agency resources in
many BLM offices and required but outdated resource management plans
often make it difficult to get drilling permits, seriously delaying
viable projects for up to 100 days, or sometimes years. In the Rawlins,
Wyoming BLM office, for example, thousands of Applications for Permits
to Drill are awaiting action because of manpower shortages. In the
Buffalo, Wyoming office, thousands more are not being accepted by BLM
because of limitations of the resource management plans (RMP) for the
area. This is because the ``Reasonable Foreseeable Development'' (RFD)
figures, estimates of future development, failed to recognize the
interest in developing coal bed methane. Updating these RMPs and RFDs
takes the BLM two or more years to complete, thus limiting further oil
and gas activity in that area until the plans are finished. Expediting
the land use planning process is critical to increasing production from
these lands over the next 5 years.
The NPC study on natural gas referred to earlier also points out
that vast reserves of natural gas in the form of coal bed methane (CBM)
lie beneath Federal lands, especially in Wyoming and Montana. However,
BLM's inability to grant permits in a timely manner has greatly
hindered CBM development, and may contribute to further shortfalls in
necessary future gas production. In some instances, we recognize that
individual BLM offices may be understaffed and therefore are simply
unable to efficiently process permitting requests. We therefore support
increased funding for BLM to adequately address these critical
permitting backlogs.
In summary, the resources of the Federal lands in the Western
states offer enormous potential to address the immediate energy demands
for natural gas in the U.S. This potential is currently highly
underutilized due to restrictions on land use for energy development,
and relaxing the restraints on access described here could produce
significant supply effects within one to two years.
Federal OCS
The second area of Federal property of key importance to supply
growth over the next five years is the Federal Outer Continental Shelf.
The OCS has assumed increasing importance to U.S. energy supply over
the past half century. The Federal portion of the OCS now supplies 24
percent and 27 percent of the oil and gas produced in the United
States. Offshore production promises to play an even more significant
role in the future. The Department of Energy forecasts that offshore
production will rise to nearly a third of our domestic oil and gas
supply within a decade.
Technological revolutions, such as 3-D seismic profiling of
promising structures, coupled with astounding computer power and
directional drilling techniques which allow numerous reservoirs to be
accessed from one drill site have driven down the costs of finding oil
and gas. And at the same time these technologies allow development with
much less disturbance to the environment. Tremendous advances in our
ability to drill and produce in the deep waters of the Gulf have also
resulted in vast new reserves being added to our resource base.
The Gulf of Mexico currently supplies over 25 percent of U.S.
natural gas production. However, it is currently in the midst of a
transition that will be substantially played out over the next five
years. That is, while the shallow waters of the shelf now provide the
bulk of supply from the Gulf, there is now accumulating evidence that
resource depletion is overtaking the effects of technical advances on
the cost structure of shelf development, and the decline from new gas
wells there is now estimated to be as high as 40 percent per year.
Fortunately, as the supply from the shallow waters of the shelf
declines, that from the deepwater is increasing, at a sufficient rate
to keep total production from the Gulf growing, although there is a
question as to how long. The NPC report, prepared in 1999, estimated
that this expansion would continue until 2010, when Gulf production
would peak at 8 TCF/yr. An MMS report prepared last year estimated a
somewhat lower peak, of 6.7 TCF, also by 2010. This year, new estimates
from the MMS project a peak much earlier, in 2002, at a still lower
level, 5.2 TCF/yr.
These numbers illustrate three points. First, they illustrate the
growing importance of the deep water in OCS supply, which is rapidly
transitioning to becoming the principal source of such supply. Second,
they raise the possibility that the feasibility of sustaining this
transition may well be decided in the five year window we are concerned
with. The numbers suggest that the drilling and capital expenditures
required to replace and augment reserves will become increasingly
important, and that we must increase deepwater development. Finally,
the transition to deepwater illustrates the importance of not losing
sight of long term objectives as we focus on the next five years. That
is, much of the shift to deepwater activity has occurred within the
past five years, in part due to the farsightedness of Congress in
passing the Deepwater Royalty Relief Act in 1995. It is essential that
as the deepwater grows into the major source of Gulf supply, we not
lose sight of the actions that need be taken today to sustain this
growth. The MMS OCS Policy Committee, Subcommittee on Natural Gas on
the Outer Continental Shelf, concluded that unless exploration and
development scenarios in the Gulf of Mexico change dramatically, the
production forecasts such as those estimated by the NPC will not be
realized.
The nation will soon have a great opportunity to sustain this
growth. Federal OCS Lease Sale 181, in the Eastern Gulf of Mexico
Planning Area, is scheduled for December 2001. The sale area is based
on comprehensive environmental reviews, and consultations between
former Secretary of the Interior Bruce Babbitt and then-Governors
Lawton Chiles of Florida and Fob James of Alabama. Congress in the past
several appropriations bills understood the importance of Sale 181
going forward and did not include it in the areas placed off-limits by
moratoria. The area available in Sale 181 is estimated by the National
Petroleum Council to contain 7.8 trillion cubic feet of natural gas and
1.9 billion barrels of oil. This means that natural gas from the Sale
181 area could satisfy the current electricity needs of Florida's 5.9
million households for the next 13 years. Moreover, the crude oil from
the Sale 181 area (most of which is expected to come from the deepwater
areas, far removed from the coastline) could fuel 74,000 cars for 20
years.
Finally, of both short and long term significance are the
``consistency'' provisions of the Coastal Zone Management Act (CZMA).
Under the guise of due process and consultation, these provisions have
caused serious duplicative and incredibly costly delays to Federal OCS
leasing and production activities that would have no adverse
environmental impacts on states' coastal zones. And regulations issued
by the National Oceanic and Atmospheric Administration (NOAA) in the
last days of the Clinton Administration appear to add impediments to
environmentally compatible energy development in the OCS, contrary to
the balancing of competing interests directed by Congress when it
enacted the CZMA. Both the summary withdrawal of multiple use
government lands without stakeholder consultation under the Antiquities
Act, and the endless due process used by opponents to block Federal
offshore production that does not affect a state's coastal zone are
extreme, and must be moderated.
Alaskan North Slope
A third area of concern to both short and long-term energy supply
is the Federal lands of Alaska's North Slope.
First, again we note that an area of growing current exploratory
interest is the Northeast corner of the National Petroleum Reserve in
Alaska, where a Federal lease sale was held in 1999, in which 133
leases were awarded. Eight wells have been drilled, and more are
planned. Again, the activity we are now seeing in
NPR-A and the prospective supply effects in the next five years is
attributable to actions taken by the Federal government in the past
five years. Likewise, actions needed within the current five year
window should be designed to sustain the activity begun in the last
one, including the planning of further lease sales within
NPR-A.
While probably not within the five year window for new production,
it is no less urgent that Congress authorize exploration on the small
section of the Arctic National Wildlife Refuge (ANWR) that was
specifically set aside by law for exploration in 1980. DOE's Energy
Information Administration estimates that the ANWR coastal plain
contains between 5.7 billion and 16 billion barrels of technically
recoverable oil. The coastal plain provides the best prospect in North
America for a new giant, Prudhoe Bay-sized oil field.
Summary
Increased access to Federal lands--in the West, offshore, and
Alaska--is the single most important lever that the government holds to
affect domestic oil and gas supply in the next five years and beyond.
Increased access extends beyond the mere act of leasing property it
extends to removing barriers to the utilization of that property in a
manner consistent with environmental protection, recognizing the fact
that technology has greatly reduced the scope of conflict between
energy development and environmental protection. Those in the Federal
government who are most familiar with our industry have lauded our
technological advances. A 1999 DOE report, Environmental Benefits of
Advanced Oil and Gas Exploration and Production Technology, stated
that, ``innovative E&P approaches are making a difference to the
environment. With advanced technologies, the oil and gas industry can
pinpoint resources more accurately, extract them more efficiently and
with less surface disturbance, minimize associated wastes, and,
ultimately, restore sites to original or better condition. [The
industry] has integrated an environmental ethic into its business and
culture and operations [and] has come to recognize that high
environmental standards and responsible development are good
business.''
To promote such growing access, there is a strong need for improved
information on the access status of the existing resource base. We
applaud the action taken in the last Congress when it reauthorized the
Energy Policy and Conservation Act (EPCA) (Section 604) directing the
Departments of the Interior and Energy and the Forest Service to
conduct an inventory of the oil and gas resources on Federal lands and
the restrictions that prevent access to these critical resources. We
urge Congress to fully fund this inventory in the Fiscal Year 2002
appropriations bill so that adequate information will be available on
resource availability. This is an important step in bringing about
increased development of U.S. oil and gas resources and an important
component in any effective national energy policy.
The American public does not have to choose between domestic energy
supplies and environmental protection. We can, as a nation, have both--
and we cannot afford to heed those negativists who tell us otherwise.
Meeting U.S. energy needs and protecting the environment are both
critical to our nation's continued economic growth--and critical to
achieving the future prosperity and well being we all seek. Our Federal
lands are an asset with multiple values, and the time has come to
recognize that energy values play a significant role in that mix.
______
Mr. Gibbons. Thank you, Mr. Rubin.
Mr. O'Connor, the floor is yours. Welcome to the Committee.
We look forward to your testimony.
STATEMENT OF TERRY O'CONNOR, VICE PRESIDENT, EXTERNAL AFFAIRS,
ARCH COAL, INC., ON BEHALF OF THE NATIONAL MINING ASSOCIATION
Mr. O'Connor. Thank you very much.
For the record, my name is Terry O'Connor. I am Vice
President of Arch Coal, the nation's second largest coal
producer, here representing the National Mining Association.
I thank all of you gentlemen and ladies for the opportunity
to appear here on this very timely subject.
I think most of us are aware that, from an electricity
standpoint, over 50 percent of all the electricity generated in
this country comes from coal. And 40 percent of that coal is
mined on Federal lands, almost exclusively in the western
United States.
Various energy experts project that as we look out into the
next 20 years, some 90 percent of the projected increase in
coal demand for this country is going to come from these
Federal lands, so this is a very relevant and timely subject.
I want to address three principal areas today. I would ask
you to allow me to incorporate our written testimony into the
record. It covers a lot more, but I will address three in the
interest of time.
First is the issue of conflicts between coal bed methane
development and coal mining and production. This is exclusively
an issue in the Powder River basin of Wyoming and Montana; it
doesn't have any impacts outside of those two states, other
than from a supply standpoint.
And the issue goes back for some 30 years--35 years, in
fact--as the Bureau of Land Management has issued oil and gas
leases to one company and coal leases to another company off of
Federal lands, without regard, without regulations,
stipulations, legislation or policies as to how to deal with
these issues when those two valuable resources collide.
Those of you who have been to the Powder River basin are
aware that we are blessed with an incredible magnitude and
quality of both of these resources.
From a coal bed methane standpoint, this is an emerging
industry in which there may be 70,000 wells drilled in the
course of the next 10 years from the Powder River basin.
The Powder River basin itself is the Saudi Arabia of coal.
One mine--there are 14--one mine itself on an energy
equivalency basis represents about an equivalency of 650,000
barrels of oil a day, larger than any oil field in the southern
48.
We desperately need legislation to deal with these issues
of conflict, so that both of these valuable industries can go
forward without the unnecessary and acute problems that are
occurring, that are creating investment uncertainties.
I will give you one anecdotal piece of information here to
identify this. Three years ago, my company was a successful
bidder on a lease. We submitted a bid of $158 million. We did
not know that there would be coal bed methane development on
there. And only later did we find that a coal bed operator
planned to put some 60 wells right in the face of our ongoing
operations.
Had we known that was going to happen, we would not have
bid the $158 million, but have been required significantly to
devalue that bid, because we would have known then, after we
got the right to mine that, we were going to have to pay many,
many millions of dollars to the coal bed operator to entice him
to move more expeditiously and remove his production
activities.
There are lease sales coming up as early as this fall that
are going to address this same issue. And unless and until
Congress deals in a proactive manner, both the Federal and
state governments are going to receive less revenues from these
coal lease sales than they would otherwise receive.
So I urge you to look favorably on this issue, and pass
legislation as introduced by Congresswoman Cubin, H.R. 1710.
The second issue, the issue of public land withdrawals and
the roadless initiative, is an issue that others have testified
before this and other Committees earlier.
A couple of quick points on there. We are unsure where the
administration is going to be going in light of the Idaho
injunction, but Congress must keep the pressure for rational
forest protection here. Two very quick examples.
One of our mines in Colorado, we are actually facing a
potential very serious safety problem, because it is an
underground mine. We have experienced unexpectedly high levels
of methane. The only way that we are able to flush this area
from the active mine areas is to actually drill bore holes down
from the surface in order to get fresh air and flush that.
These bore holes will be drilled on leased ground that we
have under lease. But to get to that surface, we have to cross
a small section of Forest Service lands, and we are
encountering major impediments because of the roadless
initiative that prohibit us or are impeding us now from being
able to drill those holes, creating a major potential safety
issue for our employees. And these are issues that will spread
elsewhere.
In Utah, are plans to develop at least two additional power
plants to service the electrical shortages for the Rocky
Mountain west. This roadless initiative has the potential to
create a serious problem, because in all likelihood, new coal
mines would be needed to supply those new power plants. And 70
percent of all the coal production now is on Forest Service
lands.
A final point, very quickly, because I know my time is
running out here. We need to accelerate the Federal coal
leasing scheduling process, because of the important strategic
value of western Federal coal leasing.
I understand that the 2002 budget has allocated an
additional $1.3 million and four FTEs to accelerate Federal
coal leasing. We are not sure how that money will be spent or
where it is going to be spent.
But right now, particularly in the Powder River basin of
Wyoming, if we expressed interest in a lease sale today, it
would probably be 2011 or 2012 before we would be producing on
that.
We have to accelerate that process. And we can do it
without compromising environmental or other regulatory means by
really administratively focusing BLM in the areas where there
needs to be greater focus.
Thank you very much.
[The prepared statement of Mr. O'Connor follows:]
Statement of Terry O'Connor, Vice President, External Affairs, Arch
Coal, Inc., on Behalf of the National Mining Association
Madame Chairwoman, my name is Terry O'Connor. I am Vice President
of External Affairs for Arch Coal, Inc. I am appearing here on behalf
of Arch Coal and the National Mining Association (NMA) to testify on
the potential that energy resources on Federal lands, specifically coal
resources, have to play in solving our nation's short-term energy
supply problems. We would like to thank you for your leadership in
holding these hearings and working to find ways to increase energy
production on Federal lands, while at the same time making certain that
exploration and production is done in a way that is compatible with
protecting the environment in which we live and work.
Summary
Our nation is facing a crisis--a shortage of affordable energy.
While this is a long term problem that will only be solved with
policies that encourage long term investments in the environmentally
sound development of our energy resources, in efficiency and
conservation, the problem also requires short term solutions. Domestic,
affordable and increasingly clean coal that provides over 20 percent of
all the energy that is used in the United States, the fuel of choice
for over 50 percent of the electricity generated in our nation today,
must be part of the short run answer. Nearly 40 percent of our coal
production is from mines located on Federal lands. Over one-third of
the nation's coal reserves are owned or controlled by the Federal
government. Forecasts show that over 90 percent of new production
expected to come on line over the next 20 years will be from mines on
Federal lands. Much of this production can come on line quickly if
electric generators can use it. However, policies now in effect
discourage modification of existing capacity and construction of new
clean coal generating capacity. Policies also have discouraged, or
prevented the exploration, development and investments that will be
required to bring new coal production on Federal lands quickly on line.
That is the subject of this hearing today. The Congress, in concert
with the Administration, can take action in three areas to allow
expansion of coal production from Federal lands, dependent upon the
demand to use coal.
LThe Congress can enact legislation to resolve conflicts
involving simultaneous development of coal bed methane and leased
Federal coal reserves in the Powder River Basin. We thank you Madame
Chairman, for the legislation, H.R. 1710, which you introduced for this
purpose and which has been referred to this Sub- Committee;
LThe Administration can extend its review of public lands
withdrawals and lease stipulations, announced last week as part of the
President's energy policy, to include coal resources as well as oil and
gas. In particular, the Administration needs to address changes needed
in the Forest Service Roadless Area Conservation Rule; and,
LThe Administration can extend its review of Federal
leasing policies--also announced last week--to include a review of the
coal leasing process with the goal of taking the administrative actions
necessary to accelerate the leasing process. Legislation is also
required to reform Federal coal leasing.
Background
By way of background, Arch Coal, Inc., headquartered in St. Louis,
is the second largest coal producer in the United States. In 2000, our
operating subsidiaries mined more than 112 million tons of coal--
approximately 10 percent of the nation's production--from surface and
underground mines in Wyoming, Colorado, Utah, Illinois, West Virginia,
Kentucky and Virginia. Arch shipped coal to approximately 149 power
plants in 30 states providing the fuel for 6 percent of the electricity
used by Americans last year. Arch owns or controls approximately 3.2
billion tons of coal reserves including reserves on Federal lands.
In 2000, our company mined nearly 65 million tons of low-sulfur,
sub-bituminous coal from our two large surface mines in the Powder
River Basin (``PRB'') of Wyoming, Black Thunder and Coal Creek mines.
We also produced 3.4 million tons in our West Elk Mine in Colorado and
9.4 million tons at three mines in Utah. This coal is almost
exclusively mined on Federal lands, including four mines that operate
at least partially on National Forest Service Lands. One of Arch Coal's
highest priorities is to operate safe and environmentally responsible
mines. Our production and reclamation experience on our mines on
Federal lands are prime examples of the way that our priorities are
met.
The National Mining Association represents producers of coal,
metals and non-metal minerals, as well as manufacturers of processing
equipment, machinery and supplies, transporters, and engineering,
consulting and financial institutions serving the mining industry. The
members of National Mining Association produce over 80 percent of
America's coal, a reliable, affordable, domestic fuel choice used to
generate over 50 percent of the electricity used in the nation.
The Nation Has a Long-Term Energy Problem, But, Short-Term Actions Can
Help
Without question our nation is facing the most serious shortage of
affordable energy since the 1970's. Gasoline prices are at record or
near record highs throughout the country. Refinery capacity cannot keep
up with the demand for the many regionally required fuels. Natural gas
prices were very high during the winter and are still far above price
levels of only 18 months ago. Electricity shortages and rolling
blackouts, a reality in California, may also occur this summer in New
England, New York City and Texas 1 as the capacity to
generate affordable electricity has not kept up with demand. As
President Bush pointed out in his report ``National Energy Policy''
released last Thursday May 17th, there is a fundamental imbalance
between supply and demand--that if allowed to continue will inevitably
undermine our economy, our standard of living, and our national
security. 2 Our nation's energy infrastructure has an
investment deficit. This is a long-term problem that requires the long-
term solutions suggested by the President's new energy policy.
---------------------------------------------------------------------------
\1\ North American Electric Reliability Council, 2001 Summer
Assessment, May 15, 2001
\2\ National Energy Policy, Report of the National Energy Policy
Development Group, May 17, 2001
---------------------------------------------------------------------------
But, the effects of this crisis--a shortage of affordable energy--
are being felt by our citizens now. We must take short-term actions
that will assist in alleviating the crisis even as policies are being
developed and implemented to address the longer-term issue. Increasing
the supply of energy produced on Federal lands, including coal that is
produced on Federal lands, can be part of the short-term solution.
Coal Is An Important Part of Short- and Long-Term Energy Policy
Increasing the production and use of coal, our nation's most
abundant domestic resource, is an important piece of both short and
long term energy policy. In 2000, 1.1 billion tons of coal were
produced in mines located in 26 states. Coal, or electricity generated
from coal, is used in all 50 states. Last year almost all our
production, or 1.026 billion tons of coal, was the fuel that generated
nearly 52 percent of all electricity used in the United States. The
reason that coal has this market share is straightforward: coal is
domestic and reliable; coal is affordable (electric rates in regions
dependent upon coal for electricity average at least one-third lower
than regions dependent upon other fuels for electricity); and, coal is
increasingly clean. Although coal use in 2000 was more than triple the
amount of coal used for electrical generation in 1970, emissions have
declined by over one-third, a trend that will continue.
As the National Energy Plan so correctly stated: ``If rising U.S.
electricity demand is to be met, then coal must play a significant
role. 3 Coal fired electricity is and will remain the most
affordable electricity available. Coal production will increase by at
least 25 percent over the next two decades to meet the increased demand
arising from the expected 40 percent or greater increase in demand for
electricity.
---------------------------------------------------------------------------
\3\ Ibid. p. 5-14
---------------------------------------------------------------------------
Coal on Federal Lands, Is and Will Continue To Be, a Vital Part of the
Nation's Domestic Energy Supply
Coal mined on Federal lands provides a vital portion of the
nation's domestic energy supply. In 2000 approximately 405 million tons
of coal, 37 percent of national production, were mined on Federal
lands. Considering western production only, nearly 80 percent came from
mines on Federal lands and, considering that the majority of privately
held western reserves are on lands that are effectively controlled by
Federal land policies, one can assume that 85 percent or more of the
growing western coal industry depends upon Federal land management
policies. Coal mines on Federal lands are found in Colorado (89 percent
of production within the state), Montana (46 percent), New Mexico (24
percent), North Dakota (7 percent), Oklahoma (35 percent), Utah (88
percent), Washington (33 percent) and Wyoming (92 percent). Less than
0.1 percent of coal production on Federal lands - 365,000 tons - was
from lands located in the Appalachian states (Alabama and Kentucky).
Coal produced on Federal lands contributes directly to local
economies in a positive way. In 2000, this coal was worth an estimated
$3 billion. Production activities provided high paying jobs for over
15,000 workers in 2000, paying wages in excess of $600 million.
Considering both direct and indirect economic benefits, coal produced
on Federal lands provided employment for nearly 150,000 workers with
wages of over $3.5 billion dollars.
Coal produced on Federal lands contributed nearly $400 million to
state and local tax revenue. Royalties paid to the Federal Government
last year were an estimated $330 million.
All the benefits of coal mined on Federal lands do not remain
within the region as this coal is shipped to electric generators in 30
states. Major destinations outside the western region include
generators in Michigan, Minnesota, Illinois, Indiana, Iowa, Wisconsin,
Texas, Kansas, and Arkansas with some being shipped as far as Alabama,
Mississippi and Georgia. Taken as a whole, coal mined on Federal lands
is used to generate nearly 40 percent of all electricity generated from
coal, or approximately 20 percent of all electricity produced in the
US. This is not an insignificant amount being enough to supply
electricity to the entire South Atlantic census region or to all the
customers in the East North Central and West North Central states
combined or to 3.2 Californias.
The Federal Government owns about one-third of the Nation's coal
resources, which are located on approximately 76 million acres of land
principally in the western United States. Western Federal lands contain
approximately 60 percent of the total western coal reserve base. An
additional 20 percent of the coal resources in the West are managed or
impacted by the Federal Government by virtue of (1) the commingling of
State and private coal reserves with Federal leases and (2) trust
responsibilities for Indian lands.
It is important to note that the enormous coal reserves on Federal
lands include some of the best coal from an environmental standpoint.
Many of the reserves, especially those located in Wyoming and Montana,
are low in sulfur and also low in inherent NOx when burned
in power plants. These coals are ideally suited to meet the
increasingly stringent emission requirements of the Clean Air Act
Amendments of 1990 and the regulations that EPA has promulgated.
Whether viewed as an environmental, an economic or as a domestic
energy security and reliability issue, continued coal production from
reserves on Federal lands is critically important to the economy and
the well being of the United States. Energy, especially electricity
would not be as readily available or as affordable if it were not for
coal from Federal lands.
Coal from federal lands is projected to increase over the next two
decades. The EIA Annual Outlook 2001 forecasts shows that over 90
percent of the expected 250 million tons increase in US coal production
will come from coal reserves located on Federal lands. Clearly, coal
resources on Federal lands not only can, but must play a major role in
meeting the demands of the future.
What Is Needed to Make the Coal Production Forecast A Reality?
Expansion of coal fired electric generating capacity is a condition
precedent.
First and foremost, coal will not be mined unless it can be used.
The future demand for coal depends upon the capability of the electric
generating industry to continue operation of its existing fleet and to
expand with construction of new plants using advanced clean coal
technologies. Maximum efficient use of generating capacity in turn
depends upon a reliable nation wide transmission network with greater
capability than exists today. President Bush has suggested several
policies that will allow existing generating capacity to operate at
maximum efficiency, new capacity to be built, and the transmission
network to be expanded without impact on the environment. Although
these policy proposals are beyond the scope of this hearing today, it
is important to note that the capacity to use coal, the capability to
turn coal into electricity efficiently with minimum impact on the
environment, is a necessary precedent to expanding coal production
capacity. National Mining Association supports the provisions included
in the President's energy plan to expand research to continue
development of advanced clean coal technologies. We also believe that
legislation to implement a new energy policy must include a provision
for incentives to assist companies building new clean coal plants by
assuming part of the financial risks associated with commercializing
new technologies.
Coal production on Federal lands can increase rapidly but not without
changes in Federal policy.
As pointed out, coal production on Federal lands is a large and
growing portion of production in the United States. Over the next four
years, the 405 million tons produced in 2000 can certainly increase to
meet demands throughout the nation but most particularly in the west
and southwest.
For example, coal production from reserves located in Utah on
Forest Service lands, or on lands controlled by the Forest Service,
fuels several plants that in turn generate affordable electricity for
the California market. The potential power plant expansions in Utah
could increase demand for coal mined in Utah by as much as 40 percent
in the short term. Production in Wyoming, now at 340 million tons could
continue to grow rapidly in both the short and the long term to fuel
demand from electric generators in the Mountain states, but also in the
Mid west, Texas and in the Southeastern states.
The rate at which the coal industry operating on Federal lands can
respond however, depends on several changes in policy. Interpretations
of legislation over a long period of time added to the regulatory
policies of the previous Administration over the last eight years have
acted to discourage or actually prevent responsible development of coal
resources on Federal lands. Although there are several issues that need
to be considered, rapid increases in coal production in the short term
will depend upon action in three areas.
LResolution of conflicts involving simultaneous
development of coal bed methane and leased Federal coal reserves in the
Powder River Basin;
LIncreased access to the resources located on Federal
lands for responsible exploration and development activities. Large
reserve blocks have already been effectively removed from development
by actions of the Federal Government. 4 The Forest Service
Roadless Area Conservation Rule will remove even larger portions of the
coal reserves located on Federal lands from responsible development;
and,
---------------------------------------------------------------------------
\4\ For example, the unsuitability provisions under SMCRA (the
Surface Mine Control and Reclamation Act of 1977) and land use planning
policies under FLPMA (the Federal Land Policy Management Act) have
removed some 53 billion tons of Federal coal from future leasing; the
previous Administration's use of the Antiquities Act to create National
Monument designations removed additional blocks of reserves from
development.
---------------------------------------------------------------------------
LReform of the Federal coal leasing process.
Coal/Coal Bed Methane Conflict in the Powder River Basin
It is important that the Congress act quickly to enact legislation
that provides for orderly development of energy resources located on
Federal lands to ensure that development of one resource does not
preclude economic development of a co-located resource. Madame
Chairman, you have sponsored and introduced H.R. 1710 to address this
problem. A companion bill, S. 675, has been introduced in the Senate.
The Powder River Basin of Wyoming and Montana is one of the world's
richest energy resource regions and includes the largest reserves of
low sulfur coal in the United States. Virtually all of the coal, and
about 50 percent of the oil and gas reserves in the Basin, are owned by
the Federal government and managed by the Bureau of Land Management
(BLM) under the Mineral Leasing Act of 1920. Problems have arisen
because BLM has issued Federal coal leases and Federal oil and gas
leases for the same locations in the Basin. In many cases when these
oil and gas leases were issued coal bed methane resource development
was not contemplated.
In those areas leased both for coal and for oil and gas, disputes
over timing of mineral development have arisen. The sequence of
development frequently becomes a critical issue because the production
of any one of the minerals can result in the loss of another. For
safety and operational reasons, concurrent development typically is
impossible. No clear statutory direction exists to resolve disputes
over the sequence of mineral development in these areas where the
Federal government has ``double leased'' its minerals. BLM has not
provided effective guidance or included conditions in its leases that
would provide a resolution to these disputes.
In the 2nd Session of the 106th Congress, the entire Wyoming
delegation sponsored legislation (The Powder River Basin Resource
Development Act of 2000 - S. 1950 and H.R. 4297) to resolve these
conflicts. The proposed legislation (which was reintroduced this year
as H.R. 1710 and S. 675) would require competing mineral developers to
negotiate first, and urges the BLM to use its regulatory authority to
achieve a possible resolution to each conflict. If both negotiations
and regulatory efforts fail, either the coal developer or the oil and
gas developer could invoke the formal resolution process established by
the legislation by filing a petition in the local Federal district
court and with the Secretary of the Interior. The bill's process then
would require a public interest determination first by the Secretary,
then by the court, as to which mineral will be developed first. There
would follow a temporary suspension or termination of rights to develop
the conflicting mineral. The court, with the aid of an expert panel,
would determine the amount to be paid to the non-prevailing mineral
developer.
The proposal is the result of lengthy negotiations between the
previous Administration, coal producers and oil and gas developers and
should be quickly considered and passed by this Congress. Until
legislation is passed, conflicts involving simultaneous development of
competing fossil fuel resources in the PRB will continue to threaten or
delay orderly development of much needed environmentally favorable
domestic energy resources.
Forest Service Roadless Conservation Areas
The Administration can extend its review of public lands
withdrawals and lease stipulations, announced last week as part of the
President's energy policy, to include coal resources as well as oil and
gas. The Forest Service Roadless Conservation Area Rule must be part of
this review.
This Committee knows well the history and the effects of the last
Administration's Roadless Area Conservation rule that was published on
January 12, 2001. Due to the lack of detailed information, Forest
Service significantly underestimated the rule's impact on energy
supplies in the western United States. Industry analysis however,
showed that the implementation of this rule could sterilize over 40
percent of the coal production in Colorado and Utah.
And, according to the Department of Energy:
``The roadless initiative will have an impact on coal
reserves in Colorado and Utah, including both the expansion of
existing mines and tracts of coal of near-term commercial
interest. While these resources are recovered using underground
mines, roads are needed to build ventilation shafts and for
safety, e.g., to fight underground fires. The mines would not
be built or expanded if roads cannot be constructed.
Existing leases may also be affected...'' 5
---------------------------------------------------------------------------
\5\ Department of Energy Report to the Forest Service, William
Hochheiser (November, 2000)
---------------------------------------------------------------------------
In Colorado, one of the mines in the Grand Mesa-Uncompahgre Forest
is my company's, West Elk Mine where 200 million tons of coal could
become unrecoverable because of the rule. This loss of reserves will
result in the premature abandonment of the mine and its $100 million
infrastructure.
The Bowie Mine in the Grand Mesa-Uncompahgre Forest will be blocked
from developing 50 million tons of high quality coal reflecting over
$2.5 billion in economic activity. The Oxbow Mine, adjacent to the
Bowie leases is surrounded on the east and north by roadless areas.
These roadless prohibitions will thwart future development at this
operation.
The Forest Services Final Environmental Impact statement for the
roadless rule declares that in Utah's Manti-La sal Forest three tracts
alone account for 185 million tons of high Btu coal that are prejudiced
by the rule. Further investigations of coal resources in the area
indicate the impact could be much greater.
The Forest Service chose to accept these severe prescriptions even
though mine roads are temporary and the Surface Mining Control and
Reclamation Act (SMCRA) mandates that these roaded areas be reclaimed
to a condition as good or better than they were before mining. It
should be noted that surface coal mines cannot be permitted on Forest
Service administered lands unless the Secretary of Interior ``finds
that there are no significant recreational, timber, economic, or other
values which may be incompatible with such surface mining
operations...'' In other words, the values the rule is supposed to
safeguard have already been considered and protected by an existing
statute. Yet, millions of tons of low sulfur coal have been sterilized
by this needless and unlawful regulation.
The reserves removed from development by this rule will have an
effect on the ability of the coal industry mining on Forest Service
lands to meet demand in the short term as well as over the longer run.
The Forest Service delayed implementation of this rule until May 12 as
part of the Bush Administration's overall assessment of rules issued at
the end of the previous Administration. However, on May 10 a Federal
judge's ruling blocked implementation of the rule pending further
review and amendment.
Secretary Ann Veneman has announced that the Department of
Agriculture intends to propose amendments to the rule in June. We would
urge this Committee to do all it can to encourage a rapid review of
these amendments with a view toward allowing industry to continue
responsible development of coal, and other energy, resources on Forest
Service lands as quickly as possible. Coal production on lands affected
by the Forest Service Rule can increase rapidly, but only after
resolution of this issue.
Federal Leasing
The Administration can extend its review of Federal leasing
policies--also announced last week--to include a review of the coal
leasing process with the goal of taking the administrative actions
necessary to accelerate the leasing process. Legislation is also
required to reform Federal coal leasing.
In August 1976, the Federal Coal Leasing Amendments Act (``FCLAA'')
was enacted. FCLAA imposed for the first time a series of radically
more stringent requirements upon Federal coal lessees, the compliance
with which forced such lessees to make a host of major financial and
operational commitments, many of which made good policy sense but
others were counterproductive. Over the past 25 years, those Federal
coal lessees who have managed to stay in business have fully complied
with both the rational and the questionable requirements.
Federal coal lessees are not today calling for major reform of the
FCLAA program, although over time certain of FCLAA's provisions
ultimately may need to be revisited and modified. Even where
modifications ultimately may be needed, in most instances, the debate
on such modifications can be deferred to a later time when adverse
impacts become more focused and imminent. There are two areas that need
immediate attention however.
1. Advanced Royalty Provisions
The first issue that must be addressed is a segment of FCLAA's
current ``advanced royalty'' provisions, which call for early
legislative reform by Congress. The current advance royalty provisions
provide, among other items, that:
LAdvance royalties may not be paid for more than an
aggregate of 10 years,
LAdvance royalties paid during the initial 20 year term of
a lease may not be carried over past the 20th year, and
LThe Secretary of Interior may unilaterally cease to
accept advance royalties.
With the progressive deterioration of U.S. coal market prices,
several Federal coal lessees have been forced temporarily to curtail
production and idle mines. Without the option of extending the lease by
paying advanced royalties, producers will be forced to prematurely
terminate leases. Once leases are terminated, the probability of the
location being mined again is small. The Federal coal and Federal
revenues associated with it will be lost.
We recommend that narrowly drafted, surgical changes be made to
FCLAA's advance royalty provisions which would:
LExtend the aggregate entitlement to pay advance royalty
in lieu of continued operations from 10 years to 20 years;
LDelete the current prohibition on the carry-over of
advance royalty payments made during the initial 20-year period of the
lease;
LDelete the current authorization for the Secretary
unilaterally to cease to accept advance royalties in lieu of continued
operations; and
LDelete the last sentence of Section 39 of the MLLA of
1920 (Section 14 of FCLAA) prohibiting the waiver, suspension, or
reduction of advance royalties.
2. Address the Need to Move Expeditiously on Lease-By Applications
The Federal Coal Leasing Amendments Act of 1976 (``FCLAA'')
requires that all leases for Federal coal be conducted by a competitive
leasing process. One of the mechanisms for initiating competitive
leasing is through a lease-by application (``LBA'') procedure, which
allows an existing coal mining operation to nominate a tract for the
expressed purpose of prolonging the life of the existing mine. The LBA
process has been effectively used in Utah, Colorado and Wyoming for
over a decade now. In the Powder River Basin (``PRB'') of Wyoming,
which is called by many the ``Saudi Arabia of coal'', since that area
is producing in excess of 1/3 of all U.S. coal, the LBA process has
been critical to the orderly development of Federal coal reserves.
As pointed out, coal production in the PRB has jumped dramatically
since the Clean Air Act Amendments of 1990 primarily because western
coals are typically very low in sulfur and also very low in inherent
NOx when burned in power plants. With this dramatic increase
in demand for low sulfur western coal has come the need for continued
access to Federal coal reserves. Western coal producers clearly
recognize this need and make their leasing plans accordingly.
Unfortunately, the Bureau of Land Management now is only processing and
holding one Federal coal lease sale per year in the Wyoming PRB. Thus,
the most recent coal lease applications filed may not be offered for
sale for eight years. Permitting requirements will then add another
approximately three years. As a consequence, it is readily apparent
that there is an excessive backlog of Federal coal lease applications
on file and that the timeframe for processing LBAs and issuing leases
has become unacceptable to orderly development of this most important
domestic energy resource.
There are several administrative opportunities to address this
backlog. The first opportunity is to consolidate the NEPA process
instead of conducting separate EIS's for each lease application.
Several LBAs should be combined into one document. Second, and even
more importantly, the Department of Interior expeditiously should
evaluate the workload of other BLM offices to determine if there are
any personnel available to help work through this backlog. Finally, and
of relevance to this hearing, Congress should give favorable
consideration to supporting additional Federal funding for the
processing of these lease applications in order to short the
intolerable backlog.
This concludes my statement Madame Chairwoman and I would be please
to answer any questions you may have.
______
[Mr. O'Connor's response to questions submitted for the
record by The Honorable Nick Rahall follow:]
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Mr. Gibbons. Thank you, Mr. O'Connor.
Mr. Sims, welcome to the Committee. We look forward to your
testimony. The floor is yours.
STATEMENT OF EARL SIMS, PRESIDENT, SIMS CONSULTING, ON BEHALF
OF THE INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA
Mr. Sims. Thank you very much. My name is Earl Sims. I am
president of Sims Consulting, a Houston-based firm that I
formed to help independent producers with public issues,
particularly in the offshore.
Today I am representing Forest Oil and Mariner Energy and
testifying on behalf of the Independent Petroleum Association
of America.
Increasingly, independent producers--from family owned
enterprises in a single state to publicly traded companies with
international operations--are bringing offshore and onshore
reserves to the market.
I appreciate the opportunity to share with this Committee
recommendations from that independent community--for increasing
supply of oil and gas from offshore and onshore lands within
the next 5 years.
My remarks today will address the issue we face on two
broad themes: providing land access and providing access to
capital through royalty incentive policies.
Let's begin with access. First, we wholeheartedly support
the executive order the President signed Friday, requiring
agencies to include in their regulatory actions a statement of
the proposal's energy impact. Including what we call energy
accountability in further decisionmaking will promote sounder
energy policies.
Second, Congress needs to assure adequate funding for the
Department of the Interior's offshore and onshore oil and gas
programs. Increases contained in the President 2002 budget is a
good first step.
A long-term solution may be to adopt the proposal from
Congresswoman Cubin, which is to use part of the royalty stream
to fund DOI's programs/ offices that are responsible for
production.
Turning to the offshore, the MMS's next 5 year OCS leasing
plan, covering the years 2002 to 2007, which we consider to be
our blueprint for the future, is a good starting point.
Beyond providing the important annual sales in the western
and central Gulf, we need to find ways to obtain affected state
buy-in for targeted exploration in top geological plays
contained in off-limit areas.
Next, Sale 181, scheduled in a nonmoratorium area in the
eastern Gulf, is an important step to take this December. And
take it we must, with all the tracts, on time, and with good
terms and stipulations that will encourage development and
production.
Make no mistake, this sale is very important to independent
producers.
Finally, in the offshore arena, IPAA agrees with the
administration's recommendations in its energy policy that it
is time to reexamine the current energy siting regime, like
coastal zone management policies, to determine if changes are
needed.
Turning to onshore land access, a good first step is the
timely completion of a land inventory with a description of the
impediments to access and development.
Chairwoman Cubin, the IPAA applauds you, along with
Chairman Skeen, for leading this effort in the House for this
requirement. And we are pleased to see that the administration
energy policy includes the recommendation to accelerate this
effort.
Finally, the onshore permitting process should be improved
and properly funded. IPAA supports the provision of S. 388,
which expands state involvement and establishes time frames for
reviewing permits. IPAA supports the executive order signed by
the President on Friday, requiring the expedition of energy-
related approvals in an environmentally sound manner. The next
step is to review the stipulation process.
Turning to the royalty theme, IPAA believes royalty
incentive policies can be a powerful tool in generating capital
investments in exploration and production projects on Federal
lands.
My written statement offers a number of royalty incentive
ideas, including:
LThe renewal of deepwater royalty relief policies
that were in place until last November,
LThe application of relief volumes on a lease
basis rather than a field basis for all deepwater leases,
LExpansion of royalty-incentive policies to
nondeepwater, but high-cost situations, such as deep wells,
subsalt prospects, and highly deviated wells, as well as
marginal production, and
LConsideration of similar royalty incentives for
onshore production.
The IPAA supports the administration's energy policy
recommendation that Interior consider economic incentives for
environmentally sound offshore oil and gas development for
specific areas that would otherwise be uneconomic.
We encourage the administration to expand its consideration
to include onshore production. We also agree the administration
royalty incentive should provide a fair return to the public.
Price triggers are one way to accomplish this.
In conclusion, providing access to the resource base and
attracting capital are critical for increasing domestic
production. It is time that the nation take its energy supply
issues seriously and develop a sound future policy.
Thank you for allowing me to appear before you today.
[The prepared statement of Mr. Sims follows:]
Statement of Earl R. Sims, on Behalf of the Independent Petroleum
Association of America
Madam Chairwoman, members of the committee, my name is Earl Sims,
president of Houston-based Sims Consulting, a recently established firm
that represents independents on offshore issues and advises them of the
political risks of operating in the Outer Continental Shelf (OCS).
Today, I am representing Forest Oil Corporation and Mariner Energy,
Inc. and am here on behalf of the Independent Petroleum Association of
America (IPAA) and all of its members that operate in the OCS and
onshore Federal lands. I am the immediate past vice Chair of the IPAA
Offshore Committee and the current Chairman of the IPAA Offshore Access
Taskforce. Until late last year, I chaired the industry's OCS Sale 181
Work Group.
Forest Oil Corporation is engaged in the acquisition, exploration,
development, production and marketing of natural gas and crude oil in
North America and selected international locations. Forest's principal
reserves and producing properties are located in the United States in
the Gulf of Mexico, Louisiana, Texas, Cook Inlet, Alaska and in Canada
in Alberta and the Northwest Territories.
Mariner Energy, Inc. is a Houston-based oil and natural gas
exploration and production company with principal operations in the
Gulf of Mexico and along the U.S. Gulf Coast. The company is majority
owned by an affiliate of Enron North America Corp. which, along with a
group of Mariner employees, provided equity financing for a management-
led buyout in 1996. Mariner has been an active explorer in the Gulf
Coast area since the mid-1980s (initially as Trafalgar House Oil and
Gas USA Inc. and then as Hardy Oil & Gas USA) and has successfully
grown its production and reserve base through the drill bit. Mariner is
one of the most experienced independent operators in the Deepwater Gulf
of Mexico, having operated nine field developments in the Deepwater
Gulf since 1995.
IPAA represents thousands of independent petroleum and natural gas
producers that drill 85 percent of the wells drilled in the United
States. Independent producers of both oil and natural gas have grown in
their importance, and are a key component of a national energy policy.
Independent producers produce 40 percent of the oil--60 percent in the
lower 48 states onshore--and produce 65 percent of the natural gas.
The presence of independents in the offshore is rapidly increasing.
Not only do independents now hold 80 percent of all acreage under lease
on the OCS, but as a group, independents have amassed as much acreage
in the deepwater as have the majors. And, they participated in half the
wells drilled in the deep Gulf in 2000. In total, it has been estimated
that independents hold more than 40 percent of the active leases in the
deepwater Gulf.
The March 2001 sale in the central Gulf of Mexico further
demonstrated the substantial presence of independents in the offshore.
With high bids from 90 companies totaling over $505 million--up from
around $300 million a year ago--industry has clearly stepped up its
activity level in response to today's marketplace. At sale 178, of the
90 companies bidding, 77 were independents (86 percent).
Today's hearing focuses on actions that Congress may take that
significantly increase the supply of energy resources from Federal land
(including the OCS) within the next five years. This testimony will
focus on such recommendations for both onshore and offshore Federal
lands. On two previous occasions, IPAA has submitted for the record
written testimony documenting the critical role oil and natural gas
reserves lying beneath Federal onshore and offshore lands will play in
meeting the nation's energy needs. And it seems that the Public agrees.
A recent USA Today poll indicated that 63 percent percent of those
surveyed support drilling for natural gas on Federal lands. The
Administration's National Energy Policy, unveiled on May 17, highlights
the need to examine the potential for regulated increase in the oil and
natural gas development on Federal lands as part of increasing energy
supplies. We agree with President Bush that we can increase energy
supply and protect the environment. We can accomplish both goals to
ensure this country has access to its oil and natural gas resources
lying beneath government controlled lands.
Today, I will discuss the steps Congress can and should take now to
increase production tomorrow. Indeed, if some of these steps had been
taken yesterday, our nation's energy situation would be far less
uncertain today. For reference purposes, the two previous testimonies
submitted by IPAA are dated April 25 and May 14, 2001.
the congressional role
The predominant areas where Congress and the Administration play a
major role in promoting or inhibiting domestic oil and natural gas
production are: providing access to the natural resource base and
providing access to essential capital.
i. access and permitting constraints
A national energy policy must recognize the importance of accessing
the natural resource base. In 1999, the National Petroleum Council
(NPC) in transmitting its natural gas study, ``Meeting the Challenges
of the Nation's Growing Natural Gas Demand'', concluded:
The estimated natural gas resource base is adequate to meet
this increasing demand for many decades. However, realizing the
full potential for natural gas use in the United States will
require focus and action on certain critical factors.
Much of the nation's natural gas underlies government-controlled
land both offshore and onshore. These resources can be developed in an
environmentally sound and sensitive manner. The Department of Energy
recently released a comprehensive report, Environmental Benefits of
Advanced Oil and Gas Exploration and Production Technology,
demonstrating that the technology is available. And, it is being
employed, when exploration is allowed.
Without policy changes, many of which can be initiated by Congress,
the nation may not be able to meet its needs. The NPC study projects
demand increasing by over 30 percent over the next decade. This will
require not only finding and developing resources to meet this higher
demand, but also to replace the current depleting resources. While many
analysts are focusing on how much more natural gas demand will grow, it
is equally important to recognize what is happening to existing supply.
All natural gas wells begin to deplete as soon as they start producing.
However, as our technology has improved, we now are able to identify
probable reservoirs more effectively. This allows us to find and more
efficiently produce smaller fields.
Unlike petroleum, natural gas supply is dependent on North American
resources with 80 to 85 percent coming from the United States. However,
much of this domestic supply is most cost effectively accessible from
government controlled lands. The current restrictions affecting access
to these lands differ depending on the area, but all must be altered to
meet future demand.
Offshore--Western and Central Gulf of Mexico
These portions of the Gulf of Mexico have proven to be a world-
class area for natural gas as well as petroleum production, accounting
for over 25 percent of domestic natural gas production. Production
comes from the continental shelf, the deepwater, and the emerging
ultra-deepwater. The NPC study projects that future production
increases in these areas are essential to meet projected demand.
A Minerals Management Service (MMS) report on Future Natural Gas
Supply from the OCS, estimates the future natural gas production from
the shelf and slope of the Gulf of Mexico in a high case peaking at 6.7
trillion cubic feet (TCF) in 2010 followed by a decline. However,
recently published MMS data indicates much lower expected natural gas
from the Gulf of Mexico. Using new data, the high case estimation could
peak in 2002 at about 5.22 TCF.
The Subcommittee on Natural Gas on the U.S. Outer Continental Shelf
of the OCS Policy Committee recently reported, ``Based on this
projection, it can be concluded that unless exploration and development
scenarios in the Gulf of Mexico changes dramatically, the production
from the Gulf of Mexico may not be able to meet the expected share of
natural gas supply to meet the expected future natural gas demand of
the U.S.'' Later in this testimony, I will discuss what IPAA believes
needs to occur to reach the expected 8.0 TCF of natural gas annual
production from the Gulf of Mexico (National Petroleum Council's
estimate for 2010) and, as well, to increase oil production.
Offshore--Eastern Gulf of Mexico, Atlantic Ocean, and California
The substantial domestic natural gas reserves in these three areas
is unavailable because of Congressional or Administrative moratoria.
President Clinton extended these moratoria until 2012 saying, ``First,
it is clear we must save these shores from oil drilling.'' This is a
flawed argument ignoring the state of current technology; it results in
these moratoria preventing natural gas development as well as oil. In
fact, both the Eastern Gulf and the Atlantic reserves are viewed
primarily as gas reserve areas, not oil. Too often, these policies seem
to be predicated on the events that occurred 30 years ago. Federal
moratoria policy needs to be reviewed and revised to reflect advances
in the industry's technology. Based on the MMS' 2000 resource
assessment, the MMS determined that offshore moratoria forgo
conventionally recoverable 16 billion barrels of oil and 62 trillion
cubic feet of natural gas. Of course these estimates are based on
little or no exploration and could be much more significant if
exploration is allowed. In the western and central Gulf of Mexico,
estimates have proven to be much greater after exploration.
Onshore - Rockies
Onshore, the NPC Natural Gas study estimates that development of
over 137 TCF of natural gas under government-controlled land in the
Rocky Mountains is restricted or prohibited. A recent study by the
Energy Information Administration concludes that about 108 TCF are
under restriction. Regardless of the exact number, the amount is
significant. A Congressionally-mandated inventory of these resources is
underway. While an important first step, it is equally important to
recognize that access to these resources is limited by constraints
other than explicit moratoria. These constraints that often result in
``de facto'' moratoria vary widely. Examples include Monument and
wilderness designations, Forest Service ``roadless'' policy, and
prohibitions in the Lewis and Clark National Forest.
At the same time the permitting process to explore and develop
resources often works to effectively prohibit access. These constraints
range from Federal agencies delaying permits while revising
environmental impact statements to habitat management plans overlaying
one another thereby prohibiting activity to unreasonable permit
requirements that prevent production. There is no single solution to
these constraints. What is required is a commitment to assure that
government actions are developed with a full recognition of the
consequences to natural gas and other energy supplies. IPAA believes
that all Federal decisions--new regulations, regulatory guidance,
Environmental Impact Statements, Federal land management plans--should
identify, at the outset, the implications of the action on energy
supply and these implications should be clear to the decision maker.
Such an approach does not alter the mandates of the underlying law that
is compelling the Federal action, but it would likely result in
developing options that would minimize the adverse energy consequences.
IPAA's Priority Short-Term Recommendation for Increasing Access to
Production from the OCS and Onshore Federal Lands:
Energy Accountability. If there is one immediate action the
Congress and/or the Administration can take that will have a dramatic
affect on increasing oil and gas production in the short-term, it is
mandating energy accountability. If all Federal agencies associated
with decisions affecting oil and gas development are held accountable
for how their decisions impact national energy supply, production will
increase.
Such a requirement is contained in the Administration's National
Energy Policy:
``Issue an Executive Order directing all Federal agencies to
include in any regulatory action that could significantly and
adversely affect energy supplies a detailed statement on the
energy impact of the proposed action.
A similar provision is contained in S. 388, the National Energy
Security Act of 2001. Independents all agree that this type of
requirement should be implemented immediately to bring balance in the
land use decision making.
IPAA's Short-Term Recommendations for Increasing Access to Production
from the OCS:
1. Sale 181
IPAA and its members companies have long considered Sale 181 to be
a high priority issue. It represents an important component of our
future in the offshore. Scheduled for December 2001, it would be the
first eastern Gulf of Mexico Lease Sale since 1988, and for some our
members that confine their activities to the Gulf of Mexico, the first
opportunity to bid outside the central and western Gulf of Mexico ever.
The Sale 181 area is estimated to hold about 7.8 TCF of natural gas
and perhaps 1.9 billion barrels of oil. The natural gas resources could
be used to meet the nation's growing natural gas demand estimated to
increase by 30 percent from today's level to nearly 30 TCF/yr by the
year 2010. It is noteworthy that the NPC natural gas study cited
earlier, assumes Sale 181 occurs on time, with all tracts offered, and
that development proceeds without delay. The NPC study projects that
Sale 181 could result in adding 400 billion cubic feet (BCF) per year
in new gas production--production that would be lost if the Sale were
not held or restrictions inhibited exploration and production.
Back in the early to mid-1990's the MMS engaged in a comprehensive
consultation with Alabama and Florida as well as other coastal states,
about leasing in the eastern Gulf of Mexico. Both States expressed
concerns about leasing and both requested that leasing not occur within
certain distances to their states--15 miles in the case of Alabama and
100 miles in the case of Florida. Sale 181 was crafted to meet both of
these criteria and was placed on the current 5-year schedule by the
MMS. Congress subsequently ratified this decision through the
appropriations process. Based on this buy-in from coastal states,
industry began to prepare--accumulating seismic data, reviewing
geologic trends, conducting preliminary engineering studies--in
anticipation of Sale 181. Independents have spent millions of dollars
with the expectation that the Sale would occur as scheduled.
Today, the debate continues as to whether the Sale should go
forward. But, after ten years of consultation, it is now time to open
up to leasing a relatively small area of the eastern Gulf of Mexico
that was established after exhaustive consultation with coastal states.
2. The Five-year OCS Lease Sale Schedule
Every five years, the MMS takes on a very thorough process to draft
a new five-year OCS Leasing Schedule. That process is now underway to
establish a leasing program for the period 2002-2007. Industry, and
other interested parties, provided comments to the MMS during the
earlier stages of the process. A draft schedule should be ready for
review very soon.
IPAA vows to work with the MMS to establish a schedule that helps
meet the nation's growing appetite for energy. For many of our members,
those that confine their activities to the Gulf of Mexico, it has meant
annual sales in the central and western Gulf of Mexico. It is essential
that these annual sales continue. IPAA is encouraged by the
recommendation contained in the Administration's National Energy Policy
that OCS oil and gas leasing and approval of exploration and
development plans on predictable schedules should continue.
As this Country drafts a national energy policy, now is no time to
be timid. Yet, we know that resistance in some regions to offshore
exploration and production remains a major impediment despite the
obvious energy needs. We have our work cut out for us if we are to be
successful at making enough offshore lands available to meet the
nation's energy needs.
One possible approach interested parties should consider during
development of the next five year plan, in consultation with industry
and affected states, is the identification of a small number of prime
natural gas plays in moratoria areas to determine if limited pilots
could demonstrate how oil and gas operations could be safely conducted
in new areas. Such an approach would require congressional funding for
scientific, environmental, and social/human impact studies. Any
piloting would require site-specific stakeholder consultations.
3. Coastal Zone Management Issues
Coastal zone management (CZM) matters are increasingly important to
independents operating in the Offshore. These matters play a direct
role in land access for the offshore. CZM issues have not historically
been seen as a priority issue for independents operating in the western
and central Gulf of Mexico, as states have not attempted to obstruct
offshore activities under the Coastal Zone Management Act (CZMA). With
an increased interest in the eastern Gulf of Mexico, independents'
interest in CZM is heightened. It is one thing to have a lease sale; it
is quite another to be allowed to explore, develop and produce from
that lease once it is purchased.
A coastal state with a Federally-approved coastal zone management
plan is empowered to block offshore exploration and production plans,
if the state can allege that the Federal lessee's activity will have
some affect on resources in the coastal zone. If the lessee's activity
will have an effect, the activity must be consistent with the state's
coastal zone management plan.
The coastal zone itself generally extends only 3 miles offshore,
but extends 9 miles in the Gulf of Mexico off Texas and Florida. The
effects test, however, can be used to extend the state's reach great
distances from shore. The Interior Department itself determines before
issuing leases that the projects it expects lessees to undertake will
be consistent with the plans of any affected states. But states can
change their minds after the leases are issued.
A Federal lessee offshore must certify that both its exploration
plan and production plan are fully consistent with the coastal zone
plans of affected states. If a state disagrees, the lessee faces
considerable delay in an appeal before the Secretary of Commerce.
Chief risks to lessees in current CZMA implementation are:
LCompliance costs caused by unexpected interpretations of
vague policies in state CZM plans,
LDelay costs caused by lengthy appeals process before
Department of Commerce,
LRisk of losing lease rights without compensation when
state changes its mind on what its plan requires.
Congress should encourage a review of the CZMA and its consistency
provisions. The Administration's National Energy Policy recommends that
the President direct the Secretaries of Commerce and Interior to re-
examine the current Federal legal and policy regime (statutes,
regulations, and Executive Orders) to determine if changes are needed
regarding energy-related activities and the siting of energy facilities
in the coastal zone and on the OCS. The review should include:
LA review of the Coastal Zone Management Act, particularly
as amended in 1990,
LImplementing regulations, especially those finalized late
in 2000 by the National Oceanic and Atmospheric Administration on
consistency,
LState implementation programs, and
LProcess issues, particularly as the process is used to
delay projects.
4. Congressional Funding
IPAA recommends that the Congress adequately fund the MMS to ensure
that its mission is not compromised during this critical period in
which the Nation aggressively seeks new energy resources to meet
growing demand. Specifically, IPAA recommends:
LSupport the Administration's Fiscal Year 2002 budget
request increasing the MMS budget by $14.7 million to meet increased
workload brought about by offshore program services and to implement
royalty in-kind.
LFully fund the MMS and other related agencies in future
years to ensure they have the resources available to increase gas and
oil supplies from the OCS.
LRequire that appropriated funds be directed to education
and outreach regarding the benefits the OCS program provides the
Nation.
Funding is always difficult during budget reductions and tax cuts.
However, investing in the offshore program provides taxpayers a great
return on their investment. In Fiscal Year 2000 alone, the MMS
collected and distributed about $7.8 billion in mineral leasing
revenues from Federal and American Indian lands. Madam Chairwoman, IPAA
applauds your proposal for using part of the onshore oil and gas
royalty streams to fund those BLM offices responsible for generating
production on which royalty payments are based. The vast majority of
royalty payments come from offshore production and, similar to your
proposal for the onshore, we recommend that a part of the offshore
royalty stream should be directed to offshore programs that will
promote increased production, especially natural gas.
For example, IPAA supports a collaborative effort for research,
development, and transfer of technologies used in the production of
natural gas, so long as there are not additional charges or costs such
as increased royalties, taxes or surcharges. Other uses of the onshore
and offshore royalty stream, including taking the stream in-kind, could
include low-income programs and environmental projects.
IPAA's Short-Term Recommendations for Increasing Access to Production
from Onshore Federal Lands:
1. Congressional Funding
Like President Bush's Fiscal Year 2002 budget request for the
offshore program, IPAA supports the President's proposed increases for
the onshore Federal oil and gas program. Specific items include:
LA $7.1 million increase to support improvements in the
land use planning and accelerate the multi-year process of updating
management plans. This is a good first step. The entire planning
process needs to be reviewed, including the funding process.
LAn $11.8 million increase for oil and gas programs,
including energy resources surveys, Alaska North Slope oil and gas
exploration, coal-bed methane permits, and oil and gas inspections.
LA $3.0 million dollar increase for Bureau of Land
Management (BLM) to work with U. S. Geological Service (USGS), the U.
S. Forest Service (USFS), and the Department of Energy to conduct an
inventory of public lands and describe the impediments and restrictions
to access and development. Madam Chairwoman, you, along with Chairman
Skeen, led the effort in the House for getting this included in the
Energy Policy and Conservation Act (EPCA), which was signed into law
late last year. We agree with the Administration's National Energy
Policy that this inventory required under EPCA should be accelerated.
LA $2.0 million dollar increase to accelerate leasing by
15 percent and to process an additional 1,000 to 2,000 drilling permits
in the most promising areas.
Similar to your proposal of using the royalty stream to fund BLM
offices managing the production generating this royalty streams, IPAA
also supports a provision contained in the Administration's National
Energy Policy to direct royalties from ANWR to conservation efforts and
eliminating the maintenance and improvements backlog on Federal lands.
If proceeds from ANWR do not become available in the foreseeable
future, IPAA would advocate that Congress fund other sources of funding
to eliminate this backlog.
Permitting Process
There are costly delays with every aspect on the onshore Federal
permitting process. In fact, there are a number of examples of
approvals that are never granted resulting in reserves never being
developed. The National Energy Security Act of 2001, S.388 reforms the
permitting process in a subsection entitled Improvements to Federal Oil
and Gas Lease Management.
This section contains a number of very important reforms. It allows
a state, if willing, to conduct a number of non-environmental oil and
gas approvals on behalf of the Federal government. Our experience has
been that states can perform oil and gas activities at a much lower
cost and in much more timely fashion than the Federal government. For
decisions remaining with the Federal government, the bill establishes
reasonable timeframes for processing different documents related to oil
and gas development. Additionally, it provides adequate funding for
environmental documents. Timing is capital and if there are never-
ending delays, this capital will be directed overseas or to private
lands.
If Congress cannot pass such reform in the short-term, it should
encourage the Administration to determine which of these reforms can be
implemented administratively. In fact, if approval processes are
improved, production will occur sooner resulting in more revenues to
the treasury. The following are two examples of this:
LApprove Pending Drilling Permits. It is our understanding
that hundreds of drilling permit are pending before the government. If
these were approved, production would increase.
LApprove Balanced Planning Documents. If pending planning
documents, like the one in Otero County, New Mexico, were approved,
production will increase. The Otero County document should allow for
development and, if it did, up to 1 trillion cubic feet of gas could be
delivered to market from one planning area.
IPAA agrees with two-related recommendations contained in the
Administration's National Energy Policy:
LAn executive order to rationalize permitting for energy
production in an environmentally sound manner by directing Federal
agencies to expedite permits and other Federal actions necessary for
energy-related projects.
LReview public lands withdrawals and lease stipulations,
with full public consultation, especially with the people in the
region, to consider modification where appropriate.
3. Other Administrative Actions
The government should not implement cost recovery regulations that
would place unnecessary costs on every facet of the oil and gas
program. These costs will further discourage small independent
producers from developing onshore Federal lands and are inappropriate
given the billions of dollars the oil and gas industry pays each year
to the Federal government in the form of royalties.
Additionally, all regulation rewrite efforts that were mandated
under Vice President Gore's ``Plain English'' Initiative should be
terminated. The proposals issued for onshore oil and gas regulations
under this Initiative proposed significant policy changes and would
result in more uncertainty. Specifically, smaller independent producers
are concerned about the proposed increase of bonding amounts. Bonds are
rarely called for the purpose of reclamation. The vast majority of good
operators on Federal land should not be punished for the bad behavior
of the few. Enforcement is the key.
Royalty In-Kind
IPAA has been a long-time supporter of RIK programs. By giving more
tools to the Federal government to maximize return to the American
taxpayer when taking in kind, the program can be expanded. When royalty
in-kind is expanded, more certainty is provided to the government and
the oil and gas lessees; thereby making offshore and onshore Federal
lands more attractive for development. IPAA support the RIK provisions
contained in S. 388. As well, we support funding and providing MMS
needed RIK authorities in their Fiscal Year 2002 appropriations.
ii. providing access to essential capital
Because oil and natural gas exploration and production are capital
intensive and high-risk operations that must compete for capital
against more lucrative investment choices, much of its capital comes
from its cash flow. The Federal tax code and royalty policies play a
critical role in determining how much capital will be retained. The
Administration and Congress need to enact provisions designed to (1)
encourage new production, (2) maintain existing production, and (3) put
a ``safety net'' under the most vulnerable domestic production--
marginal wells.
However, given that this Subcommittee has jurisdiction over royalty
policies, not the tax code, I will not discuss IPAA's tax proposals.
Rather, I will address the area of royalty policies.
IPAA's Recommendations for Increasing Access to Capital for the OCS:
1. Deepwater Royalty Relief
The Deep Water Royalty Relief Act of 1995 (Act) provided for
automatic royalty relief for all new oil and gas leases issued from
1995 through 2000 in waters deeper than 200 meters in order to
stimulate exploration and production of natural gas and oil in the
deeper waters of the central and western Gulf of Mexico. The portion of
the Act that provided this automatic relief for new leases expired in
November 2000.
The MMS has now put in place regulations that would leave to its
discretion the use of any upfront royalty relief for future Gulf of
Mexico lease sales. IPAA is concerned that, although the new MMS
royalty incentives put into place for water depths greater than 800
meters, subsalt, and deep gas drilling are a good first step, they fall
short of truly accelerating the rate of development and production of
natural gas and oil in the Gulf of Mexico. Additionally, the MMS is not
offering any relief for water depths between 200 and 800 meters.
To this end, IPAA supports the reauthorization of the original
automatic royalty suspension volumes as contained in the expired
provision of the 1995 Act. These terms led to a boom in natural gas and
oil activities in the deep waters of the Gulf of Mexico in the five
short years they were in place. At the most recent central Gulf of
Mexico Lease Sale 178, where no royalty relief was offered for water
depths of 200 to 800 meters, bidding activity fell sharply compared to
that previously experienced with royalty relief incentives. We believe
if the Act would have been reauthorized, there would have been
substantially more interest in these water depths and in ultra-
deepwaters.
Would such a reauthorization of the Act cost the American taxpayer
revenues? Simply put--no. Third party modeling demonstrates that a
reauthorization of the act would have provided additional, not less,
revenues to the American taxpayer. Increased production would occur,
far outweighing the temporary loss of royalty. We should remember that
prices will not always be this high and we need to encourage aggressive
leasing now, to meet our production needs for the future.
We agree with Senator Murkowski's recommendation that under the
auspices of a National Energy Policy Taskforce that the Secretaries of
the Interior and Energy form a Gulf of Mexico Leasing Incentives Review
Team to determine what level of incentives for all water depths are
appropriate in order to ensure that we optimize the domestic supply of
natural gas and oil from offshore areas that are not subject to current
leasing moratoria. In particular, the team should further examine the
field size distribution of the Gulf of Mexico resource base and the
international competitiveness of the Gulf. Recommendations, as a result
of this review, should be made in the context of the importance of the
development of the natural gas and oil resources of the Gulf of Mexico
to the Nation's future energy and economic needs. These recommendations
should be implemented prior to the August 2001 western Gulf of Mexico
lease sale.
2. Deepwater Leases Issued prior to November 2000
During Sale 178, the MMS adopted an important approach to stimulate
activity in the 800 meter plus water depths--royalty incentives were
offered on a lease-basis . For deepwater lease issued prior to sale
178, the MMS only offered royalty incentives on a field-basis. If the
MMS would retroactively offer such relief on a lease-basis, this would
greatly stimulate production from the deepwaters. Too many leases
issued during the term of the Deepwater Royalty Relief act were found
to be ineligible for royalty relief because of the existing policy of
relief to be offered on a field-basis (vs. lease-basis) or the MMS'
interpretation of the rules implementing this policy.
3. High Risk Exploration on the Shelf
In addition to the deepwaters, independents are quite interested in
the significant natural gas and oil reserves that could be developed by
deep drilling, drilling into subsalt structures, and drilling highly
deviated wells. IPAA recommends royalty incentives be offered for (1)
wells below 15,000 where there is no current production AND (2) extend
royalty relief as embodied in Central GOM Sale 178 for new and existing
leases for drilling of sub-salt prospects or prospect located in
abnormal pressure conditions AND (3)for drilling highly deviated wells
off existing platforms which might not otherwise have been attempted.
In other words, these incentives would apply to expensive, high risk
plays on new and existing leases. Such relief would, of course, be
phased out at higher prices.
During Sale 178, the MMS took some important first steps. It
offered a royalty incentive for new leases whereby natural gas is
discovered for drilling in excess of 15,000 feet for water depths of 0
to 199 meters. Similar relief is needed for existing leases where
production has not yet been established.
With regard to subsalt, the MMS recognized the high risk nature of
exploring such a play in the OCS by offering for new leases a 2 year
extension of the 5 year term should a well be drilled. What are truly
needed are more incentives to encourage drilling.
4. Marginal Production on the Shelf
Independent producers report that there are significant resources
still remaining on the Shelf that would be developed if royalty
incentives were available. Marginal properties and/or fields are being
left behind. IPAA understands that DOE had initiated modeling of
different royalty incentives to stimulate production from marginal
fields. This modeling effort should be completed and, if appropriate,
royalty incentives implemented.
IPAA's Recommendations for Increasing Access to Capital for the
Onshore:
1. High Risk Exploration Onshore
Like in the offshore, independents are interested in the
significant natural gas and oil reserves that could be developed by
onshore deep drilling. Royalty incentives should apply to expensive,
high risk plays on new and existing onshore Federal leases. Such relief
would, of course, be phased out at higher prices.
2. Marginal Production Onshore
It has always been understood that much of the production lying
beneath onshore Federal lands is marginal. This is why the Bureau of
Land Management continues to offer royalty relief for stripper oil
wells (e.g., wells that produce less than 15 barrels per day) under
certain prices. A similar program should be implemented for marginal
natural gas wells.
3. The National Energy Security Act of 2001, S. 388
The National Energy Security Act of 2001, S.388 contains a
provision entitled Royalty Investment in America. This provision allows
lessees to forgo Federal royalty payments during periods of low energy
prices and instead make capital investments in energy production.
During low prices this type of provision will reduce the likelihood of
dramatic decreases in exploration, such as those during the 1998-99
downturn. This applies to both onshore and offshore production.
4. The Administration's National Energy Policy
The National Energy Policy acknowledges the contribution the
Deepwater Royalty Relief Act made to increasing supply. It recommends
that the President
...direct the Secretary of Interior to consider economic
incentives for environmentally sound offshore oil and gas
development where warranted by specific circumstances: explore
opportunities for royalty reductions, consistent with ensuring
a fair return to the public where warranted for enhanced oil
and gas recovery; for reduction of risk associated with
production in frontier areas or deep gas for formations; and
for development for small fields that would otherwise be
uneconomic.
IPAA supports this review and encourages the Administration to have
this review include the above incentive proposals for both offshore and
onshore Federal production.
Royalty incentives, in conjunction with new tax policies, must be
developed to encourage renewed exploration and production needed to
meet future demand, particularly for natural gas. The NPC gas study
projects future demand growth for natural gas and identifies the
challenges facing the development of adequate supply. For example, the
study concludes that the wells drilled in the United States must
effectively double in the next fifteen years to meet the demand
increase. Capital expenditures for domestic exploration and production
must increase by approximately $10 billion/year--roughly a third more
than today. Generating this additional capital will be a compelling
task for the industry. As the NPC study states:
While much of the required capital will come from reinvested
cash flow, capital from outside the industry is essential to
continued growth. To achieve this level of capital investment,
industry must be able to compete with other investment
opportunities. This poses a challenge to all sectors of the
industry, many of which have historically delivered returns
lower than the average reported for Standard and Poors 500
companies.
In fact, as the past year has shown, capital markets have not
shifted to supporting the energy sector. For the industry to meet
future capital demands--and meet the challenges of supplying the
nation's energy--it will need to increase both its reinvestment of cash
flow and the use of outside capital. The role of royalty incentives and
the tax code will be significant in determining whether additional
capital will be available to invest in new exploration and production
in order to meet the $10 billion annual target.
there's no short-term fix--recovery will take time
It will take time for any realistic future energy policy to achieve
results.. There is no simple solution. The popular call for OPEC to
``open the spigots'' failed to recognize that the low oil prices of
1998-99 reduced capital investment from the upstream industry all over
the world. Only Saudi Arabia had any significant excess production
capacity and no one knew just how much or whether the oil was of a
quality that it could be refined in most refineries. The collateral
damage of low oil prices on the natural gas industry is affecting gas
supply today and will until the industry recovers. The producing
industry lost 65,000 jobs in 1998-99. While about 40 percent of those
losses have been recovered, they are not the same skilled workers. If
measured by experience level, the employment recovery is far below the
numbers. Less obvious, but equally significant, during the low price
crisis equipment was cannibalized by operating and support industries
who were decimated. It will take time to develop the infrastructure
again to deploy new drilling rigs and provide the skilled services that
are necessary to rejuvenate the industry.
conclusion
Providing access to the resource base will be critical and requires
making some new policy choices with regard to the onshore and offshore
Federal lands. Access has and can occur while we accelerate the
protection and improvement of the environment, and increase our
nation's energy security. A critical first step is to require agencies
to measure and document the impact of their decisions on the
development of energy resources.
Overall, attracting capital to fund domestic production under these
circumstances will be a continuing challenge. This industry will be
competing against other industries offering higher returns for lower
risks or even against lower cost foreign energy investment options. The
slower the flow of capital, the longer it will take to rebuild and
expand the domestic industry.
These two issues are the ones that are particularly dependent on
Federal actions, and should be the immediate focus of this Congress and
the Administration.
Energy production--particularly petroleum and natural gas--is an
essential component that must be included and addressed at once.
Independent producers will be a key factor, and the industry stands
ready to accomplish our national goals, if policies reflect that
reality.
______
Mr. Gibbons. Thank you, Mr. Sims.
Mr. Fry, welcome to the Committee. Again, the floor is
yours. We look forward to hearing you.
STATEMENT OF TOM FRY, PRESIDENT, NATIONAL OCEAN INDUSTRIES
ASSOCIATION
Mr. Fry. Mr. Chairman, it is always a pleasure to be with
you and this Committee. I would like to ask that my written
remarks be made a part of the record.
Mr. Gibbons. Without objection.
Mr. Fry. Thank you.
Mr. Chairman, I am here today representing the more than
300 members of the National Ocean Industries Association. This
is an organization that represents all facets of the offshore
oil and gas business, from producing, to drilling, engineering,
transportation, telecommunications, finance, law, and
insurance. Everybody who works in offshore tends to be a member
of the National Ocean Industries Association.
Today I would like to address, though, a bigger picture--
our national energy needs.
Secretary Pena asked the National Petroleum Council to look
into natural gas supplies over the next 20 years. They did so
and finished their report about 2 years ago.
They determined that we were going to need an additional
one-third natural gas over the next 10 to 12 years in order to
fuel this economy. Now, the first 2 years of that report are
now under our belt.
It turns out, we used more than was even projected. But
allowing for dips in the economy, other things to happen, I
think the report thus far has proven to be right on track.
The question than becomes, where will this natural gas come
from? About a third of all the natural gas that is produced in
this country comes from the offshore. As you look at all the
new power plants that are being built in this country, over 90
percent are going to be fueled by the clean-burning natural
gas.
Where is this gas going to come from? It has either got to
come from the offshore, the onshore, but certainly, it has to
come from this hemisphere. We do not import natural gas from
overseas, with the exception of small amounts of natural gas
liquids. It is important that we look for domestic supplies of
natural gas.
Now, I would like to agree with what I think Mr. Kind and
Mr. Tauzin both said: We have to look everywhere in terms of
where we will find our energy for the future. We are going to
look to the offshore. We are going to look to the onshore. We
are going to have to look to coal. We are going to have to look
to conservation. We are going to have to look to geothermal. We
are going to have to look to renewables.
All of those are going to have to be a part of the mix as
our economy continues to grow and continues to need the energy
to fuel the economy.
As I look at the offshore program, I note that over 85
percent of all Federal lands offshore are now under either
congressional or presidential moratoria. We only really look in
the eastern and western Gulf of Mexico.
I recognize that the President campaigned and made a
promise to recognize existing moratoria. But I think as we look
at the long-term needs of this country, relative to oil and gas
and oil and gas development, we need to start planning for the
long-term range future.
And while I am not here today to recommend to you that we
repeal current, existing moratoria, certainly we need to have
access to those areas that are not under moratoria--the 181
eastern Gulf of Mexico area, which is more than 100 miles off
the shoreline of Florida.
But we also need to look to areas currently in moratoria to
start doing some looks to see what is there. The work that was
done 20 years ago developed the current estimates of how much
oil and natural gas may exist in the Federal offshore, but that
is old technology, old information. We need to update that
information.
The Minerals Management Service needs to be given the
ability over the next portion of the 5-year plan to start
developing the kind of information and inventory of what kind
of energy resources are in our offshore.
Lastly, I would ask that, along with the other things that
have been suggested by my fellow panelists, that we also begin
a pilot project on e-commerce. One of the things that can speed
up the process of leasing in the offshore is to have the
ability for people to communicate through the Internet, to file
permits through the Internet, provide information back and
forth through the Internet. And a pilot project along that line
would be most helpful for the industry and I think for the
Minerals Management Service in the year 2002.
With that, I would like to thank you, Mr. Chairman, for
giving us the opportunity to testify, and we look forward to
your questions.
[The prepared statement of Mr. Fry follows:]
Statement of Tom Fry, President, National Ocean Industries Association
My name is Tom Fry and I am the President of the National Ocean
Industries Association, or NOIA. NOIA is the only national trade
association representing all segments of the offshore industry with an
interest in the exploration and production of hydrocarbon resources on
the nation's Outer Continental Shelf. The NOIA membership comprises
more than 300 companies engaged in numerous business activities ranging
from producing to drilling, engineering to marine and air transport,
offshore construction to equipment manufacture and supply,
telecommunications to finance and insurance.
I am delighted to have the opportunity to discuss some of the
possible short-term solutions available to the American people to
increase our domestic energy supply from public lands, specifically the
important choices that we face with regard to offshore energy
exploration and production from the submerged public lands of the
Federal Outer Continental Shelf (OCS). In light of the tightened energy
markets, volatile commodity prices, and the tragic situation in
California, this topic clearly demands our urgent attention.
Furthermore, a frank discussion of our current energy situation is
particularly timely because I believe that the nation has arrived at a
pivotal point with respect to how we address these issues.
Pivotal in this sense: in the next few months our elected leaders
will be asked to make some important choices. If the right decisions
are made, the United States could be embarking on an unprecedented era
of innovation and growth. If the wrong decisions are made, we could be
walking down a path of uncertainty, constriction, and economic tumult.
The choices that this committee and other of our national leaders will
make in the coming months will determine whether our future will be a
time of growth and prosperity, or a time of constriction and
uncertainty.
I have been called here to address short-term solutions to these
problems, and I will. But when I discuss ``short term'', I am thinking
in terms of years as opposed to weeks. I have no immediate answers to
California's quandaries, but I will offer some suggestions as to how we
as a nation can avoid the missteps that could create similar crises in
other regions of the country.
Background
At present, the United States imports considerably more than half
of the oil that we require to support our quality of life and our
economy. As demand escalates, we will likely continue to grow more
dependent on foreign oil. While it is unlikely that our nation could
ever operate independently of the volatile world oil markets, an
increase in production would go far toward stabilizing domestic prices,
and increasing our ability to counterweight OPEC's price manipulations.
The United States has oil--a great deal, in fact. In recent times,
however, we have chosen to rely increasingly on overseas production,
treating our domestic hydrocarbon production as if it were a shameful
vice to be hidden and avoided. Of course, energy production is not a
vice, and we certainly cannot afford to avoid or ignore it. It is now
clear that an increase in domestic oil production is needed if we are
ever to attain some degree of flexibility with which to cope with the
issues that have confounded consumers across the country in recent
years.
With respect to natural gas, an increase in domestic production is
not only desirable to cushion us from volatile markets; it is
absolutely necessary if we are to meet even our most basic needs.
According to the Secretary of Interior's OCS Policy Committee's
Subcommittee on Natural Gas, in 1998, the United States consumed 21
trillion cubic feet (TCF) of natural gas, but produced only 18.7 TCF.
Imported Canadian natural gas provided the balance of supply.
Recently the U.S. Department of Energy, the National Petroleum
Council and others have predicted that the U.S. demand for natural gas
will increase to 35 TCF in little more than a decade. While we continue
to import a great deal of gas from Canada, our neighbors to the north
are running at full tilt in order to meet their own climbing domestic
needs. Here is an important point: since natural gas is imported
through pipelines, it is not currently feasible to meet our
skyrocketing demands with natural gas from overseas. We must increase
our domestic production to meet this demand. The American people have
demonstrated their preference for clean-burning natural gas to generate
their electricity. Over 90 percent of our planned electrical generation
capacity in this country will be natural gas-fired. It is clear that we
are moving rapidly toward a much greater reliance on natural gas. This
is not a bad direction for our nation. Increasing our utilization of
natural gas will enhance our quality of life. It is our most readily
available source of clean energy. We should use more. However, if we
head in the direction of greater natural gas reliance, while
simultaneously choking off our supply; we are heading for tragedy. The
policy of increasing our demand while decreasing our access to supply
is a recipe for disaster. We must make swift and direct steps that will
increase our domestic production in order to preserve our strong
economy and high standard of living.
The offshore energy industry is working tirelessly to increase
production. More than one-fourth of the oil and one-third of the
natural gas produced in the United States is harvested from the Gulf of
Mexico. NOIA's members are currently working at maximum capacity to
bring America the energy it needs. We will do our part, but we can't do
it alone. You, our congressional leaders, as well as the President and
the Executive Branch agencies, face some important choices that will
determine whether we as a nation are able to meet these pressing
demands.
The 5-Year Plan
The first decision that must be addressed is the Minerals
Management Service's 5-Year Plan for Oil and Natural Gas Leasing on the
OCS, which the MMS is currently in the process of compiling for the
years 2002 through 2007. This plan determines which of our submerged
Federal lands will be available for leasing, and which will be off
limits to mineral exploration. Areas included in the plan are
considered for leasing, but need not be leased. Areas not included in
the plan, however, cannot be leased.
The choices made in the formation of this plan will impact our
economy and our standard of living for years to come. It is important
to underscore here that the 5-Year Plan will dictate what energy
resources we have at our disposal well into the future. For many
offshore operations, the cycle time from the moment a tract is leased
to the time first oil or gas production occurs can average between 2 to
5 years, though in many deepwater regions, the time required sometimes
exceeds 10 years. It is important to understand therefore, that the 5-
Year Plan will determine what energy resources we will have at our
disposal not only in the next two years, but also in the year 2012 and
beyond.
NOIA asks that the MMS be allowed to include areas currently under
moratoria in the 5-Year Plan in order to determine the resource
potential of the Federal OCS. Basic assessment activities such as
socioeconomic studies, geological and geophysical studies, and
environmental impact assessments that are typically done on areas
included in the 5-Year Plan, should be done on these areas, even though
leasing is not currently an option because of executive moratoria.
Failing to engage in these basic assessments would be to continue to
conduct the energy debate in a vacuum, ignoring the entire spectrum of
our choices and alternatives until it is too late.
As it now stands, we have little knowledge of what our hydrocarbon
resource base comprises. Excepting what we know of the central and
western Gulf of Mexico, and certain areas off the coasts of California
and Alaska, we simply do not have any adequate knowledge of what
resources we are sitting on, and whether or not they are recoverable
economically and environmentally. Not all areas are suitable for
development. However, before we can have an informed discussion, it is
imperative that we carefully examine all areas likely to contain
hydrocarbons that can be found and harvested in a manner consistent
with our nation's highest environmental standards by including them in
the 5-Year Plan. Any other course of action would rob the MMS, and the
nation, of the flexibility we require in order to meet our rapidly
changing energy needs.
Currently 85 percent of the lower 48 state's coastal lands are off
limits to hydrocarbon resource development. Although the MMS continues
to issue a resource assessment every year that estimates the amount of
hydrocarbons available in these areas, the agency is basing these
determinations on decades-old information. In light of the
technological leaps that the industry has made in the past few years
with seismic exploration and deepwater drilling ability, to name but
two, the current MMS assessments based on data from the 1980s in most
cases, are grossly inaccurate. If we do not include these areas in the
5-Year Plan and allow for basic work to be done, we cannot have a
reasonable debate about a national energy policy, because we will not
have all, or even most, of the facts before us.
The most important lesson to be drawn from the energy crisis in
California is that we must not allow ourselves to be painted into a
corner. Our policymakers must allow themselves the full flexibility to
deal with changes in our energy supply including the machinations of
OPEC countries, a volatile business cycle, aging infrastructure, and a
tight labor market.
If the MMS is not given the authority to consider the full range of
options in the upcoming 5-Year plan, then we will be painting ourselves
into a corner. And I fear that such a decision will leave us without
the energy security and reliability required for prosperity and growth.
Lease Sale 181
Another vital step that we must take to increase energy production
is ensuring that upcoming Eastern Gulf Lease Sale 181 occurs as planned
and on schedule.
At a time when 90 percent of our planned electrical generation
capacity will be fired by natural gas, the estimated 7.8 trillion cubic
feet of natural gas in the Sale 181 region is vital to our national
security and our economic prosperity. That is enough clean-burning
natural gas to supply 4.6 million households for 20 years--and if our
experience in the central Gulf is any indication, 7.8 trillion cubic
feet is a very conservative estimate of the resource potential of the
area. (Again, as I noted earlier, the current resource estimates of the
Sale 181 region's potential are based on very limited exploration work
done in the mid-1980s.)
Lease Sale 181 is a key component of our energy future because it
is a region with an already existing infrastructure that can be
utilized rapidly and with a minimum of turnaround time to bring our
country the energy we need. That the Eastern Gulf is also nestled
neatly in one of the most rapidly growing population centers in the
United States only underscores the sale's importance. The streamlined
development of the Sale 181 area's resources is what will prevent
Florida from becoming our next California-style energy crisis.
Coastal Zone Management
Another important issue that I would ask Congress to address, which
could have even more immediate implications for the stability of our
domestic energy supply is the Coastal Zone Management Act of 1972
(CZMA), and its subsequent implementing regulations. The CZMA is an
excellent example of good legislation that has gone awry as it has been
implemented over the years. The act was passed with the laudable
intention of creating a national program that would encourage states to
manage and balance competing uses of, and impacts to, coastal
resources. However, anti-development interests within states have used
the law to stall or halt offshore development by taking advantage of
loosely worded passages within the statute and regulations that enmesh
offshore lessees in a never-ending loop of permit approvals and
appeals.
A recent example of the law's potential for misuse occurred when
Florida officials signaled their intention to use the CZMA's Federal
consistency provisions to oppose the use of Floating Storage,
Production, and Offloading (FPSO) systems in the central and western
planning areas of the Gulf of Mexico--regions that are far removed from
Florida's coastal waters. NOIA believes that it is vital that FPSOs are
approved for use in the Gulf, as they hold great potential to improve
the economics and efficiency of the deepwater operations that are
behind the continued dynamism of the region. NOIA is asking legislators
to review the CZMA and to remove the aspects of the law that obfuscate
its original intent--paying specific attention to the approval
processes that currently have no finality or reasonable timeline in
place.
Streamlining the Minerals Management Service
Another issue that relates to expedited permit processes--and
therefore to a more rapid increase in energy supplies--is the MMS's
proposed ``e-Government'' initiative. The hip, ``new economy'' name of
this effort disguises a regulatory initiative that could have real
value for government officials, industry operators, and energy
consumers. In essence, the e-Government program would allow the
industry to submit permit applications over the Internet, stream safety
and geophysical data to a secure central server at MMS. This would
allow for immediate permit confirmation, more reliable and accurate
record keeping, and a greatly streamlined working relationship with the
MMS. In an industry where consumer responsiveness is so important,
where time is money, and where good data equals sound decisions, NOIA
strongly supports the e-Government initiative at MMS and asks that the
appropriators ensure that the agency gets the funding it needs to pilot
such an effort.
Conclusion
In closing, I would like to comment on a very positive step that
was recently taken by the Vice President's Energy Policy Development
Group, and that is the recommendation that the President create a
governmental unit of energy policy oversight. This White House-level
oversight body will ensure that new regulations and policies will be
carefully examined for the potential impacts to our energy supply and
demand. The office would be similar to the White House's Council of
Environmental Quality whose mandate is to review regulatory impacts to
the environment. NOIA believes that such an office would guard against
the enactment of regulations that, while well intentioned, have an
overall negative impact on the stability of our energy supply or,
conversely, on our energy demand.
I have touched on only a handful of the choices that our leaders
must face. But the course that is chosen will have a lasting impact on
the reliability and abundance of our domestic energy supply and
therefore, on our nation's economic future and the sustained health of
our standard of living.
On behalf of the ocean industries, I ask our nation's leaders to
choose wisely. Their public trust obliges them to plan carefully now to
secure a bright future for the United States.
Thank you very much for your time and attention.
______
Mr. Gibbons. Thank you very much, Mr. Fry.
And let me ask one real quick question of you, because just
now, in your oral testimony, you indicated that we are looking
for oil and gas in the western and eastern portion of the Gulf
of Mexico.
Mr. Fry. Excuse me. Western and central, Mr. Chairman.
Mr. Gibbons. I just wanted to clarify that it is the
central portion.
Mr. Fry. Thank you.
I wish we were looking for it in the eastern.
Mr. Gibbons. There are a lot of people who wish you were
looking for it in the eastern.
Let me pose a question within the time limits I have--we
are going to limit our members to 5 minutes--to all of you and
then maybe get some feedback, if I could, from you.
And the question that I want to ask--and I want to give all
of you a minute to think about it, so I am going to ask this
question first, and I am going to follow it up with a couple of
other questions, and then give you time to think about it.
And I want to know, from your standpoint, what three
actions could the Federal Government do to increase energy
production from government land during the next 5 years. Just
give me your top 3 actions that this government could do that
would increase energy production from public lands in the next
5 years.
Now, let me ask also, because I think this question will be
just a little bit easier, all of you have in one way or another
addressed the problem of the delays in the permitting process,
principally due to inadequate funding for staffing, et cetera.
Let me ask this question to all of you and get your
visceral reaction to it. Would you support a portion of the
Federal share of the royalties that are taken from oil and gas
today being directed to the Minerals Management Service or the
permitting process to expedite this effort of getting more
permits more quickly accomplished than we have seen in the past
or what has been your experience in the past?
And I will start with Mr. Rubin and just go right down the
line.
Mr. Rubin. Thank you. Yes, the three actions that can be
taken to increase production:
First, I would start with expediting the permitting and
land management planning process in the western U.S. There are
a lot of places where there are permits piled up, where people
are ready to drill wells. We need to get those permits out.
In addition to the permitting problem, we have to make sure
that we have enough rigs and capital to drill those wells. But
the permitting issue would help significantly.
I would also add that it is important to keep Lease Sale
181 in the eastern Gulf of Mexico on track, and to keep all
tracts in the sale, because some of the tracts that can be
brought on the quickest are those in the shallowest areas.
And I would also add that additional leasing should be
conducted in the NPR-A in Alaska, where just yesterday, as I
mentioned, there were several discoveries that were announced,
some fairly exciting discoveries.
So those are the three areas.
As far as supporting royalties being used to expedite the
permitting process, I don't see why that should not be done. I
think it is up to the Congress, of course, to figure out how to
pay for it. But we do think it is very important to increase
the resources committed to the permitting process.
Mr. Gibbons. Thank you.
Mr. O'Connor, your answers to the two questions.
Mr. O'Connor. Yes, sir. I identified three items in my
testimony, dealing legislatively with the coal bed methane
conflicts issue. Secondly, providing some additional degree of
flexibility and local involvement in the roadless issue. And
third, additional funding for more expedited Federal coal
leasing analysis.
With your permission, I would like to throw in a fourth
that I did not identify, but which is of really overriding and
overreaching importance, and that is, it is absolutely critical
to this country that we have more expedited permitting and
construction of transmission lines, particularly in the western
United States, in order to be able to provide a delivery system
for electrical needs.
On the question about whether or not we would be willing to
consider seeing some share of the Federal share or some portion
of the Federal share to help with the funding of more expedited
permitting and leasing, you know, it is appropriate to consider
that. We would not oppose it. And we think there would be an
enormous return on that investment.
Mr. Gibbons. Thank you.
Mr. Sims?
Mr. Sims. The several items I would identify would be,
first, the successful implementation of the executive order
regarding energy impact analysis on regulatory matters. We
think that would, over the near term and long term, bring much
better balance into play in terms of regulatory actions as they
affect energy supply.
Second, I would agree with Mark Rubin, my good friend from
the API, that Sale 181 is a high priority and should go
forward. That is a high priority for independents in the near
term. And we believe that with the 7.8 trillion cubic feet of
gas and 1.9 billion barrels of oil estimate, that it is a very
good opportunity that we shouldn't miss.
And finally, we believe that royalty incentives in the
offshore and onshore would be good to help stimulate that kind
of capital deployment into these kinds of activities.
Earlier, there was a citing that production had increased
during the Clinton administration. And I don't know those
numbers exactly, but one of the big successes over the last 5
years was the deepwater royalty relief program that led to an
increase in activity in deepwater. And we believe that kind of
stimulus and incentive should continue going forward and be
helpful.
Mr. Gibbons. Thank you, Mr. Sims.
Mr. Fry?
Mr. Fry. First off, I hesitate almost to get into what are
the three most important, because I mentioned, Mr. Chairman, I
think that everything we do is going to important to deal with
this problem.
However, I will suggest that I think Sale 181, which was a
sale that was proposed by the Clinton administration, be a sale
that goes forward in its entirety.
The second area is area of coastal zone management. We have
lots of opportunities to development natural gas in the
offshore. But the Coastal Zone Management Act, because of some
deficiencies in terms of timing in the act, make it almost
impossible to finally bring production on-line in some offshore
areas.
Thirdly, it has already been mentioned, the area of royalty
relief. We have seen that royalty relief, given properly and in
proper ways, will increase activity that wouldn't normally
occur.
So I think those three things would be items that would be
high on my list, recognizing that I think we are going to have
to do everything.
In terms of sharing the Federal royalties, there is
currently a program within the Minerals Management Service
where some of the fees that are collected go to supporting some
of those programs.
I think those are appropriate when set up properly and
managed properly, and we would certainly support continuation
of those. And I think it is proper to look past those at other
possibilities, Mr. Chairman.
Mr. Gibbons. Thank you, Mr. Fry.
Mr. Kind?
Mr. Kind. Thank you, Mr. Chairman. Just a few questions.
It is an interesting proposal in regard to the royalty
issue, but obviously, you still have to deal with the
appropriators. We found that in dealing with CARA, where a lot
of the offshore royalties were going to go into some good land
conservation programs. We ran into a huge fight at the
appropriation level with our appropriators, who kind of like to
control these funds and decide how best to use them.
But there is another problem with the royalty aspect, and
we have seen this over the last half a year to a year or so,
and that is the numerous cases of litigation that have gone to
trial now, even government audits showing that there have been
some problems in getting the true market value of the royalties
that are being sent back to the American taxpayer.
In fact, a recent jury verdict in Alabama, I think, against
I think it was BP, recently showed that--the argument was that
reasonable people can disagree in regard to what an accurate
royalty payment should be in that, but the evidence there
showed that there was certainly some undermining of data and
information being used.
So if we are going to be relying on royalty payments, I
think we need to address that issue as well, which is a growing
concern with a lot of people here in Congress.
One of the questions I have for you gentlemen today is in
regard to existing oil capacity and the danger of corrosive
pipes that we are seeing more and more so, especially up in the
North Slope.
We have had numerous stories of corroding pipes leaking and
that affecting the tundra up there. This is with existing oil
fields and production that is going on right now, and the whole
argument about being able to go into new public lands, for
instance, in an environmentally safe manner when existing
facilities right now are having problems and are experiencing
severe leaking problems.
And I am wondering if you would address that issue, first
of all.
Mr. Rubin, want to start with you?
Mr. Rubin. Regarding the corrosion issues on the North
Slope, the companies that operate up there spend of millions of
dollars every year on corrosion protection, on working to
maintain their facilities. The corrosion problems exist mainly
with produced water piping systems.
And while the problems have to be addressed, they have to
be corrected, and the companies are spending a great deal of
money on those, it is important to note that those leaks that
are occurring are mainly leaks of produced water, not
hydrocarbons. And that is something that is helpful.
Mr. Kind. Mr. Rubin, let me just ask, as far as the
environmental impact of that, though, I think a lot of this
water is saltwater that is being used. Does that also not have
the environmental impact with the--
Mr. Rubin. No, it does have an environmental impact, and it
is important that we have to remediate those sites.
One of the things that helped the recent spill was that the
produced water mixed with the snow that was on the ground, and
that reduced the salinity of the water that impacted the
tundra. That is important.
No doubt, we have to do the best job we can of protecting
the tundra on the North Slope, of protecting the environment.
And in fact, the companies that operate on the North Slope
have spent more money than any other area of the world for
spill protection, for spill response. They have the best spill
response facilities in the entire world on the North Slope of
Alaska.
I would add one comment regarding your comment regarding
royalties. We have long advocated greater use of royalty in-
kind so that we can get past many of these arguments of how oil
and natural gas should be valued.
There have been successful pilots conducted in Wyoming and
in the Gulf of Mexico that show that royalty in-kind does work
to the benefit of the Federal Government. And we think that
expanding the use of royalty in-kind, we will get past these
arguments that you are talking about.
Mr. Kind. Mr. Sims, do you have any additional comments?
Because I think there is a public perception problem here. The
American people, by and large, are not completely convinced
that we have the technology to be able to do this in an
environmentally safe way. Even Governor Jeb Bush isn't
convinced that we can do this in an environmentally responsible
way, given the potential effects on the west coast of Florida.
So, Mr. Sims, if you have any--
Mr. Sims. I would begin by amending my previous answer to
address the question of tying a portion of the royalty stream
to MMS funding. Yes, the IPAA would support that, for the
record.
Regarding pipeline or flow-line corrosion on the North
Slope, I just don't have the experience there. Most of our
members operate in the lower 48, in the offshore.
I could speak to the importance of our safety and
environmental practices offshore. Independents, like the larger
companies, participate in what is called a SEMP program on the
offshore that tracks our performance and establishes guidelines
for performance. And we think we have a very good track record
offshore as well as onshore.
But my firsthand knowledge of North Slope, I just don't
have it.
Mr. Kind. Mr. Chairman, with my remaining time, I would
like to submit for the record, for purposes of this hearing, a
few articles from the Anchorage Daily News: one that was
published on April 17 of this year, ``Pipeline Leak's a
Doozy,'' talking about some of the problems of the leaks on the
North Slope; as well as an article that appeared on April 22 of
this year, ``Corrosion Is a Constant Enemy,'' a very insightful
and detailed article; and then finally one that appeared on May
22 of this year in the Anchorage Daily News, ``Phillips Finds
NPR-A Oil,'' discovery of three oil and gas fields on the North
Slope inside the newly opened National Petroleum Reserve in
Alaska.
And if preliminary estimates prove correct, it is the
largest oil and gas find in the last decade. This was land that
apparently was leased under the Clinton administration.
So I would like to submit those three articles for the
record, Mr. Chairman.
Mr. Gibbons. Without objection.
[The articles referred to follow:]
Pipeline leak's a doozy
KUPARUK: Crude and saltwater soak tundra in year's biggest spill.
Anchorage Daily News
By Ben Spiess Anchorage Daily News
(Published April 17, 2001)
In what may be one of the largest spills ever on the North Slope,
92,400 gallons of saltwater and crude oil leaked from a pipeline at the
Kuparuk oil field Sunday night.
The mixture, which was more than 97 percent saltwater, leaked from
a 10-inch pipeline at a temperature of more than 100 degrees. The spill
saturated nearly an acre of tundra, said Ed Meggert, head of oil spill
response with the state Department of Environmental Conservation in
Fairbanks.
No exact cause has been determined, but Meggert said ``it looks
like erosion or corrosion to the pipe is the cause.''
This is the fourth major spill on the North Slope this winter and
the second due to erosion or corrosion.
By midday Monday, Phillips, which operates the Kuparuk oil field,
North America's second largest, said it had cleaned up most of the
spill.
Corrosion from water and erosion from abrasive material such as
sand is a growing problem on the North Slope. As Kuparuk and Prudhoe
Bay age, the companies are grappling with internal pipe corrosion from
water running through lines and external corrosion from water seeping
between pipe insulation and hot steel pipe walls, where it eats at the
metal.
The accident timing is bad for Alaska's big oil companies--
Phillips, BP and Exxon Mobil--and state leaders who are trying to put a
positive spin on the oil industry's environmental record in an effort
to open the Arctic National Wildlife Refuge to drilling. The refuge
sits about 90 miles east of existing oil fields and, according to
government geologists, may hold the largest undeveloped oil reserves in
the nation.
Workers discovered the spill at 10:45 p.m. Sunday when a drop in
pipeline pressure set off an alarm in Kuparuk's central processing
facility. Within 12 minutes the pipe was shut down, said Phillips
spokeswoman Dawn Patience. It is unknown how long the water and oil
spilled before the leak was discovered.
The pipe carries what is known as ``produced water.'' For more than
a decade, the oil companies have injected saltwater deep into oil
fields to boost reservoir pressure and enhance oil flow. As a result,
large amounts of water come out of the underground reservoir along with
oil and gas. The mixture runs to the processing facility where the gas
and most crude oil are stripped off. Then, operators send the water,
along with some crude, back to the production pad and re-inject it to
keep reservoir pressure high.
The leak occurred in a line that returns the water and trace oil to
Kuparuk production pad 1B. The leak happened at a road culvert close to
where the pipeline leaves the processing facility's gravel pad,
Patience said.
At the time of the spill the weather was 9 degrees Fahrenheit.
While Meggert said that the oil content in the water was low, about
1 percent, the huge spill size means that independent of the saltwater,
nearly 1,000 gallons of crude hit the tundra. That crude spill would be
one of the 10 largest spills on the North Slope in the past five years,
according to state statistics. The high temperature as it left the pipe
may mean the mixture penetrated into the ground.
Meggert said the saltwater may be more damaging to the tundra than
oil.
``It's just as toxic as diesel,'' he said. ``The plants that
normally grow die. The crude will only coat but the saltwater
penetrates.''
By 1 p.m. Monday, Patience said, Phillips and its contractors had
cleaned up more than 92,000 gallons of fluid. Much of that may have
been snow and ice melted by the hot crude and water mixture.
Meggert said that in the coming days the spill area will likely be
diked with sandbags and flooded with freshwater and, possibly, a
chemical agent to flush the salt and crude from the tundra.
Meanwhile, the cause of the spill was under investigation.
A particular problem in the oil fields is water seeping between
thick insulation and the hot transportation pipes. High temperatures
and water make a perfect climate for corrosion.
Phillips and BP, which operates the neighboring Prudhoe Bay field,
use an array of techniques including X-rays, chemical corrosion
prevention and infrared monitoring to detect points of pipeline
weakness.
At Kuparuk, Patience said, Phillips spends about $24 million a year
on corrosion control. Yet problems persist.
On March 6, more than 3,200 gallons of drilling lubricant spewed
across the tundra at Prudhoe Bay after grit carved a hole inside a
pipe.
In October 1998, an oil-processing building at Prudhoe Bay exploded
after natural gas leaked from an eroded pipe.
In June 1999, a pipeline ruptured at a Prudhoe Bay production pad
due to corrosion, according to state officials.
Reporter Ben Spiess can be reached at [email protected].
Copyright--2001 The Anchorage Daily News (www.adn.com)
______
Phillips finds NPR-A oil
The three prospects may be the largest found in a decade
Anchorage Daily News
By Ben Spiess
(Published May 22, 2001)
Phillips Alaska Inc. announced Monday it discovered three oil and
gas fields on the North Slope inside the newly opened National
Petroleum Reserve- Alaska.
The Clinton administration opened the environmentally sensitive
reserve amid a storm of controversy in 1998. Monday, the expanse of
tundra and lakes yielded its first oil and gas prospects: Rendezvous,
Lookout and Mooses Tooth.
Phillips Alaska president Kevin Meyers declined to say how much oil
and gas the fields may produce, but he described the combined reserves
of the three prospects as ``in the ballpark of Alpine''--a 429 million-
barrel oil field 25 miles northeast. If the fields prove that big, the
three would be among the largest onshore oil discoveries in the United
States in a decade.
Meyers said Monday that the drilling results are preliminary but
that ``we believe all three have the potential to be economic.''
Phillips owns 78 percent of the prospects. Houston-based Anadarko owns
22 percent.
He said the companies will continue to assess their drilling from
last winter and likely drill more wells next winter before deciding how
to develop the new fields. At the earliest, the fields would begin
production in three years, he said.
The discoveries are small relative to fields like 13 billion-barrel
Prudhoe Bay or 2.8 billion-barrel Kuparuk, more than 50 miles east. The
discovery of those giant fields three decades ago sparked an
exploration frenzy on the North Slope and drew comparisons between
Alaska tundra and Saudi sands. Thirty years of exploration has found no
other multibillion-barrel giants. But in the past 10 years a string of
large, promising prospects have been discovered, adding almost a
billion barrels of oil to the North Slope reserves.
Coming amid a simmering national energy crisis and a debate over
opening the Arctic National Wildlife Refuge to oil companies, some
people may see the new discoveries as confirmation of the North Slope's
long-term potential to produce oil and gas.
After Phillips' announcement, Fran Cherry, Alaska director of the
Federal Bureau of Land Management, said the agency plans to hold a
second petroleum reserve lease sale in the vicinity of the new
discoveries in June 2002. Cherry said the BLM is also considering
opening a new swath of land west of the existing lease area in 2004.
Phillips' announcement and the pledge for more North Slope lease
sales drew loud applause at Anchorage Chamber of Commerce luncheon,
where Meyers announced the discoveries.
BLM estimates the swath of the petroleum reserve leased two years
ago may hold 1.24 billion barrels of oil that can be produced, a
fraction of the estimated 10 billion barrels in ANWR's coastal plain.
ANWR packs controversy. But some people say the petroleum reserve
is also a valuable environment. The oil-rich coastal fringe of the
reserve is mostly a spongy spread of lakes and grass and is habitat for
tens of thousands of nesting birds, including two threatened species.
``Its wildlife values for bird life are unexcelled. It may well be
the most important area on the Slope for birds,'' said Mike Frank, an
attorney with environmental law firm Trustees for Alaska. Trustees
challenged the 1999 reserve lease sale, asserting that the
environmental review was inadequate and failed to follow required
procedures for leasing wetlands. The lawsuit is pending in Federal
district court in Washington, D.C.
But unlike ANWR, which was largely set aside for its wildlife and
wilderness values, President Warren Harding designated the reserve
expressly for its oil potential in 1923.
Oil companies explored the reserve in the 1960s and 1970s but had
little luck. A lease sale in 1986 drew no bidders. But Arco Alaska
Inc.'s 1996 Alpine discovery on the eastern edge of the reserve fired
beliefs that similar fields lay to the west inside the reserve. In
1998, amid opposition from environmentalists, the Clinton
administration agreed to reopen the area to leasing.
In the past two winters, BP and Phillips have drilled eight
exploration wells in the reserve. BP has not announced the results of
its two exploration wells.
Phillips' Meyers said Monday that five of the company's six wells
hit commercial quantities of oil or gas in the three discoveries.
A test well at the Rendezvous site produced 1,550 barrels a day and
26.5 million cubic feet of natural gas.
``It's a sign that this area is going to be a producer long-term
for the state,'' said Ken Boyd, a geologist and former director of the
state Division of Oil and Gas.
Reporter Ben Spiess can be reached at [email protected].
Copyright--2001 The Anchorage Daily News (www.adn.com)
______
Corrosion is constant enemy
KUPARUK: Oil company, state monitors try to keep up with aging
pipelines.
Anchorage Daily News
By Ben Spiess
(Published April 22, 2001)
Just past 11 p.m. last Sunday, Phillips Alaska's Kuparuk field
operations manager, Bill Patterson, got the call an oil executive
dreads: The field had a spill.
A pipeline had ruptured, spilling a hot mixture of salt water and
crude onto the tundra. At 92,400 gallons, the spill may be the largest
ever to hit the North Slope's fragile tundra.
The next day Patterson flew to Kuparuk, which sits west of Prudhoe
Bay and is the Slope's second-largest oil field. Within 24 hours, most
of the water and crude had been recovered. But the damage had been
done. Some crude still coats vegetation. Salt, which may be more
damaging than oil, covers the ground.
The cause was an ongoing problem for oil executives like Patterson:
corrosion. Water seeped between insulation and pipe at a weld joint and
ate away the steel.
Every year hundreds of spills hit the ground on the North Slope.
Most are less than 10 gallons. Corrosion accounts for only a few,
usually five to 10 a year. But they tend to be big, averaging 4,261
gallons, according to state statistics.
Over the past 15 years, corrosion and abrasion in the Slope's 2,000
miles of oil, water and natural gas pipelines have worsened from
occasional problems to constant headaches for BP and Phillips, the two
companies that run the fields. Both companies spend tens of millions of
dollars to X-ray pipes, run infrared tests and pump chemicals to
control corrosion rates. Spill rates have fallen and in some cases
corrosion rates eased. But problems persist.
This winter, there have been four large spills, two from corrosion
or abrasion.
``We recognize this as a serious problem,'' Patterson said. ``Over
the past several years there has been a major effort to get on top of
this.''
All agree the problem is serious--so serious it was under
negotiation during BP's takeover of Arco last year. And the timing of
the Kuparuk spill is bad, as the industry is trying to put the best
face on its operations to help open the nearby Arctic National Wildlife
Refuge to exploration.
However, Kuparuk-type spills are not likely to afflict new
development in ANWR--at least not right away.
Corrosion and abrasion are symptoms of aging oil fields, like
Prudhoe, which started up 24 years ago, and 20-year-old Kuparuk. As oil
production has fallen at the fields, the companies pumped huge amounts
of seawater underground to boost oil flow. Now vast volumes of water
come out of the ground with the crude. The oil companies have built a
network of pipes and pumps to gather, inject, separate and transport
the water.
The water is not benign. It has a mild acid that eats at the pipes
and must be constantly combated.
At risk is not only the tundra but also worker safety and the
industry's reputation as an environmentally friendly operator in the
Arctic.
State environmental regulators say the industry appears to be
making a good effort to control the problem.
But the section of pipe where last week's spill happened had never
been inspected for the type of external corrosion that caused the
spill, Patterson said.
Regulators also note that corrosion and abrasion problems grow as
the fields age. And unlike with big pipes like the 800-mile trans-
Alaska oil pipeline, state environmental regulators have little power
to ensure the safety of the thousands of miles of lines inside the
fields. They also lack the manpower to monitor all lines.
``If we had more presence up there, maybe these problems would come
to light sooner,'' said Ed Meggert, state spill coordinator in
Fairbanks. ``The companies have been pouring a lot of money into it. Is
it enough? I don't know.''
Observers note that as oil flow falls, the managers are under
pressure to spend less money. Like an old car, however, the fields are
giving less performance but are demanding more money in maintenance.
The motive to cut costs could run counter to protecting the tundra,
said Richard Fineberg, a Fairbanks economist who follows the oil
industry.
``The idea is to hold maintenance costs just below the cost of
cleaning up a spill,'' Fineberg said.
Since 1996, BP's corrosion control budget at Prudhoe has fallen 14
percent, to $37 million this year.
BP's corrosion manager, Richard Woollam, agreed there is pressure
to control costs at the aging field but ``that is secondary to
controlling corrosion.''
The falling budget is caused by efficiencies, such as mixing
expensive corrosion control chemicals at Prudhoe instead of incurring
shipping costs to the Slope, he said.
Woollam says the corrosion program is successful. The company is
injecting more chemical inhibitors, and Prudhoe pipeline corrosion
rates have fallen. Overall, there is a decreased number of corrosion-
related repairs.
Still, when corrosion and erosion happen, the results can be ugly.
In March 1997, almost 5,000 gallons of crude spilled as Arco
workers repeatedly tried and failed to increase pressure in an oil line
in the eastern part of Prudhoe Bay. Later they discovered a rupture
caused by corrosion in the pipe, said Meggert, the DEC official.
``We contemplated criminal charges for that,'' he said.
In October 1998, sand and grit cut a small hole in a pipe at a
Prudhoe production site, known as Z-Pad. Natural gas leaked inside a Z-
Pad building. Only minutes after a worker left the area, the building
exploded.
At Kuparuk, water running through the pipes is less acidic and
corrosion has typically been a smaller problem than at Prudhoe Bay.
But in an interview last year, Kuparuk field manager Tom Wellman
said that then-operator Arco got a wake-up call in July 1997. At a weld
joint, meltwater seeped through insulation and settled against a hot
oil transportation line.
The water ate at the steel. Eventually, the pipe ruptured, spraying
2,000 gallons of oil over the tundra.
Since then, workers have checked about 67,000 weld joints. The
corrosion budget has climbed 71 percent since 1996 to $24 million.
Wellman said that although pressure to control costs is constant,
prevention is cheaper than spill cleanup and repair.
``We can't afford to let these lines get to that point. It's not
good business to have these lines fall apart,'' Wellman said.
But the spill last week points to continuing problems.
The leak happened where a pipe runs through a culvert, where it is
difficult to check pipe integrity. Kuparuk operations manager Patterson
said the pipe section had never been checked for that type of
corrosion, though it was scheduled for inspection later this year.
Phillips and BP have been working on new technology, similar to X-ray,
to examine such hard-to-reach pipes.
``This is a hole in the program,'' Meggert said. At 10:45 p.m.
Sunday, the pipe split. The crack was 30 inches long and 3 inches wide.
``Looks like a smiley face,'' Meggert said.
Though the oil fields sit on state land, most pipelines in the oil
fields are private property. State officials have no direct regulatory
oversight and cannot set maintenance schedules or require inspections.
``The real problem here is a lack of regulatory structure,'' said
Jenna App, an attorney with Trustees for Alaska, an Anchorage
environmental law firm that has sued the oil industry. ``There is no
way to enforce safety. Spills keep happening.''
Recognizing the lack of oversight, the state used negotiations over
BP's takeover of Atlantic Richfield Co. to win cooperation from the
industry to address the problem. BP agreed to pay $500,000 a year for
10 years to help fund state corrosion experts and increased monitoring.
Meanwhile, the state relies on the industry to take care of the
public interest.
Susan Harvey, head of oil spill response planning for the state,
said that for now no new regulations are planned.
``If they have more spills, that's the next step, to regulate them
more,'' Harvey said.
Reporter Ben Spiess can be reached at [email protected].
Copyright--2001 The Anchorage Daily News (www.adn.com)
______
Mr. Gibbons. Mr. Flake?
Mr. Flake. Yes, thank you.
A question for Mr. Sims. Forgive me if this was covered
during testimony.
When natural gas prices were up, obviously there was more
exploration and activity going on. Are there now some inactive
or abandoned resources that could be easily revived to step up
production in an expedited fashion?
Mr. Sims. In terms of existing fields that are ready for
production, excess capacity, you know, occasionally, when we
get to an energy shortage situation, people say that what we
need to do is turn on the spigot. We don't really have a
spigot, in terms of excess capacity that we can bring into the
system in the very near term.
Prices for both natural gas and crude oil are attractive
from a historical perspective. And I am just now aware of any
resources, reserves in the ground, that are ready for
production that we are not already actively producing.
Mr. Flake. Mr. O'Connor, the geothermal plants obviously
requirement very little dedicated land--well, relatively--can
be installed fairly quickly. Is that a solution that could come
fairly quickly or not?
The permitting process is difficult, I realize, but as far
as actually producing, what potential is there for an expedited
fashion there?
Mr. O'Connor. I am not a representative of the geothermal
industry, so I am going to have to beg off on that. I have to
confess, I don't know that much about that industry.
Mr. Flake. Okay.
Mr. O'Connor. I am here on behalf of the coal mining and
the National Mining Association, and whatever I would say would
expose my ignorance.
[Laughter.]
Mr. Flake. Mr. Rubin, could you attack that a little
better?
Mr. Rubin. The geothermal resources?
Mr. Flake. Yes.
Mr. Rubin. I am really not familiar enough with geothermal
resources to be able to give you a really valid answer.
Mr. Flake. Mr. Sims?
Mr. Sims. If it is possible, I know less than Mr. O'Connor.
[Laughter.]
Mr. Flake. Okay. Well, great.
Mr. Fry, unless you want to tackle that one--
Mr. Fry. I just know that geothermal projects are just as
hard to permit as anything else.
[Laughter.]
Mr. Flake. We actually went through that in another
hearing, and, yes, we did learn that the permitting process is
no faster. But installation, I am told, is a little quicker.
And actually, time from permitting to production can be faster.
I was just wondering if any of you saw that as a solution
that could be moved to more quickly. But we will save that for
another panel, I guess.
Thank you.
Mr. Gibbons. Thank you, Mr. Flake.
Mr. Inslee?
Mr. Inslee. Thank you.
I would like to ask Mr. Sims and Mr. Rubin, in June 1999,
as a result of some mistakes by some folks in your industry,
three young men were incinerated in Bellingham, Washington.
And since then, the U.S. Senate has passed a bill
overwhelmingly for pipeline safety, to improve our pipeline
safety.
And I just ask Mr. Sims and Mr. Rubin, have you urged the
Republican leadership and Mr. Young to move that bill through
the House expeditiously? If you can just me a clear answer, I
would appreciate it.
Mr. Rubin. We have supported passage of pipeline
legislation. Unfortunately, I am not familiar with the various
bills that you are describing. And we have others in API who
deal with those issues. So I can't speak to the specific bills,
but we do support moving forward with pipeline legislation.
Mr. Inslee. Mr. Sims?
Mr. Sims. I am not familiar with that legislation either. I
am representing truly the upstream part of the business, the
exploration and production. Our members are not generally
engaged in the transportation part of the oil and natural gas
business.
Mr. Inslee. Well, let me ask, sir, that you do become
engaged in that debate because, mysteriously, I hear from
industry that you support pipeline safety, but nothing ever
passes here, any meaningful measure. And we would appreciate
your support of the Senate bill or my bill or Mr. Oberstar's
bill.
It is not just a safety issue; it is a reliability issue.
We can't have a reliable source if the pipelines explode. And
that is one of the problems with the El Paso line.
We appreciate your interest that.
I want to note on this issue of drilling in public lands
that I think that this hearing is a perfect metaphor for the
Bush administration energy plan, which intends to drill in some
of our most pristine areas, in that the shades are drawn to
keep light out of the hearing room.
[Laughter.]
But you have, by my count, 73 light bulbs burning fossil
fuel to light the room that could be lit by God himself through
the window.
And I think it is a perfect metaphor of what is wrong with
this policy, both in its shortsightedness in conservation and
its failure to recognize new technologies that are going to be
coming on-line.
I want to note that the Department of Energy of itself
concluded over a 3-year study that by doing things like opening
the blinds, we can save 25 to 45 percent of all of the energy
needs that the country will need over the next 10 years--
through conservation and efficiencies.
And yet, this administration has failed in any meaningful
way to move forward on either alternative renewable sources of
fuel, which happen to not be the ones, at least at the moment,
that your industries are involved in, or to help Americans move
forward to have conservation technologies available to them.
And I think it is a major, major failing of this policy.
And instead, at the same time that this administration has
failed to try to improve the efficiencies of our vehicles by
one-tenth of one gallon per mile, they want to open up these
pristine areas, which I can tell you people in my district have
a very, very strong feeling about.
And I think it is a major, major mistake.
I also believe it is mistake for your industry, which I
want to note is an extremely important industry and extremely
useful. We appreciate your personal commitments to providing
energy for my constituents.
But it has failed, as far as I can tell, to support meaning
conservation efforts, for instance, in our automobile fleet.
So I guess I just ask Mr. Sims and Mr. Rubin, have your
associations supported improving CAFE standards?
Mr. Rubin. You know, we don't represent the auto industry,
and so we don't spend a lot of time working the CAFE issue.
We do, however, recognize the importance of conservation as
part of the solution to energy problems. Especially when you
are talking about short-term solutions, conservation is one of
the most important things that can be done to deal with the
current problems. In fact, if you will go to our Web site, you
will see a number of recommendations on how drivers can use
less gasoline.
Mr. Inslee. So is that a yes or a no? Do you support
improving our CAFE standards, your association?
Mr. Rubin. We support conservation efforts. We are not
taking a position on CAFE because it is really not our
industry; it is the auto industry that has to deal with the
CAFE issue.
Mr. Inslee. You see, that is what I don't understand. We
have an energy crisis in our country. You are intimately
involved in the energy industry, and you come before us and
don't make a recommendation one way or another on CAFE
standards?
I don't understand that. Why not?
Mr. Rubin. Congressman, we presume to be experts on the oil
industry. We do not presume to be experts on the auto industry,
which is why we are not taking that position.
Mr. Inslee. Mr. Sims I think wanted to answer as well.
Mr. Sims. I will. I am involved in the upstream part of the
business, the supply part of it. And I wouldn't disagree, Mr.
Inslee, that we don't talk a lot about conservation because we
mostly talk about what we know, and we know a lot about supply.
I, quite frankly, don't know if the IPAA has a position on
CAFE standards. That is not a part of the business we are
actively involved in.
But I wouldn't disagree that perhaps we as an industry
should be more balanced in terms of addressing both sides of
the equation. And that would be something important for us
going forward.
Mr. Inslee. Thank you.
Mr. Gibbons. Thank you, Mr. Inslee.
Let me say that this is my fifth year on this Committee, 4
years under which the Clinton administration, and not one penny
was ever invested by their administration in venetian blind
research to lighten the rooms.
[Laughter.]
Nor did they come up with an energy policy.
Mr. Inslee. We give that advice free, Mr. Chairman.
Mr. Gibbons. Right, right.
Mr. Rehberg?
Mr. Rehberg. Thank you, Mr. Chairman.
I get downright giddy when you finally get to me.
[Laughter.]
I am not sure on the Full Committee I will ever live long
enough to get ask a question.
[Laughter.]
Thank you to the panel and for all you are trying to do to
help us out of this situation.
I want to ask you some specific questions.
First of all, were any of you involved in the Vice
President's task force? Did you provide information to the
administration, as far as your resources?
Mr. Rubin. Yes, we provided information to the
administration, just as we provide information to Members of
Congress on both sides.
Mr. Rehberg. Okay. I just wondered if they asked you
specifically.
I see that you all are nodding your heads.
I guess the question I would ask is, specifically, could
you make available to me or the Committee the kind of
information that will show how close many of the projects that
your individual companies are working on are to actually being
ready to be either drilled or dug? Is that possible?
The reason I ask that question is, Mr. Sims, you had
mentioned that you didn't know of anything that wasn't in the
pipeline yet. And one of the projects that I am familiar with
in Montana is up northwest of Chouteau, Montana. I think it is
Startech Energy.
Seven years ago, the EIS was done on their lease proposal.
Most recently, Bureau of Land Management has said that they
have to now go back and do a supplemental to that EIS. The
company tells us that they are 8 months from production.
So I guess what I am interested in, can you provide
information to us, both in the coal arena and the natural gas
or oil arena, that can tell us how far away, within the next 12
months, there are projects that can be put into the pipeline?
And I will start with you, Mr. Sims.
Mr. Sims. Yes, I would be willing to provide that.
Mr. Rehberg. You have that kind of information?
[The information referred to follows:]
Independent Petroleum Association of America
In the Administration's fiscal year 2002 budget request, the BLM
admitted to a backlog of about 2500 drilling permits for oil and gas
projects on onshore federal lands. IPAA believes this number remains to
be about the same today. Therefore, Mr. Rehberg, if these backlogged
projects were approved, significant oil and gas resources could be put
into the pipeline in a very timely fashion.
______
Mr. Rehberg. Mr. O'Connor?
Mr. O'Connor. The information of the National Mining
Association submitted to the energy task force was more public
policy in orientation, and so they didn't focus in, in terms of
specific projects and specific time frames. But we will be
delighted to provide you some information.
[The information referred to follows:]
ENERGY POLICY - PRINCIPLES FOR ACTION
NATIONAL MINING ASSOCIATION
Reliable affordable energy is necessary for both economic growth
and national security. All domestic energy resources - coal, natural
gas, petroleum, nuclear (uranium) and renewables - will be required and
each is essential to meeting the nation's future energy needs. Use of
domestic energy resources must increase while we simultaneously
develop, produce and use energy more efficiently and cost effectively
while we maintain and improve the quality of our environment.
Energy policy must be based on several underlying principles:
economic efficiency and support for market based policies; advancing
energy technology; use of additional regulations only if based on sound
science and relative risk assessments; and, expanded use of incentives
to promote investment in technology and infrastructure. Policy must be
able to recognize and react to the rapidly changing energy requirements
of our society and to advances in technology. As recent events clearly
illustrate, energy policy must address both energy supply and energy
demand.
Energy Policy and Coal.
The need for a dynamic energy policy is underscored by rapid
electrification of our economy. Affordable and reliable electricity has
supported much of the economic expansion of the past several years and
affordable and reliable electricity is necessary to support the economy
of the future.
Coal is electricity. Over one-half of the nation's electricity
requirements are met with coal-fired power. Coal is the nation's
largest and most affordable domestic resource. Coal must be a major
factor in the future as demand for electricity continues to increase at
a rapid pace.
Coal generating capacity and coal use must increase to support a
growing demand for electricity; efficiency and environmental
performance must continue to improve.
The nation's electric generating fleet is not sufficient to meet
current, let alone future, demands for electricity. Barriers to
construction of generation and transmission infrastructure must be
removed, regulatory certainty with respect to criteria pollutants is
necessary and incentives to increase environmental performance and
power generation efficiency are necessary to spur investment to ensure
that additional capacity is built and existing capacity upgraded. Fuel
diversity, and affordability are essential for economic growth. Coal
must be used in existing plants and much of the new capacity must be
advanced clean coal technology.
LThe Administration should support legislative and
regulatory actions that provide a measure of burden sharing to improve
operational and environmental performance of the existing coal-based
fleet and incentivize construction of a number of commercial
applications of advanced clean coal technologies.
LFuture regulation of criteria and hazardous air
pollutants from coal based electricity generation, if warranted by
sound economic and scientific considerations, should be implemented
under a well defined and integrated strategy to optimize control and
minimize costs. The Administration should take immediate steps to
harmonize air quality regulations currently pending at EPA.
LClimate policy is an integral part of energy policy.
Command and control regimes to control or reduce greenhouse gas
emissions should not be part of the policy. Policies should encourage
aggressive voluntary actions to reduce emissions, development of new
technologies and accelerated research in sequestration. The United
States' climate policy must recognize the global nature of the issue
and support responsible international agreements that focus on
technology transfer and on energy efficient economic development
throughout the world.
Investments in Coal Production Capacity Must Be Facilitated
Coal output is approaching 1.1 billion tons annually. Production is
forecast to increase by 250 million over the next decade to meet
demand. Unnecessary barriers to coal reserves must be removed and
income tax policies should encourage, not discourage, investments in
expanding capacity, while continuing to incentivize the highest safety
and environmental standards in the world.
______
Mr. Rehberg. I am thinking, in the coal arena, the Otter
Creek as an example of the Bureau of Land Management sitting on
their duffs. We have been waiting for them to make an agreement
to fulfill a deal that they made when they said we couldn't
have the New World mine north of Yellowstone Park.
We are still sitting around, waiting for it. That process
ought to be far enough along that it could be put into the
pipeline somewhere, hopefully within the next 12 months.
How about you, Mr. Rubin?
Mr. Rubin. Yes, we can certainly provide more detailed
information on permitting backlogs and other things that
would--
Mr. Rehberg. I am not sure if the Committee is interested,
but I am certainly am, because we are really one of the states
that, in fact, are a net producer of energy, and yet we are
going through the same crisis everyone else is. We are seeing
our price go up.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T2515.010
[GRAPHIC] [TIFF OMITTED] T2515.011
[GRAPHIC] [TIFF OMITTED] T2515.012
[GRAPHIC] [TIFF OMITTED] T2515.013
[GRAPHIC] [TIFF OMITTED] T2515.014
[GRAPHIC] [TIFF OMITTED] T2515.015
Mr. Rehberg. So it isn't just California. Montana is
feeling the effects as well.
And we think it is time to pass the point trying to point
fingers and blame particular parties. With all do respect to
some of the people in Congress, we think this is nonpartisan
issue, and we ought to be solving it from an nonpartisan
standpoint.
That, of course, is easy for me, as a freshman, because I
don't have anybody to point fingers at.
[Laughter.]
Let me ask the next question. I am having a hearing up on
the Missouri River next week, having to do with the national
monument that the last administration designated within the
State of Montana. And I know of an existing oil and gas leases
within that property.
Can you tell me of other existing oil and gas leases that
are either producing or not producing that are within
designated monument areas that perhaps could be readdressed
quickly, at least within the next 12 months?
Mr. Rubin?
Mr. Rubin. Yes, I don't have the details on all the
monuments handy. But certainly there is production, for
example, in the area of Canyon of the Ancients, I believe, the
monument in Colorado. And there are a couple of other monuments
that have existing production.
Mr. Rehberg. Have they been within Federal boundaries
already, or were they added to the monument designation?
Mr. Rubin. The production was on government lands, I
believe, in the case of Colorado.
I am not sure I completely understand the question.
Mr. Rehberg. There is a different management procedure or
protocol once it becomes a monument.
Mr. Rubin. Yes.
Mr. Rehberg. Were those within an existing protective
status of Montana, we had a wild and scenic designation which
moved to a monument designation. It changes the management, the
Bureau of Land Management.
And I guess my question is, does it change the potential
for that property?
Mr. Rubin. Certainly. It is my understanding that it
significantly changes the potential especially for things like
in-fill drilling to enhance the production of those fields.
Mr. Rehberg. Mr. Sims, if I could ask you to finish that
question, then, the same question.
Are you familiar or aware of oil and gas potential on
leases that are within designated monument areas that the
President most recently added?
Mr. Sims. I am not familiar with any of the details of
that. We would be glad to track that down from the independent
producer segment of the industry and see what we can provide
you on that.
There is no doubt that my own remarks about the
availability of near-term supply, I was referring to reserves
in the ground that are waiting to produce. There are a number
of projects that are being held up through different kinds of
permitting delays and that kind of thing that could be brought
on in the fairly near term if we could break that logjam.
We will provide you with something.
Mr. Rehberg. Mr. Chairman, if I might just ask one quick
question, and this is, that brought to mind, that in a former
life, I was a lobbyist for the real estate industry. And we
always wanted to have subdivision and plotting review.
And we found that oftentimes the supply of lots outstripped
the ability of our state regulators to review. And it was our
fault as legislators ultimately to make a determination, which
was subjective or objective.
Do you honestly believe the Bureau of Land Management has
the potential to increase employment fast enough to do an
adequate job to follow the law or are we, you know, barking
into the wind here? Or even that we can get these out faster,
but under what circumstances could they get them out faster,
because of either objectivity or subjectivity of the review
procedure.
Mr. Sims. I know the association would support increased
funding to the Bureau of Land Management as well as MMS in
order to get some of this backlog of permitting handled in an
expeditious way. That would be very important to us.
Mr. Rehberg. And do you think they can, in fact, find--
Mr. Sims. I think they can, given the resources, given the
tools to do the job. I think they, going forward, ought to be
able to look at these things in a more timely fashion.
Mr. Rehberg. Thank you, Mr. Chairman.
Mr. Gibbons. Thank you, Mr. Rehberg.
Mr. Carson?
Mr. Carson. Mr. Sims, if I could ask you a quick question.
One of the glaring omissions, I thought, in the Bush energy
report, which generally I was quite sympathetic to, coming from
Oklahoma, where I know you spent some of your early years in
the business, is there is no discussion at all of incentives
for domestic production of oil and gas.
Our focus is on the use of public lands and opening up the
Rockies or the OCS or other areas like that for more
production, but having talked to many of your members who are
in my state, public lands is usually far at the bottom of their
list when they talk about what we need in energy policy.
Instead, it is the clever use of the tax code to encourage
the maintenance of stripper wells, for example, when you have
tremendous swings in the oil and gas economy.
My question to you is, do you think we can have a coherent
energy policy? As important as many of the Bush recommendations
are, to your industry, that you mentioned produces about 60
percent in the lower 48 onshore, can we have a coherent energy
policy that doesn't do things that encourage domestic
production onshore on the lower 48?
Mr. Sims. My response would be, in the Bush energy plan,
there is a call for review of royalty incentive programs--
Mr. Carson. Right.
Mr. Sims. --for the offshore, that we would welcome that
opportunity to look at that.
Regarding other incentives, I know the association is
looking at the strategy that came out last week and hasn't come
to any firm conclusions on the pluses and minuses of it.
But I do know that the association does support changes in
the tax code that would provide for some incentives.
And the three that come to mind--I am no expert here, but
the three that come to mind include expensing G&G expenses, AMT
reform, as well as tax credits for marginal well production,
which would be very important in the State of Oklahoma.
I am a graduate from the University of Tulsa; I know
Oklahoma production well.
Mr. Carson. Thank you.
Mr. Rubin, you had shaken your head earlier when Mr.
Rehberg asked whether you had some influence on the Vice
President's report. You provided them with some input, what the
API's perspective was.
Was there any input from the API about the use of the tax
code, outside of the royalty issue, that was in the Bush
report, to encourage domestic production?
Mr. Rubin. Yes, API supports, for the most part, the same
tax incentives supported by IPAA, expensing of geological and
geophysical and other types of tax treatment that would help
the industry in our efforts.
Mr. Carson. The question to both you and Mr. Sims, then,
is, how important are those as part of a larger energy policy?
As I mentioned, talking to a lot of people in the oil and
gas industry, both now in Congress and being from the State of
Oklahoma, where it is the No. 2 industry, that is the very
definition of an energy policy to most people in the oil and
gas industry that I have talked to Oklahoma and Texas.
Public lands are no doubt important. That is an essential
part; I agree with you on that. I am a supporter of those
issues.
But the omission of it, far from being tertiary to
discussion, seems to be quite glaring. I mean, I would like
your opinion about, can we have a real energy policy in this
country that doesn't deal with protecting domestic production
from vicissitudes of the oil and gas economy?
Mr. Rubin. You know, we would certainly prefer to see those
types of tax issues addressed. We are hopeful that there will
be continuing opportunities, as Congress considers legislation,
to address those issues.
Mr. Carson. Mr. Sims?
Mr. Sims. We would certainly agree.
Tax issues have been a high priority for IPAA, more
particularly last year, and they continue to be so.
Whether or not they have to be included in this particular
package or not is something that is still being sorted out at
the association.
Mr. Carson. Understood.
And if I could ask a question to Mr. O'Connor on the issue
of coal. In this discussion, especially in the Bush energy
report, and in the larger debate about energy, about the role
of coal in economy, obviously, as Mr. Fry mentioned, 90 percent
of the new plants are coming on board--and the Bush plan calls
for about 1,500 new power plants to be built in the next 20
years--are gas-fired.
Can you give me any projections, or does your industry have
projections about what the demand for coal is going to be over
the next 20 years?
We hear much about oil, the demand for oil going up by 30
percent, natural gas 45 percent, electricity by 50 percent. But
largely, we are going to be moving to a more gas-fired world
and away from the coal-fired world.
Can you discuss what the long-term demands for coal are
going to be?
Mr. O'Connor. Certainly.
As part of that answer, let me say that, as this country
inventories its presently identified, proven and economically
recoverable fossil fuel reserves, we can see that somewhere
between 85 and 90 percent of all of the reserves are coal. This
country is amazingly blessed with an enormous amount of
presently recoverable coal reserves that are located in more
than 20 states in this country.
Depending upon the market economics, this is an industry
that has the capability of dramatic increase. To put it in a
different perspective, coal production has tripled in the last
20 years in this country. I might add that during this time
that coal production has tripled, emissions have been reduced
by a third. And so, despite popular misconceptions to the
contrary, we are an increasingly clean industry.
I think there is no doubt but that a substantial portion,
probably a substantial majority, of the new generation in this
country that we will see over the course of the next 20 years,
is going to be gas-fired.
The real question is, what are going to be the costs and
what is going to be the availability of additional gas
production? To the extent that it is available at economic
costs, it is going to take a very significant amount.
The Energy Information Administration has projected
recently that we will see, in all likelihood, between now and
2020, a 20 percent increase in coal production in this country.
Whether or not it will be that much, whether or not it will
double, is really dependent on market economics, as coal
competes with other fuels for its logical place in the
electrical generation marketplace.
One of the big differences between coal versus natural gas,
among many, is that natural gas goes into a number of different
markets, whether it is for heating purposes in homes and
businesses, whether it is for synthetic use in fertilizer or
whether it is for electrical generation.
Electrical generation has been a really expanding
opportunity for the gas business. Coal almost exclusively in
this country goes to electrical generation.
Mr. Carson. Right.
Thank you, Mr. Chairman.
Mr. Gibbons. Thank you, Mr. Carson.
It is interesting to note that the one community in
California which is not suffering from blackouts is the city of
Los Angeles. And it does so because it has coal-fired
electrical plants, in which the supply of coal has not been
interrupted, compared to the supply of gas to the new
generation facilities, which will not be able to come on-line
to prevent the blackouts.
It is an issue of which this Committee does have great
concern, and was part of the reason why we are here today
talking about short-term energy supplies, how do we get those
supplies from the areas where they are being produced to the
demand-side area.
One of the things that struck me as interesting is when you
look at the map or the outer continental shelf areas around the
Gulf of Mexico and the Atlantic coast--of course, the Pacific
coast is off-limits--Florida's increased projection of its
demand increase for natural gas is like double or triple over
the next 10 or 15 years.
How are we going to be able to supply even one state, like
the State of Florida, with its natural gas increased demands,
unless we look at areas like 181 and go forward with those
lease sales?
The issue that I see there is that Florida, even though it
recognizes a tremendous increase in its demand for natural gas,
refuses to permit exploration, drilling and other areas of
exploration for the supply of those natural resources, 181
happening to be right down the border of Alabama. It is not in
Florida until you get beyond the 100-mile range, and then does
sort of an eastern loop and cuts in there.
But we put off-limits so much area of Florida when Florida
itself is becoming an enormous demand.
What are your solutions to states like Florida? What would
you suggest to Florida and to east coast states who have a
demand for fossil fuel resources, yet they are unwilling to
look at their own backyard, so to speak, for a supply of those?
What would be your recommendation?
Mr. Rubin. Certainly, the 181 area that you mentioned, the
resource estimate for natural gas, for example, in 181 is
that--if you equate that to home residential electricity use,
there is enough natural gas just in the area of that lease sale
to provide all of the electricity needs of all of Florida's
homes for about 13 years. So there is a great deal of natural
gas that could be used for electricity generation.
If you look at other areas, certainly Canada has been far
less opposed to developing the resources off its eastern coast
than we have. And they found significant volumes of natural gas
that are being shipped to the U.S. for use in the Northeast.
Ultimately, we believe that we have the track record in our
operations in the Gulf of Mexico that shows that we can operate
responsibly. And ultimately, we would hope that that would be
viewed favorably by the public and that some of these other
areas would be opened to us.
And there would be significant resources, especially of
natural gas some of these areas, for electricity.
Mr. Gibbons. The Canadian field of natural gas that you
mentioned, does that extend down the Northeastern Atlantic
coast into some of the Northeastern States?
Mr. Rubin. It is my understanding that, yes, the geology
does come down farther south, off U.S. waters. And there may be
significant natural gas potential there as well.
Mr. Gibbons. But those areas are currently off-limits?
Mr. Rubin. Yes, sir.
Mr. Fry. Mr. Chairman, some of those areas we looked at 20
years ago, as I mentioned in my earlier testimony, with old,
old technology. And that is why we have to really get an
inventory of what is out there.
The OCS Lands Act, which established how we shall do
business in the offshore, said it should be a balanced program;
it should balance regionally, that all states and all regions
should participate in this program. We have gotten away from
that.
Mr. Gibbons. So you recommend a complete revision of the
estimates under MMS studies that are outdated?
Mr. Fry. I would like to see those updated so that we have
a better idea of what is there, so that we can really make
informed choices about areas where it may be appropriate to
have future development, as we look to try to fuel this economy
in the future.
Mr. Gibbons. In my final question here that I want to ask,
I want to talk about royalty in-kind, and open it up to anybody
for discussion out there. I know that it has been mentioned by
Mr. Rubin, but royalty in-kind is truly a responsible way to
deal with the royalty issues.
And since you brought up the issue that royalty in-kind is
the truth serum of the valuation of oil and gas production, are
there any states out there that do accept royalty in-kind? How
are they putting it together? And how this should this
government, the Federal Government, look at royalty in-kind
issues?
Mr. Rubin. The State of Texas takes some of its royalties
in-kind, I believe. I am not familiar with all of the programs
out there. I believe the State of Alaska also takes some of its
royalties in-kind. And I believe that Alberta in Canada, they
also take royalties in-kind.
And everywhere it has been used, it has been relatively
successful. I think the MMS's own pilot programs have also been
very successful.
And we can certainly rely on the data that has been
developed at the Wyoming pilot and the data that is being
developed in the offshore pilots, to point to that success as
well.
Mr. Gibbons. Mr. Sims?
Mr. Sims. Well, I would just add that I am not familiar
with all other states and how they have conducted RIK.
We certainly support RIK programs because it takes the big,
long debate of valuation out of the formula. And we think it
would help both sides go forward without the question of
evaluation taken in-kind.
Mr. Gibbons. Thank you.
And, Mr. Inslee, do you have any--
Mr. Inslee. I do, Mr. Chairman, if you allow a few minutes.
I want to ask Mr. Sims, my understanding is there has been
a substantial increase in the number of drilling operations now
going on in the last 2 years, something like there were 400
rigs in operation a couple years ago and now there is pushing
1,000. Is that about right?
Mr. Sims. I don't know the numbers, but there has been a
substantial increase both onshore and offshore, responding to
market forces.
Mr. Inslee. Well, that is what I wanted to ask you about.
The reason there weren't 1,000 rigs 2 years ago was not
because the environmental laws were bad 2 years ago; it was
because the price wasn't good enough, right?
Mr. Sims. We do respond to price. Price is something we pay
a lot of attention to.
Mr. Inslee. I want to make sure I understand.
Two years ago, the impediment, the thing that was choking,
preventing people from going out and drilling more wells, was
not environmental regulations, it was the fact that price was
not high enough. Now the price is high enough, and they are now
drilling. Isn't that right?
Mr. Sims. It is certainly true that price is a big driver.
In terms of overall activity, there are other factors at play,
including restrictions that we have talked about today. They
aren't exclusively, but price is a big factor in our level of
activity.
Mr. Inslee. Well, I appreciate you saying that. In fact,
you kind of agree with Mr. Gene Edwards, the senior vice
president of Valero Energy of San Antonio, who said, ``Our
margins are not wide enough to justify building new refineries.
When we need to expand, we do it at existing sites.''
The reason I say that, I think there is substantial
evidence that the price is what is going to drive additional
exploration, not rolling back environmental standards.
One more point, and then I will finish.
As you know, there is substantial concern about price
gouging in the wholesale electrical markets in the western
United States. I am going to read to you, and I am going to ask
Mr. O'Connor a question, if I may, from the San Francisco
Chronicle, this Sunday.
It starts out:
Large power companies have driven up electricity prices in
California by throttling their generators up and down to create
artificial shortages, according to dozens of interviews with
regulators, lawyers, and energy industry workers.
According to the accounts of three plant operators, company
X's--and I won't embarrass them with their name here--company
X's operations schedulers on the energy trading floor ordered
them to repeatedly decrease then increase output at the 1,046-
megawatt plant X. This happened as many as four or five times
an hour.
Each time the units were ramped down and the electricity
production fell, plant employees watched on a control room
computer screen as spot market energy prices rose. Then came
the phone call to ramp the units back up.
``They were telling us what to do, and we would do it,''
said one of the men, who only agreed to speak on condition he
not be identified because they feared being fired.
``Afterwards, we would just sit there and watch the market
change.''
Now, Mr. O'Connor, I understand you are not involved in
that specific level of the industry, but if that kind of thing
is going on, would you agree that it would be important, by
some jurisdiction, to have some price mitigation strategy to
prevent these incredible price spikes, which, as you realize,
have gone up 1,000 percent since last year on the spot market
at times, at least at the same time, or I would think before,
we open up national monuments to drilling for new sources?
Would you generally agree, if some of those things were
going on?
Mr. O'Connor. You are absolutely correct in your first
assumption that I am not familiar with that specific
circumstance, so I am not going to even--
Mr. Inslee. I understand that.
Mr. O'Connor. I am not even going to try to get close to
that.
But let me start your answer with this more general
proposition. We have heard a lot of rhetoric in the course of
the last few years, and particularly in the last 6 or 8 months,
that we haven't seen new power plants built in this country.
And it really raises the question, well, how did this country
get along for the last 10 years while new power plants not
being built because electrical demand was increasing in this
country?
Well, the answer was that the power plants that existed 10,
15 years ago were running at about low 60's percentile capacity
factors, which means that they were running--you know, power
plants can't run 100 percent of the time, 365 days a year.
There are outages and there are also, in the spring and fall
time periods, those are shoulder months in which demand for
electricity isn't as great as they are in the heat of the
summer and the dead of the winter.
What we saw over the course of the last 10 to 15 years is
that these capacity factors generally in this country have
increased from about 60 percent up to the low 70's, 73, 74
percent.
How far can these plants increase without just absolutely
hitting a wall? They can't go to 100 percent.
From time to time, there may be a few plants that can get
into the high 80's. But generally, we are reaching a point
where plants, as a general proposition, are running close to
their maximum capacity factors.
There are still some more that can be squeezed out of
individual different plants, but we have been able to avoid
much of the problem in the last 10 or 15 years because of this
increase in capacity factor utilization. We are not
indefinitely going to be able to do that in the future.
Now, are individual utility power plant operators
curtailing production at different times? Absolutely so.
Is part of the reason for that the absolute need for
maintenance and repairs? Absolutely so.
Are there individual decision being made by individual
plant operators on a day-to-day basis for market reasons to cut
back or to accelerate production? You will, honestly, have to
ask those people what their rationale for doing this is.
But I will tell you that our industry is not in favor of
price controls. It is not our industry, but we think that it
creates major market disruptions that will actually exacerbate
over the long term the electrical needs of this country.
Mr. Inslee. Can I ask just one more question, Mr. Chairman,
if you would allow me? Thank you.
I understand, I think, your answer. You don't have
individual knowledge of what is going on in the circumstances.
But if through investigations we find that, in fact, this
isn't a maintenance issue, it is consciously withholding power
from a generator sometimes on an hourly basis in order to drive
the price up and maximize profits and have an induced shortage,
if you will, and if we find out that that is a significant
problem on the west coast, would you agree with me that we
ought to solve that problem before we are drilling in a
national monument, the Hanford Reach up in Washington, for
instance?
Mr. O'Connor. I think the answer to that, in generics, is
you need to look to see if that utility is acting in concert
with other utilities in order to restrain the market in a
manner that is inconsistent and probably in violation of the
antitrust laws, in which case enforcement action needs to be
taken. Or does it have such market dominance that it has
monopolistic power, in which case, regulatory measures need to
be examined.
But operating in a market situation where an individual
utility does not have market dominance will create exacerbated
problems by trying to regulate their prices over these periods
of time, because while it may grant some short-term relief, it
will create an enormous disincentive for the construction of
additional generation or expansion of existing generation.
Mr. Inslee. Mr. O'Connor, your answer is one I don't agree
with, but it is entirely clear, and I thank you.
[Laughter.]
Mr. O'Connor. Thank you, sir.
Mr. Gibbons. Thank you, Mr. Inslee.
And I will say that there is only one type of generating
facility that cannot ramp up and down and that would be a coal-
fired facility, compared to hydroelectric facilities which can
control the flow of energy to the generating capacity, which is
like in your State of Washington, and natural gas, which would
be the other type of ability to control the combustion cycle
for that.
But coal-fired power plants cannot control that kind of--
Mr. Inslee. Mr. Chair, there are four questions Mr. Rahall
would love to propound to Mr. O'Connor. Would he be amenable to
taking--
Mr. Gibbons. The Chair is going to announce, and I will do
it today, do it now, that written questions submitted by
members of the Committee will also be open and submitted--
Mr. Inslee. Thank you.
Mr. Gibbons. --to the witnesses. And we would like to ask
that the record remain open.
Mr. Otter, do you have any questions that you want to ask?
Mr. Otter. Yes. Thank you very much, Mr. Chairman. And my
apologies to the panelists for my having to absence myself from
here, but I had another pressing issue to deal with.
I believe that I truly pay a great deal of disrespect to
the panel when I ask you to come here, and I come and give a
statement and then I just leave and not even listen to what you
say.
So, I think that is terribly disrespectful, and I apologize
to the extent that that has happened here this morning, because
I think what you do have to say should be important to us.
Otherwise, we ought to have the courage enough not to ask you
to come.
One of the things--and I am not sure you all are prepared
to answer this right now--but one of the things that I have
found, which has a tendency to put an awful lot of light on the
energy shortage, which does or does not exist.
Quite frankly, I do believe that it exists. And I believe
that it has been caused. And I believe that it has been caused
by over government regulation and not enough dependence on the
private sector instead of too much, because all the situations
that you have talked about, whether it is ramping up and down
in order to fluctuate the spot market--I do not know of a power
plant that isn't indeed licensed by the government.
And the government already has the control to withdraw that
license, should those kind of activities take place. So we
don't need more government, as far as I am concerned, involved.
But one of the things that I would like to shed an awful
lot of light on, unlike the previous representative's question,
I think prices of energy were way too high last year and the
year before. And I believe, so do an awful lot of the
consumers, especially in the State of Idaho that are on fixed
income, and especially those producers in the State of Idaho
that their third highest cost ingredient in the last 10 years
has become energy.
It takes 27,000 Btus, for instance, to make a pound of
french fries.
And the cost of energy going up continues to cause havoc in
the marketplace for our product, especially when you have to
compete with Australia, Argentina, and other places that can
produce the same product with a much cheaper source of energy
because they don't have the government control to the extent
that we do.
But one of the things that I would like to know, whether it
is coal, whether it is oil, or whether it is gas, I would like
to know the cost per 1,000 cubic feet, per unit of measurement.
Maybe 1,000 Btus is the best.
What is the government cost per 1,000 Btu measurement?
For instance, in the Idaho right now, we know that, between
regulations and taxes, when we pay $1.68 for a gallon of 88
octane gasoline, we know that between taxes and regulation,
that our costs are almost $1.
And if you don't have that answer today, I would be more
than happy to receive that answer from you. Do any of you
happen to have that answer today?
Mr. Rubin. No, sir.
Mr. Otter. Mr. Rubin, is that an attainable figure? Can we
obtain that from the petroleum industry?
Mr. Rubin. I don't know how easily obtainable it is. In a
lot of cases, the regulatory burdens are so great that we are
not able to drill. So I guess that would drive the cost of the
regulation to infinity.
Mr. Otter. Doesn't that, in fact, constrict the market and
limit the supply? And as a result, supply and demand, isn't
that going to make the price go up?
Mr. Rubin. Absolutely.
Mr. Otter. So that can be a contributing factor?
Mr. Rubin. Absolutely.
Mr. Otter. Okay.
And the reason I bring that up is because we did a little
research in the fast food business here a few years ago and
found out that a Big Mac, as it was going up in price, had 258
taxes and regulations on it; 258.
So I suspect, as regulated as the energy industry is, it is
going to be even more.
Mr. O'Connor, how do we stop future conflicts between the
coal methane bed and the drilling? How do we stop those kinds
of conflicts?
Mr. O'Connor. I will address that question. First of all,
may I respond to your earlier question with regard to the layer
of taxes and other fees?
On a national average, first of all, the delivered price of
coal into power plants, on a national average, has been about
$1.25 to $1.30 per million Btus. That has generally been
anywhere from a third to a fourth of the price of delivered gas
or oil into power plants on a delivered basis.
On a more specific level though, and particularly since we
are talking here about Federal lands, I will address the
Federal lands component exclusively.
Looking at the Powder River basin, which I alluded to
earlier, Campbell County, if it were its own country, Campbell
County, Wyoming, would be the fourth largest coal-producing
country in the world, with the United States being number two.
So let's look at just it, since it is such an enormous resource
area.
When coal in 1999 was selling on a spot market basis for
about $4.25 or $4.30 a ton, if one broke that component into
taxes and other fees--and I will address those in just a
moment--plus fixed costs, plus all the variable costs of
depletion and what minimal profit there was, if you looked at
the fixed costs--the employment, the costs of explosives, costs
of reclamation, those sorts of unavoidable fixed costs--the
taxes and royalties combined were almost as great as the fixed
costs themselves.
What are those made up of: 12.5 percent royalty to the
Federal Government (by the way, I am not here to argue pro or
con; I am just identifying them) 12.5 percent royalty to the
Federal Government; 10.5 percent state severance and ad valorem
property taxes; a $.35 a ton abandoned mine lands fee; a black
lung fee--that is amazing because this is surface coal; it
doesn't create any of these impacts--but a black lung tax of up
to $.55 ton; and then various other more indirect taxes.
And as I said, that came to almost the direct costs of our
operations.
Let me turn now to the second question: How do we deal
prospectively with these issues of conflict in coal bed arenas?
And I will do it in two parts.
One is, the problem has occurred because historically--and
this is not an indictment of any administration or of any party
because for 35 years this has been the rule by BLM up until the
last year or so.
When leases were issued, there was no mechanism to do
anything. BLM, to its credit, is now, starting in the year
2000, has started looking at when leases are issued in the
future to impose some stipulations and trying to impose through
regulatory means mechanisms to address this.
So as we look into the long-term future, this issue can be
dealt with administratively through regulations, through
stipulations in leases as leases are issued.
But the crying problem here is what do you do with those
leases that have already been issued and, much more acutely,
the parties are already in conflict? The leases are issued. You
can't enact regulations to try to retroactively go back and do
something, unless there was a statutory mechanism to do it.
And the legislation introduced by Congresswoman Cubin, H.R.
1710, quite simply would do this--and I am going to
overgeneralize in the interests of simplicity--say, first of
all: Parties, go away and try to negotiate your differences out
between yourselves, coal and coal bed methane operator.
If you can, great. Bring it back and give it to us.
But if you can't, and despite your best efforts, you are
not able to, then a panel of experts--one selected by the coal
company, one selected by the coal bed operator, one selected by
the Interior Department, for example, under the jurisdiction
and supervision of a Federal court in that district--will look
at, first, the issue of who creates the greatest financial
value to the Federal and state government.
And that party that does that will be given the right of
possession, but will also be given the obligation to pay fair
market value to the party that is giving up its right of
possession.
And that fair market value will be determined on a case-by-
case basis by that panel of experts.
Mr. Otter. Mr. O'Connor, excuse me. If I were the landlord,
and I rent my land to two different people, one to grow
potatoes on, the other to grow hay on, neither of which can
exist with the other, why isn't it the landlord's problem
instead of the lessors or the lessees problem?
Mr. O'Connor. A spectacularly good question.
[Laughter.]
I absolutely agree with you.
Very honestly, you know, the Bureau of Land Management
historically has said, basically: It doesn't make any
difference if we created the problem; it is your obligation to
figure your way out of this.
Mr. Otter. When was the last time we did this? When was the
last time we committed this kind of thing?
Mr. O'Connor. Case in point, 1998, our company paid $158
million for a Federal coal lease, and we found out later that
we were going to have to pay many, many millions of dollars to
a coal bed operator.
Mr. Otter. I guess my question goes to, are we still
involved in this, in this lease practice?
Mr. O'Connor. Yes.
Mr. Otter. Thank you.
I would just like to ask Mr. Rubin one more question.
Would your company be interested in your landlords having a
working interest, even if your landlord was the Federal
Government? A working interest rather than a royalty? Would
your industry, I mean?
Mr. Rubin. That is not an issue that I think we have ever
even thought about, at least certainly not when I have been
around.
As a working interest owner, depending on the size of the
working interest, that working interest owner has a say in the
development.
Look, I mean, any company will look at any terms offered
and decide whether it is appropriate for that company to go
forward, so I couldn't preclude anything.
But I will tell you, it is not something that we have
talked about or thought about.
Mr. Otter. Thank you, Mr. Chairman.
Mr. Gibbons. Thank you, Mr. Otter.
Gentlemen, it is obvious that we have kept you here for the
requisite 2 hours--
[Laughter.]
--and even then a little bit more.
We certainly appreciate the courtesy of your cooperation
and your presence, as well as the testimony you have provided.
As I mentioned earlier, the staff or the Committee may have
written questions that it will submit to you, and we would ask
that you do respond to the Committee with an answer to those
questions in writing.
This has been an hearing which has obviously brought us new
information, information which we certainly appreciate
learning. We are actively interested in finding a solution, and
even short-term solutions to the energy problems that this
nation in the beginning of the 21st century.
Your presence here has helped us greatly, and we appreciate
your recommendations.
With that, there being no other questions from the
Committee, we would again say thank you and call this hearing
to an end.
[Whereupon, at 12:07 p.m., the Subcommittee was adjourned.]
[Additional material submitted for the record follows:]
1. Statement for the record from The Geothermal Energy
Association
2. A letter from William F. Whitsitt, President, Domestic
Petroleum Council, submitted for the record follows:]
Near Term Potential For Geothermal Energy
The National energy crisis is most immediate and severe in
California and the far West. This region has a wealth of renewable
resources, including geothermal energy. Geothermal energy has
significant potential to contribute to alleviating the energy supply
crisis in the West, and the Department of Energy's programs could
assist with realizing this potential. With proper support, hundreds of
Megawatts of geothermal electricity could be brought on line fairly
quickly, and thousands of megawatts could be added in a matter of a few
years.
We estimate that electricity production from many existing power
plants could be improved through better technology and operational
changes. Existing plants could provide perhaps 2030% more power--adding
400600MW--if there was a significant short-term investment in these
improvements. Also, efforts to supply treated wastewater to The Geysers
need to be continued on a priority basis to achieve projected increases
in generating capacity.
In fairly short order, new geothermal capacity could be on-line in
the West. A thousand megawatts or more of additional capacity lies in
or immediately near existing facilities. Because there is some
knowledge of the subsurface resource, and some infrastructure already
in-place, these sites could be developed as fast as markets and
permitting allow. (This does not include substantial undeveloped
geothermal resources in Mexico that lies close to the California
border.)
Further, USGS has estimated that as much as 20,000 MW of additional
geothermal electric power resources could be developed in the West.
This level of development would presume sustained strong markets, or
financial incentives like the production tax credit, and continued
development of technology that DOE's research and development efforts
support. Based upon our review of experts in the field, this level of
power development may be possible over the next decade with appropriate
federal and state support.
Of course, this is only electric power resource development. Today,
there is also a significant direct use industry throughout the West
that uses geothermal heat in schools, homes, farms, and industrial
processes. Dr. John Lund of the Oregon Institute of Technology has
estimated than an equal amount of energy could be harnessed through
direct use applications in buildings, commercial operations and
industrial processes. Of course, Dr. Lund also assumes that both
federal and state governments continue to support expanded use of
geothermal resources.
Combined, geothermal power and direct-use energy has enormous
potential for the Western United States. Together, these estimates
represent energy equivalent to roughly 20% of total current U.S. energy
needs. And, with continued advances in technology, the ultimate
potential for geothermal energy will continue to expand far beyond this
range.
Keys to achieving the potential of geothermal energy are: 1)
extension of the production tax credit to new geothermal facilities and
incremental capacity additions at existing power plants, 2) priority
processing by federal and state agencies of leases and permits for new
geothermal development and expansions at existing facilities
(consistent with the substantive requirements of the law) and, 3) a
strong DOE geothermal research and development program that works
closely with industry.
The Geothermal Energy Association
209 Pennsylvania Ave SE
Washington, D.C. 20003
Phone: 202-454-5261; Fax: 202-454-5265
______
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