[Senate Hearing 109-35]
[From the U.S. Government Publishing Office]
S. Hrg. 109-35
OIL RESOURCE DEVELOPMENT
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
TO
DISCUSS OPPORTUNITIES TO ADVANCE TECHNOLOGY THAT WILL FACILITATE
ENVIRONMENTALLY FRIENDLY DEVELOPMENT OF OIL SHALE AND OIL SANDS
RESOURCES, AND TO ADDRESS LEGISLATIVE AND ADMINISTRATIVE ACTIONS
NECESSARY TO PROVIDE INCENTIVES FOR INDUSTRY INVESTMENT, AS WELL AS
EXPLORE CONCERNS AND EXPERIENCES OF OTHER GOVERNMENTS AND ORGANIZATIONS
AND THE INTERESTS OF INDUSTRY
__________
APRIL 12, 2005
Printed for the use of the
Committee on Energy and Natural Resources
______
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska RON WYDEN, Oregon
RICHARD M. BURR, North Carolina, TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri DIANNE FEINSTEIN, California
CONRAD BURNS, Montana MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia JON S. CORZINE, New Jersey
GORDON SMITH, Oregon KEN SALAZAR, Colorado
JIM BUNNING, Kentucky
Alex Flint, Staff Director
Judith K. Pensabene, Chief Counsel
Bob Simon, Democratic Staff Director
Sam Fowler, Democratic Chief Counsel
Dick Bouts, Professional Staff Member
Patty Beneke, Democratic Senior Counsel
C O N T E N T S
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STATEMENTS
Page
Allard, Hon. Wayne, U.S. Senator from Colorado................... 3
Barna, Dr. Theodore K., Assistant Deputy Under Secretary of
Defense,
Advanced Systems and Concepts, Department of Defense........... 13
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 7
Bunning, Hon. Jim, U.S. Senator from Kentucky.................... 1
Craig, Hon. Larry E., U.S. Senator from Idaho.................... 9
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 1
Evans, Jim, Executive Director, Associated Governments of
Northwest Colorado, Rifle, CO.................................. 42
George, Russell, Executive Director, Colorado Department of
Natural
Resources, Denver, CO.......................................... 37
Hatch, Hon. Orrin, U.S. Senator from Utah........................ 2
Lonnie, Thomas, Assistant Director for Minerals, Realty &
Resource Protection, Bureau of Land Management, Department of
the Interior................................................... 14
Maddox, Mark, Principal Deputy Assistant Secretary for Fossil
Energy,
Department of Energy........................................... 9
Murkowski, Hon. Lisa, U.S. Senator from Alaska................... 8
Mut, Stephen, CEO, Shell Unconventional Resources Energy, Shell
Exploration and Production Company............................. 31
Salazar, Hon. Ken, U.S. Senator from Colorado.................... 7
Smith, Steve, Assistant Regional Director, The Wilderness
Society, Denver, CO............................................ 48
Thomas, Hon. Craig, U.S. Senator from Wyoming.................... 7
APPENDIXES
Appendix I
Responses to additional questions................................ 63
Appendix II
Additional material submitted for the record..................... 69
OIL RESOURCE DEVELOPMENT
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TUESDAY, APRIL 12, 2005
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:04 a.m., in
room SD-366, Dirksen Senate Office Building, Hon. Pete V.
Domenici, chairman, presiding.
OPENING STATEMENT OF HON. PETE V. DOMENICI,
U.S. SENATOR FROM NEW MEXICO
The Chairman. We are going to get started. I think one
Senator is here. He is talking in the back room with a
representative from Canada. I think what we will do, if it is
all right with Senator Bingaman--we have two visiting Senators
who have other hearings. At least we are scheduled here. So why
do we not just start?
As everybody knows, this is a hearing to get some kind of
an overview about oil shale in the United States, and we all
know that the Senators that are in front of us here, one from
Utah and one from Colorado, represent States where most of the
American shale is located. It is located more inland in
America, but it is a different kind of shale and in proportion,
it is a lot less than what is contained in your States.
We have some opening remarks here, but in deference to your
time--you know the nature of the hearing. We have no idea what
you all are going to talk about, other than we assume it will
be about oil shale in your States.
Having said that, we will go with you, Senator Hatch, then
Senator Allard.
[The prepared statement of Senator Bunning follows:]
Prepared Statement of Hon. Jim Bunning, U.S. Senator From Kentucky
Mr. Chairman, I am pleased we are having this hearing today.
The United States is currently facing a tight reserve of oil. Our
domestic supply is not enough to keep up with our demand and so we
import more than 55% of the oil we use.
The price of oil has remained at over $50 a barrel. OPEC estimates
that within 2 years the price of oil could jump to $80 a barrel.
These high prices mean we are just throwing money needlessly at
other countries.
We need to stop this. Our economic and national security depend on
our ability to provide our own resources.
Using alternative fuels such as oil shale and tar sands is one good
way for the country to increase its domestic supply of energy.
The hearing today will help us determine how to increase our energy
independence by using these alternative fuels. I firmly believe that
this will help move our country forward in the 21st Century.
I want to thank all the witnesses today for testifying on this
important issue.
Thank you Mr. Chairman.
STATEMENT OF HON. ORRIN HATCH, U.S. SENATOR
FROM UTAH
Senator Hatch. Well, thank you so much, Mr. Chairman and
Senator Bingaman. We are grateful that you are so courteous to
us.
Mr. Chairman, I want to thank you for holding this hearing
today. I applaud you for your vision and leadership on energy
policy issues in general and on oil shale and tar sands in
particular.
I am a strong believer and a promoter of the use of
alternative fuels, as you know. As the author of the CLEAR Act,
which has been a part of every energy bill over the last 4
years, I have tried to promote a vision of a future that is
less dependent on oil. The CLEAR Act has been an attempt to
provide strong tax incentives for the use of alternative fuels,
alternative fueling stations, and alternative and advanced car
technologies. I still believe that alternatives are a critical
component of our Nation's energy strategy. However, at the
moment, our Nation continues to be dependent on a steady and
cheap supply of oil. It is a fact I do not like, but it is a
fact nonetheless.
Mr. Chairman, I congratulate you for recognizing the
gigantic domestic energy resource that is waiting to be
developed in the tar sands and oil shale found principally in
Utah, Colorado, and Wyoming. There will be some numbers thrown
around today that are mind-boggling. Who would have guessed
that in just Colorado and Utah, there is more recoverable oil
than in the Middle East, except that we do not count it among
our Nation's oil reserves because it is not yet being developed
commercially.
The government of Canada has recognized the potential for
large tar sands deposits in the Province of Alberta, and they
have developed a government policy to go promote their
development. The result is that Canada has now increased its
oil reserves by more than a factor of 10.
I find it disturbing that Utah imports oil from Canada tar
sands, even though we have a larger tar sands reserve or,
should I say, resource within our own boundaries that remains
undeveloped.
Why has Canada moved forward in leaps and bounds while the
United States has yet to take even a baby step in this
direction? I believe the difference has been the government
policies of the respective countries. I know, Mr. Chairman,
that you are keen on changing that, and I fully support you.
I cannot sit by while gas prices are going through the roof
and while I hear from constituent after constituent about the
disastrous effect gas prices are having on their livelihoods
and their businesses, farmers included.
As you know, I have been leading an effort by working with
your staff and with the offices of Senators Bennett, Allard,
Salazar to develop legislation that can be agreeable to all
sides. We are in the early stages of our discussions, but I
believe that with your leadership, we can change the mind set
of our Government enough and open up a much more stable future
in terms of our energy policy. So I commend you, congratulate
you, and request your help in moving the United States forward
in these great reserves that really could be developed and
certainly developed, in time, at a lesser cost than actual oil
extraction from the ground.
So, thank you, Mr. Chairman.
The Chairman. Thank you, Senator Hatch.
Senator Hatch. If you do not need me any further, I am
going to head over to another----
The Chairman. Maybe you could stay just a moment. Can you?
Senator Hatch. Sure.
The Chairman. Senator Allard.
STATEMENT OF HON. WAYNE ALLARD, U.S. SENATOR
FROM COLORADO
Senator Allard. Mr. Chairman, I want to commend you for
your forward-looking efforts as far as our energy sources here
in this country. I think you agree with me that we simply
cannot ignore any potential source of fuel for this country
because of the shortages that we are facing, particularly long
term. I agree with my colleague, Senator Hatch, that we need to
look at renewables, we need to look at those other sources that
perhaps maybe we have not utilized as well as we possibly
could, and I think we can do that and still protect the
environment.
This hearing is on oil shale, and I have an opportunity to
visit personally some of the new technology that is emerging. A
lot of it is proprietary, so I do not think I can say too much
about it other than the fact that I would just say that I feel
oil shale is a promising fuel source and produces very light
crude suitable to fill needs for jet fuel and similar pure
fuels.
In the Rocky Mountain area, there lies an area with a very
large oil shale deposit. In the last several years, a handful
of companies have worked to develop technology that will allow
for the economical development of this resource. Some of the
resource lies under private lands, but much of it, certainly
the richest deposit, is under Federal lands. This area, now
under the purview of the BLM, was formerly known as the Naval
Oil Shale Reserve.
In this discussion, we must remember that when my former
colleague, Senator Ben Nighthorse Campbell of Colorado,
authored the legislation to transfer the Naval Oil Shale lands
into the keeping of BLM, the legislation specified that the
resource remain available for development. Congress never
intended to place the development of this resource off limits.
Rather, Congress recognized that BLM was in a better position
to manage publicly owned lands than was the Department of
Energy.
Many on the Western Slope remember the bust associated with
oil shale that occurred in the early 1980's, the height of
which became known as Black Sunday. Higher priced crude made
oil shale more attractive, and there was a real rush to develop
the resource. When crude prices fell, companies pulled out of
the area just as quickly, leaving many jobless. I want to
assure those in Colorado who remember and who were affected by
this time, there is no rush to develop this time around. There
will be no quick peaks and falls. The companies involved and
the Federal Government are moving at a much slower and more
deliberate pace.
The legislation currently being drawn up allows for
demonstration scale projects, as I understand it. These
demonstration projects will have to move themselves before
full-scale projects can go forward.
Mr. Chairman, thank you for holding this important hearing.
I intend to continue to work with you, Senator Hatch, and our
colleagues to continue to develop this legislation to allow for
deliberate and conscientious development of the resource. I am
pleased that I have an opportunity to work with my esteemed
colleague, Senator Hatch.
Thank you, Mr. Chairman. I look forward to working with
you.
The Chairman. Let me ask both of you. From what we read,
the experience that occurred heretofore kind of reminded people
of a boom and bust, which put kind of a big shadow over shale
and tar sands in your region. But it does seem that the price
of oil has something to do with that. We were right down at the
margins in terms of cost of oil. When the price of oil dropped,
which they did back then, as you know, it obviously went from
realistic to totally unreal, and out went the investment and
the activity and down came the city or the communities and the
jobs.
Might I ask, in terms of the attitude of people in your
States, is it fair to assume that they are concerned about this
potential for an expedited development hurry-up and then fall
again, but there is a genuine, positive interest in our
proceeding in a gradual and guarded way to see what can really
happen up there? Senator Allard, Senator Hatch, whichever.
Senator Hatch. Well, let me say this, Mr. Chairman. Back
when I was practicing law in Utah, I was the first attorney to
obtain rights to mine the Saudi Arabia coal, the Kaiparowits
Plateau. I also represented one of the top scientists in the
world, Dr. Alex Oblad, who wound up at the University of Utah,
who was developing systems for extracting oil from tar sands,
and he believed that over time, they could do it as
competitively with the then price of oil.
And now I am fully aware that we have come a long way in
the ability to extract oil from not only tar sands, but also
oil shale. We had abilities back then, but we are far advanced
over those abilities today. And I think you will hear some of
the leaders talk about that today.
But we can no longer sit back.
The Chairman. But, Senator, my question is, is there any
reason for the people of your States to be opposed to this?
Senator Hatch. Not any reason at all, other than you might
find a few environmental extremists who might try to give it a
difficult time, but they should not because these are lands
that long have been considered available for development of oil
resources.
The Chairman. Senator.
Senator Allard. Mr. Chairman, I think you will find strong
support in western Colorado. That is where all this oil shale
is located. The community that originally was formed with the
oil shale development has evolved into a retirement community
now, and I suspect that there may be some opposition that would
come from that. I suspect that the extreme environmentalists
perhaps will try and raise some concerns in that regard.
But we have in the State of Colorado an organization called
Club 20. It is made up of the 20 counties from the whole
western part of the State of Colorado. They have passed a
resolution, I understand--and I was at their meeting just about
10 days ago--where they have endorsed an effort to try and see
if there is not a way to utilize the oil shale that is in that
area. So my impression at this point in time is that there is
strong support through that resolution from the Club 20
counties, and they support the approach that Senator Hatch and
myself are talking about where we look at it on a minimal basis
and then let it prove itself and then move forward from there.
I have seen some of the technology, and I am convinced that
the technology that I saw is not going to damage the
environment.
The Chairman. Senator Bingaman.
Senator Bingaman. I have no questions, Mr. Chairman.
The Chairman. I just would like to say to both of you and
for the record here, while you are still here, I think we do
have in Canada an opportunity to learn so that we will not make
as many mistakes up front as we might otherwise, and also with
reference to the value of this being public land as compared
with private ownership in terms of accessibility and control
over leases and the like, it turned out to be a big positive up
there. But they have taught us a few things in the few moments
we have spent with them that we ought to take a look at.
Senator Hatch. I agree with that.
Senator Allard. I think that is important, Mr. Chairman.
Again, I would just remind you that when this was set up, it
was never designed--when we had the transfer from the Naval Oil
Shale over to the BLM management, it was never intended that we
preclude the ability to go ahead and develop those resources if
technology was made available.
Senator Hatch. I might add that in eastern Utah, it would
uplift that economy tremendously. I think people really want to
develop these natural resources, and they want to do it not
just for the betterment of our country, but for the betterment
of their economy in that area as well.
The Chairman. Well, I want to thank you both. I also want
to tell you, without you having to spend a lot of time--and
your staff and you will because it is very important to your
States--the one thing that is predominant in the Canadian
experience is that they do not, up front, have a lot of
government expenditure. To the contrary, they give a lot of tax
benefits to involvement, but they did not have a plan to go out
and spend a lot of money developing things. They left that up
to companies that received the benefit through tax treatments
and royalty treatments that I thought, in the brief
discussions, we would need to look at for the tax committees.
But I think it is a rather exciting approach. We will see if
applies to shale. It applies clearly to tar sands. No question.
We thank you both.
Senator Hatch. Thank you, Mr. Chairman.
Senator Allard. Thank you, Mr. Chairman.
The Chairman. All right. Having said that, let me make my
few remarks, and then I will yield to Senator Bingaman. I want
to thank you, Senator Thomas, for coming today.
First, Congress has not passed comprehensive energy
legislation since 1992, and it is the U.S. consumers, in my
opinion, who are paying for our failure to act. We are going to
have to do something to show that we are seriously concerned
about what is happening to our consumers and what is happening
to our country's security by this growing dependence upon crude
oil.
Over the last few weeks, Senator Bingaman and I have been
working as hard as we can to try to draft the beginnings of a
bill and the major portions of a bill so that we might move as
rapidly as possible and have at least a significant portion of
the bill that has been worked over by both sides and these two
Senators and the legislative assistants of all the Senators.
Hopefully, the bill is going to provide a comprehensive
strategy to help produce more energy, conserve more, that moves
us toward new, nonconventional energy sources, where we have
the resources and technology to do so.
It is my intention to include language that would lead,
hopefully, to the development of vast shale resources and tar
sands in the United States. We have short notice on that, and
we are clearly not going to hold up the bill until we learn
everything about it, but we are going to do what we can from
what we know.
There is no question in my mind that our Nation must, where
economically and environmentally viable, maximize energy
production as the outlook is not very bright for global oil
prices falling at least dramatically very soon. In this
country, we have a vast oil shale reserve. It is estimated to
be 2 trillion barrels of oil from oil shale, and that is just
an estimate, with nearly 80 percent on Federal lands. I expect
that getting this oil is not going to be very easy. In fact, I
expect that it is going to be very difficult, but I am very
confident, that with the prices being what they are, that we
will try to make it work. And I am hopeful that American
companies will get more interested day by day than they have in
the past 10 or 15 years.
We just had a brief meeting in the back room with the
Canadian minister. He could not testify himself because of
problems of comity that address his particular position in the
country of Canada.
But today, believe it or not, Canada supplies more oil to
the United States markets than any other country, and much of
it comes from oil that is garnered from tar sands. Their
experience up there in the north, which they have gained on
this nonconventional oil source, is something that I think we
could benefit from.
I note that in your State, Senator, there is also a very
big inventory of this raw material, along with coal. You are
very much like Alberta, in fact. You have both. You have all of
those.
With the demand for energy increasing, the need for us to
understand what it will take to encourage development of this
resource is very important. Our witnesses today are going to
share their perspectives on these challenges, and we thank
those who are here to do that.
With that, I would yield to Senator Bingaman for his
comments and then to you, Senator Thomas and Senator Salazar,
and then we will proceed with the witnesses.
Senator Bingaman.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Thanks very much, Mr. Chairman. Thanks
for holding this hearing. Obviously, this is a very important
issue. We do have a very large supply of oil shale and oil
sands that we need to look to to see if we can develop these at
a price that makes them competitive in the market today.
I do think the issue of technology development is
absolutely crucial here, what point are we at in the
development of the technology that will be needed to extract
the oil from these resources, and then, of course, just the
economics of producing oil from this source. Obviously, we are
anxious to learn all we can about that and then try to
understand whether there are incentives that we can provide
that will encourage actual development in a way that is
responsible and helps meet our energy needs.
Thank you very much for having the hearing.
The Chairman. Thank you, Senator.
Do either of the two Senators want to comment?
Senator Thomas, you are first. Senator Salazar, you follow.
STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR
FROM WYOMING
Senator Thomas. Thank you, Mr. Chairman. Very briefly, you
all have covered I think where we are.
Certainly there is great potential in oil shale. Wyoming is
in the triangle with Utah and Colorado and the opportunity
there.
This, of course, was done some back in the 1970's, and
there was quite an effort to do something with oil shale. It
did not turn out to be economic at that time. Now I am anxious
to hear whether the processes have changed, whether it is
simply the values that are changed. But I think certainly we do
need to go forward with this.
It is kind of interesting that DOE's oil gas research and
development thing has been zeroed out, at a time when perhaps
it is very useful.
I guess I would observe that in our last energy bill, we
had a tremendous amount of financial incentive. I think it was
something like $30 billion over some time. That is not going to
happen this time. I hope we have some incentives, but we are
not going to be able to have that kind of money in there.
So it will be interesting to hear what the private sector
feels in terms of making the kind of long-term investment that
is going to be here. At the prices there are now, obviously it
is a good deal. Whether those prices are going to be that way
is another question.
So I am glad we are having this, Mr. Chairman, and I think
it is one of the alternatives and one of the directions we need
to be looking. It makes more sense that some of the kinds of
sources that we talk about in my view. So thank you, sir.
The Chairman. Thank you.
Senator Salazar. I think before you came, Senator, Senator
Allard was here. Did you catch him before he left?
STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR
FROM COLORADO
Senator Salazar. I caught him in the hallway.
Thank you very much, Senator Domenici. Let me just say,
first of all, that there are a number of people from Colorado
who we will hear from today, and I wanted to welcome them and I
am sure we will all welcome them as a committee. But Russ
George, a wonderful person from Garfield County, right in the
heart of the oil shale capability in Colorado, will be here, as
well as Jim Evans, who has worked on this issue for a very long
time now, for some 30 years, and Steve Smith from The
Wilderness Society, along with Steve Mut from Shell who has
been working on the Mahogany Project. I just personally wanted
to welcome them here as Coloradans.
I want to make one comment, Mr. Chairman, about oil shale
because Colorado in the 1970's and the 1980's was probably at
the focal point of the Nation in terms of the possibility of
oil shale development. While times were good, it seemed that
the Western Slope of Colorado and many rural communities were
thriving on the potential for oil shale development only to end
up in the mid-'80's, realizing that the billions of dollars
that had been spent by private industry and by government ended
up going nowhere. I still remember the unemployment rates in
places like Mesa County, Garfield County, other counties on the
west slope that went up to as high as 20 percent, as I recall,
because we felt in Colorado that the rug had been taken out
from under our feet as we were moving forward with oil shale
development.
So as we look at the possibility of developing oil shale in
the West, as part of the comprehensive energy package that
Senator Domenici, Senator Bingaman, and the rest of this
committee are working on, I would only urge some caution as we
move forward. I believe that oil shale does create a potential
opportunity and has great promise, but it is still a technology
that needs to be tested to see how we can move forward with the
development of oil shale.
So I would only say that as we move forward, hopefully we
can recognize that the development of oil shale itself is not
going to be the end all or all the answers that we need in this
energy legislation, that it can be part of a much larger
package. My hope is that we can move forward in a thoughtful
process, more of a marathon as opposed to a sprint, in how we
look at the development of this great energy resource in the
West.
Thank you very much, Mr. Chairman.
The Chairman. Thank you, Senator.
Senator Murkowski, did you want to comment?
STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Mr. Chairman, I just wanted to thank you
for your ongoing series in the focus on different sources of
energy. We have had some great briefings to this point in time.
I am looking forward to the opportunity this morning to
understanding a little bit more about the technology that is
being utilized in the process as we derive significant
quantities of oil from oil shale and oil sands. So just thank
you to you, Mr. Chairman.
The Chairman. Thank you.
Senator Craig, do you want to comment? You are the last
Senator here, and we will close the door after you.
STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR
FROM IDAHO
Senator Craig. Why do you not get your witnesses going?
There is a lot more about this I need to know, but I am glad
you are holding this hearing. I know it is critical, and these
projects become more and more competitive. Let us get them on
line and get them going.
The Chairman. Thank you.
We will get started now with the panel. Mr. Mark Maddox,
Principal Deputy Assistant Secretary for Fossil Energy,
Department of Energy; Dr. Ted Barna, Assistant Deputy Under
Secretary of Defense for Nuclear, Biological, Chemical
Technology. And then I guess we have another witness here that
I did not catch, Tom Lonnie. Is that how you say it?
Mr. Lonnie. Yes.
The Chairman. Assistant Director for Lands and Minerals,
Bureau of Land Management from the Department of the Interior.
I assume we are going to proceed, starting with you, Mr.
Maddox. Would you please start? Remember the 5-minute rule.
Please proceed.
STATEMENT OF MARK MADDOX, PRINCIPAL DEPUTY ASSISTANT SECRETARY
FOR FOSSIL ENERGY, DEPARTMENT OF ENERGY
Mr. Maddox. Mr. Chairman, members of the committee, thank
you for the opportunity to testify on oil shale and its
potential for increasing our Nation's energy security by
mitigating our dependence on imported oil.
Our domestic total oil shale resource is more than 1.8
trillion barrels, with perhaps 100 billion to 200 billion
barrels commercially viable, to play a significant role in
meeting the Nation's future demand for liquid fuels.
With high oil and gas prices, industry has strong
incentives to develop technologies that can bring shale oil and
other non-conventional fuels into production on an economically
and environmentally sound basis.
The Nation's oil shale resource is concentrated in pockets
in Utah, Colorado, and Wyoming, and 80 percent of the nearly 2
trillion barrel resource is owned by the Federal Government.
The resource is so large that even if only partially developed,
it could deliver 2 million to 3 million barrels of oil per day
for decades.
But in order to tap this enormous energy resource, industry
must develop economically and environmentally sound
technologies as we attempted to do at the oil interruptions and
price shocks of the 1970's when the Federal Government
encouraged the development of oil shale and other
unconventional domestic resources. Those efforts were abandoned
when both government and industry concluded that the world oil
market could provide adequate supplies, reasonable prices, and
sufficient excess capacity.
While the benefit of 2 million to 3 million additional
barrels a day of secure domestic oil from shale is obvious,
there are numerous challenges to development, including the
attitude of the public, business investment considerations, and
land access and usage and environmental concerns.
The shale oil development work of 30 years ago left a
legacy of uncertainty for industry and the public, particularly
the people living in the centers of development. The affected
areas enjoyed a boom period during development, followed by a
devastating bust, and has left them understandably wary.
Nevertheless, they seem to be ready to support a new
development effort, only with more planning and support for
infrastructure and development.
The oil industry today is finding most of its attractive
investment opportunities overseas, but as conventional oil
plays become more difficult and conventional oil production
peaks, industry is again looking to develop a higher cost
resource such as shale oil. How long this process will take is
an open question. The answer will depend on economics and the
economics will be determined by projected oil price trends, tax
rates, resource access, royalty regulations, permitting
requirements, and the receptivity of State and local
populations to development.
Looking down the list, it is clear the Federal Government
and State governments have a large role to play in shale oil
development. A key development concern will be the
environmental impact of extracting oil from shale by using
technologies to heat the rock either above or below ground.
Despite the significant research and development concluded 20
to 30 years ago, the industry has not reached consensus on the
best technology to use. Regardless of the process, there will
be environmental impacts to land, water, and air as a result of
shale oil operations.
Fortunately, we have a very successful model for the
development of oil shale to broad production of over 1 million
barrels per day of oil from Canada's Alberta oil sands, where
production is expected to exceed 2 million barrels per day in 8
years.
Many parallels exist between shale oil and oil sands
technologies, markets, and economics. We cannot be certain that
oil shale economics will parallel those of Alberta tar sands,
and there are important physical differences between oil sands
and oil shale, and the extraction technology for one cannot
directly be transferred to the other. But some comparisons
suggest the domestic oil shale industry in some ways is similar
to the Canadian oil sands industry of 30 years ago.
As part of its energy security goal, the Department is
committed to improving energy security by developing
technologies that foster a diverse supply of reliable,
affordable, and environmentally sound energy and improve our
mix of energy options. This prospect of adding 2 million to 3
million barrels of secure domestic oil to our Nation's energy
supply for decades to come demands our attention. The
Department will work to achieve this goal in support of the
economic security of the United States, in line with our
commitment to deliver results for the American taxpayer.
Mr. Chairman and members of the committee, this concludes
my statement. I will be happy to answer questions. Thank you.
[The prepared statement of Mr. Maddox follows:]
Prepared Statement of Mark Maddox, Principal Deputy Assistant Secretary
for Fossil Energy, Department of Energy
Mr. Chairman, Members of the Committee, thank you for this
opportunity to testify on oil shale and other non-conventional oils,
and their potential role in elevating our Nation's energy security by
mitigating our dependence on imported oil. U.S. energy security is
important by virtue of the crucial role it plays in achieving economic
security.
I would like to share with you today our thoughts on the oil shale
resource in these areas--first, oil shale's magnitude and potential;
then, the history of past unsuccessful attempts to develop it; and,
finally, barriers to development as they exist today. In addition, I
will compare the prospects for oil shale with the commercial
development experience of another non-conventional resource, Alberta's
vast oil sand resources.
Ensuring the present and future energy security of the United
States is a primary goal of the Office of Fossil Energy, and we are
committed to the President's goal of elevating our energy security
through increased economic domestic production. Domestic oil shale
represents a resource of more than 1.8 trillion barrels and is a
resource which if economic, could play a significant role in meeting
the Nation's strategic needs for more liquid fuels over the next
several decades. We also have potential domestic sources of non-
conventional liquid fuels such as the technologically mature but
uneconomic Fischer-Tropsch coal liquefaction, recovery of stranded oil;
undiscovered oil and other currently uneconomic resources. With high
oil and gas prices, industry has strong incentives to develop
technologies that will facilitate exploration of non-conventional
domestic resources, and in fact there is evidence that they are doing
so.
THE RESOURCE
The total U.S. oil shale resource is estimated to be 1.8 trillion
barrels and is primarily concentrated in the Green River formation in
northeastern Utah, northwestern Colorado, and southwestern Wyoming.
Over 50% of the world's oil shale resources are in this area, 80% of
which are owned by the Federal government. It is estimated that over
400 billion barrels will be found in shale at concentrations greater
than 30 gallons/ton. In 1980, the Office of Technology Assessment
published An Assessment of Oil Shale Technologies, which estimated that
between 189 and 315 billion barrels of oil would be recoverable from
this high quality shale. Oil and Gas Journal, in its August 9th 2004
issue, suggested that 100 billion barrels of oil from domestic oil
shale could be reclassified as proven reserves if the technology became
commercially viable. Suffice it to say, if it were economic to even
partially develop, the resource could sustain an industry of 2-3
million barrels per day for decades.
The factors that limit the development of oil shale have nothing to
do with the potential quantity of the resource. Historically, oil shale
production hasn't been economic. The cost of production has been too
high compared to the cost of producing from conventional resources.
This problem has been compounded by the need to build an infrastructure
to support oil shale and the cost of disposal of byproducts. Although
the federal government attempted to make oil shale economic in the late
1970's and early 1980's, this effort was abandoned because shale oil
production could not be sustained in the face of abundant and cheap
conventional crude oil. This was true even though the government
embarked on this effort at a time when oil prices were higher in real
terms than they are today. The failure of the government's efforts in
the 1980's was not due to the failure of the resource, the technology,
or environmental problems; economically it was simply too expensive.
Recently, however, industry has shown renewed interest and has begun
committing resources.
WHAT IS THE COMMERCIAL HISTORY OF OIL SHALE IN THE UNITED STATES?
After the oil interruptions and price shocks of 1973-74, the
Federal Government encouraged the development of unconventional
domestic resources including oil shale. The Department of the Interior
offered commercial leases for development in 1973. Bonus bids totaled
$450 million for four oil shale leases and industry began development.
Economic incentives were later offered for oil shale development
including a guaranteed price floor, and a production tax credit of $3
per barrel. In total we estimate $5 billion was invested in oil shale
facilities beginning roughly in 1975. Major players at that time
included Exxon, Shell, Mobil, Occidental, Atlantic Richfield, Chevron,
and Unocal. In the early 1980's these projects began to close and the
last closed in 1992.
The consensus of the industry was that oil prices simply did not
stay on a price path over the long term that would assure a reasonable
return on investment for an unconventional crude oil. In addition,
policy changes accompanying new administrations removed the subsidies
for synthetic fuels. Witness the demise of the Synthetic Fuels
Corporation, which was chartered during the Carter Administration but
allowed to expire during the Reagan Administration. The oil price
collapse of 1986 assured the end of the U.S. synthetic fuels industry.
The general impression left following the demise of the U.S. oil
shale industry was very negative. During the boom period, the influx of
workers into Western Colorado strained and ultimately overwhelmed the
local infrastructure and housing, producing lasting socioeconomic
effects. When the industry collapsed, the local towns were left with
infrastructure in excess to their needs, shrunken property values and a
tax base incapable of supporting the infrastructure.
It will be instructive to include a very brief description of the
two basic oil shale extraction processes at this point.
HOW IS OIL PRODUCED FROM OIL SHALE?
Kerogen, a low grade form of immature oil, is extracted from oil
shale in a process called ``retorting'', which requires heating of the
rock to about 900 degrees Fahrenheit. Two generic methods of retorting
have been developed:
In situ: This method leaves the rock in place and injects a
heat source that releases the oil from the kerogen. The shale
oil then flows to a well and is pumped to the surface. The
source of the heat is a technical issue still open to research
and testing. The only active pilot project in the U.S., owned
by Shell Oil, is using down hole electric resistance heaters,
but optional technologies involve steam, microwaves, and fire.
Surface retorting: This technology depends upon mined ore
for a feedstock. The ore can be either surface mined or mined
underground. The ore is brought to the surface, crushed and
placed into a retort. The shale oil is removed and the spent
shale sent for disposal. The shale oil is upgraded by the
addition of hydrogen and then is conventionally refined to
produce finished products. Several different retort designs
have been constructed and tested in the United States as a part
of earlier development efforts. However, there are currently no
commercial surface retorts in the U.S. processing oil shale.
CHALLENGES TO COMMERCIALIZATION
Perceived Risk: Shale oil activities in the late 1970s and early
1980s have left a legacy of uncertainty. Members of industry and the
citizenry alike are uncertain about the risks associated with
commercial development.
Current Oil Industry Economics: U.S. domestic oil production is
high cost compared to many parts of the world because our fields are
mature and declining. Private investment dollars are directed to the
most economic areas where costs of production are low, like West
Africa, Brazil, the Middle East, Russia and Central Asia. As long as
current geopolitical and market conditions persist, we expect more
money to flow to energy extraction on a world wide basis; however, not
a large share of it is expected to be invested in the United States in
the immediate future. As conventional oil plays become more difficult
to find, and as conventional domestic oil production peaks, industry
will again begin to focus on the development of the resources that can
be extracted profitably at higher prices, including oil shale.
Prospects for commercial oil shale production will depend on the
private sector's perception of the relative profitability of oil shale
versus competing resources. Factors that will determine economics are
projected oil price trends, tax rates, cost of production, resource
access, royalty regulations, permitting requirements, cost of byproduct
disposal, and the willingness of the state and locals populations to
host a new industry.
The size of the industry will be limited by existing distribution,
pipeline capacity, water availability, power distribution and refining
capacity in this region of the Rocky Mountains. If the oil shale
industry develops to any appreciable size, investments will be required
to expand the limited infrastructure.
Land Access and Usage: A major driver of shale oil extraction
economics is the concentration of the resource. Movement of ore to the
retort can be very expensive, because the ore is mostly rock with only
a little oil (more than one ton of ore per barrel of oil). Therefore,
the ore must be processed at or near the geologic formation where it is
found. While the natural resource is very concentrated in Colorado,
Utah and Wyoming, the ownership is not. The Federal Government owns 80
percent of the resource base, and the remaining tracts are broken up.
At this time the Department of the Interior does not have a commercial
leasing program, although it recently solicited comments on a leasing
program for research and development.
Environmental Impact: The environmental impacts of shale oil
development are significant. Like the resource, they will primarily be
concentrated in small geographic locations. Because oil shale is mined,
there are surface impacts. Oil shale production is water intensive,
which is an important limited resource in the regions with oil shale
deposits. Because the retorting processes are energy intensive, there
are combustion emissions in areas where the air is currently very
clean. The mining or in-situ technologies may also disturb the local
water tables. In the case of the in-situ technology, the spent shale in
place may contain toxins that need to be kept away from ground water.
In the case of surface retorting, the spent shale, processing water,
and other byproducts must be disposed of in a safe manner. How to do
that on a massive scale has not been defined. To produce a million
barrels of oil would require disposal of more than a million tons of
byproducts. Finally, because shale oil production is energy intensive,
the industry could add significantly to green house gas emissions
during production Similarly, greenhouse gas emissions will be released
when the fuel is consumed.
The positive aspect of the resource is that its density is so great
that the environmental impacts can be restricted to a relatively small
area within two or three states.
Extraction Technology: Despite the significant research and
development conducted 20-30 years ago, there is no accepted benchmark
for the best technology to use. Furthermore, because of modern
developments in environmental appreciation and resource conservation,
it will be important for the existing technologies to improve from an
efficiency, and environmental impacts perspective. Companies will have
to advance extraction technologies through research development, and
demonstration.
COMPARISON WITH ALBERTA OIL SAND COMMERCIALIZATION
Commercial production from formerly uneconomic resources occurs as
markets change and drive technology development. Oil from Alberta oil
sand, once considered to be an unconventional resource, is being
commercially produced today. Oil was first produced at a commercial
scale from Alberta oil sand more than 35 years ago. Today, oil sand
production is over one million barrels per day and is expected to
exceed 2 million barrels per day within the next eight years. A strong
partnership between government and industry stimulated more than $65
billion in private investment to accelerate development and achieve
industry scale operations during this decade.
Like oil sands, U.S. oil shale is rich, accessible, geographically
concentrated, and well defined. However, the technologies required for
exploitation of oil shale are very different from those required for
oil sands. The richness of the respective resources are similar, with
oil sands yielding approximately 25 gallons per ton of bitumen while
some oil shale deposits yield an average of about 30 gallons per ton. A
comparison of the qualities of the two oils shows them to produce a
similar product after processing. The Athabasca sand produces 34 degree
API oil and the oil shale produces 38 degree API oil. However, there
are important physical differences between oil sands and oil shale and
the extraction technology for one cannot directly be transferred to the
other.
SUMMARY
In summary, we need to examine all of our resource bases if we are
to do a credible job in protecting the United States energy security
interests. As part of its energy security goal, the Department is
committed to improving energy security by developing technologies that
foster a diverse supply of reliable, affordable, and environmentally
sound energy and improve our mix of energy options. The Department will
work to achieve this goal in support of the economic security of the
United States, in line with our commitment to deliver results for the
American taxpayer. Mr. Chairman, and members of the Committee, this
concludes my prepared statement. I will be happy to answer any
questions you may have at this time.
The Chairman. Thank you very much.
Let us proceed now with Dr. Ted Barna, and then we will
come to the Interior Department.
STATEMENT OF DR. THEODORE K. BARNA, ASSISTANT DEPUTY UNDER
SECRETARY OF DEFENSE, ADVANCED SYSTEMS AND CONCEPTS, DEPARTMENT
OF DEFENSE
Dr. Barna. Mr. Chairman and members of the committee, I am
Dr. Ted Barna. I am Assistant Deputy Under Secretary of
Defense, Advanced Systems and Concepts. I thank you for the
invitation today to appear and discuss opportunities to advance
the technology that will facilitate environmentally friendly
development of oil shale and oil sands resources for the
Department of Defense.
I would like to preface my remarks by highlighting DOD
involvement thus far. In 2003, I was asked to manage a program,
originated by Senator Inhofe of Oklahoma, to research synthetic
fuels produced via the Fischer Tropsch process. I initiated a
joint program with the Army's National Automotive Center in
Detroit to investigate the military use of these fuels and
evaluate the potential of producing and using a new generation
of clean fuels for the military.
The Army formed a collaborative program with the Air Force
Research Lab in Ohio, the Naval Air Systems Command, the
Department of Energy National Technology Lab, as well as the
Southwest Research Institute, San Antonio, several universities
and industry, to conduct preliminary evaluation of the
technological potential of these fuels for use in aircraft,
tactical vehicles and ships. This effort did not address the
economics of using clean fuels for the military or whether or
not it is ever likely that commercial scale production by the
private sector will occur.
The research, though, did provide me with exciting results
since fuel made via this process produces lower pollutant
emissions from diesel engines, reduces particulate emissions
from jet engines, has superior high temperature and low
temperature characteristics, and provides improved storage
characteristics on Navy ships. Even the use of clean fuel
blends, designed to counter problems like lubricity and seal
swell, provide significant--by that, I mean about 50 percent--
reduction in tailpipe emissions.
So based on this earlier work, in 2004 I have expanded this
initial effort into a wider variety of resources for the
production of clean fuels, notably oil shale, oil sands, coal,
biomass, renewables, and petroleum coke, by looking at the
broader picture of alternative fuels. And I established a clean
fuels initiative. This program looks at the total energy
picture.
So that is where we stand in DOD, Mr. Chairman. I look
forward to working with you and members of the committee as we
pursue our mission of providing energy security. And I would be
more than happy to answer any questions. Thank you.
The Chairman. Mr. Lonnie from the Interior Department.
STATEMENT OF THOMAS LONNIE, ASSISTANT DIRECTOR FOR MINERALS,
REALTY & RESOURCE PROTECTION, BUREAU OF LAND MANAGEMENT,
DEPARTMENT OF THE INTERIOR
Mr. Lonnie. Mr. Chairman and members of the committee,
thank you for the opportunity to appear here today to discuss
the Bureau of Land Management's efforts to facilitate and
promote oil shale research and development on public lands.
America faces an energy challenge.
For a considerable time, many have believed that oil shale
has the potential to be a major source of domestic energy
production, especially since it is suited for refinement as jet
fuel for the military and the airline industry. Recently the
BLM, which has the authority to issue leases for oil shale
under the Mineral Leasing Act and to receive rental payments
and royalties, has received expressions of interest from
industry for conducting research and development projects,
particularly on public lands in the Green River formation in
the tri-State area of Colorado, Utah, and Wyoming. It is the
BLM's hope that renewed interest in oil shale research and
development efforts will lead to environmentally responsible
ways of unlocking the vast oil shale resources contained in the
United States, potentially helping to reduce the imbalance in
domestic energy consumption and production that currently
exists in this country.
The current BLM efforts. The President's National Energy
Policy outlined a number of recommendations to diversify and
increase energy supplies, encourage conservation, and ensure
environmentally responsible production and distribution of
energy. In response, the BLM developed a plan containing 54
tasks designed to implement the President's directives,
including efforts to promote the development of oil shale
resources on the public lands. To carry out this task in an
environmentally responsible manner, in keeping with our
multiple-use mandate, the BLM established its own Oil Shale
Task Force.
The Oil Shale Task Force was established to, one, address
access to unconventional resources, such as oil shale, on
public lands; two, to address impediments to oil shale
development on public lands; three, assess industry interest in
research and development and commercial development
opportunities; and finally, provide the Secretary with options
to capitalize on opportunities. The task force has prepared a
draft report containing recommendations on designing an oil
shale leasing program that will make public lands available to
industry to conduct research and development activities and
determine if Federal oil shale resources can be developed
economically and in an environmentally responsible manner.
In addition, on November 22, 2004, the BLM published a
proposed oil shale lease form and request for information in
the Federal Register to solicit comments and suggestions from
interested parties about the design of the oil shale leasing
program. The BLM is now reviewing the comments it received. The
draft report recommendations and BLM's analysis of the
responsive comments to the Federal Register notice form the
basis of policy options the Department is now considering for
making lands available for oil shale research and development
projects and subsequent commercial operations, all in support
of the President's National Energy Policy.
Thank you for the opportunity to testify today about the
BLM's oil shale development efforts. I would be happy to answer
any questions you may have.
[The prepared statement of Mr. Lonnie follows:]
Prepared Statement of Thomas Lonnie, Assistant Director for Minerals,
Realty & Resource Protection, Bureau of Land Management, Department of
the Interior
Mr. Chairman and Members of the Committee, thank you for the
opportunity to appear here today to discuss the Bureau of Land
Management's (BLM) efforts to facilitate and promote oil shale research
and development on public lands.
America faces an energy challenge. As recently as April 5, 2005,
Federal Reserve Chairman Alan Greenspan commented extensively on this
challenge. He stated,
``Markets for oil and natural gas have been subject to a
degree of strain over the past year not experienced for a
generation. Increased demand and lagging additions to
productive capacity have combined to absorb a significant
amount of the slack in energy markets that was essential in
containing energy prices between 1985 and 2000.''
For a considerable time, many have believed that oil shale has the
potential to be a major source of domestic energy production,
especially since it is suited for refinement as jet fuel for the
military and the airline industry. Recently, the BLM, which has the
authority to issue leases for oil shale under the Mineral Leasing Act
and to receive rental payments and royalties, has received expressions
of interest from industry for conducting research and development
projects on public lands in the Green River Formation in the tri-state
area of Colorado, Utah and Wyoming. It is BLM's hope that renewed
interest in oil shale research and development efforts will lead to
environmentally responsible ways of unlocking the vast oil shale
resources contained in the United States, and presents a potential
means of helping to reduce the imbalance in domestic energy consumption
and production that currently exists in this country.
BACKGROUND
Oil shale is a type of rock formation that contains large
concentrations of combustible organic matter. When processed, oil shale
can yield significant quantities of shale oil. Various methods of
processing oil shale to remove the oil have been developed. A common
element among those methods is the use of heat to separate out the oil
from the rock.
The United States has significant oil shale resources, primarily
within the Green River Formation in Wyoming, Utah and Colorado. These
oil shale resources underlie a total area of 16,000 square miles and
represent the largest known concentration of oil shale in the world.
Federal lands comprise roughly 72% of the total oil shale acreage in
the Green River Formation.
In the latter years of World War II, several tests were conducted
to determine the economic viability of oil shale extraction
technologies. However, in the years following World War II, petroleum
producers looked to more easily accessible and economically viable
supplies and interest in oil shale extraction declined. More recently,
during the mid 1970s through the late 1980s, the Department of the
Interior and the BLM made oil shale resources on public lands available
through the Oil Shale Prototype Program, which was designed to allow
companies to develop and refine the technology for extracting oil from
oil shale. Additionally, in the 1980's, the U.S. Geological Survey
(USGS) had an active oil shale mapping program, which mapped the major
oil shale fields of the United States and conducted geological research
on the Green River deposits. The USGS also conducted mineralogical and
geochemical studies aimed toward characterizing oil shale for the
commercialization of this resource.
Precipitated by the oil price spikes of the early 1970s, companies
showed significant interest in exploring domestic oil shale
development. Previous oil shale research showed some promise from a
technological standpoint, but the extraction process was energy-
intensive and costly. Through a series of experiments, industry
attempted to extract shale oil from oil shale rock, but the easing and
subsequent collapse in petroleum prices led the companies to conclude
their efforts to extract oil from oil shale were not economically
viable. The participants in the Oil Shale Prototype Program withdrew
from their research efforts before the BLM could promulgate permanent
regulations for oil shale leasing and operation. As a result, BLM
currently has no regulations for oil shale leasing, and no oil shale
leasing program.
Most USGS activities related to this commodity have also diminished
significantly. However, since the latter half of the 1980s, the USGS
has maintained a small effort in oil shale studies, both domestically
and abroad, which included evaluation of world oil shale resources and
a cooperative effort funded by the Department of Energy to create a
National Oil Shale Database, in which shale oil analyses and other data
were entered and compiled. With the recognition that oil shale is a
potentially important domestic fossil energy resource, the USGS has
continued in these efforts to the present day. Although no national oil
shale assessment has been done, there have been USGS oil shale resource
studies done on a local or regional scale. One example of this is
``Thickness, oil-yield, and kriged resource estimates for the Eocene
Green River Formation, Piceance Creek basin, Colorado'' USGS Oil and
Gas Investigations Chart OC-132. Another example is USGS Open-File
Report 91-0285 ``Oil-Shale Resources of the Mahogany Zone in eastern
Uinta Basin, Uintah County, Utah.'' USGS is currently working with the
State of Utah to evaluate all oil shale lands in eastern Uinta Basin,
compiling, among other things, geologic maps, cross sections,
geophysical and lithologic logs, and drill hole information.
Elsewhere in the world, continuing efforts have resulted in the
successful development of oil shale resources. For example, in
Gladstone, Queensland, Australia, there is a large-scale demonstration
project where, from June 2001 through March 2003, 703,000 barrels of
oil, 62,860 barrels of light fuel oil, and 88,040 barrels of ultra-low
sulphur naphtha were produced from oil shale. In January 2003 alone,
the operation produced 79,000 barrels of oil. Significant oil shale
reserves also exist in the Republic of Estonia, where active oil shale
deposits amount to about 1,200 million tons and, at current levels of
consumption, are forecast to last one hundred years.
CURRENT BLM EFFORTS
The President's National Energy Policy outlined a number of
recommendations to diversify and increase energy supplies, encourage
conservation, and ensure environmentally responsible production and
distribution of energy. In response, the BLM developed a plan
containing 54 tasks designed to implement the President's directives,
including efforts to promote the development of oil shale resources on
the public lands. To carry out this task in an environmentally
responsible manner in keeping with our multiple-use mandate, the BLM
established its own Oil Shale Task Force.
The Oil Shale Task Force was established to address: 1) access to
unconventional resources (such as oil shale) on public lands; 2)
impediments to oil shale development on public lands; 3) industry
interest in research and development and commercial development
opportunities on the public lands; and 4) Secretarial options to
capitalize on the opportunities. The Task Force has prepared a report,
which is currently under review within the Department, concerning the
development of oil shale resources on Federal lands in order to
determine whether technological advances have reached the point where
it is possible to those resources economically and in an
environmentally responsible manner.
In addition, on November 22, 2004, the BLM published a proposed oil
shale lease form and request for information in the Federal Register to
solicit comments and suggestions from interested parties about the
design of the oil shale leasing program. The BLM is now reviewing the
comments it received. The report recommendations and BLM's analysis of
the responsive comments to the Federal Register notice form the basis
of policy options the Department is now considering for making lands
available for oil shale research and development projects and
subsequent commercial operation, all in support of the President's
National Energy Policy.
CONCLUSION
Thank you for the opportunity to testify today about the BLM's Oil
Shale Development efforts. I would be happy to answer any questions you
have.
The Chairman. Thank you very much.
Well, let me say to you, first, Mr. Maddox, and then I will
proceed with the others, I do not know why I gather from
reading your testimony that you are not very enthused about
moving ahead with oil shale from the standpoint of the Federal
Government's activities. Are you or are you not?
Mr. Maddox. We are enthused about this resource and would
very much like to see it come on line and be produced.
The Chairman. So your testimony is not intended to be any
different than this Strategic Significance of American Oil
Shale which you have issued under date of March 14? Your
testimony is not in any way intended to be inconsistent with
this?
Mr. Maddox. I am not familiar with that document, so I
could not comment on that document.
The Chairman. What is your name?
Mr. Maddox. Mark Maddox.
The Chairman. Well, this says Mark Maddox.
Mr. Maddox. I am vaguely familiar with it. No, I am not
intending to be counter to that. However, I am trying to make
certain that the committee has a full picture of the challenges
to development. I think that is probably the point of my
testimony.
The Chairman. Let me ask all three of you. Have any of you
tried to evaluate and look at in any detail how the Canadian
program is working and what are the significant features that
made it workable?
Mr. Lonnie. I have not, Senator.
The Chairman. How about you, Mr. Maddox?
Mr. Maddox. I have looked at it generally but not in
detail.
The Chairman. How about you, Mr. Barna?
Dr. Barna. No, I have not.
The Chairman. Well, who do you think would be doing that if
you are not?
Mr. Maddox. I have asked my staff to look at it. I can
speak to it in general terms. One of the hallmarks was the
Province of Alberta took very close ownership of this resource
and actually became an equity owner in the resource and its
development. So that was probably the single biggest factor,
that they actually were partners in literally every sense of
the word.
The Chairman. Do any of you have any other observations on
that? None?
Well, I would say, Mr. Maddox, my brief encounter with it
would say that was one part, but the most significant thing was
tax policy that affected the companies that were making these
major investments, without which it would have been very risky
for them to do that. I wonder if we might ask if your
Department could look at the Canadian plan in some detail and
report to us, as soon as possible, what you think about their
ideas.
Mr. Maddox. We would be happy to, Senator.
[The information follows:]
The Canadian government provides the following tax treatments for
development of oil sands within the general Canadian corporate income
tax code:
Exploration expenses are treated as fully deductible in the year
they are incurred. For this purpose the pre-production development
costs for mines are treated as exploration expenses.
Development expenses are deductible at the rate of 30 percent per
year. Property costs are deductible at the rate of 30 percent per year.
A resource depletion allowance is provided equal to 25 percent of
net income before interest, exploration, property and development
costs.
The depreciation schedule for most machinery and equipment is 25
percent of the declining balance.
An accelerated capital cost allowance: Certain eligible capital
expenditures for new mines or major expansions and capital costs
exceeding 5 percent of gross project revenue may be deducted to the
extent of income from a particular mine.
In sum, these tax incentives, plus the equity position taken by the
Alberta Government in Suncor, and a liberal leasing policy for resource
access have served to preserve and stimulate a commercial Canadian oil
sands industry. While the Canadian experience with incentives provides
us with insights on the potential to stimulate oil shale production,
any specific tax proposal would require scrutiny by the Department of
Treasury, the Department of Energy, the Office of Management and Budget
and possibly other agencies of government to determine its
effectiveness as an incentive, its impact on competition and its impact
on government revenues, all within the context of our existing tax
code.
The Chairman. As chairman of this committee and as a member
of this committee, if we were to ask about tax policies as it
refers to the development of either tar sands or shale in the
United States, would that question be asked of you, OMB, or the
Treasury Department, or where would we get the information?
Mr. Maddox. Probably a combination of the three, but I
would assume eventually OMB would play into the mix, as well as
Treasury.
The Chairman. Let me suggest right off that I am quite
convinced that unless there is a major tax change with
reference to the investment, that we are not going to get a
significant involvement unless we choose to invest huge amounts
of money in some kind of a demonstration project wherein the
Federal Government puts the money in. I think Canada explored
that and decided not to do that. It decided to do it with a
series of expeditious write-offs and the like with reference to
the major investments that were made and an alteration in the
royalty policy so as to capture more at the end rather than at
the beginning and give incentives, depending upon what you
invested and what you produced.
In any event, let me move to the environment, again, with
you, Mr. Maddox. You outline a series of environmental issues
that are significant to overcome. You included a comparison
with Alberta oil shale. I think you would agree that the
principal similarities are that at one time both resources were
considered uneconomic as unconventional resources. Is that
correct?
Mr. Maddox. That is correct.
The Chairman. The oil sands succeeded due largely to a
strong effort on the part of that province to move ahead and
getting some significant tax assistance. Is that correct?
Forget the tax part. But they made a real serious----
Mr. Maddox. Very much so. They embraced their resource and
made a commitment to developing it, yes.
The Chairman. Is it possible that the Government of the
United States can move, together with industry, to develop a
similar emphasis with reference to shale? And is that currently
the status of things?
Mr. Maddox. It is very possible. The administration is
reviewing its options on how to support this industry. I know
there is a great deal of interest at very senior levels in how
it is we bring this oil shale to market.
The Chairman. Now, what does that mean, at very senior
levels? I mean, we thought we had senior levels here.
Mr. Maddox. Well, as you know, there is a large policy
process at the White House and at DOE, and I think everyone is
engaged in it in trying to figure out how best to support this
industry.
The Chairman. I will yield now to Senator Bingaman.
Senator Bingaman. Thank you very much, Mr. Chairman.
As I understand it, we are all, I guess, in agreement that
the economics of producing oil from this resource is going to
ultimately determine whether or not it is done. But in
determining whether the economics work, obviously the
technology that is used is absolutely essential.
I am concerned that as I read the President's budget
request to us, there is absolutely nothing requested for the
Department of Energy to pursue the technology development in
this area. Maybe I am missing something, but the only thing I
found in your budget request is under petroleum oil technology,
and I assume that is all oil and gas-related activity. You have
asked for an over 70 percent cut from current year's levels,
and there is nothing I can find that relates to oil shale or
oil sands or anything like that. Am I missing something, Mr.
Maddox, or is it the judgment of the Department of Energy that
this is not worth investing taxpayer dollars in?
Mr. Maddox. I think the sense of the budget was that at
current price levels, there is adequate private sector capital
to go forward on commercially viable projects, and that was the
basis for developing the budget.
Senator Bingaman. So this is R&D that, if it makes sense to
do it, it ought to be done by the private sector is basically
your position.
Mr. Maddox. I think that is the general belief, that
industry is better able to assess its potential opportunities
and invest accordingly.
Senator Bingaman. Well, let me just give you my
perspective, which is that we have some very capable Department
of Energy laboratories around this country. Some of them are
focused directly on energy issues and others are certainly
active in those areas. My own view is that the private sector
suffers somewhat the same problem that those of us in politics
suffer from, and that is we have a short planning horizon. We
are not able to look long-term as well as we should, and that
is one reason why Government support for research and
development, particularly long-term research and development,
makes so much sense.
I am just disappointed that we do not have a commitment to
have some of our capable scientists and engineers in the public
sector in these DOE national laboratories working on this
issue. It would seem to me to make a lot of sense if there is
any potential there. If there is not any potential, obviously
they should not be fooling with it.
What is your reaction to that, Mr. Maddox?
Mr. Maddox. I think you have a great deal of legitimacy in
your comments. As I think Secretary Bodman testified in various
committees, there have been a lot of budget constraints this
year, and unfortunately, oil and gas research is not the
priority based on some of the private sector activities and the
relative wealth they are feeling right now.
Senator Bingaman. Well, I know when Secretary Bodman was
here testifying on the budget, he made the point that the high
prices of gas were adequate justification for the cutbacks in
Federal support for research and development in the oil and gas
sector. I would think that this is a sufficiently challenging
area, though, the technology in this area, that it is not
realistic to just think that every oil and gas company would be
willing to take on the job of developing the new technologies
that are going to be needed to pursue this because this is a
resource that is not currently under lease, as I understand it,
and it will never be under lease unless the technology is
developed that will make it economic to develop it in the eyes
of industry. Am I right in that thinking?
Mr. Maddox. I will defer to Mr. Lonnie on the leasing
questions. But I would argue that clearly you look at our next
set of testifiers, at least one private sector company who is
involved in this research now. I think that a lot of issues
need to be explored, including what the appropriate leasing
structure is, and I think BLM is doing a good job right now
putting out feelers on what it is industry needs to move
forward on this. But it goes hand in hand. Research dollars
will flow in the corporate sector to places where they think
there is a likelihood that they can actually apply this
research. So it has got to be a complete package.
Senator Bingaman. Mr. Lonnie, let me ask you. As I
understand it, the Department of the Interior did have two
previous instances where they tried to lease. One was during
the 1960's. The other was a Federal prototype oil shale leasing
program established in the 1970's. Could you tell us what went
wrong in those circumstances or what the experience was in
those cases? Do you think there is a demand out there? Are
there companies that are contacting you saying we want to lease
this land for development of this resource?
Mr. Lonnie. Senator, many companies have contacted us
indicating they have an interest in access to the Federal oil
shale resource, particularly in the Green River formation in
the tri-State area that I mentioned in my oral testimony.
In terms of what occurred earlier in the oil shale program,
I think what has been identified is that the volatile prices
that occurred during the 1970's and early 1980's required that
companies pull out of that program at the time.
In terms of what we received in more or less broad terms
from the comments we received on the R&D proposal that we put
out in the Federal Register back in November, we received 32
different commenters submitting comments, and the vast
majority, well over 90 percent, were very positive about R&D
availability of the Federal resource for research and
development. That included in situ, as well as mining and
retorting, which basically was what was occurring in the 1970's
and early 1980's.
Broad comments associated with incentives. Most commenters
indicated that royalties should not be applied during at least
the research and development phase.
Senator Bingaman. Mr. Chairman, maybe my eyesight has given
out on me, but I cannot see the lights down there anymore. Is
my time up?
Senator Thomas. Yes.
[Laughter.]
Senator Bingaman. Senator Thomas evidently can see the
lights. So I will go ahead and quit. Thank you.
The Chairman. The reason they are not on is you passed up
your time and the light went out.
[Laughter.]
The Chairman. No. They never were on. I am sorry, Senator.
Now, we are going to proceed. Let us see. Senator Thomas,
you are next.
Senator Thomas. I really did not mean to get into that one,
Senator.
Mr. Barna, you mentioned wanting a clean fuel. Were you
exploring a clean fuel where there was not any production?
Dr. Barna. We had limited production going on in the United
States, and we used that fuel to----
Senator Thomas. When? When was that?
Dr. Barna. Starting in 2003, sir.
Senator Thomas. Where is the production?
Dr. Barna. It is in Syntroleum Corporation in Tulsa,
Oklahoma. It is a plant that was developed by DOE to make clean
fuel. That particular plant makes it from natural gas, although
it can be made from----
Senator Thomas. But were they using oil from shale?
Dr. Barna. No, they were not at that time. Our initial
involvement was just looking at clean fuels, and then we have
now expanded to look at all fuels.
Senator Thomas. Oh, I guess I did not quite understand what
your role was here.
Why have these resources not been brought forward before in
the Department in terms of looking for new sources? Mark, yes.
Mr. Maddox. I think the issue has been the commercial
viability of the project. One of the issues from a commercial
standpoint is not just profitability, but the return on
investment rate, and you need a high price in the $40 to $50
range to really make this commercially viable. It is not just
enough to make profit. I mean, if you make 10 cents, it is not
enough for a company to go back and justify to their
shareholders. So I think the belief that prices would not
support a profitable venture or a commercially viable venture
has been a pretty large barrier to people looking at this
resource.
Senator Thomas. Are we pretty well persuaded that this $50-
plus price is there forever?
Mr. Maddox. I do not know if the industry is ready to
concede that. I know most companies are still looking from a
planning number in the 20's somewhere, so I do not know if that
price confidence is there at this time.
Senator Thomas. Mr. Lonnie, the policy of the BLM has been
to restrict the size of leases. As I understand, that has been
something that the shale people are concerned about. Have you
done any thinking about that?
Mr. Lonnie. Under the R&D proposal that was in the Federal
Register, we solicited comment on lease size, at least for the
research and development leases. The comments that we got
ranged from 40 acres would be enough for an R&D lease all the
way to we need at least 1,200 acres for R&D. The Mineral
Leasing Act, the statute, only allows up to a 5,120-acre lease.
So anything beyond that would require legislation.
Senator Thomas. Some of the private folks believe that it
should be beyond that. Is that correct?
Mr. Lonnie. For commercial operations, that is what we have
been told.
Senator Thomas. What do you think, Mr. Maddox, is necessary
to provide the necessary incentive for the private sector?
Mr. Maddox. Kind of referencing back to my earlier
discussion, I think probably the industry needs to know they
are going to have access to the resources in a timely manner.
R&D does not make sense if you cannot apply it, and there has
got to be confidence that you can apply your R&D and your
technology once you develop it. I think you need access to land
in order to test your technology, which is the path BLM is
pursuing right now.
Senator Thomas. Thank you, Mr. Chairman.
The Chairman. Let us go to Senator Salazar. Thank you,
Senator, for coming.
Senator Salazar. Thank you, Senator Domenici.
Let me just say from my point of view I think this
committee is doing the right thing in terms of having oil shale
on the radar screen of our country as a potential avenue to
help us deal with our over-dependence on foreign oil and the
rest of the energy crisis that we are dealing with.
I will tell you, frankly, I am somewhat disappointed, Mr.
Maddox, that the Department of Energy is not coming before this
committee saying this is our program and our effort with
respect to oil shale development, whatever that might be. It
seems to me you are still very much in the development phase,
and I think what you are going to see from this committee is
action and moving forward with an energy bill. I think oil
shale will be a part of that in some way.
Let me ask a question of Mr. Lonnie, because so many of
these resources are located on our public lands, two questions.
One is the comments that you received concerning the BLM oil
shale leasing program that you asked for in the November
Federal Register, if you could summarize what those comments
have been back to the BLM and the Department of the Interior, I
would appreciate that, No. 1.
No. 2, Senator Domenici has requested a $2 million
appropriation for the oil shale leasing program. If that gets
approved by the Congress, what will that do then with respect
to the BLM moving forward? What capacity will that allow you to
develop? How will you use the $2 million that Senator Domenici
has suggested be given to the BLM for this purpose?
Mr. Lonnie. Thank you. Let me summarize the comments. As I
have mentioned, actually 32 different individuals or entities
commented on the proposed regulations. What that included was a
lease form and then how should we go forward with research and
development leases and opportunities for access.
The main areas of comment were lease size, lease duration,
royalty amounts, including bonus bid amounts, research and
development transition to commercial operations. Let me just
give you the general scale of the comments.
As I mentioned earlier, lease size ranged from 40 acres to
1,250. This is just research and development component of it.
In terms of duration, it was anywhere from 30 months to 20
years for R&D leases. There were concerns expressed associated
with duration from the standpoint of speculation and requiring
some diligence associated with the R&D. Some of those comments
dealing with lessees should be required to submit a plan of
operations that the BLM would approve and review and then
monitor to assure that a particular lessee was continuing
research and development at an approved rate.
Royalty amounts. Most commenters said that royalties should
not be charged for at least the first 5 years of a research and
development lease, that to charge a royalty would be a
disincentive.
Rental was identified in the same way, but similar to the
statute that limits the size of an oil shale lease from the
standpoint of commercial development, the statute also requires
a 50 cent rental payment per acre. So the BLM would not have
discretion there.
In terms of R&D to commercial transition----
Senator Salazar. If you could get us a summary of those
comments, that would be, I am sure, appreciated certainly by me
and I think by members of the committee, if we could just get a
summary.
Speak briefly to my second question, that is the $2 million
appropriation request from Senator Domenici. How would the BLM
intend to use those dollars if they are, in fact, appropriated
by Congress?
Mr. Lonnie. Well, depending on the final decision of the
Secretary in terms of reviewing the options that she has to go
forward with, R&D leasing, based on the comments we received in
the Federal Register notice, also based on the draft report
that was completed by the Oil Shale Task Force, I think that
how additional funding for oil shale could be used would range
from a speedier approach to making oil shale available, or we
have identified that some additional alignment or analysis in
terms of the National Environmental Policy Act will have to be
completed. So those would be two potential areas, I would
assume.
Senator Salazar. Dr. Barna, if I can ask you this question.
In terms of the difference between the successful effort in
Canada concerning the development of the oil sands and the
recovery effort there of oil shale, can you describe to us, in
a very general way, what the differences are with respect to
the two kinds of resources that we are looking at here?
Dr. Barna. Well, from DOD's perspective, we are looking at
shale oil primarily as a jet fuel. We have a lot experience
with that from back in the 1970's when it started and then fell
apart, and we are using that.
Also, you are going to hear from Shell Oil Company here
later on. They are also shipping us some of their fuel that
they got from the Shell project in Mahogany sands. So we can do
further testing for DOD so that if and when these become
available, we are ready to use them as a source of fuel for us.
Senator Salazar. Do you have any preliminary sense of how
those fuels are working for you that you have gotten from the
Mahogany project?
Dr. Barna. We have not actually gotten them from the
Mahogany project. The ones that we got earlier, I understand,
were excellent jet fuels.
Senator Salazar. Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator.
Senator Murkowski, then Senators Craig, Burns, and Burr.
Senator Murkowski. Thank you, Mr. Chairman.
Mr. Lonnie, this is a question directed to you. In
reviewing your testimony, you were talking about trying to
determine what is it that we have, and I have always been
fascinated that we do a lousy job with our natural resources in
terms of inventorying them. As I understand, you have done
regional assessments of the areas that have potential for oil
shale, but you have not done a national assessment. Is that
correct?
Mr. Lonnie. Was that question directed at me?
Senator Murkowski. Yes.
Mr. Lonnie. No, we have not done a national assessment in
the BLM.
Senator Murkowski. So how do we know what it is that we
have?
Mr. Lonnie. Well, I think there are estimates the
Department of Energy has put together in terms of total
resources.
Senator Murkowski. Okay. Maybe my question is directed to
the wrong person then. Mr. Maddox, can you help me out?
Mr. Maddox. Total resources?
Senator Murkowski. Do we have a national assessment of the
oil shale and the potential here in this country?
Mr. Maddox. Yes. We are estimating about 1.8 trillion based
on an early 1980's assessment and approximately 300 billion
available that has the right depth and formations to be
relatively easily and economically available, which is
significant by any standard.
Senator Murkowski. I guess I was getting this from your
testimony, Mr. Lonnie, about the national oil shale data base
and the national oil shale assessment. So that was why I
directed it to you. So I do not know whether it was an issue on
BLM lands or not.
Mr. Maddox, you are telling me that we, in fact, do have
analysis that comes to us from the early 1980's on a national
level.
Mr. Maddox. That is correct.
Senator Murkowski. I guess I will go back to the chairman's
initial questions about what we know and what Alberta has
demonstrated in terms of the incredible potential coming out of
that province and how they have figured out a way to make this
process economic and to truly provide a benefit. If we have had
this level of assessment for the past 25 years, I understand
the realities very, very well of the market, but we kind of do
this boom and bust. We get going with a little bit of
technology, somebody gets a good idea, and then it goes flat.
If we recognize the potential here in this country, we can
look to other countries where they are making a difference,
whether it is in Canada or someplace else, I guess we have a
project going in Australia, in Estonia, what can we do in this
country to eliminate or even out this boom and bust and
actually get this technology moving forward?
Mr. Maddox. Clearly, there needs to be a full commitment by
all the stakeholders, the Federal Government, State
governments, local communities. We do have a problem that we do
tend to live on today's level. From the Government's
standpoint, we all have budget pressures. We are feeling them
this year. But I think the commitment needs to be made to
developing these nontraditional resources and bring them to
market. Some grew up and came of age in the oil situation of
the 1970's. We have got to, I think, embrace as a Nation that
energy is an ongoing issue, regardless of today's price, and
make a commitment to policies that understand that, that even
if we dropped to $20 tomorrow, it could be again $50 the day
after. We have a very tenuous supply situation around the world
and a highly competitive one, and I think we need to sit down
and say, okay, what do we need to do to make certain that we do
not zig and zag.
Senator Murkowski. I guess maybe that is my frustration. We
have recommendations coming out of DOE that call for us to
develop a Federal oil shale program plan, but there is no real
hard specifics in terms of what it is that we do to advance
that policy. Do we need tax incentives? Do we need a Federal
financial policy? What is it that we need in order to provide
some leveling?
Mr. Maddox. I would argue what we really need is a
regulatory policy that allows people to explore for oil and
extract oil. We have seen a large number of large producers
leave the country, and if you talk to them--I am sure you have
heard it too--they do not have any confidence that they are
going to be able to bring their resource to market ultimately
because of various regulatory issues, public concern issues.
And I think that you have got to essentially tell people that
we want to produce oil in this country.
The United States is the third largest oil producer in the
world, 5.5 million barrels a year. 80 percent of that is from
independents. Some of these resources--you want to see money
involved in oil shale, for example. That is not going to be
developed by an independent. It is going to be developed by a
major producer just because of the sheer amount of money
involved, I mean, billions and billions of dollars. But right
now, I think most oil companies' senior people would tell you,
at least privately, that they have concerns about whether the
United States will support development of domestic resources.
Senator Murkowski. Let me ask just one very quick question,
if I may, Mr. Chairman. This is in regard to the balance
between oil and natural gas. The process, as I understand, to
release these hydrocarbons, we have got to use a considerable
amount of natural gas in order to allow this process to move
forward. As we all know, the price of natural gas is sky high.
The demand in this country is very high and growing higher
every day. At some point in time, does this process get stopped
because we do not have the natural gas that we need in order to
allow this process to go forward if the price of natural gas is
just too high?
Mr. Maddox. A byproduct of this process, at least in the
in-situ process, once it gets up and going, is natural gas, and
it will self-generate natural gas adequate to create the energy
and the heat necessary. So there should not be any net loss of
natural gas in this process to the market. So there should not
be any kind of price pressures as a result of the natural gas
being used.
Senator Murkowski. Thank you. Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator.
I am going to turn the meeting over for the next 15 minutes
to Senator Craig.
But I wanted to ask you, Mr. Maddox, did I hear that you
have a plan or do not have a plan? Which was right?
Mr. Maddox. We are developing a plan now.
The Chairman. Could you tell us what that means? Will we
have one pretty soon?
Mr. Maddox. Hopefully in the next several months. We are
trying to identify both regulatory barriers and market barriers
to developing this resource.
I want to leave no misimpression with the chairman. We
actually do believe that this resource should be developed. We
are trying to avoid the mistakes of the past and make certain
we do not run down any blind alleys. I apologize if I have left
some sort of misimpression.
The Chairman. Well, I want to just make this point. Then I
will quit on this subject. But the biggest problem in the past
was the price of oil was too low. Of all the arguments you want
to make, that is it. We started at time and those communities
he spoke of fell apart because the price was so low, and every
time it got up, the companies noticed, it came down.
So now the question is, is it going to come down from its
$50-plus to a settlement level that is so low that it does not
justify this production? And I do not know what that is, but we
have got to ask the companies and you all have to find out, if
you are going to put a plan together, what is the general
expectation on the supply demand piece. Is supply demand still
relevant? Is there still a great supply, or is it all a demand
question?
I would say to the Defense Department I do not speak for
you all, but I would tell you if I were in charge of the
defense of the United States, I would have them involved in
this. Speaking of a demonstration project, the Defense
Department ought to be building one consistent with
environmental conditions right now. At least they could say
here is an alternative. We are sitting here. You probably do
not even know today how much we are spending out of the defense
budget for oil and related projects, but it is an enormous
amount of money. Right, Senator Craig? We probably cannot even
figure out in the defense budget what it is. We could probably
guess.
Senator Craig. Yes, we do not know.
The Chairman. We do not know. If we put it in at 30, it
ends up at the end of the year at 50. They have got to spend
it. Right? They have got to take out of something.
But anyway that is my comment, and now we will turn it over
to you, Senator.
Senator Craig [presiding]. Well, Mr. Chairman, consistent
with that comment, I had a price shock on Sunday evening. My
family had rented a 24-foot Penske diesel truck to haul a
family member across country. So at the end of the day, the
keys were handed to me and dad was going to take it and refuel
it and take it back to Penske. I hunted around town for the
cheapest diesel. I grew up at a time when diesel was by far
less expensive than gas by almost a factor of half. Well, in
Boise, Idaho, this past Sunday evening I found $2.45 diesel,
and I had to fill a 50-gallon tank.
I am not used to that. But it was a reality check about
input cross in the economy in this country that we are still
sleeping with today that is amazing to me. I suspect if more
consumers and more, shall I say, anti-folks as it relates to
resource development had the similar price shock that I had
this past Sunday, maybe--maybe--they would change their
thinking.
Let me ask this question of you, Mr. Maddox and Mr. Lonnie.
We had the chairman of the Federal Reserve before us recently
talking about natural gas and a variety of other issues as it
relates to energy and the impact on our economy. I was not able
to ask all the questions I wanted, so I have just received
response to some questions as it related to growth of resources
in the market.
Here is the chairman's observation. I thought it was pretty
valid, and I suspect it is underlying and it is a bias within
our agencies of the Federal Government today, especially those
who sometimes view themselves as the protector of the resource
instead of the manager, guardian, and reasonable facilitator of
the resource.
He said this. In a sense, there are two value systems, the
economic value system and the environmental value system, and
there is no mechanistic tradeoff. As an economist, I cannot
provide a clear mathematical formulation to allow you to
compute the tradeoff. This is a judgment call the Congress will
have to make.
It is also a judgment call that the administration will
have to make and should accelerate their facilitating of all
that we need to know to make the judgment call here. We are
about at a time to make that judgment call, I hope, again and
that we can get it completed.
But my guess is that one of the reasons our oil shales have
not come to development yet is that we have spent more time
guarding them than we have facilitating their value as a
resource. Would you disagree with that?
Mr. Maddox. I would not disagree with it. I think it is
also a little bit of benign neglect more than anything else or
as much as guarding them.
Senator Craig. Mr. Lonnie.
Mr. Lonnie. I think from the BLM standpoint, we think--and
the Director speaks to this quite a bit--quality of life type
issue in terms of access to public lands and impacts on local
communities. So I think from, at least, the perspective that I
have we are anxious to make the resource available and the
economics will help determine what can actually occur in terms
of its ultimate production.
Senator Craig. But the Secretary and the Director have not
come up with any form of mechanistic tradeoff, have they?
Mr. Lonnie. I think through our land use planning process,
we attempt to do that in terms of soliciting public comment and
involving local communities.
Senator Craig. Mr. Barna, what other fuels is DOD looking
at, any alternative fuel interests that you are looking at?
Dr. Barna. Right now we are looking at synthetic fuels
produced by Fischer Tropsch primarily from coal. We are looking
at getting the fuels that will be produced by shale and also
just redefining what our specifications for fuels are so that
we can cut down on the number of fuels that we have to use
during deployments. So we are looking very hard at the
specifications so that perhaps we can get one fuel or two
fuels, where right now in Iraq we have, I think, nine fuels.
Senator Craig. Has DOD at all spoken about biomass,
cellulose biomass or any of the biomass----5
Dr. Barna. We are looking at biomass. We are looking at all
fuels. We do have biodiesel right now and we do use it. It does
have some limitations based on temperature that we could
perhaps get around by blending it with Fischer Tropsch type
fuels. That is one of the things we are investigating, but we
are in fact using biodiesel.
Senator Craig. Thank you.
Senator Burns, you are up.
Senator Burns. Yes, sir. I just got a couple of questions
with regard to Mr. Barna and the work that you have done. I
have been to that plant, by the way, and also reviewed the
situation with coal gasification to go into diesel. It is my
understanding that they can take all the environmentally bad
stuff out of that. With the people you mentioned, the Fischer
Tropsch people--clean fuels--is that important to you?
Dr. Barna. Absolutely.
Senator Burns. Or just fuel general?
Dr. Barna. Well, just fuel generally. While we are doing
just fuel generally, clean fuel is certainly important to us
from an environmental standpoint. The problem is it is such a
clean fuel that we have to investigate its impact on the fleet.
It is especially true of our legacy fleet, the older things as
opposed to the new ones.
Senator Burns. Do you plan to continue to support that idea
down there in your research dollars?
Dr. Barna. Absolutely.
Senator Burns. Thank you. I appreciate that.
I was just looking here and you were talking about
research, Mr. Maddox, and you have cut your research dollars on
fuels and especially in this area and on oil and gas, saying
that the companies are making enough money and they should be
investing in research and development in their own right. Are
they doing so? Have they increased their resources into their
R&D to a level that satisfies you?
Mr. Maddox. I do not think I would ever be satisfied with
enough research especially at a $50 level or $55 price level.
However, we do have significant budget issues in the Federal
Government, and we have all been asked to tighten our
bootstraps.
Senator Burns. Do you monitor those companies on the amount
of dollars that they spend in research?
Mr. Maddox. We have discussions. Can I give you a number?
No, I cannot. In discussions with them, my impression is that
they are looking very hard at research and are funding every
possible avenue they can, but I cannot give you a hard number
on that.
Senator Burns. Well, I think maybe if they are not, I would
suggest you work with them a little more to make sure that they
do, and if they do not, I think it is irresponsible from our
standpoint that we are not picking up that slack. Now, I do not
want to throw that out there and let them off of the hook, but
nonetheless, I think the time has come to look at what
Syntroleum and those people are looking at, gasification and
fuel cells, anything. But we know that there is nothing in the
near future that would replace diesel as far as a
transportation fuel is concerned. Is that correct?
Mr. Maddox. Correct.
Senator Burns. Then I would suggest that we accelerate some
of these programs because the impact of high transportation
costs is being borne by, of all people, my farmers. I know you
do not think much about my little farmers out there in Montana,
but I will tell you what, high natural gas, fertilizer costs,
because you got to remember that we are in an industry that we
sell wholesale by retail and we pay the freight both ways. I do
not know. If you keep commodity prices at the present level, we
cannot make it. So your Department and the Bureau of Land
Management becomes very important to us in production
agriculture.
So I would suggest that you find out what they are
spending, how much they are spending, and where they are
spending it and work with them to make sure that those
resources are used in that area. And if not, then we should be
looking at actions on our part to make sure that it is
happening. We are at wits end. We cannot operate under
circumstances like this. So you may not have a crisis in some
areas, but boy, you have got one on the farm, I will tell you
right now. That is very, very important.
I am going to look at this budget and the appropriations,
as far as we are concerned, to the Department of Energy. That
used to be under my chairmanship. But, nonetheless, I would
hope that I would have some suggestions to make to that.
But I would get a little more enthusiastic about what you
guys are doing down there and make damned sure they get done
because we are in a crisis. Any way you look at it and any way
you want to turn it, we are in a crisis. I just do not see
anybody getting very excited about it down there.
End of comment. End of questions. Thank you very much, Mr.
Chairman.
The Chairman [presiding]. They got the message.
Senator Burns. They better get it or we will have a new
Department.
The Chairman. Senator, go ahead.
Senator Burr. Mr. Chairman, thank you. To the witnesses, I
will not ask questions, but I want to take this opportunity to
make an observation, having come late.
I have heard all of you answer questions and I have heard
looking at, working on, considering changes. Let me fast
forward for a second to some of Mr. Mut's testimony, who will
come up in the next panel. I just want to use half of his
recommendations to this committee.
``Shell believes that the United States recognize oil shale
as a strategically important domestic energy source. We believe
that Congress and the administration should officially support
public policy initiatives that encourage and support
accelerated commercial oil shale development and use as a
feedstock for transportation fuels and other products.
``Two, Shell believes that the Secretary of the Interior
should develop a commercial oil shale leasing program on an
expedited basis. We support the BLM's proposed R&D leasing
program as a small but important first step in the right
direction. BLM should be urged to finalize and implement that
program on an expedited basis.''
I want to just highlight the differences. Looking at,
working on, considering change. Shell: accelerate, expedite,
finalize, remove. A huge difference here. There is a canyon
between what they are saying and what we are doing.
I commend all of you.
If there has ever been a crisis in my young life, we are in
it. I am not sure--I will turn to some of the more senior
members in their lifetime--whether we have had a more defined
crisis as it related to our energy needs in this country. If
there is, I am not aware of it.
I am not willing to accept $50 a barrel plus is the norm
and not the exception. But we cannot wait to figure out which
one is right before we focus our efforts on how we come up with
alternatives. I understand the stop and start and exit from the
marketplace in prior years, but we have to restructure in a way
that we cannot allow that to happen. We cannot expect an
industry to be created in shale if there is not somebody that
is leading it.
I think the one thing that is highlighted in this testimony
that I read was it has to be the U.S. Government. That is us.
That is us up here and it is you down there. I am not sure that
looking at, working on it, and considering change displays
leadership.
And clearly if we have got agencies that are not in
agreement with us that there is a crisis, then Mr. Chairman, we
need to work on that. But I am hopeful, in a bipartisan way, we
will do our job at producing an energy bill. We cannot solve
finalizing regulations. We can but you do not like it when we
do it. There are a lot of things that are pointed out in there
that are administrative matters. It does not take us for these
things to happen. It takes you expediting, and I think that
this has to be a partnership if we want to make this
possibility at least reach a point where we can determine its
viability and whether, in fact, for somebody like Mr. Barna,
whether it is an opportunity for military security and for the
security of this country.
I thank you, Mr. Chairman.
The Chairman. Thank you, Senator. Thank you very much. I
assume you do not have any comments on what the Senator said.
Do you all agree there is a crisis in terms of the United
States being so dependent upon foreign oil? Mr. Maddox?
Mr. Maddox. Yes, sir.
The Chairman. Mr. Lonnie?
Mr. Lonnie. I think we certainly need to diversify our
energy supply, and I think oil shale could be a big part of
that.
The Chairman. Dr. Barna?
Dr. Barna. Absolutely.
The Chairman. All right. Let us go. Thank you very much.
Whatever you have agreed to get us, get us as soon as possible.
The next panel: Steve Mut from Shell; Jim Evans, Associated
Governments of Northwestern Colorado, a friend of Senator
Salazar; Mr. Russell George, Colorado Department of Natural
Resources from Denver; Steve Smith from Denver. All of these
Coloradans are here to visit with you, Senator.
Senator Salazar. Thank you, Senator.
The Chairman. Mr. Steve Mut from Shell, we are glad you are
here. You have heard a little bit of the rumblings up here.
While you are not the whole solution, clearly you have got to
shed a little light on things for us, if you can, please. Your
testimony will be made a part of the record and you can
proceed.
STATEMENT OF STEPHEN MUT, CEO, SHELL UNCONVENTIONAL RESOURCES
ENERGY, SHELL EXPLORATION AND PRODUCTION COMPANY
Mr. Mut. Thank you. Good morning, Mr. Chairman and members
of the committee. I am Stephen Mut, CEO of the Shell
Unconventional Resources group of Shell Exploration and
Production. It is a real pleasure to be here to discuss
progress we are making on a new technology called in-situ
conversion process. I want to state unequivocally it is not the
1970's technology. It is a new path.
We have three specific goals for this: to exploit shale oil
in an environmentally friendly fashion, to make it economically
viable, between $25 and $30 of crude price, and to be of scale.
That means having a significant part of the U.S. energy
production matrix.
In-situ conversion means just what it says. It is in the
ground, and conversion, converting from one form to another. We
insert many electric heaters into holes drilled down into the
rich oil shale layer and heat to 650 degrees plus. During that
time, immature oils are matured. In 3 or 4 years' time, we do
the work, with a little assistance from electricity, that
nature takes tens of millions of years to do. In the process
smaller, light compounds are sheered away from the dense mass
that was the original material. The majority of the hydrogen
present in the resource is concentrated in those lighter
molecules. At that temperature, these lighter molecules are in
the gaseous phase and move more readily in the subsurface to a
well bore than they would have if they were in liquid phase.
We form an ice wall around this heated zone to do two
things: to keep water out, which destroys the thermal
efficiency of the process, and to keep the products that we
have produced contained, thus protecting the groundwater. We
project that about 70 percent of the carbon that is in the
subsurface is recovered through this process. Of that which
comes to the surface, at room temperature, you will have one-
third that is gas and gas liquids like propane and butane, and
two-thirds that will be transportation fuels.
Through modest upgrading, relative to refining, this liquid
can be treated to form gasoline, jet fuel, and diesel in about
a third and a third and a third ratio by the injection of
hydrogen. This injection of hydrogen also removes sulfur and
nitrogen that are the key contaminants. Nitrogen can be used,
in fact, to create urea or fertilizer.
The carbon left in the ground is very dense. Is it not
movable and contains the majority of the nitrogen and sulfur
that was originally there, as well as all the metals that were
in place originally.
The resource is the most concentrated resource that we know
in the world, and therefore, in exploiting it, we are going to
have a relatively small footprint relative to the production.
In addition, because of reduced processing, there are lower air
emissions. Because we produce only clean products, we are going
to have much less carbon dioxide impact. Because there is no
mining, there are no tailings piles, significantly less water
use than previous technologies. And that, combined with a
robust system developed to protect groundwater, gives us an
environmental package that is a sense of pride to the 150
people working on this on the Western Slope and in our offices
in Denver and Houston.
The DOE reports that in the Green River basin alone there
are a trillion barrels of reserves that could be recovered
using various technologies. That size and this technology are
consistent with some descriptors of the future. That would be
large scale developments, high capital intensity, and high
volumes that are obviously produced far distant from markets.
In our initial views, we believe that the first markets for
this material will be in southern and central California where
these clean products can act to reduce supply constraints and
give the people of the west coast an alternative supply of
light products.
Shell has made a great deal of progress over the last few
years. We have tested and proved all parts of our technology on
an individual basis. We have, in fact, built one of those
freeze walls or ice walls taller than the Empire State Building
and have produced out of this recent experiment referred to
earlier at the Mahogany project 1,200 barrels of very light
crude oil type material.
There is still much to be done, however. We need to test
this process in an integrated fashion to make sure that all the
pieces of the technology work together so that we can make a
commercial decision by the end of the decade to develop oil
shale. While we are doing this, we have to keep the people
informed as we go.
Shell believes that there is a role for government too and
some of that is already going on. We are working with the Oak
Ridge Labs, the Sandia Labs, and Morgantown Labs in developing
the mix of technologies we believe are required. As stated
earlier, we believe that oil shale should be recognized as a
vital part of the future energy mix of this country.
The DOI should provide access via commercial leasing
programs and land exchanges, in addition to the fine work that
has already gone on in developing an R&D leasing program.
We believe that some change or removal of the acreage
limitations associated with the 1920 Act regarding oil shale
should be made.
We hope that a simple royalty mechanism can be developed,
one which encourages development but provides significant
revenue as well to the State and Federal Governments.
We believe we need a regulatory regime that protects the
environment but is devoid of duplicate processes and extracted
delays due to sequential processes.
And finally, we believe that clarity is required on the
fiscal side such that oil shale is treated for tax purposes
like any of the other nonconventional fuels.
We at Shell are very excited about ICP, the process, and
the part it might play in the U.S. energy mix.
That concludes my remarks. It is a summary of the written
statement I sent. And I would be happy to answer any questions
that you may have.
[The prepared statement of Mr. Mut follows:]
Prepared Statement of Stephen Mut, CEO,
Shell Unconventional Resources Energy
Good morning, Mr. Chairman and Members of the Committee.
My name is Stephen Mut. I am CEO of the Shell Unconventional
Resources unit of Shell Exploration and Production Company. I am
delighted to appear before you today to describe Shell's initiative to
develop and advance, hopefully to commercial success, a unique and
innovative technology which we are increasingly optimistic can open up
the vast oil shale resources in the Western United States. This
technology, once thoroughly proven technically, will allow Shell to
produce clean transportation fuels such as gasoline, jet fuel and
diesel as well as clean burning natural gas from oil shale in an
economically viable and very environmentally sensitive fashion. Because
the oil shale resource in the United States is extensive, this
technology holds promise for significantly increasing U.S. domestic
energy production.
For decades, energy companies have been trying, without success, to
unlock the large domestic oil shale resources of northwestern Colorado,
eastern Utah and southwestern Wyoming. Oil shale can be found in large
parts of the Green River Basin and is over 1,000 feet thick in many
areas. According to DOE estimates, the Basin contains approximately 1
trillion recoverable barrels of hydrocarbons locked up in the shale. It
is easy to see why there have been so many attempts to unlock this
potentially enormous resource in the past.
Some 23 years ago, Shell commenced laboratory and field research on
a promising in ground conversion and recovery process. This technology
is called the In-situ Conversion Process, or ICP. In 1996, Shell
successfully carried out its first small field-test on its privately
owned Mahogany property in Rio Blanco County, Colorado some 200 miles
west Denver. Since then, Shell has carried out four additional related
field tests at nearby sites. The most recent test was carried out over
the past several months and has produced in excess of 1,200 barrels of
light oil plus associated gas from a very small test plot using the ICP
technology. We are pleased with these results not only because oil and
gas was produced, but also because it was produced in quantity, quality
and on schedule as predicted by our computer modeling. With this
successful test, Shell is now ready to begin work on the final tests
that will be required to prove the technology to the point where there
is sufficient certainty so as to make a decision to proceed to
commercial development.
Most of the petroleum products we consume today are derived from
conventional oil fields that produce oil and gas that have been
naturally matured in the subsurface by being subjected to heat and
pressure over very long periods of time. In general terms, the In-situ
Conversion Process (ICP) accelerates this natural process of oil and
gas maturation by literally tens of millions of years. This is
accomplished by slow sub-surface heating of petroleum source rock
containing kerogen, the precursor to oil and gas. This acceleration of
natural processes is achieved by drilling holes into the resource,
inserting electric resistance heaters into those heater holes and
heating the subsurface to around 650F over a 3 to 4 year period. During
this time, very dense oil and gas is expelled from the kerogen and
undergoes a series of changes. These changes include the shearing of
lighter components from the dense carbon compounds, concentration of
available hydrogen into these lighter compounds, and changing of phase
of those lighter more hydrogen rich compounds from liquid to gas. In
gaseous phase, these lighter fractions are now far more mobile and can
move in the subsurface through existing or induced fractures to
conventional producing wells from which they are brought to the
surface. The process results in the production of about 65 to 70% of
the original ``carbon'' in place in the subsurface. The carbon that
does remain in the sub-surface resembles a char, is extremely hydrogen
deficient and if brought to the surface would require extensive energy
intensive upgrading and saturation with hydrogen. Chart 1 illustrates
the ICP process.*
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* All charts have been retained in committee files.
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The ICP process is clearly energy intensive as its driving force is
the injection of heat into the subsurface. However, for each unit of
energy used to generate power to provide heat for the ICP process,
about 3.5 units of energy are produced and treated for sales to the
consumer market. This energy efficiency compares favorably with many
conventional heavy oil fields that for decades have used steam
injection to help coax more oil out of the reservoir.
The produced hydrocarbon mix is very different from traditional
crude oils. It is much lighter and contains almost no heavy ends. Its
quality can be controlled by changing the heating time, temperature and
pressure in the sub-surface. The production mix generally seen from
Colorado oil shale is about two thirds liquids and one-third natural
gas and gas liquids such as propane and butane. On the liquid product
side, the typical split encountered is about 30% each of a gasoline
precursor called naphtha, jet fuel and diesel with the remaining 10% of
the barrel being slightly heavier. These fractions can be easily
transformed into finished products with significantly reduced
processing when compared with traditional crude oils.
Because the ICP process occurs below ground, special care must be
taken to keep groundwater away from the process, as its influx would
seriously reduce thermal efficiency. Special care must also be taken to
keep the products of the process from escaping into groundwater flows.
Shell has adapted a mining and construction technology to isolate the
active ICP area and thus accomplish these objectives and to safe guard
the environment. For years, freezing of groundwater to form a
subsurface ice barrier has been used to isolate areas being tunneled
and to reduce natural water flows into mines. Where groundwater
intrusion is a problem in the ICP process, the subsurface adjacent to
the rich oil shale layers is frozen forming a container of sorts thus
preventing the influx of water while at the same time containing the
products formed. Shell has successfully tested the freezing technology
and determined that the development of a freeze wall prevents the loss
of contaminants from the heated zone. During this same test, Shell was
able to demonstrate that traditional subsurface reclamation
technologies such as steam stripping, pumping and treating and carbon
bed stripping were able to remove contaminants developed in the ICP
process from the subsurface to levels sufficient to meet stringent
permit requirements. Though freezing the subsurface while
simultaneously heating it is clearly a counter-intuitive application of
technology, it is a good example of the creativity and unconstrained
thinking that necessarily has been a major contributor to solving
potentially vexing problems in this complex Research and Development
project. A schematic of the basic freezing technology is shown in Chart
II.
Because the ICP process involves no mining, no large or
contaminated tailing piles are created. Water usage is expected to be
considerably less than is required for traditional retort methods.
Because the technology has the potential to recover in excess of 1
million barrels of oil per acre in the richest parts of the Basin, or
about ten times that possible from conventional mining and retorting,
temporary land disturbance associated with ICP during production will
be significantly less. This smaller and cleaner footprint, the reduced
water needs, the reduced processing needs, a robust system for
protecting groundwater from contamination and the production of clean,
less Green House Gas intensive products creates an environmentally
attractive package about which we at Shell are very proud.
It is through well-established technologies and constant monitoring
that Shell expects to ensure proper and transparent stewardship of the
environment. Shell is already working closely with local communities,
NGOs, elected officials, and regulatory agencies to ensure that our
research addresses community needs and sensitivities while ensuring
strong environmental protection.
Shell is currently focused on reducing the remaining risks and
uncertainties that could affect the commercial viability of this
technology. For this reason, Shell has a research staff in Colorado of
approximately 55 personnel in addition to approximately 100 Houston and
Denver based employees assigned to the oil shale project. The focus of
these efforts is to insure the technical, commercial and environmental
viability of the technology via a relatively large integrated
demonstration project. This project would represent the final step
required before a financial investment decision would be taken by Shell
for a commercial scale unit.
While Shell has spent many tens of millions of dollars on research
and development for this technology and has learned a tremendous amount
while reducing risk and uncertainty, much work and expenditure still
remain before the ICP process can be commercialized. Shell is anxious
to proceed with ICP research so as to help unlock the significant
potential that oil shale holds to increase indigenous energy supply in
the United States. Achievement of this objective on a timely basis will
require the active support of Congress and the Administration
Because the commercial development of oil shale would yield many
benefits to the U.S. economy, Shell supports responsible policy
initiatives that will facilitate early commercial production of shale
oil and associated gas via methods that minimize industry's footprint
and protect the environment. Shell is committed to working with
Congress, with the Department of Energy, the Department of Defense, the
Department of Transportation, the Department of Homeland Security and
the Department of Interior, which has stewardship responsibility over
approximately 80% of the oil shale bearing lands in the Green River
Basin of the Rocky Mountain West, in order to accomplish this
objective.
Key to the early development of oil shale technology is early
access to appropriate Federal oil shale deposits to allow for pilot
field tests to be carried out. The leasing of tracts of federal land to
encourage research and development is an essential next step. As a
private company, Shell supports appropriate lease terms and incentives
for the development of new oil shale development technologies.
As the Department of Energy has pointed out in a recently released
two volume report entitled ``Strategic Significance of America's Oil
Shale Resource'', that while oil shale is located in many countries
throughout the world, the Green River Basin of northwestern Colorado,
eastern Utah, and southwestern Wyoming contains the largest, most
concentrated quantities of potentially recoverable shale oil in the
world. The Report indicates that the Basin may have as much as 1.6
trillion barrels of oil in place, of which an estimated 1 trillion
barrels ultimately may be recoverable using various recovery
technologies. This latter number is roughly equivalent to all the
combined proven conventional oil reserves in the world today, (see DOE
Charts 3, 4 & 5).
Given the size of the resource, Shell is committed to pursuing
commercially and environmentally viable technologies that can unlock
the enormous potential for oil shale that exists in the Rockies.
Shell's advancing ICP research is getting us close to being able to
help unlock these resources. We believe that successful utilization of
the ICP technology could yield substantial economic impacts to
Colorado, the rest of the Rocky Mountain West and to the United States
as a whole.
Clearly, Shell believes there is a role for the appropriate
development of oil shale deposits as part of America's overall energy
and conservation mix to meet increasing energy demand. We are committed
to the principles of Sustainable Development, to ensuring that our
activities minimize the impact on the environment and to enhancing
opportunities for local communities while facilitating our business
objectives.
Ironically, despite the fact that the United States clearly has the
largest and most concentrated oil shale resources in the world, several
other countries have ongoing oil shale Research and Development
projects. Australia, China, Estonia and Brazil are all progressing
projects that are governmentally assisted or driven in one fashion or
another.
It is Shell's belief that the time has come for the United States
to join these other nations so as to encourage, facilitate, and
accelerate the development of this potentially vast domestic energy
resource.
A range of options should be seriously considered in order to
accelerate responsible U.S. oil shale development that would enhance
national security and protect our Nation's economy. We would offer the
following six recommendations for this Committee's consideration. While
we are not including specific legislative language, we are willing to
work with the Senate Energy and Natural Resources Committee, as well as
all other relevant Senate and House Committees of jurisdiction on
specific language to create the proper mix of incentives and
opportunities for accelerated, but responsible, oil shale development.
Recommendations for the Senate Energy and Natural Resources
Committee:
1. Shell believes that the U.S. government should recognize oil
shale as a strategically important domestic energy source. We believe
that Congress and the Administration should officially support public
policy initiatives that encourage and support accelerated commercial
oil shale development and use as a feedstock for transportation fuels
and other products.
2. Shell believes that the Secretary of the Interior should develop
a commercial oil shale leasing program on an expedited basis. We
support the BLM's proposed R&D leasing program as a small but important
first step in the right direction. BLM should be urged to finalize and
implement that program on an expedited basis.
3. Congress should act to lift the current federal acreage
limitation under Title 30, Section 241(a) of the Mineral Lands Leasing
Act that restricts a lessee to acquisition of but one lease of 5,120
acres nationally. In order to facilitate commercial development for oil
shale production, Shell believes that this acreage limitation should be
removed. Otherwise, companies who wish to build facilities and produce
shale oil from federal lands will forever be limited to one project.
Such a limitation, which dates back to 1920, until changed will create
an impediment to even first-generation projects where the costs and
risks will be greatest.
4. Congress and the Administration should work to develop royalty
rates that encourage investment in oil shale development giving
particular recognition to the extraordinary costs involved in literally
bringing a new energy industry into existence. In particular, Shell
believes that government should develop a royalty regime for first
generation commercial oil shale production that: 1) is simple to
administer and to enforce and eliminates the need for interpretation or
the likelihood of litigation; 2) would deliver significant revenue to
the U.S. Government, and thus 50% of that amount to the impacted
states; and 3) would not involve royalty rates that are steep enough to
create another obstacle to the acceleration of large scale commercial
oil shale projects.
5. Shell believes that Congress and the Administration should work
to ensure that an appropriate system is put in place to provide
certainty and timeliness in the permitting process for oil shale
development without waiving substantive environmental performance
standards. A concern is that sequential overlay of multiple federal and
state permitting processes has the potential to add many years to what
will already be a complex and protracted permitting process.
6. Congress and the Administration should identify appropriate tax
incentives that encourage investment in oil shale technology and
development, that recognize the research and development hurdles
involved in oil shale technology and development, and that
appropriately treat oil shale production as the development of a ``non-
conventional resource'' in a manner similar to other non-conventional
energy resources. Specifically, where ambiguities may now exist
relative to determining whether or not in-situ oil shale recovery
technologies will qualify for tax benefits in the same manner as do
existing mining tax regimes, those ambiguities should be cleared up as
soon as practicable.
In summary, the United States has a huge energy resource in the
form of oil shale. The time has come for Congress and this
Administration to consider appropriately targeted legislative and
regulatory measures to allow oil shale to be developed at an early
date, provided that such development can occur in an economically
feasible and environmentally acceptable manner. We are increasingly
encouraged and optimistic that our ICP technology may very well
represent the first available technology to do so.
This completes my written testimony. I will be happy to respond
orally or in writing to any questions any Committee member may have.
The Chairman. Thank you very much. We have some questions,
but let us proceed with the witnesses.
Mr. George, please.
STATEMENT OF RUSSELL GEORGE, EXECUTIVE DIRECTOR, COLORADO
DEPARTMENT OF NATURAL RESOURCES, DENVER, CO
Mr. George. Thank you, Mr. Chairman. I appreciate your
invitation to participate in this hearing. I am Russell George,
executive director of the Colorado Department of Natural
Resources. As the lead State agency responsible for natural
resource management, I appreciate the opportunity to be here
and provide our perspective on the potential for renewed oil
shale development in northwest Colorado.
The State of Colorado is excited to be partners in this
effort to move our great Nation closer to energy independence.
With perhaps as much as 2 trillion barrels of oil locked in the
shale of the Western States, this vision of energy independence
may well be achievable in our lifetimes.
As a lifelong resident of shale country, I would like to
share some thoughts with you on the three decades of lessons
that we have learned regarding impacts and possible tools to
manage the resource successfully in the future.
The State of Colorado has consistently supported the
development of oil shale resources in northwest Colorado since
the early 1970's. Our focus has been on making sure that the
projects are fiscally and environmentally sound and that the
communities do not incur extraordinary economic burdens.
Over the last 30 years, several concepts have worked. These
included oil shale lease bids, the Synthetic Fuels Corporation,
the Colorado Joint Review process, the Cumulative Impacts Task
Force, and the DOE Technology Partnership. These efforts
provided funds to mitigate impacts, provided incentives for
private investments, supports and grants to fund private sector
technology development, a coordinated permit review process
that allowed adequate public input into the environmental
impact analysis process and the permit process at the State and
local level, and accessible economic analysis tools to model
local economies to determine what projects would be causing
what impacts in what communities in what years. These processes
and procedures were critical, given the enormity of the issues
facing western Colorado, primary concerns that focused on how
to dispose of the spent shale, the cost of production, the
impacts to local communities, and the water requirements that
would be needed to carry out large scale operations.
While we do not know the specifics of the technologies that
may be pursued over the next decade, we do know water
availability, materials handling, power requirements, and
transportation networks must be assessed in detail and the
impacts mitigated appropriately.
The Chairman. Mr. George, could I just interrupt for a
minute?
Mr. George. Certainly.
The Chairman. I am going to excuse myself for just a few
moments. I am going to let Senator Salazar preside until I
return. Thank you for doing this for me. I appreciate it.
Senator Salazar [presiding]. Thank you, Mr. Chair. It is a
great honor for me to actually do this since Russ George is not
only executive director of the Department of Natural Resources,
which is a position that I previously held, but also a very
esteemed statesman in Colorado, former Speaker of the House of
Representatives, and a person whose wisdom ultimately will be
what I believe will guide the whole future oil shale and a
whole host of other things in Colorado. So please proceed.
Mr. George. Well, thank you, Senator Salazar. Mr. Chairman,
the honor is all mine.
Again, talking about where we think we are today, times
have changed, but the circumstances are proportionately the
same. As in the 1970's, we have record coal production that is
straining existing transportation networks. We have record
natural gas production levels and increased permitting for
coalbed methane development. This development overlaps an area
with increasing tourism and recreation opportunities and an
expanding urban population. There are many competing issues at
play here.
To that end, technology and environmental oversight must be
rigorous. Technology must employ the best available practices
to minimize impacts. State and local needs must be anticipated
and funded. Development of public land must be prioritized by
resource and by region, and the cumulative impacts of mineral
and energy development on both public lands and private lands
must be mitigated.
So where should we go from here? We have some suggestions
to propose.
Given the complexity of multiple uses and demands already
present in oil shale country, for example, natural gas,
recreation, wildlife, coal, the Federal Government must
determine those areas where oil shale development could be
accommodated in a manner that is least disruptive to
communities and existing activities. The Federal Government
should provide this cumulative impact analysis and
identification of areas suitable for oil shale development
through a public process.
Any Federal leasing program to be implemented in this new
effort should ensure that the bonus bid concept continues and
the proceeds are distributed to the State in which the lease is
located.
Any financial incentive program must have a duration
comparable with the timeframes for private investment that
include a realistic timeframe for technology development and
implementation or the private dollars will not come.
Given the economic transformation of northwest Colorado in
the past 20 years, coupled with the increasing level of coalbed
methane development, a coordinated and integrated permitting
process is essential. The Colorado Joint Review Process is an
option that the Federal Government should consider fully
funding or partially funding, along with industry, to assure a
rigorous review with adequate public input and consultation.
It is essential that Congress consider the full life cycle
of oil shale development as it contemplates a renewed national
oil shale effort. We must understand the complete picture.
The State of Colorado looks forward to ongoing discussions
and being a partner in this process.
[The prepared statement of Mr. George follows:]
Prepared Statement of Russell George, Executive Director, Colorado
Department of Natural Resources
Mr. Chairman, thank you. I appreciate your invitation to
participate in this hearing. I am Russell George, Executive Director of
the Colorado Department of Natural Resources. As the lead state agency
responsible for natural resource management, I appreciate the
opportunity to provide our perspective on renewed oil shale development
in Northwest Colorado.
We are excited to be partners in this effort to move our great
nation closer to energy independence. With perhaps as much as two
trillion barrels of oil locked in the shales of western states, this
vision is achievable in our lifetimes.
As a lifelong resident of ``Shale Country'', I would like to share
some thoughts with you on three decades of lessons learned regarding
the impacts and possible tools to manage the development of the
resource successfully.
BACKGROUND PRINCIPLE
The State of Colorado has consistently supported the development of
oil shale resources in Northwest Colorado since the Arab Oil Embargo of
the early 1970's. Our focus has been on making sure that the projects
are fiscally and environmentally sound, and that the communities do not
incur extraordinary economic burdens. As history has shown, if
development pays its way, the community impacts are less if the
projects do not materialize.
HISTORY
Let me summarize the key elements of the oil shale development
cycles of the last three decades.
Oil Shale Lease Bids. The federal government leased two tracts in
each state--Colorado, Utah, and Wyoming--in the early 1970's. Bonus
payments accompanied each of these leases--that determined the winning
bid for the lease. Half of those bonus payments were distributed back
to the state. The General Assembly established the State Oil Shale
Trust Fund and Program which developed planning and coordination
mechanisms for federal, state, and local governments and provided
funding for designated local government services and projects ($100+
million). The goal was to mitigate the ``boom town'' syndrome.
The Energy Mobilization Board. As the energy crisis worsened in the
late 1970's, the Executive Branch of the Federal Government pondered a
national board that could declare the development of a resource in the
national interest--thus preempting local land use regulations and much
of the state permitting process. The Western Governors, in particular,
led the effort to oppose this preemptive measure by the federal
government. The Board never materialized.
Synthetic Fuels Corporation. Congress funded the Synthetic Fuels
Corporation to initiate oil shale projects in a manner that would allow
several technologies to develop simultaneously. Congress allocated $15
billion in price guaranties and price incentives that were
competitively awarded on a multiple year cycle. In a large part, this
approach made the federal government a partner in accelerated
technology development.
Joint Review Process. In response to the national focus on the oil,
gas, oil shale, coal and uranium resources in Northwest Colorado,
Colorado developed the concept of a Joint Review Process. That process
consisted of a centralized facilitation of the permit process at the
local, state, and federal level. The Joint Review Process Program
determined the timelines of the various required permits, coordinated
the scoping process for the environmental impact statements, and
facilitated public hearings and public comments. The overall
coordination of the effort could allow for the application of several
permits for an individual project to occur simultaneously. All the
major oil shale projects, associated power plant projects, and coal
mines used the Joint Review Process.
Cumulative Impacts Task Force. In addition to the permitting and
environmental analyses related to the simultaneous development of
multiple resources, the State of Colorado was also concerned about the
fiscal impact to individual communities and counties in high
development areas. To that end, the state developed the concept of the
Cumulative Impacts Task Force that modeled the budgets, revenues and
expenditures of 104 jurisdictions in Northwest Colorado. The key task
was to determine what projects would cause what economic impacts to
what jurisdictions in what years based on different population and
development scenarios.
The effort proved to be extremely valuable when Exxon closed its
Parachute Creek facility. At that time, because of the front-end
analysis work, the distribution of energy impact funds, and the use of
the Oil Shale Trust Fund, long-term economic impacts were manageable.
At the time of the Exxon pullout, only one school district had a
multiple hundred thousand dollar residual impact.
DOE Technology Partnership. In the late 1980's, Occidental Oil
under the leadership of Armand Hammer, proposed the cooperative
development of an improved oil shale technology at the C-b Oil Shale
Tract in Northwest Colorado. This was to be a 50-50 partnership of
Occidental and the Department of Energy. Through the work of the state,
the Department of Natural Resources, and the Associated Governments of
Northwest Colorado, a seven-year commitment of funds was secured from
the Department of Energy for this demonstration project. The other oil
shale states contributed to the technology analysis for the project.
The primary market was not for processing shale oil into motor fuels,
but as chemical feedstocks for other uses. The project terminated upon
the death of Armand Hammer when corporate directions were changed.
TECHNOLOGY AND THE ENVIRONMENT
In the 1970's and 1980's, the Project Independence Technology
Assessments and the Synthetic Fuels Corporation financial plan focused
on both in-situ (in the ground), surface, and modified in-situ
technologies. The goal for synthetic fuels was an industry that would
convert coal, tar sands, and oil shale to liquid fuels at a level of
two million barrels per day by 1992--the majority of which would have
come from western oil shale.
The dimensions of the proposed technologies were immense. A surface
oil shale mine associated with a minimum-sized (50,000 BPD) commercial
plant would be comparable in size to the largest iron and copper mines
in the world. This scale was necessary since it required 2.5 tons of
rock to produce one barrel of oil.
Underground (in-situ) processes would have recovered less resource.
Such mines would need to produce as much as 100,000 tons of rock each
day to support a 50,000 BPD facility. The ore would be processed
(retorted) above ground. Disposal of the spent shale in some cases
would have filled valleys.
The most advanced technology was modified in-situ. That technology
mined a portion of the deposit by conventional methods for surface
processing. The remaining shale was then fractured by underground
detonations, the rubble ignited, and the oil transmitted to the
surface. This process would recover less, but with less surface impact.
As you can see, the surface area requirements for mining,
retorting, or spent shale disposal were significant. Costs were
enormous even in 1980 dollars--an average of $2 billion for each 50,000
BPD plant. Based on the applicable 1977 Clean Air Act standards,
production in NW Colorado would have been limited to 400,000 BPD. Water
requirements for a 50,000 BPD facility would require 8500 acre-feet per
year of water.
In the end, the oil shale industry collapsed of its own weight--
given the volumes of material to be removed and processed, the
enormously fluctuating world oil price, and the lack of a consistent
national vision for the development of this resource that could focus
private capital investment.
While we do not know the specifics of the technologies that may be
pursued over the next decade, we do know water availability, materials
handling, power requirements, and transportation networks must be
assessed in detail and the impacts mitigated appropriately.
WHAT WORKED--WHAT DIDN'T WORK
If the Federal Government is to contemplate a renewed oil shale
effort, it must do so based on the lessons learned over the past thirty
years. While the technologies are changing, so are the characteristics
of ``energy country'' in Northwest Colorado.
As in the 1970's, we have record coal production that is straining
existing transportation networks. We have record natural gas production
levels and increasing permitting for natural gas development. The
diverse development of this resource has dotted the landscape,
increased truck traffic on county roads, and access to the resource has
impacted many private landowners where the surface and mineral estates
are severed. Additionally, there is a growing public sensitivity to in-
situ activities, such as fracking with ``proprietary fluids''.
This development overlaps an area with increasing tourism and
recreation opportunities and an expanding urban population. Oil shale
leasing on top of this existing network of energy development and
changing land uses may put more pressure on an already fragile
ecosystem and public temperament.
We do not control world oil markets, nor do we control the actions
of OPEC. Therefore, the development of oil shale cannot be purely price
driven. It must be a commodity of national interest developed on public
lands in the national interest. That implies a prioritized use of
public lands for the development of specific resources. Federal
financial support must be sustainable over several decades to encourage
private sector investment. An environmental review process must be
thorough. A financial safety net for local governments that allows for
growth to pay its way, and allows front-end financing of some
infrastructure needs and analytical tools, is essential.
All this said, the implication is that bonus lease payments from
federal leases for local government facilities and services are good.
Long-term federal financial support that fosters private investments is
good. A coordinated permit process with adequate public input is good.
And analytical tools that allow state agencies and local governments to
anticipate the timing and amount of revenues for impact mitigation are
essential.
What will not work are processes that preempt or supersede local
and state land use and environmental permit processes. What will not
work is the development of technologies without adequate oversight to
insure both public acceptance and environmental compatibility. What
will not work is a national effort that does not address financial and
infrastructure needs at the local level.
COLORADO RECOMMENDATIONS
Colorado is excited to be a partner in the development of a
resource that is both abundant and in the national interest. But it
does intend that technology and environmental oversight be rigorous,
that development use the best available practices to minimize impacts,
that state and local needs are anticipated and funded, that development
on public land be prioritized by resource and by region, and that the
cumulative impact of mineral and energy development on both public
lands and private lands be mitigated.
Oil Shale Lands Suitable for Development. Given the density of
natural gas and coal development in some areas of NW Colorado, the need
for recreational/wildlife habitat/undeveloped areas, and the network of
privately held oil shale lands that did not exist in the last boom, the
federal government must determine those areas where oil shale
development could be accommodated in a manner that is least disruptive
to communities and existing activities. Not all types of resource
development can occur everywhere. The carrying capacity of the land,
communities and infrastructure must be evaluated. That will determine
the suitable areas for coal, natural gas, and oil shale development.
One type of mineral and energy development today, may preclude or
limit another type of resource development tomorrow. We cannot forget
that a consequence of the oil shale pull-out of the 1980's, and the
sustained soft energy market in the 1980's, has been the transformation
of the NW Colorado economy from an energy base to a tourism,
retirement, second home and recreation base--and public attitudes have
changed as well. That cannot be underestimated if accelerated
development is to resume.
The lead federal agency in this new effort should provide this
cumulative impact analysis and identification of areas suitable for oil
shale development as an element of any development and leasing plan.
Oil Shale Lease Bids. Along with an oil shale lease process that
generates front-end revenue and production royalties for the federal
government, the 1970's concept of the bonus bid should be applied to
any oil shale leases in the future. For the tracts leased in Colorado,
a sum of over $100 million was collected and distributed to the
impacted counties. This economic cushion is essential to community
stability, and the ability to withstand the economic shock of a project
termination.
The federal leasing program to be implemented in this new effort
should insure that the bonus bid concept continues, and the proceeds
are distributed to the state in which the lease is located.
Federal Financial Support. Several options have been pursued
through the years to fund technology development. Tax credits have been
one avenue that proved very successful for coalbed methane development.
Incentives like those of the Synthetic Fuels Corporation have been
another. The DOE Demonstration Project route like that at Logan Wash is
another. And the DOE cost-share like the Occidental C-b Oil Shale
Project is another.
Oil shale technology development is still fraught with uncertainty.
Once a technology appears promising, it must be field tested. And then
limited commercial scale production may occur. Collectively, this could
span a decade or more. But the lesson learned from the 1970' and 1980's
is that any financial incentive program must have a duration comparable
with the timeframes for private investment that include a realistic
timeframe for technology development and implementation, or the private
dollars will not come.
The Department of Energy should poll the industry prior to the
passage of any legislation to determine the adequate minimum timeframe
to encourage private investment.
Coordinated Permitting Process. Given the economic transformation
of NW Colorado in the past 20 years, coupled with the increasing level
of natural gas development, a coordinated and integrated permitting
process is essential. The environmental and land use permitting process
can be complex and time-consuming when all the local, state and federal
requirements are considered. Coordinating the process is essential, and
cannot be underestimated. For the requirements in place 20 years ago,
the average timeframe to permit an oil shale project was about 42
months. Some processes have become more complex since then--and
certainly public interest is more organized and focused.
As a reminder, the Colorado Joint Review process grew out of the
concerns raised over the concept of the Energy Mobilization Board. That
Board would have had the power to preempt local and state regulatory
requirements in the national interest. The reaction in the West was to
coordinate and streamline, not dismantle, the existing process. And it
worked. Attempts in recent years to truncate the process have been met
with public criticism and lawsuits. Such efforts have proven to be
counterproductive to the goal of developing these important resources.
The Colorado Joint Review Process is an option that the federal
government should consider fully funding, or partially funding along
with industry, to assure a rigorous review with adequate public input
and consultation.
Economic Impact Analysis. Once the development area is determined,
a procedure must be established to evaluate economic impacts at the
local level. The federal government should fund, either through the
bonus bid process or authorizing legislation, a concept similar to the
tools used by the Cumulative Impacts Task Force. This analysis would
not only guide the timing of needed permanent and temporary community
services and infrastructure, but also allow local governments to
establish fiscal tools that would insure that growth could pay its own
way.
The true cost of the development of strategic resources such as oil
shale must be evaluated not only in the context of their technology and
development costs, but also the costs and benefits to the community.
Securing a safety net is the primary lesson of the last bust.
CONCLUSION
It is essential that Congress consider the life cycle of oil shale
development as it contemplates a renewed national oil shale effort.
Only this view will portray the complete picture, so that the
appropriate technology, environmental and economic structures can be
defined and funded for a successful long-term effort. I look forward to
working with you in the months ahead.
Senator Salazar. Thank you, Mr. Speaker. I appreciate your
comments here this morning.
Mr. Evans.
STATEMENT OF JIM EVANS, EXECUTIVE DIRECTOR, ASSOCIATED
GOVERNMENTS OF NORTHWEST COLORADO, RIFLE, CO
Mr. Evans. Thank you, Mr. Chairman. My name is Jim Evans. I
am the director of the Associated Governments of Northwest
Colorado, a local government association of cities and counties
that was formed 30 years ago as the regional oil shale planning
commission, and it was formed specifically to deal with the
impacts of oil shale development in our five-county region.
I am here in support of the DOE strategy that was
referenced earlier by the chairman for a research and
development approach rather than a commercial scale venture
that was premature in the last cycle. So my testimony, that
submitted, references some of the things we learned from the
last cycle and some of the things we would like to be addressed
as we go forward now. I would just like to hit those highlights
and actually start with the statement that I am here from the
local government and I am here to help you. You know, that is
what we hear from the Federal agencies when they come out to
help us. This time I would like to repay that because I have
some specific recommendations.
Senator Salazar. Usually when it is the local government,
it is very helpful, Mr. Evans.
Mr. Evans. Well, we appreciate all the comments of the
members of the committee about that concern and the Department
of Energy and Department of Defense have all indicated that as
well.
The Club 20 resolution that has been submitted that Senator
Allard referenced earlier basically sets forth what our local
position is. We do not want to wait for another crisis mode
like the Arab oil embargo of 1974 and go for premature
commercial scale development. We very much appreciate Shell Oil
Company's efforts going forward with a steady research and
development effort, and we think that that should be encouraged
by the Department of the Interior and the Department of
Defense, as well as DOE.
Specifically, with some of the recommendations that are
contained in our testimony, we would like environmental impacts
as part of this effort, and I think Mr. Smith will go into that
in more detail.
We would like the socioeconomic impacts that Russ George
has just indicated considered as part of that effort, and my
written testimony goes into more details.
At the State level, we would encourage those things the
Colorado Joint Review program already referenced, the
Department of Natural Resources. Also their wildlife and
reclamation programs should be utilized. And the Colorado
Department of Public Health air quality--I also sit on the
State Air Quality Control Commission--I think the State is in a
position to the air quality and we are encouraged by Shell's
experience so far.
Then I would like to get to money. I have a suggestion for
the Federal Government. You have an opportunity before you.
Congress approved the transfer of the Naval Oil Shale Reserve
lands in our State from the Department of Energy to the
Department of the Interior. I have attached a letter from the
Secretary of the Interior on the status of the funds that now
have been accumulated from the natural gas leasing that that
triggered. That is the current natural gas leasing, Mr.
Chairman. I am not talking about the proposed additional
leasing. There is a $38 million fund accumulated now from the
Federal and State share that is being transferred over to the
Department of Energy in a special account, and it is referenced
in that letter. I think those funds should be made available
for the oil shale program in some mechanism.
Then estimates of future leasing on the Naval Oil shale
Reserve. There is a lot of discussion on whether there should
be additional drilling on top of the area or from the side.
Technology will eventually get at that resource, but it is an
$8 billion natural gas resource in estimates, of which one-
eighth, or $1 billion, in royalties will occur that both Shell
and the Governor's representative here have referenced. That
would be split 50-50 with the State and the Federal Government.
So there is a $500 million potential for the Federal Government
and a $500 million State share over a 20-year period estimated
for that resource.
I believe--and our association and local governments
believe--that a statement in legislation you are considering
should reference that some of these mineral leasing funds
should go toward oil shale impact, as well as other energy
impacts. There is already priority language in the Mineral
Leasing Act, but I think it should be strengthened. There would
be a good source of funds for the research and development
efforts that you are considering.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Evans follows:]
Prepared Statement Jim Evans, Executive Director of the Associated
Governments of Northwest Colorado, Rifle, CO
A Local Government Perspective on Federal Oil Shale Research and
Development Efforts
Mr. Chairman and Members of the Committee:
My name is Jim Evans, Executive Director of the Associated
Governments of Northwest Colorado (AGNC), representing cities and
counties in the 5-county region of Garfield, Mesa, Moffat, Rio Blanco
and Routt Counties in Northwest Colorado. On behalf of our local
governments I want to express our appreciation to your committee for
asking our local government views on the development of oil shale
technology.
Our local government association was formed at the start of the
last oil shale development cycle as the ``Regional Oil Shale Planning
Commission'' with the specific charge to address the socioeconomic and
environmental impacts of a potential commercial scale oil shale
industry. Now, renamed as the Associated Governments of Northwest
Colorado, we are still concerned with this issue. This time around it
appears that our region will need to address the potential growth and
infrastructure impacts of oil shale development on top of the
socioeconomic impacts already occurring in our region from record
levels of natural gas, oil and coal production. With estimates of from
600 billion barrels to 1.8 trillion barrels of recoverable oil from
shale in our region, we recognize the national interest in developing
the technology for this resource. In particular, the needs identified
for the Department of Defense for a secure domestic source of fuel make
us realize that the importance of the resource cannot be ignored. We
also understand the potential economic benefit development of this
resource can play on our national balance-of-trade and G.N.P.
Since more than 80% of the oil shale resource is located on
federally-owned public land and recognizing that the future development
is driven by national interests, local governments in our region
believe the federal government must play a lead role in addressing
these socioeconomic and environmental impacts and costs. We do not want
to see local governments (and local taxpayers) stuck with the costs of
new infrastructure and the mitigation of environmental impacts. So we
are pleased to see that your Committee and the Department of Energy as
we begin this next cycle in Oil Shale development are addressing these
issues up front. This is a refreshing difference than the start of the
last cycle. Back then, with an oil embargo facing the country, Congress
first responded with a proposal for an Energy Mobilization Board with
the power to declare Northwest Colorado as a ``National Sacrifice
Zone''. Fortunately, that proposal did not make it all the way through
Congress and as my following testimony indicates, we learned a lot
during a fairly painful 18-year boom/bust cycle prematurely attempting
to develop commercial scale projects.
This time we appreciate the ``Research and Development'' type
approach being put forward by the Department of Energy, and by the
recognition of your Committee up front that you are looking for
development of an environmentally friendly technology, and an approach
not dependent upon the price of oil.
Because we support your stated approach it gives me the opportunity
to say, ``I am from the Local Government, and I am here to help you.''
I would like to start my help by submitting for the record the
following resolution from Club 20, the community based Colorado
organization representing cities, counties, businesses and citizens
throughout Western Colorado. This resolution was unanimously adopted by
the Club 20 Board of Directors endorsing a Research & Development
program as being considered by your Committee.
club 20 support for an economically viable
and environmentally sound oil shale r&d program
Whereas Oil shale may still be the largest untapped resource
available for transportation fuels;
Whereas the richest deposits of oil shale in the world are
located in Northwestern Colorado and Eastern Utah;
Whereas a DOE report indicates that oil shale development may
still be important for our country's National Security (as an
alternative to imported oil) and for our Economic Security (to
improve our balance of trade); and
Whereas without a well conceived federal R&D program this
region may again someday be faced with another crisis oriented
commercial scale oil shale program.
Now therefore be it resolved that Club 20 supports research
and development efforts leading to an economically viable and
environmentally sound oil shale program.
Further, Club 20 supports DOI/DOE/DOD efforts to develop a
national oil shale policy and long-term R&D plans.
Approved, Feb. 15, 2005,
Club 20 Energy Committee,
Club 20 Natural Resources Committee.
Approved, April 1, 2005,
Club 20 Board of Directors.
Background: Last Oil Shale Development Cycle 1974-1992
The last oil shale cycle started with the Arab Oil Embargo
in 1974. This was a Sudden Oil Shortage, resulting in long
lines at gas pumps, temporary high gas prices, and a staggering
impact on the U.S. Auto Industry and U.S. economy, aggravated
by gasoline rationing.
Congress responded in a crisis mode.
The first industry proposal to local government was: Get out
of the way and we will develop Oil Shale! Congress responded
with a Proposal for Northwest Colorado to be declared a
``National Sacrifice Area'', including an Energy Mobilization
Board with power to override Federal, State and Local
environmental and land use laws. State and Local governments
responded on an adversarial basis.
President Jimmy Carter instead got Congress to establish the
Synfuels Corp. with $15 Billion in price guarantees and price
incentives.
In our region 12 projects were underway at peak of cycle
(either in planning, permitting or construction).
An Exxon White Paper suggested a socioeconomic impact of a
one-million population increase in NW Colorado by 1990. It
appeared that all the construction workers in U.S.A. would be
required for the effort if all the companies went forward at
the same time.
The Colorado projects reaching construction or testing:
Exxon Colony Project, Unocal, Oxy (CB), CA consortium. The DOE
Anvil Points facility in the meantime was pretty much
abandoned, except for a look at an asphalt additive byproduct.
The cycle collapse (Bust) started May 2, 1982 with an abrupt
Exxon Colony closure. In the Boomtown Blues book, this event
was blamed for the U.S. and worldwide recession.
The Unocal project & Oxy continued their efforts through
1990-92. This somewhat mitigated the ``bust'' cycle. At the
peak of the cycle, the combined population of the 2 most
impacted counties (Garfield and Mesa) increased from 1981 to
1983 by 12%, from 112.0 thousand to 125.6 thousand. Then in the
next 2 years the combined population dropped back to 111.8
thousand.
Congress then overreacted and shut down virtually all oil
shale research programs, despite recommendations from many
sources that research and development activities should
continue.
Was Anything Learned During This Cycle? Yes!
Congress in 1975-76 enacted Mineral Leasing Act Amendments
at the urging of States and Local Governments. The State share
of federal royalties increased from 37% to 50% with priority
for local governments impacted by Mineral Leasing activities,
such as Oil Shale, Oil, Natural Gas and Coal.
Congress enacted Payments-In-Lieu of Taxes (PILT) Act to
compensate counties for tax exempt federal land thereby giving
direct assistance to rural public land counties.
States in turn enacted Severance Taxes, also with a priority
to address socioeconomic impacts.
Local governments in turn enacted Major Impact Land Use
Mitigation Ordinances.
The Colorado Joint Review Process (CJRP) was initiated. This
was a voluntary program designed to coordinate and speed up
federal, state and local permitting.
Local Government Energy Impact Programs were established by
States with the new Revenue from Mineral Leasing and Severance
Taxes. These programs today address the ongoing impacts of
mineral development. The Energy Impact Program in Colorado
actually started with the formation of the Regional Oil Shale
Planning Commission (now AGNC) and the enactment of the Oil
Shale Trust Fund (OSTF). From the OSTF $75 million plus
interest was allocated to NW Colorado counties. The $75 million
was Colorado's 37.5% of federal Oil Shale leasing bonuses.
Negative impacts of the abrupt Exxon Colony Project closure
actually resulted in a positive turnaround on State/Local/
Industry relationships and communications as Unocal and Oxy
proceeded with their projects with local support.
Local governments also supported continuation of the Unocal
and Oxy projects, including proposals to turn them into federal
oil shale technology demonstration projects.
Support for a Federal Oil Shale R&D program was generated in
Colorado, Utah, Wyoming, Kentucky, Illinois and California, but
to no avail.
New Paraho Corp. temporarily continued oil shale asphalt
testing at Anvil Points to demonstrate the byproduct approach
to make oil shale economically viable. Some of the asphalt test
strips are still in place with no repairs required.
Local Government Advice to Industry for the Next Oil Shale Development
Cycle: Communicate! Communicate! Communicate!
The Shell Oil Shale Project is on the right track. Shell Oil is the
only company in Colorado who is currently continuing with field-
testing. Local governments appreciate these efforts. Their efforts have
included ongoing meetings with County Commissioners, Cities, school
districts and citizen groups. They have sponsored and organized town
meetings. These were very successful from a local perspective. These
should continue at the beginning of each phase of an R&D program.
The Department of Energy also appears to be on the right track. The
Naval Petroleum and Oil Shale Reserve Office of DOE has prepared a well
documented and thorough report indicating the National interest in
developing the oil shale resource (trade deficit impact on the economy
and national defense interest in a secure oil source.) We believe
addressing the socioeconomic and environmental issues in the DOE
proposal for a National R&D program and demonstration facility is on
target. Virtually all groups and industry involved in the last oil
shale cycle have recommended the need for an ongoing federal oil shale
research program.
These Groups and individuals back in 1991 were: The Rocky Mountain
Oil & Gas Association, The Western Oil Shale Action Committee, Club 20,
Associated Governments of Northwest Colorado, The Garfield County
Citizen Alliance, Governor Roy Romer, Senator Tim Wirth, Representative
Ben Campbell, The Rebuild America Foundation, The Alternate Energy
Research Institute, and The Rocky Mountain Institute. There may have
been others. These were the ones that I was aware of.
Recommendation to Address the Socioeconomic Impacts of the Next Oil
Shale Cycle
With the renewed interest in oil shale development, the Department
of Energy needs to provide funding for socioeconomic programs to:
Assemble and update impact data from the last cycle.
Identify appropriate computer systems/models to assess
projected impacts.
Development of baseline economic data for current
activities.
Help identify and provide revenue streams for local/state
government services/infrastructure potentially impacted by oil
shale development.
DOE also needs to identify and recommend appropriate federal, state
and local policies to encourage prudent and environmentally sound oil
shale development.
Recommendation to Address Environmental Impacts of Oil Shale
Development
The DOE Demonstration program/projects should address:
Surface disturbance impacts and ongoing reclamation
requirements.
Air Quality impacts.
Water Quality and Quantity impacts.
Wildlife protection and mitigation requirements.
Employee health, safety and training needs.
Regular communications with news media and environmental groups
should address the potential environmental impacts of various oil shale
technologies.
The Colorado Department of Public Health and Environment should be
actively involved in monitoring air quality and water quality impacts.
The State of Colorado Department of Natural Resources and its
Wildlife Division should be actively involved in these reclamation and
wildlife issues.
The Department of Interior should develop a leasing program to
accommodate access to oil shale for research and demonstration project
purposes. Any commercial scale leasing proposals must include
provisions that recognize the ``carrying capacity'' concepts for
socioeconomics and the environment that are part of the BLM Piceance
Basin Resource Management Plan.
Recommendation to Provide the Funding for Oil Shale Research Costs and
Incentives
We believe it is fortunate that Congress may have already provided
a potential source of funding for Oil Shale R&D efforts. This revenue
may be currently available from the Naval Oil Shale Reserve (NOSR)
lands themselves located in Northwest Colorado. As indicated in the
attached letter from the Department of Interior, some $43.7 million may
be accumulated by March 2007 in a U.S. Treasury account from the
current natural gas leases on their NOSR lands. These NOSR lands were
transferred by Congress from DOE to the Department of Interior with a
Congressional priority established for natural gas leasing.
Some of these funds, estimated at $5.8 million, are earmarked for
environmental cleanup of the Anvil Points spent shale pile. Otherwise,
we believe Congress has the opportunity for the remainder of these
funds to be made available to address the socioeconomic and
environmental aspects of oil shale development in Northwest Colorado.
In the future, more revenue should be available from this source.
According to industry estimates, additional leasing of the NOSR lands
could produce leasing bonuses of up to $360 million (to be shared 50%
federal and 50% state) plus ongoing production leases of an estimated
$32 million annually for at least 20 years. That would be another $640
million total also to be split 50/50 federal and state. Congress should
establish a priority to address oil shale and other energy development
impacts in Northwest Colorado from these leasing revenues.
We believe this type of funding is necessary to make sure the DOE
research and demonstration projects can proceed without interruptions
from fluctuations in the price of oil.
Thank you for this opportunity to testify. I would be happy to
answer any questions you may have.
______
Department of the Interior,
Bureau of Land Management,
Lakewood, CO, February 9, 2005
Hon. Forest Nelson,
Chairman, Associated Governments of Northwest Colorado.
Hon. Jim Evans,
Executive Director, Associated Governments of Northwest Colorado.
Dear Mr. Nelson and Mr. Evans: This is in response to your letter
dated January 5, 2005, regarding the state share of federal mineral
royalty payments related to the Roan Plateau area (formerly Naval Oil
Shale Reserves Nos. 1 and 3). Your letter requested a response to two
questions.
1. Have sufficient funds been accumulated to satisfy the
reimbursement provisions of the legislation?
Sufficient funds have not yet accumulated to cover the
reimbursement provisions of the legislation. As of December 28, 2004,
the treasury account has accumulated $23,087,790 while the total
reimbursement amount is estimated to be $43,735,001. This leaves a
difference of $20,647,211. There are two components of the reimbursable
costs, environmental restoration and cost recoupment of the United
States investment in wells and gathering lines. The cost for
environmental restoration is estimated to be $5,800,000 (-15% to +30%
accuracy). The costs to be recouped for the investment in wells,
gathering lines, etc., is established at $37,935,001.\1\
---------------------------------------------------------------------------
\1\ $37,935,001 includes past DOE costs as outlined in a May 5,
1999, DOE memorandum, entitled, ``NOSR Cost Recovery Model and Results"
---------------------------------------------------------------------------
2. When will the states share of royalty revenues resume?
The lands currently leased are producing royalties of approximately
$799,000 per month, based upon a fourteen month average of royalty
payments for fiscal years 2004 and 2005. Based upon this average, the
remaining $20,647,211 to be reimbursed will be accumulated in about 26
months, or approximately March 2007. Under the current schedule, the
Engineering Evaluation/Cost Analysis of the environmental restoration
work is anticipated to be completed by May 2005; with cleanup completed
by July 2007.
Since sufficient funds still have not accumulated to satisfy the
reimbursement provisions of the legislation, we do not believe that we
can initiate or expedite sharing of the royalty payments sooner than
March 2007.
We understand and appreciate your concern with this issue.
If you have any questions on this issue, please feel free to
contact any of the following: Jamie Connell, Field Manager, Glenwood
Springs Field Office at 970-947-2800; Lynn Rust, Deputy State Director,
Energy Lands and Minerals, BLM Colorado State Office at 303-239-3885;
or Duane Spencer, Chief, Branch of Fluid Minerals, BLM Colorado State
Office at 303-239-3753.
Sincerely,
Ron Wenker,
State Director.
Senator Salazar. And we have that letter, Mr. Evans?
Mr. Evans. Yes. That is in the written that was submitted.
Senator Salazar. Thank you very much, Jim.
Mr. Smith.
STATEMENT OF STEVE SMITH, ASSISTANT REGIONAL DIRECTOR, THE
WILDERNESS SOCIETY, DENVER, CO
Mr. Smith. Good morning, Mr. Chairman. It is a pleasure to
be here this morning and especially to address you on the dais
as our newest Senator and with your new, if momentary, title.
Senator Salazar. It is momentary, let me assure you.
[Laughter.]
Mr. Smith. My name is Steve Smith. I appreciate very much
this opportunity to address the committee. I also appreciate
the interest shown by Colorado's other Senator, Senator Allard,
in this remarks and questions presented earlier.
I am assistant regional director for The Wilderness Society
Four Corners States Office. My testimony today, however,
reflects thoughtful research and recommendations compiled by
staff and volunteers from an array of conservation and citizen
organizations.
Perhaps uniquely relevant to today's topic, I live in
Glenwood Springs, Colorado, 30 miles from one of America's
richer deposits of oil shale. I am also an active member of
Club 20's Energy Subcommittee where, along with Mr. Evans and
others, we crafted the details of the resolution mentioned
several times about the deliberate, but very cautious and
careful encouragement of looking into the possibility of oil
shale development.
Over the past 17 years living in Glenwood Springs, I have
watched the local people and communities there slowly,
steadily, and sometimes bitterly crawl out from under what was
the disaster of the last oil shale experiment in our county.
Generally, our communities are thriving now, building economies
that are diverse, enlightened, and based in large part on the
preservation and enjoyment of the unique scenic and untrammeled
public lands surrounding us.
We in western Colorado are aware of oil shale's potential,
its potential to help provide for the Nation's energy needs,
but also its potential to engender false hopes, exaggerated
claims, and unfilled promises.
There are at least three basic environmental issues that
oil shale development presents, and we urge that this committee
of the Senate and Congress proceed carefully in considering any
commitment of Federal land or resources in this endeavor.
First, this technology may threaten groundwater quality and
the supply of water in the Upper Colorado River Basin.
Second, the current version of the new in-situ process
requires very tightly spaced drilling shafts to treat and
produce fuel, with surface impacts that approach 100 percent.
Third, the process consumes more energy than it produces by
a significant margin.
If other companies decided to pursue development of oil
shale using conventional mining and above-ground processing or
retorting, the environmental and water resource issues would be
multiplied 10- or 100-fold.
An even more immediate concern to the people and
communities near oil shale deposits are the impacts that a
revived oil shale industry would have on the growth, social
structure, public facilities, transportation systems,
watersheds, tourism, and public land recreation opportunities
that are crucial to our daily lives. Local people have a strong
concern about these issues and need to have a strong voice in
their governments' decisions.
We commend Shell Oil Company in particular for the careful
and deliberate approach the company has pursued so far. We hope
that other companies will emulate their model of slow, small
research using private financing.
Most basically, Mr. Chairman, we do not really believe that
any new Federal funding or significant action is needed at this
time. Private research is continuing. The Mineral Leasing Act
grants the Secretary of the Interior authority to issue new
leases, if interest warrants, and the Department of the
Interior is, indeed, in the midst of promulgating rules for a
limited public lands leasing program for oil shale research and
development.
Those oil shale research and development leases, by the
way, should be for truly new research. Companies leasing
Federal lands for this research should pay full market value
for the use of the land. Leasing tracts should be tightly
constrained in size, require continuous and comprehensive
environmental monitoring, provide baseline data on energy
producing techniques, and on environmental protections
necessary to minimize any effects on natural and public values.
No lease for research and development should be converted to a
commercial production lease.
Such are the small, cautious, and smart steps appropriate
to this technology and the limited impact it might have on our
energy future. Let the free market work. Be cautious with
limited Federal dollars and especially careful with
irreplaceable Federal land, and learn from small, smart
experiments before embarking on anything larger.
If there is one thing that might be done, we recommend
specifically that the Department of the Interior enter into a
cooperative agreement with the States of Colorado and Utah to
develop a comprehensive, programmatic, environmental impact
statement under the auspices of the National Environmental
Policy Act, to evaluate economic, technical, environmental, and
socioeconomic issues regarding oil shale development before
public lands or resources are committed. This detailed NEPA
analysis should be conducted even before implementation of
research and development leasing program, certainly before
undertaking any larger scale use of public lands or resources
for oil shale production.
Thank you again for this opportunity and this generous
length of time to discuss and address with the committee this
fascinating discussion about this unique resource. Please let
us know at any time how we can assist with further
congressional discussion of these important questions. Thank
you.
[The prepared statement of Mr. Smith follows:]
Prepared Statement of Steve Smith, Assistant Regional Director,
The Wilderness Society
Good morning, Mr. Chairman and senators. My name is Steve Smith. It
is a pleasure to be with you today, and a special pleasure to see my
newest senator, Senator Salazar, on the dais.
I am Assistant Regional Director for The Wilderness Society's Four
Corners States Office. My testimony today, however, reflects thoughtful
research and recommendations compiled by staff and volunteers from an
array of conservation and citizen organizations, including Biodiversity
Conservation Alliance, Center for Native Ecosystems, and Colorado
Environmental Coalition, and Oil & Gas Accountability Project, among
others.
I am especially grateful for the very able advice and assistance
that I have received from Jim Martin of Western Resource Advocates,
Randy Udall of Community Office for Resource Efficiency, air quality
expert Robert Yuhnke, and Kevin Markey.
Perhaps uniquely relevant to today's topic, I live in Glenwood
Springs, Colorado, 30 miles from one of America's richer deposits of
oil shale. Over the past seventeen years living there, I have watched
the local people and communities slowly, steadily, sometimes bitterly,
crawl out from under what was the disaster of the last oil shale
experiment in our county.
Generally, our communities are thriving now, building economies
that are diverse, thriving, and based in large part on the preservation
and enjoyment of the unique scenic and untrammeled public lands
surrounding us.
With recent news stories about increasing oil and gasoline, and
with our continuing and increasing reliance on oil--especially oil
imports--to fuel our vehicles, it is apparent that some Members of this
Committee and other policy makers have a renewed interest in the
development potential of the oil shale resources in Colorado, Utah, and
Wyoming. However, there is an old and enduring saying in Colorado about
oil shale, ``Oil shall has a fantastic future--it always has and it
always will.''
Almost exactly a month ago today, The Wall Street Journal carried a
story that reiterated both the enormous resource that is tied up in the
shale of the Mahogany Zone of the Green River Formation, and the
challenges that are entailed in literally extracting oil from rock. We
who live in western Colorado, who lived through the last oil shale
boom--and bust--are well aware of this resource's potential. We are
aware of its potential to help provide for the nation's energy needs,
but we also are aware of its potential to engender false hopes,
exaggerated claims, and unfulfilled promises.
Other witnesses appearing before you today are far better qualified
than I am to assess both the quantity of shale oil that is potentially
recoverable and the quantity that may prove to be economically
recoverable. While considering their presentations, however, it seems
important to recall that producers and their investors sank $5 billion
into oil shale last time around, and then abandoned the field on May 2,
1982.
It is important to put today's oil and gasoline prices into
perspective. As the last oil shale venture in northwest Colorado was
coming apart in 1980, the Office of Technology Assessment projected
that the production of oil from oil shale might be economically viable
at a market price of $61 per barrel, and an internal Exxon memo pegged
the number at $108 per barrel, both those numbers in 1980 dollars. Even
our current prices of $50-$58 dollars per barrel, adjusted for
inflation, do not come close to those levels.
I would like to use my time before you today to identify some of
the environmental issues that oil shale development entails, and
ultimately to urge that this committee, the Senate, and the Congress
proceed carefully and deliberately in considering any commitment of
federal land or resources to this endeavor.
There are two basic variations of oil shale developments currently
contemplated--in-situ processing and mining and surface retort
processing. Each raises unique concerns.
The technology that Shell and others are pursuing is, as we
understand it, an in-situ process that heats shale rock to 650-700
degrees Fahrenheit to release the petroleum compounds that are bound to
that rock. I have been very impressed by presentations about the
imaginative and innovative experimentation the company is conducting on
private land in northwest Colorado. That process raises at least two
immediate issues, however.
First, from what we understand, this technology may threaten ground
water quality. Shell is proposing to prevent ground water contamination
through the use of something called an ice wall--in short, they propose
to super-cool the area around the extraction cone. This represents a
potentially ingenious solution to a very serious issue--but it should
go without saying that this committee and the Department of the
Interior should insist upon thorough testing, analysis, and peer review
of the technology's use before committing the nation to an unproven
technology that irretrievably contaminates ground water across. a wide
swath of Colorado or other western states.
Second, the current version of the new in-situ process requires
very tightly spaced drilling shafts to treat and produce fuel. The
surface impacts of such a process approach 100%; this is a highly
industrial operation imposed on previously natural landscapes. The
cumulative effects that such a process might have on public lands, were
the technology to be transferred there, bear close scrutiny.
Third, the process consumes more energy than it produces, by a
significant margin. This heating and cooling process will create huge
new demands for energy to extract oil from shale.
The experience in Alberta should be a cautionary note for us. Tar
sands development in Canada could not occur without the use of large
quantities of natural gas--potentially much of the entire production to
be carried by the new pipeline from the MacKenzie Delta. Tar sands
development in Canada is one of the principal reasons natural gas
exports to the United States will not increase and may even decline
over the next ten years.
The question this committee should pose is--where will this energy
come from? If the answer is natural gas, that decision will further
exacerbate a structural gap between natural gas supplies and natural
gas demand between now and 2025. If the answer is new coal-fired
electric power plants, then I hope the Committee and the Environmental
Protection Agency will be directed to assess the air quality impacts
that inevitably will result from both new energy sources and the oil
shale process itself. As the Bureau of Land Management's analysis for
natural gas development in and near the Roan Plateau suggests, the
cumulative impacts of energy and other resource development in this
part of Colorado, combined with emissions from nearby areas, threaten
air quality in a wide range of Class I areas. At a minimum, we should
understand the air pollution impacts of full field development and have
in place a mechanism for mitigating those impacts.
Meanwhile, we must put the prospect of a relatively minor
contribution that oil shale might make to the nation's energy supply
into the larger context of energy production, energy use, and
efficiencies in both.
Another recent Wall Street Journal article, from March 28,
described the discussions and recommendations of 26 former national
security advisors who, in essence, encouraged the nation to recognize
the full cost of our continuing, disproportionate, and, some would say,
debilitating dependencies on oil from any source.
One way to address the increasing cost of oil and the slowing pace
of oil production is to use it more efficiently. According to the
Community Office on Resource Efficiency, an improvement in the fuel
efficiency of the United States' automobile fleet would save 400,000
barrels of oil, more than oil shale is ever likely to produce.
Certainly, efficiency alone will not replace our need for physical,
usable fuels. Just as certainly, it can make the sources we have go a
lot farther in supplying the sustenance, mobility, and products that we
need. My point is that before considering any significant investments
in promising but unproven and expensive technologies like oil shale, we
need to be sure that we have taken all the easier and less expensive
steps possible in improving the way we produce and use fuel from
existing sources.
As a Coloradan and a long-time resident of the Western Slope, I
also hope this committee will carefully assess how full field
development would impact water rights and water-related issues in
Colorado and in the upper Colorado River basin. I raise just a few of
the many questions that must be asked. Is any water available for a new
energy industry in drought years? If so, would the withdrawals for oil
shale result in a reduction of flows--or even a loss of flows--in the
critical reach just upstream of Grand Junction? If so in turn, what
endangered species issues are implicated? If any water is available in
drought years, how would oil shale development affect the total amount
of water remaining for Colorado's use under the Law of the River?
The recent conversation about oil shale development has revolved
around the in-situ processes being developed by Shell. However, if
other companies decide to pursue development of shale oil using
conventional strip mining and above-ground retorting, the environmental
and water resource issues would be multiplied ten or one hundred-fold.
The retorted material contains a plethora of toxic substances that
would pollute ground and surface water. The material expands during
processing, creating massive waste storage problems. The processing
itself requires staggering amounts of energy and emits large quantities
of both criteria pollutants and hazardous air pollutants. In addition,
it goes without saying that the mining areas are near the Colorado
River, which provides drinking water to literally millions of people
downstream.
One of the factors that must be addressed for any above-ground
retorting operations is the control air pollution. Primary among
pollution types is the inevitable generation of sulfur and, once that
element is exposed to air, the generation of sulfur dioxide. That was
an important issue in 1980, when the court held that oil shale
operations must comply with direct and regional incremental degradation
of air quality. The technologies for control of sulfur dioxide has
improved in the past two decades, but not all sources of the pollutant,
primarily electric power plants, have taken measures to use them. If
oil shale operations add sulfur dioxide to the regional mix, oil shale
operators may be able to mitigate those additions by investing in
pollution control technologies at existing power plants. Such exchanges
of so-called pollution credits must, however, be investigated and
integrated into any expanded oil shale program.
An even more immediate concern to the people and communities near
oil shale deposits are the impacts that a revived oil shale industry
would have on the growth, social structure, public facilities,
transportation systems, watersheds, tourism, and public lands
recreation opportunities that are so crucial to our daily lives. Local
people must be assured that they will have a strong voice in their
government's decisions, especially those that have such a potential,
based on past experience, for terrible consequences.
We commend Shell for the careful and deliberate approach the
company has pursued to date. We hope that other companies will emulate
their model of slow, small, research, using private financing.
Meanwhile, we urge, in the strongest terms, that this committee and
Congress adopt a policy of carefully looking before we leap. There are
myriad questions--not just environmental--to be addressed. As Shell's
Mr. Terry O'Connor said in the Denver Post just last week, ``we think
we're about a decade from making a decision on commercial production.''
We hope that Shell's research is successful and they can find a way to
develop this process in an economic and environmentally responsible
way. While research by Shell and others continues, we encourage the
Congress to take a hard look, based on careful and incremental research
and experimentation, at the natural resource and environmental issues
that shale oil development poses and begin to identify ways in which
impacts can be prevented, avoided, and mitigated.
Most basically, Mr. Chairman, we do not believe that any action is
needed at this time. Private research is continuing, and by Shell's own
description, the company--operating on private land with its own
financing--is years from making the go/no go decision about full field
development. Several companies already hold leases. Meanwhile, the
Mineral Leasing Act grants the Secretary of the Interior authority to
issue new leases if interest demands. Indeed, the Department of the
Interior, in cooperation with other departments, is in the midst of
promulgating rules for a limited public lands leasing program for oil
shale research and development.
Those oil shale research and development leases, by the way, should
be truly new research, not continuation of old, unsuccessful
techniques. Companies leasing federal lands for this research should
pay full market value for both the use of the land and for any minerals
extracted from it. Leasing tracts should be tightly constrained in
size. Continuous and comprehensive environmental monitoring must be
implemented by both the leasing companies and by federal land managers.
The research should provide detailed and comprehensive baseline data on
energy producing techniques and on environmental protections necessary
to minimize any processes effects on natural and public values. No
lease for research and development should be converted to a commercial
production lease without competitive bidding and additional payments to
the treasury.
Such are the small, cautious, smart steps appropriate to this
technology and the limited impact it might have on our energy future.
Let the free market work, be cautious with limited federal dollars and
especially careful with irreplaceable federal land, and learn from
small smart experiments before embarking on anything larger.
Specifically, we recommend that, before Congress considers any
commitment of federal public lands or resources, beyond research and
development projects on very limited financial and geographic scale,
the Department of the Interior enter into a cooperative agreement with
the States of Colorado and Utah to develop a comprehensive,
programmatic Environmental Impact Statement under auspices of the
National Environmental Policy Act (NEPA) that would evaluate and review
all relevant economic, technical, environmental, and socioeconomic
issues regarding proposed oil shale development policies and
development proposals.
This detailed NEPA analysis should be conducted even before
implementation of a research and development leasing program, certainly
before undertaking any larger scale use of public lands or resources
for oil shale production.
We think this approach would be valuable for several reasons. For
one thing, the most recent comprehensive evaluation of the
technologies, economics, resource demands, socioeconomic impacts, and
environmental impacts of oil shale development that we could find was a
1980 assessment by Congress's Office of Technology Assessment (An
Assessment of Oil Shale Technologies, Office of Technology Assessment,
June 1980, available at http://www.wws.princeton.edu/ota/ns20/
topic_f.html). Though an interesting and comprehensive document, with
much useful information, it was published two and a half decades ago.
In the intervening years, much change has taken place, both in terms of
the technology of oil shale extraction, and within the region itself.
An environmental impact statement would afford an opportunity for
the relevant government entities to evaluate the potential advantages
and disadvantages of various technologies and policy approaches, and
the potential impacts of various scales of development on the
communities and environment of western Colorado and eastern Utah.
Some of the questions to be addressed in an EIS that I mention
above. A larger list of questions also would include: What scale of
development are we considering: 50,000 barrels/day; 100,000 b/d;
1,000,000 b/d? What are the water requirements of oil shale projects at
these different levels? What water quality impacts might we anticipate?
What are the potential impacts on air quality? Are their unique
pollution control challenges with oil shale technologies? What is the
new regional context for regional air pollution and pollution control,
compared to 1982? What are the energy requirements of various levels of
oil shale development? Will development require the construction of new
power plants elsewhere? Will these be coal plants, natural gas, or
both? What will the impacts of energy demands for oil shale development
be on fulfilling energy demands from other user sectors? What are the
workforce requirements? Will new public infrastructure be required,
i.e., roads, schools, police protection, etc.? Who will pay for this?
These are some of the issues that need to be addressed, and that
citizens and policy-makers need to be informed about, before we put
policies in place that seek to commercialize the development of oil
shale.
These are important issues for our region to understand. For
example, the 1980 OTA report noted with respect to socioeconomic
impacts of a 1,000,000 barrel per day program the following:
A 1-million-bbl/d industry could not be accommodated without
major Government involvement and massive mitigation programs.
The participation of Federal, State, and local agencies, the
public, and the developers would be essential to minimize the
adverse living conditions that would inevitably arise. [Chapter
1, p. 5]
With respect to water demands, the report noted that the region
could sustain a 500,000 bbl/d program until the year 2025, ``after
which water scarcities may limit all regional growth.'' [Chapter 1, p.
4]
With respect to water pollution, the report noted that, ``The
potential leaching of waste disposal areas and in-situ retorts after
the plants are abandoned is a major concern. If it occurs, the
leachates could degrade the water quality in the Colorado River system,
a vital water resource in the Southwest . . .'' [Ch. 1, p. 4]
These are just three examples of a wide range of issues that need
to be addressed before we adopt policies to encourage the development
of oil shale.
Of special importance, the framework of an EIS affords the people
of Colorado, Utah, and American citizens in general an opportunity to
become informed about the status, promise, risks, opportunities and
impacts of oil shale development. Because state and local governments
will have to shoulder much of the responsibility for dealing with both
the socioeconomic and environmental impacts of this industry, they need
to have as much information as possible to make informed decisions.
Finally, it is to the advantage of policy-makers here in the Congress,
as well as within the Executive Branch, to have as much information
available as possible about the promise and perils of oil shale
development, before any final policy decisions are made.
Whatever our various views on the policy choices before us, I hope
that we all can agree that developing as much information as possible,
and affording the citizens of the communities affected the opportunity
to learn more about the consequences and opportunities of oil shale
development, is necessary before we make any hard and fast decisions
about the direction we will take. Such an approach is in the best
interest of all of us, including industry proponents, the federal,
state and local governments, and the people of Colorado and Utah. I
hope that this time around, we will be more careful than we were the
last time. I urge that we use the framework provided by the National
Environmental Policy Act, combined with cautious, sensible
deliberations, to inform the decisions we make, before we make those
decisions.
Thank you again for this generous opportunity to address the
committee and the fascinating discussion that this hearing has
promptly. Please let us know at any time how we can assist with further
Congressional discussion of these important questions.
Senator Salazar. Thank you very much, Mr. Smith, and on
behalf of the Energy Committee, I thank all of you for
participating and giving us your testimony and this information
today.
I will ask some questions of the panel for a few minutes
here.
First, Mr. Mut, if you can tell us a little bit more about
the time line with respect to the project that you currently
are working on. I heard in your comments that you were planning
on being in a position where perhaps by the end of the decade,
you would be able to develop a plan after you have completed
your research and development. Can you tell us a little bit
more about your time line with respect to getting to a point of
whether or not you can decide if this in-situ technology is, in
fact, going to work to develop oil shale?
Mr. Mut. Yes, Senator. There are still a number of things
that we need to test, some on a sequential basis and some in an
integrated test. To design, construct, and then conduct that
integrated test will take on the order of 4 years. In the most
optimistic case, if we get the type of response that we are
designed to and see the recovery efficiency that we need to see
in order to make the process economic, the time between now and
the end of the decade would be totally consumed with that
process, designing, building, conducting, and evaluating the
results of the experiment.
Senator Salazar. Mr. Mut, if I may, what are the factors
that are requiring the amount of time to be taken to do the
further research and development? The reality is that we do
know a lot about oil shale. The experiences of the past did not
work. This new in-situ process which you have underway is a new
process, where you have been working on it for a while. Are
there things that could be done to try to speed up that
process, or do you think that you are doing everything that is
worldly possible in terms of your schedule so that it is still
to the end of the decade before we will know whether or not
this will work?
Mr. Mut. Our belief is that our level of knowledge today is
insufficient to make a commercial decision today. So one larger
scale and almost a magnitude larger integrated test is
required.
The real issue, Senator, with getting the quality of
information you need is that you need to model the commercial
process. By that, I mean you have to have the well spacing far
enough apart that you can emulate the commercial process. In
order to get the heat transferred to get the type of recovery
that you need to measure, it takes about 3 years. So if we made
tighter spacing of those heaters in the experimentation, we
could get an answer quicker, but then we would have a larger
extrapolation to make into commercial. So we are trying to
balance the time that it takes to do the experimentation so as
to get the information that would be required to make that leap
at time of commercial.
Senator Salazar. So in summary, then you essentially, from
the point of view of Shell Oil out there on the ground building
this R&D project, believe you will not be in a position until
about 2010 to determine whether or not this technology will
work to commercially develop oil shale. Is that correct?
Mr. Mut. That is correct.
Senator Salazar. Let me ask a question both of you and Mr.
Smith, if I may, Mr. Chairman. Mr. Smith raised a question
about the amount of energy that it actually takes to produce
the fuel from the in situ heating up of the oil shale. Give us
a sense of that concept. How much energy does it take to
actually heat up the oil shale to the point where it is
commercially producible, and are we putting more energy into
the ground to heat up the oil shale than ultimately what we are
taking out of the ground? What is your sense of that equation?
Mr. Mut. Well, Senator, I could never make those economics
work. If you take the electric energy that is input into the
ground, we produce seven times as much energy coming out. When
you take the thermal inefficiency involved in power generation
into account, that number is cut to about 3\1/2\ to 1. So the
energy balance is, say, 3\1/2\ to 1 when everything is
calculated into the whole process. So for every bit of basic
energy required to process and to generate power, we yield 3\1/
2\ units of energy out.
Senator Salazar. I have just one more question, and this is
of Mr. George. You lived through oil shale probably like nobody
else has in this room, watching what happened on the Western
Slope back in the 1970's and the 1980's. What is your view of
the development currently underway by Shell Oil? Generally how
do you respond to some of the concerns that Mr. Smith raised
from an environmental perspective?
Mr. George. Thank you, Senator. Pretty clearly, we would
have no interest in repeating the boom/bust cycle. If that was
the option and if we go forward based solely upon the influence
of price of oil, then we are destined to repeat the same
mistake. So even though we have a changing culture and
increasingly sophisticated population in western Colorado, it
is hard to try to speak for everyone. So we are always going to
have people at a different place on the spectrum of how can we
anticipate they would react to some change in the oil shale
process in industry.
But I think we could probably say these things, that most
of us recognize the role that our part of the country plays in
national security in the future. I think we have an
understanding, an appreciation for the role that our part of
the State needs to play in its own economic growth, but in
particular and in addition to the State's and the Nation's
economic growth. So I would say most of us would be willing to
take a look at a different future than we have seen in the
past.
I think most people would say we probably wasted the last
20 years. We should not have quit the science. We should have
kept doing what a number of companies did do for a while, to
learn as much as we can about the chemistry, the geology, all
of these things that we have been talking about today. It is
important to do that, and it is going to take a significant
role from the Federal Government to lead us to do that. So it
would be our thought that stepping up that pace has a lot to be
said for it. This would need to be done in many of the ways
that Mr. Smith has indicated.
I think all of us have become more sophisticated as the
years have gone by about the interconnectedness of the things
we do for business, the things we do in the development of
natural resources, and how you protect and keep all the other
values you have. I think we are getting pretty good at that,
and it is the right way to do it. I think many of us believe
that the way we would step up the pace in the proper
development of oil shale can be done consistent with the use of
these other resources and the protection of wildlife and water
quality, air quality, and a way of life.
So I think it is a matter of timing and how we have
included the population, everybody, in the discussion and the
partnership of the State and the Federal Government and
everyone else that lives there.
Senator Salazar. Thank you, Mr. George.
Mr. Chairman, I just want to make one comment because I
said something about Russell George in your absence, and that
is that he is truly a model of bipartisanship. He is a good
Republican, a wonderful Republican, who was Speaker of the
House of Representatives in our State of Colorado, went on to
be the director of the Division of Wildlife and now executive
director of our Department of Natural Resources, a Harvard
graduate, and someone who has done a lot to contribute to the
well-being of the people of the State of Colorado. I am just
honored to have him here before our committee today and honored
to have the rest of the members of this panel as well. Thank
you very much.
The Chairman [presiding]. Well, thank you, Senator, and
thank you for doing what you did for me just now. I was not
very pleased, but I had another appointment that I should not
have had because of this hearing but I had to go do that.
I have a couple of questions. Working with the
laboratories, as you have--and you indicated the ones you have,
which would have been the ones I would think you would be
working with--would you give me a sense? Do they think this is
the most practical and feasible and most appropriate technology
for the development of shale?
Mr. Mut. Well, Senator, I can only speak to the discussions
that we have had about it, which has been limited to our
process. We have not opened up the discussion quite that large.
But in generic terms, relative to older technologies or other
things that were being considered, yes, they believe this is
far and away the most logical way to proceed.
The Chairman. Now, you mentioned numbers in terms of people
and the like, and I do not know that you can tell me this, but
how much are you investing in some period of time, annually, in
this research, this development?
Mr. Mut. Well, we spend tens of millions of dollars each
year on this process, and in order to move to an objective of
having this technology commercial by the end of the decade, we
would have to significantly ramp that expenditure level up.
The Chairman. What would be the deciding factor in terms of
whether that ramp-up occurs or not?
Mr. Mut. It would be a function of the results of our
testing, the determination of whether or not environmental
protection is accomplished as we have seen in individual
experiments and determine whether or not the recovery
efficiency that drives the economics and is the whole reason
for doing it in the first place is as projected. That is what
takes the greatest amount of time.
The Chairman. Now, I know there is a lot of proprietary
interests and potential patent involvement, but I assume that
as you work on the environmental part, that you will bring the
communities of interest in to at least verify what you are
finding.
Mr. Mut. Yes.
The Chairman. It does not do any good for you to come up
with it and then have 3 years of litigation as to whether it is
any good, which you might have anyway.
Mr. Mut. That is absolutely correct, Senator. In fact, for
the last many years, since 1997 when we started in earnest
working in the area on our own lands, we have taken a very
steadied approach, informing the community of what is going on,
seeking their input, seeking their advice, and keeping them
informed as we go along the way.
The Chairman. Now, where is your demonstration project now?
Public or private land?
Mr. Mut. It is on private land.
The Chairman. That decision was made intentionally, or
there was no alternative, no way to do it on public land?
Mr. Mut. I cannot speak for that exactly. Shell has some
35,000 to 40,000 acres in that particular area, so there was no
need at that particular point in time to seek Federal lands.
I might add, Senator, that we are not in this as a science
experiment. We started this research when oil prices were
considerably lower than today, and our objective is to produce
oil and gas at prices significantly lower than today's price as
well.
The Chairman. Are there other companies, to your knowledge,
that are involved in any way of significance in developing
technology in this area?
Mr. Mut. We are unaware of anyone who is doing the types of
field experimentation that we are doing. There have been
mentions. I have seen patents and public statements by other
companies that would indicate that they are also interested.
The Chairman. In the area that you are involved in, you
would require a considerable amount of energy to heat the
furnaces. What would be the source of that? Electricity or
what?
Mr. Mut. Yes. They are electric resistance heaters, much
like a hair dryer or a toaster, but significantly more exotic
metallurgy. The source of it would be electricity that is
generated from a source. It does not really matter where the
energy to generate power comes from.
In our process, the assumption we make is that we produce
about two-thirds liquid fuels and one-third gaseous fuels. For
simplicity, we assume we take a portion of that natural gas and
burn it in power generation operations to supply the
electricity to heat the subsurface.
The Chairman. So if this scheme works, you would not be
looking for an outside source of energizing power plants. You
could do it from within.
Mr. Mut. We could do it from within. We are somewhat
agnostic to that. In fact, we would be looking for the best
environmental and economic solution. It is very possible that
we could use alternatives, including coal that is located in
the vicinity, or nuclear in the future. We look at this as a
very long-term project because the resources will stretch for
decades and decades.
The Chairman. Now, I was here when we did the Synthetic
Fuels Corporation. I am not sure you were, were you?
Mr. Mut. I know of it.
The Chairman. I was not one of those who thought it was a
total failure. I thought we made some bad mistakes, but that
was the result of so many people wanting to have input that the
ultimate legislation looked more like a Christmas tree than a
law. So everybody had to go through too much to build anything.
But the whole reason given then for capture of shale
failing was the price of oil, although Mr. George suggests that
we will never in the future rely upon price, but that was given
as the reason we could not.
I still assume that with your very brief response a while
ago to a question where you said that would not be economic or
used some nice words like that, you clearly meant that you had
to include your company's evaluation of where the price of oil
would be at the point in time that you started producing this
and thereafter. Is that not correct?
Mr. Mut. That is absolutely correct.
The Chairman. So it is going to rise and fall, more or
less, on whether we have high enough prices of oil. Right?
Mr. Mut. That is correct. The volatility of the market is
certainly bound to continue, and I do not either have a
personal opinion, nor does our company at this point in time
have a position as to whether the types of price levels we are
seeing today are sustainable. But this technology was developed
for oil prices to be stable in the $25 range.
The Chairman. Right. Maybe I am wrong, but I do not know
anybody that is really predicting that, even in the rise and
fall, it is going to go back down to $25. I assume some
companies are still expecting that.
Mr. Mut. I do not know.
The Chairman. You do not have to say.
Mr. Mut. I can only say as a former crude trader, when
everybody has an opinion, it is definitely wrong.
[Laughter.]
The Chairman. Well, the problem is we would love that, but
on the other hand, it seems to me that we are beginning to be
realistic on the supply demand side, although something like
tar sands and shale would add significantly to the
understanding of where the reserves were. It would be rather
long-term, but it would certainly change it.
Canada has changed it already. They went from a 6 million
or 8 million barrel reserve to 180 million almost overnight,
which incidentally, Mr. George, was totally related to price.
It was plenty high. There was a lot of extra money. They figure
they will come in at $12 after they have been at it for a
while. Right now it is $25-$30. It seems it is going to happen
in this area. It is going to come in less 15 years from now.
There is no doubt about it. Is that not correct?
Mr. Mut. I think that is probably directionally correct.
The Chairman. Yes, just because that is what happens when
technology gets perfected.
The other question I have, while you have operated on
private land, I think it is really important and I hope that
you will consider helping the Federal Government with input as
they develop the demonstration research leasing that they are
talking about. Clearly, one of the advantages expressed by our
Canadian friends for our development is that large parcels of
this are owned by the Federal Government, not because of the
ownership concept, which somebody expressed, but rather because
of the ability to manage access, where people can drill and
where people can use land. But that is not going to be very
important if we do not handle the leasing right. We do not want
to get in a muddle where we have been delaying things 5 years
because we have leases that are all messed up. So whatever the
industry has to add to what would be right, we would hope that
you would consider doing that.
Mr. Mut. Yes, Senator. In fact, we have been very involved
with the Department of the Interior, Department of Energy, and
Department of Defense in discussions about how to move this
process forward. We do see some significantly attractive lands
that are currently in BLM hands, and one of our reasons for
suggesting moving forward with commercial leasing regimes and
land swaps was to determine whether or not an acceptably large
tract of land can be put together for commercial utilization.
The Chairman. Mr. Smith, I do not want for you to think
that I have been only interested in technology. I understand
what permeates all of this is can it be done in this manner
satisfactory to the community and the public lands, the nature
of public lands and its relationship to the public ownership,
can it be done right, clean.
Was anything said here in my questions that deserve some
retort or thought by you? I noticed you wrote down a few
things. Does that mean there are some things you would like to
call to the committee's attention that have been talked about?
Mr. Smith. Thank you, Mr. Chairman. Just a couple.
The Chairman. Please.
Mr. Smith. One would be the scale of the amount of land
needed. Mr. Mut describes some public lands that might be
suitable for a larger scale version of this process. We are
very concerned and strongly recommend that the committee and
Congress itself and the administration take the very careful,
slow, thorough steps of review that each of the members of this
panel have recommended before going to a large scale commercial
version of oil shale production and especially on public lands
because there are so many public and natural values that those
contain. So if, indeed, we are looking at the kinds of
thousands of acres just described by Mr. Mut, we need to do
that slowly and very thoughtfully, using the tenets of the
National Environmental Policy Act and other tools available to
the administration.
The Chairman. Well, I do not think anybody would think that
if you were moving in the direction you just said, that that
would not be a major Government activity as covered under NEPA,
whatever those words are.
Mr. Smith. Thank you.
The Chairman. I do not see how it could be otherwise, but I
am not passing judgment on that now. It seems like that is the
case.
Well, let me say that even though it seems like a long way
out there, whenever you think that could be, I am interested in
making sure that we do things right so that not only your
company would be interested, but any company that has a big R&D
potential and has a lot of money, a lot of resources would be
interested also.
My last observation. We were talking about the price of
oil, and I talked about the fact that I did not think that
investments would be made on the probability that oil would
drop dramatically in the $25 range or $20. I would make an
observation about your company and most of the major oil
companies. They are acting like they expect it to come back
down because of the amount of money they are holding in
reserve, which is not going unnoticed. It is extremely large in
terms of how much is being accumulated. Some hope that it will
be invested. That is not our business, but pretty soon it will
be and especially when we need R&D in some of these areas. This
is not a primary thing on your horizon. It is a minor
investment compared to some other investments you are making.
Well, I should not say that, but it is not one of your major
ones.
In any event, I will, for myself, tell you--and I say this
to environmental community too--we are not engaged any longer
in some modest debate about the problem America has. This is a
big problem. If I were to list crises, I cannot avoid listing
this among the three or four that are confronting this country
that are apt to bring us to our knees and cause some major
disruption. I have got to put this one in there. The dependence
on energy has got to be in there. For those who have other
interests, which are legitimate, I think we have to understand
that there is this big interest of what happens to our country.
If we do not find some alternatives here and maximize our own,
while conserving to the maximum extent, we as leaders are just
fools because you cannot escape the fact that this is a sorry
state of affairs for our great country. Just look at one little
thing.
We were speaking of a million barrels a day and the
environmental community said that is not very much in Alaska.
Canada is going to produce 1 million barrels in their tar sands
effort. They hope to get up to 2 million in 3 or 4 years and
then maybe 5 million in 7 or 8 years. They think that is
terrific and tremendously important. Well, I would just take 1
million. On a yearly basis, that is $38 billion in foreign
trade dollars. 1 million barrels a day is $38 billion, which is
a huge amount and going up. So I think it is important that we
pursue this.
My last question is, would your company have any feelings,
whether it is here today or in further discussions, about what
the tax policies might or might not have to do with your
investing in this activity?
Mr. Mut. Well, I think there are a number of things that we
would like stability on. We talked about regulatory, et cetera.
From the standpoint of taxes, we believe that this type of
resource and the technology that is required to exploit it and
the R&D that is required to develop that technology would
justify treatment of this resource as a nonconventional fuel.
We believe that and items like the depletion allowances may be
appropriate for this type of really unusual resource.
The Chairman. We seriously ought to consider that.
Our neighbors have a very expedited depreciation for not
only the R&D but the actual investment in production. It is
written off in the first year. Imagine that. We do not do
anything like that around here, but they do. That is how they
got a lot of money invested. Then, of course, they pick it up
in their scheme over the next 10 or 15 years, and the royalty
goes up dramatically too. We do not have enough coordination to
do anything as rational as that around here, I do not think.
But it made some good sense. We ought to be asking some
companies whether it makes sense out there too. I would think
we might need more than the depletion allowance.
Mr. Mut. Well, I was referring to section 29 credits as
well.
The Chairman. Correct, which should be broadened to cover
it. We are not sure it does not cover it.
Mr. Mut. We think there is ambiguity at this point. We are
not sure it is covered either.
The Chairman. Senator, did you have anything else?
Senator Salazar. I just want to thank the panel.
The Chairman. I thank you all also.
We stand adjourned. Thank you very much.
[Whereupon, at 12:27 p.m., the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
The Wilderness Society,
Four Corners States Regional Office,
Denver, CO, May 9, 2005.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Chairman Domenici: Thank you for sending supplemental
questions on the topic of oil shale following the Senate Energy and
Natural Resources Committee's April 12 hearing. Bill Meadows, President
of The Wilderness Society, forwarded to me your letter and questions
asked me to respond.
I appreciate the opportunity to comment further on this potential
energy source and on environmental precautions that must be included in
any discussion of it. I apologize for the delay in responding and hope
that the following information is still timely and helpful to the
committee.
Thank you again for the opportunity to address the committee, both
at the hearing and in this form. Please let us know if we can provide
additional clarification or assistance.
Sincerely,
Steve Smith,
Assistant Regional Director.
[Enclosures.]
Questions From Senator Domenici
Question 1. In your testimony, you referred to ``the potential to
engender false hopes, exaggerated claims, and unfulfilled promises'' as
was done in the last effort to develop oil shale 25 years ago. Nobody
wants to repeat that experience.
How would you suggest we avoid this possibility and keep these new
efforts focused on realistic approaches?
Answer. The primary factor that prompted exaggerated claims and an
unrealistic pace of oil shale development in the late 1970s was the
provision of federal subsidies and inadequately controlled access to
federal public lands for companies pursuing the technology. In the end,
the production of oil shale could not be sustained, even with
artificial federal support, let alone without it.
Any new oil shale research program should be based only in direct
investment by interested companies. The production of fuel and other
useful products from oil shale must meet the basic test of
profitability and sound business investment, best measured by
individual companies willingness to use their own resources.
This emphasis on private investment would be even more important in
any commercial oil shale development ventures. Full production of oil
shale, if it occurs, should be financially sustainable.
That financial sustainability should be calculated at reasonable
energy equivalent market prices and not based on high oil price spikes,
such as those seen recently, lest the industry again fail when prices
drop.
Similarly, access to federal public lands for oil shale research
should be very limited in scope and tightly controlled to protect other
public lands values. Research tracts should be limited, as contemplated
in the Bureau of Land Management's draft oil shale research
regulations, to 40 acres or less. Total leased land held by any one
company for research purposes should be limited, and individual tracts
should not be combined into larger operations.
These cautious approaches are especially important in that oil
shale leasing and activities have been largely dormant for two decades.
Federal land managers and Congress should be very careful not to launch
or even encourage crash programs in oil shale research or development.
It is important to take the time to get companies, scientists, and
citizens familiar with both the failures of the past and with any new
approaches that higher potential for sustainable success.
Research tracts leasing should be limited in duration, no more than
five years. Research leases should not be converted to commercial
production leases without additional federal environmental, scientific,
and financial review and associated public comment. Transition to
commercial production leasing, if it occurs, should be based on
competitive bidding and should include stipulations providing for the
payment of royalties at least in the amount of 12.5% as with other oil
development--possibly higher to account for the intensity of surface
impacts on federal land.
Perhaps the most basic consideration in any oil shale leasing
program--for research or for commercial operation--is the involvement
of local citizens and local elected officials in each stage of review
and activity. Extensive citizen review and comment on oil shale
proposals will help temper any unrealistic boosterism and will pose
fair, realistic, and practical questions about the sustainability of
any particular technology.
Any oil shale leasing program--for research or for commercial
operation--should require the use of best and evolving management
practices, and research leases should be offered only for the testing
of genuinely new technologies that overcome the environmental,
technical, and financial shortcomings of those used in the past.
The Bureau of Land Management, or other appropriate federal agency
or agencies, should conduct a full programmatic analysis of oil shale
research and development activities, under the provisions of the
National Environmental Policy Act, prior to the issuing of any leases.
That analysis should review both potential individual field operations
and the compounded and cumulative effect of potential development over
the multiple states where oil shale ore lies.
Question 2. You commented on Shell Oil's ``careful and deliberate
approach''. How would you suggest we ensure that other companies do the
same?
Answer. The approaches, precautions, and requirements outlined
above will encourage only serious investment by companies with the
resources, talent, and long term commitment to a sound and sustainable
program. By basing oil shale development on private funding and on
careful planning programs of companies serious about developing sound
technologies and committed to protecting the larger environment, the
use of federal lands for oil shale research and possible production
will be more likely to find success.
Question 3. You have provided a long litany of issues that need
analysis before decisions are made to commit land and resources to any
project.
Do you think the environmental community can support an oil shale
program on public lands if these issues can be adequately addressed?
Answer. Energy production for the general benefit of the nation is
a legitimate use of select federal public lands, both under the
provisions of the Federal Land Policy and Management Act and other
relevant statutes and in a sound approach to the husbanding and use of
valuable public resources.
Correspondingly, it may be possible to engage in careful research
into the potential of oil shale as an energy source while still
protecting the many other, more enduring values found on federal public
lands. If oil shale research projects demonstrate that oil shale can be
produced commercially in an energy efficient manner and while
continuing to protect those other public lands values, many
environmental organizations are likely to support the careful
transformation from research to production.
Some threshold considerations, in addition to those mentioned
above, for a limited research program on federal public lands include:
Leasing should be offered only for research and development
of clearly new technologies and not for continued use of old
technologies or minor variations on them;
Leasing must not be a license for speculation. Potential
lessees should be required to demonstrate, in advance, how
their proposed activities in the particular areas proposed for
leasing reduce the environmental impacts of oil shale
development or how their technologies or processes improve
energy efficiency, contribute to resource conservation, make
development of oil shale 'more economic, or reduce waste
outputs;
No research leases should be offered on any lands in
Colorado, Utah, or Wyoming that any federal agency has
identified as having wilderness characteristics--wilderness
study areas, wilderness inventory areas, or lands with a
reasonable probability of wilderness characteristics;
No research leases should be offered on any lands proposed
for wilderness designation in legislation pending before
Congress (examples from past Congresses include America's
Redrock Wilderness Act, Colorado Wilderness Act, Northern
Rockies Ecosystem Protection Act, and Wyoming Wilderness Act;
No research leases should be offered on any lands designated
as Area of Critical Environmental Concern;
The Bureau of Land Management (BLM) and other federal
agencies involved in oil shale research leasing should fully
consider new information supplied by citizens' groups or
generated by the agencies themselves regarding potential
wilderness values before leasing any lands for oil shale
research, and the BLM should continue inventorying wilderness
characteristics and appropriately managing wilderness quality
lands;
Leases for oil shale research should include strictly
enforced non-waivable stipulations mandating that lessees
submit a reclamation plan to the appropriate state and federal
agencies prior to authorization of any ground disturbing
activities. Those stipulations should include the requirement
that reclamation activities begin promptly upon lease
expiration, termination, or relinquishment. Leases should be
issued only in exchange for genuinely adequate bonding or other
advance mechanism to ensure the completion of reclamation;
Leases should contain stipulations requiring lessees to
conduct air quality monitoring to establish baseline
conditions, modeling to anticipate impacts from lease-based
activities, and continuing monitoring to measure and control
impacts on air quality, visibility, and human health.
Similar monitoring and precautions should be required
relative to water quality, watersheds and streamflow, wildlife
habitat, and the protection of plants and plant communities.
Similar precautions and practices should be applied even more
stringently in the event any federal lands are considered for leasing
for commercial development of oil shale.
Questions From Senator Bunning
Question 1. What do you think the federal government needs to do in
order to increase development of these resources?
Answer. Any development of oil shale--for research or for
commercial production--should be based in requirements that ensure the
financial sustainability of such development, respect the wishes and
long term needs of affected communities, and complete and enduring
protection of other natural and public values on federal lands.
The development of oil shale and tar sands can be increased, and
such increase sustained, only if those key principles are considered
and engaged in all decisions about the use of federal lands or
resources, lest any temporary increase in research or production be
just that--temporary.
Some details of this careful approach, emphasizing sustainable
increase in development, are suggested above in responses to questions
from Senator Domenici.
Question 2. What do you think are possible hindrances to developing
oil shale and oil sands in this country?
Answer. The primary historical limitations on development or oil
shale and oil sands have been financial, social, environmental, and
energy efficiency.
Past efforts to develop these resources have been based on
extensive federal subsidy, momentarily high oil prices, and
inadequately constrained access to federal public lands. Without those
artificial supports, sometimes even with them, the financial
practicality of development has not been realized. The development of
oil shale and oil sands must be based in technologies that are
sustainable without subsidy and at reasonable market prices.
Past efforts at development have been crash programs that
artificially raised the expectations of affected communities, skewed
municipal and state land and services planning decisions, and left
individuals and communities hurt financially and socially when the
programs failed.
The environmental impacts of technologies used so far have been
severe and largely uncontrolled. Resistance to a revival of development
will be strong until new techniques are proven and employed for
protecting the long term health of the natural and human environment.
The relative inefficiency of extracting liquid fuel from rock is
perhaps the most basic technical constraint on development. While
recent private experimentation suggests that the proportion of energy
produced to energy used is improving, such advances must consider
before development can be seen as practical or appropriate.
In addition, energy and government planners must anticipate the
comparative value and expense of various energy sources. For example,
an increase in the fuel economy of the nation's car and truck fleet, by
just one mile per gallon, would, at lower total expense, save 400,000
barrels per day of oil, the equivalent of oil shale's potential
contribution at full production.
Question 3. Do you know of any problems with developing oil shale
and sands in Kentucky?
Answer. I have not found materials specific to the development
potential of oil shale or sands in Kentucky, and I recommend relaying
this question to the Department of Energy for more detailed response.
Meanwhile, I offer two observations. First, to the degree that
deposits in Kentucky arc found on public lands, the considerations and
constraints suggested above would be appropriate.
Second, whether located on federal, state, or private land, the
precautions about careful pace, scale, financial sensibilities, and
impacts on local communities, also as outlined above, would be
important in any location where these resources might be researched or
developed.
______
Responses of Jim Evans to Questions From Senator Domenici
Question 1. What is the current population of the area we are
discussing for oil shale development?
Answer. The Western U.S. oil shale resources are located in
Northwest Colorado, Eastern Utah and Southwestern Wyoming. The areas of
greatest concentration where oil shale development has been proposed
specifically are within Garfield and Rio Blanco County, Colorado and
Uintah County, Utah. In Colorado the latest (2003) population estimates
are:
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2003
Population Square Miles
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Primary Development
Garfield County......................... 48,000 2,947
Rio Blanco County....................... 6,000 3,221
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Sub Total........................... 54,000 6,168
Secondary Impact
Mesa County............................. 125,000 3,328
Moffat County........................... 13,000 4,742
Rout County............................. 21,000 2,362
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Sub Total........................... 159,000 10,432
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5-County Total.................. 213,000 16,600
===============================
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This is approximately double the population of 25 years ago. Most
of the growth has occurred in Garfield and Mesa Counties (along the I-
70 corridor) and in Routt County (in the resort/ski town area of
Steamboat Springs).
Question 2. How would you describe the economic base for this
region of the State and how does this compare to the base of 25 years
ago?
Answer. The economic base of the Northwest Colorado region was, and
still is, a mixture of energy/mineral development, tourism and
agriculture. The energy/mineral sector includes more than half of
Colorado's coal production (about 20 million tons per year), the
largest oil producing county in the State (Rio Blanco with the Rangely
Oil Field producing about 7 million barrels per year), and the most
active natural gas development county (with 21 drilling rigs now
operating in Garfield County--more than half of the state total).
There is currently a labor force of 116,000 in the region with $5.7
billion annual personal income total, and retail sales of $5.2 billion.
Tourism is important in each county, especially in Steamboat Springs
which is recognized internationally as Ski Town U.S.A. Mesa County is
the major retail center of Western Colorado and has an active economic
diversification program.
Question 3. Do you feel the socioeconomic problems associated with
the oil shale development of 25 years ago can be overcome and can we
ensure they are not repeated?
Answer. I am optimistic that the socioeconomic impacts of oil shale
development can be dealt with adequately in Colorado once a cost-
effective and environmentally sound technology (or technologies) is
developed The key to this type of development is the federal government
since the federal government owns more than 80% of the oil shale
resources. DOE, DOI and DOD should be encouraged by Congress to develop
as oil shale strategy or plan that is not dependent solely upon a high
price of oil. From a socioeconomic point-of-view we do not want to wart
far another oil crisis (lake the Arab Oil Embargo of 1974) that fosters
another crash development program with unproven technologies. Such an
approach would invite another boom/bust cycle in our region.
Therefore, the federal government should encourage an orderly
development of cost-effective technologies. Then, with the Local
Government Impact Mitigation Ordinances, Colorado Local Government
Energy Impact Program, and Colorado Joint Review Process now in place
local governments will have the tools to deal with the socioeconomic
impacts of oil shale development
However, I am concerned that this approach may not be achieved with
the aggressive timetable now included in the House-passed Energy Bill.
HR6 calls for a commercial scale oil shale leasing program by the end
of 2006. This timetable by itself may be OK since BLM is almost ready
to initiate an oil shale R&D leasing program which could set the stage
for a commercial scale leasing program. However, H.R. 6 also calls for
oil shale leases (oar sales) within 180 days after adoption of the
leasing program. I believe this may be too fast and too inflexible. It
also may be unnecessary since the BLM R&D leasing program proposes to
allow conversion of R&D leases to commercial leases once a cost-
effective technology is demonstrated. I believe expansion of this R&D
conversion to commercial scale concept should be encouraged by
Congress, rather than a tight; inflexible timeline tor commercial scale
leases.
To ensure that the mistakes of 25 years ago are not repeated
Congress should also encourage industry to move forward with
demonstration projects, like what is being done with the Shell Oil
Mahogany Project Congress should consider enactment of many of the
recommendations submitted by Shell Oil Company, including a commercial
scale oil shale leasing program. Local governments in our region are
encouraged by the Shell Oil R&D project which is moving forward
independent of the price of oil and which is clearly attempting to
minimize potential socioeconomic and environmental problems.
I believe the overall key to a successful oil shale leasing program
is already embodied in the adopted ELM White River Resource Area RMP
(Resource Management Platen). This RMP has an oil shale resource
leasing objective to ``provide for a prudent and planned future leasing
and development program for the oil shale resource.'' The 1997 White
River RMP includes and carries forward the oil shale management
decision developed in the 1985 Piceance Basin RMP for oil shale leasing
and Management to be based upon a ``carrying capacity'' concept for
socioeconomic and environmental impacts. Local government believes
Congress should recognize and reinforce these management plans rather
than specifying a fixed inflexible leasing timetable of 180 days.
Attached, for your consideration, is a copy of the Record of
Decision and Approved White River Resource Area RMP, including the oil
shale resource decision with Appendix D summarizing the critical
carrying capacity thresholds to oil shale development.*
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* All attachments have been retained in committee files.
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Question 4. You referenced a fund made up of Naval Oil Shale
Reserve receipts of about $44 million. Is this already committed to any
other use?
Answer. Approximately $6 million is committed to DOI for
environmental clean-up of spent shale tailings at the former DOE Anvil
Points oil shale R&D facility. This is outlined in the February 9, 2005
letter from BLM submitted April 12 with my Congressional testimony.
That leaves $38 million as uncommitted to any other program. However, a
Congressional appropriation would be required to access the funds.
Question 5. Would you see this funding going solely to
socioeconomic and environmental study and compliance?
Answer. No. But I would hope a portion of these finds could be
utilized for socioeconomic and environmental impact studies and
mitigation, especially prior to the flow of any royalties from future
oil shale leases. I believe this would be an appropriate use for these
funds because half of the funds are the 50% state share of natural gas
royalties now being produced from the Naval Oil Shale Reserve (NOSR)
lands. Congress required the state share of these royalties to be
withheld until DOE is fully reimbursed for its investments associated
with the NOSR lands. This was established as a condition of the
transfer of these NOSR lands to be managed by DOI with priorities for
natural gas leasing. It would also be appropriate for use of these
minds as a source for DOI oil shale leasing costs and for the costs of
DOE oil shale development strategies and programs.
In addition, the natural gas industry has estimated that potential
increased future leasing of natural gas resources from the NOSR lands
could produce up to $1 Billion in additional royalties over a 20-year
period. Half of these natural gas royalties would accrue to the federal
government and 50% would be the state shale. I encourage your Committee
to establish a Congressional linkage or priority for use of these funds
to address the potential socioeconomic and environmental mitigation
costs of oil shale development in addition to existing Congressional
priorities already included in the Federal Mineral Leasing Act.
Question 6. What do you think the federal government needs to do in
order to increase development of these oil shale resources?
Answer. I believe that DOE has detailed a prudent coarse of action
in its Strategic Fuels Analysis released last year. This analysis
recommended a coordinated DOE/DOI/DOD program for developing secure
domestic energy resources, similar to the effort utilized to develop
oil sands in Canada.
Question 7. What do you think are possible hindrances to developing
oil shale and oil sands in this country?
Answer. The number one problem remains the development of a cost-
effective technology. Since 80% of the resource is owned by the federal
government, it should be a federal government program to provide
incentives to develop the technology.
Question 8. Do you know of any problems associated with developing
oil shale and sands in Kentucky?
Answer. No. I would hope that any technology that is developed for
Western oil shale would also work for Eastern oil shale.
Appendix II
Additional Material Submitted for the Record
----------
Anadarko Petroleum Corporation,
Western Region Operations,
Houston, TX, April 25, 2005.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: Anadarko Petroleum Corporation (Anadarko)
applauds you and the Senate Energy and Natural Resources Committee for
initiating discussions on environmentally-acceptable development of
domestic oil shale and oil sands. Anadarko believes the United States
should undertake immediate action to maximize efforts to identify and
produce domestic oil shale, oil sands and all other petroleum
resources. In our opinion, prolonged inaction in that regard will only
exacerbate current threats to our economy and security fostered by
increasing worldwide energy demand, rising imports and diminishing
conventional resources.
Anadarko is a publicly traded independent oil and gas exploration
and production company with active operations in the Gulf of Mexico,
Gulf Coast States, Mid-Continent, Western States and Alaska.
Internationally, we operate in Canada, Algeria, Qatar and Venezuela. In
2004, the company produced 190 Million BOE and our year-end reserves
amounted to 2.37 Billion BOE.
One of the strategic assets in Anadarko's portfolio is the land
acquired by the Union Pacific Railroad under the Pacific Railroad Act
of 1862 and 1864. Anadarko acquired. these lands through its merger
with Union Pacific Resources in 2000. The area includes four million
three hundred thousand privately-held mineral acres and over eight
hundred thousand surface acres within the state of Wyoming. Much of
this acreage traverses the Green River and Washakie Basins, long known
for their extensive oil shale resources. Consequently, Anadarko is one
of the largest private owners of oil shale resources in the world.
Anadarko believes the forthcoming Energy Bill should contain
mandates that would make commercial oil shale production a reality
within the next decade and provide the momentum needed for private
enterprise to commit to domestic projects of sufficient magnitude to
make this happen. We believe there are five important actions which the
federal government could institute to advance oil shale production.
Those include
developing a federal oil shale leasing program,
developing a stream-lined land exchange program to block up
federal and private acreage of sufficient size to support
commercial oil shale projects,
fast tracking and streamlining regulatory and NEPA
processes,
facilitating technological research, and
providing incentives which recognize the tremendous initial
capital requirements involved in projects of this magnitude.
Anadarko encourages Congress to direct the Department of the
Interior to develop regulations governing oil shale leasing and
development. In addition, Congress should amend the Mineral Leasing Act
to increase the maximum allowable acreage for oil shale holdings. The
current law restricts oil shale leases to one per company and to a
maximum five thousand one hundred twenty (5,120) acre lease. These
leasing restraints and limitations on lease size will constrain
development opportunities.
For example, Anadarko's oil shale acreage in Wyoming is located in
a checkerboard pattern wherein federal and some state acreage
alternates with the company's private acreage. Because the federal
acreage is currently off limits to leasing, Anadarko is limited for
potential oil shale development to its own sections of land and only
that for which we have access. In addition, the oil shale resource in
Wyoming is thinner and more widely distributed than those in Colorado
and Utah which puts even more importance on securing larger federal
leases.
The Department of the Interior should be provided the authority to
streamline the land exchange process involving oil shale resources. We
believe such action would promote resource development possibilities
and efficiencies as well as create opportunities for responsible
environmental management alternatives. In order to make the commitment
to initiate a commercial-scale oil shale development project,
proponents must first be confident that acquisition of the acreage
necessary to justify substantial capital investment will be possible.
Pursuant to this need, Congress should appropriate the money necessary
to fund an oil shale exchange program.
Congress should also investigate ways to streamline the regulatory
and National Environmental Policy Act (NEPA) processes. Consistent and
predictable regulatory requirements and dependable specific NEPA
timelines must be established to allow investors to enter into sizable
financial commitments with the conviction that their investment will
not linger due to untimely staff workloads or frivolous objections.
Anadarko prides itself on putting a high priority on protection of
the environment and developing energy in a manner compatible with the
natural surroundings. By streamlining and establishing definitive
timelines, we are not suggesting circumvention of this nation's
environmental laws or goals. Our objective is simply to improve the
current process and establish a predictable permitting system upon
which investors can rely.
Technological advances in this emerging energy opportunity can be
vital to reserve maximization, production volumes and product quality.
Through its vast networks with private industry, academia, qualified
scientists and engineers, the federal government, through the
Department of Energy (DOE), is properly positioned to encourage and
reward research and technological improvements which attract and
stimulate oil shale developers. We believe the current data base and
potential oil shale production scenarios of the DOE should be expanded.
Congress should also explore the possibility of financial
incentives to help private enterprise manage and endure the tremendous
up-front capital burdens associated with oil shale development. The
magnitude of these costs can and will discourage potential developers
and reduce competition. Incentives that may be worthy of adoption
include, but are not limited to:
production tax credits
additional federal royalty relief
accelerated depreciation
investment tax credits
depletion allowance
loan guarantees
Anadarko concurs that it is in the best interests of the nation to
secure this vast, stable, long term domestic source of oil. With
assistance from Congress in the aforementioned key areas, private
enterprise can be stimulated to do its part in realizing that goal.
The men and women of Anadarko Petroleum look forward to working
with federal, state, and local governments as well as the key
stakeholders to see that these strategic national resources become a
viable and dependable part of our nation's economy.
Sincerely yours,
James L. Fuchs,
General Manager.
______
Statement of Department of Energy, Government of Alberta, Canada
The Government of Alberta, Canada, is pleased to provide this
written submission on the Alberta Oil Sands to the U.S. Senate Energy
and Natural Resources Committee.
Included herein is a brief overview of the Province of Alberta; our
role in North American energy security; the extent of oil sands
resources in Alberta including reserves based on currently available
extraction technologies; the role the Government of Alberta plays in
bringing these valuable resources to market; and, importantly, the
direct effect this has had on increasing investment and production.
Production of crude oil from Alberta's oil sands has the potential to
close the U.S. energy gap.
THE PROVINCE OF ALBERTA
Albertans are a breed apart. They are driven by the pioneering
spirit that first settled the land. They hold dear the ethics of hard
work and personal responsibility. They cherish the ideals of family and
community that built the province.
Our policies focus on free trade and competitive markets as the
best way to allocate scarce resources. Provincial law prevents the
government from subsidizing any commercial business entity. The
Province has no sales tax, a 10% flat income tax, and no debt--
something that has not been achieved anywhere else in Canada, and
something of which Albertans are justifiably proud.
Year after year, Alberta's economic growth leads Canada, averaging
3.7% annually over the past 10 years. We lead the nation in job
creation, and our unemployment rate is consistently among the lowest in
Canada. Alberta's per capita disposable income and standard of living
are the highest in Canada. Not surprisingly, we continue to experience
the strongest population growth in Canada, with people from all over
Canada and around the world migrating to our province to experience the
Alberta Advantage for themselves and their families.
NORTH AMERICAN ENERGY SECURITY
Alberta is rich in hydrocarbon resources--producing over 1.6
million barrels per day of crude oil, and over 15.2 billion cubic feet
per day of natural gas.
Both Alberta and Canada are vital to the energy security of the
United States--we are reliable, secure and, importantly, stable
suppliers of energy to the U.S. In 2004, for the sixth year running,
the U.S. Energy Information Administration recognized Canada as the
largest supplier of oil (crude and refined) to the U.S.
Approximately 11% of U.S. crude oil imports and 15% of its natural
gas consumption come from Alberta alone.*
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* Appendix and Figures 1-5 have been retained in committee files.
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WHAT ARE OIL SANDS?
Oil sands are deposits of bitumen, a molasses-like viscous oil that
requires heating or dilution with lighter hydrocarbons in order to
flow. Second only to the Saudi Arabian reserves, Alberta's oil sands
deposits have been described by Time Magazine as ``Canada's greatest
buried energy treasure,'' which ``could satisfy the world's demand for
petroleum for the next century.''
Deposits are found in three major areas in northeastern Alberta:
Peace River, Athabasca (Fort McMurray area), and Cold Lake (north of
Lloydminster), totaling approximately 54,400 square miles--an area
larger than the State of Florida.
SIZE OF ALBERTA OIL SANDS RESERVES
Alberta is home to the largest oil sands reserves in the world.
Proven reserves\1\ of 174.5 billion barrels are second only to Saudi
Arabia.
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\1\ Proven reserves: extractable with present technology and
pricing.
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Proven Reserves........................... 174.5 billion barrels
Probable Reserves......................... 311 billion barrels
In-Place Reserves......................... 1.4 trillion barrels
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This data is on the public record and confirmed by the Alberta
Energy & Utilities Board (AEUB), an arms-length regulatory agency. Over
56,000 wells and 6,000 cores were the basis of the analysis.
Since December 2002, these figures were recognized by the Oil & Gas
Journal, followed by the U.S. Energy Information Administration in
2003.
GROWTH IN OIL SANDS PRODUCTION
Oil sands production in Alberta hit 1 million barrels a day in 2004
(about a third of total Canadian production) and by the end of this
decade, we expect production to rise to 2 million barrels a day. See
Appendix 1: Oil Sands potential: 3 million bpd by 2020, 5 million bpd
by 2030.
Annual oil sands production is growing steadily by about 200-250
barrels per day (bbl/d) per year, as the industry matures. Output of
marketable production increased to 858,000 barrels per day (bbl/d) in
2003, up from 741,000 bbl/d the year before. It is anticipated that in
2005, Alberta's oil sands production may account for one-half of
Canada's total crude output and 10 per cent of North American
production.
PRODUCTION METHODS: MINING AND IN-SITU
There are two methods of oil sands production methods: mining and
in-situ. Oil sands mining involves open pit operations. Oil sands are
moved by trucks and shovels to a cleaning facility where the material
is mixed with warm water to remove the bitumen from the sand. Today,
all operating oil sands mines are linked with upgraders that convert
the bitumen to synthetic crude oil.
For oil sands reservoirs too deep to support economic surface
mining operations, some form of an in-situ or ``in place'' recovery is
required to produce bitumen. In-situ oil sands production is similar to
that of conventional oil production where oil is recovered through
wells. Present operating costs, not including capital recovery, vary
between $10-15/per barrel.
The AEUB estimates that 80% of the total bitumen ultimately
recoverable will be with in-situ techniques. In general, the heavy,
viscous nature of the bitumen means that it will not flow under normal
conditions. Numerous in-situ technologies have been developed that
apply thermal energy to heat the bitumen and allow it to flow to the
well bore. These include thermal (steam) injection through vertical or
horizontal wells such as cyclic steam stimulation (CSS), pressure
cyclic steam drive (PCSD) and steam assisted gravity drainage (SAGD).
Other technologies are emerging such as pulse technology, vapor
recovery extraction (VAPEX) and toe-to-heel air injection (THAI).
In general, oil sands mines operations are found in central
Athabasca deposits (around Fort McMurray). In-situ production is used
in the Cold Lake, south Athabasca and Peace River deposits.
GOVERNMENT FRAMEWORK
The mineral rights in approximately 97% of Alberta's 54,000 square
miles of oil sands area are owned by the Government of Alberta (i.e.,
state-level) and managed by the Alberta Department of Energy. The
remaining 3% of the oil sands mineral rights in the province are held
by the federal Government of Canada (i.e., federal-level) within Native
Indian reserves, by successors in title to the Hudson's Bay Company, by
the national railway companies and by the descendants of original
homesteaders through rights granted by the Government of Canada before
1887. These rights are referred to as ``freehold rights''.
The Alberta government departments of Environment and Sustainable
Resource Development administer complementary environmental policies.
The Alberta Energy & Utilities Board (AEUB) regulates oil and gas
activities in the province.
The Alberta Department of Energy is responsible for administering
the legislation that governs the ownership, royalty and administration
of Alberta's oil, gas, oil sands, coal, metallic and other mineral
resources. The Department's main objective is to manage these non-
renewable resources to ensure their efficient development for the
greatest possible benefit to the province and its people.
OIL SANDS ROYALTY STRUCTURE
In 1996, Alberta announced a new generic royalty regime for oil
sands based on recommendations from a joint industry/government
National Oil Sands Task Force (NOSTF). This regime is defined in the
Mines and Minerals Act and the Oil Sands Royalty Regulation 1997, as
amended (OSRR 97). Royalty is calculated using a revenue-less-cost
calculation.
In early project years before capital investment and other costs
are recovered, the royalty rate is lower than the rate that is applied
after costs are recovered. This helps project cash flows in early
years. Once costs are recovered, the Province shares in project
profits. Details are provided below.
In the pre-payout period (before the project has recovered
all of its costs), projects pay royalty tied to 1% of gross
revenue;
In the post-payout period (after the project has recovered
all of its costs), projects pay royalty tied to the greater of
1% of gross revenue or 25% of net revenue.
Since 1990, oil sands royalties have totaled over $2.5 billion.
ANNOUNCED INVESTMENT
Since 1996, when the generic royalty regime was introduced, $25
billion of investment in the oil sands has occurred. Looking forward,
it is expected that new capital investment could range between $2.5-$4
billion per year.
THE WAY FORWARD
To date, only about 2% of the established oil sands resource has
been produced. Alberta's oil sands industry is the result of multi-
billion-dollar investments in infrastructure and technology required to
develop the non-conventional resource. In the last five years alone,
industry has allocated $20 billion towards oil sands development, and
the Government of Alberta invested over $700 million over a 20-year
period.
Alberta encourages the responsible development of these extensive
deposits through planning and liaison among government, industry and
communities to ensure a competitive royalty regime that is attractive
to investors, appropriate regulations and environmental protection and
the management of the Province of Alberta's rights to oil sands while
taking into account some of the barriers--higher technological risk and
higher capital costs--faced by oil sands developers.
In 2003 Alberta's oil sands were the source of just over half of
the province's total crude oil and equivalent production and over one
third of all crude oil and equivalent produced in Canada. Over the last
three fiscal years, through to 2003/2004, oil sands development
returned $565 million to Albertans in the form of royalties paid to the
Provincial government.
Continuing technology improvements will lead to greater energy
efficiency and a reduction in natural gas as a fuel input source. As
the future unfolds, the only impediment to oil sands production could
be shortages of skilled labour to complete the projects. Oil sands
projects will compete for the same skilled workforce as the MacKenzie
and Alaska natural gas pipelines.
Development of Alberta's oil sands resources represents a triumph
of technological innovation. Over the years, government and industry
have worked together to find innovative and economic ways to extract
and process the oil sands and energy research is more important today
than ever before. Working through the Alberta Energy Research
Institute, the Alberta government is committed to a collaborative
approach with counterparts in Canada and the United States to spur new
technology and innovation programs that will reduce the impact of
greenhouse gases and other emissions, and reduce the consumption of
water and gas.