Naval Petroleum Reserves: Transfer Options for Naval Oil Shale Reserves 1
and 3 in Colorado (Testimony, 05/07/97, GAO/T-OGC-97-42).
The Petroleum and Oil Shale Reserves were established in the early 1900s
when the government began setting aside large sections of public lands
favorable for hydrocarbon production. Although these reserves were
originally intended as a source of oil for the military, the Naval
Petroleum Reserves are now primarily produced for commercial purposes.
By contrast, the Naval Oil Shale Reserves have remained largely
undeveloped, although protective drilling has occurred since 1985 to
protect government-owned resources from being drained by adjacent
operations. This testimony discusses the Energy Department's
recommendation that Oil Shale Reserves 1 and 3 be transferred to the
Interior Department for leasing and surface management under the Mineral
Leasing Act and the Federal Land Policy Management Act.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-OGC-97-42
TITLE: Naval Petroleum Reserves: Transfer Options for Naval Oil
Shale Reserves 1 and 3 in Colorado
DATE: 05/07/97
SUBJECT: Shale oil resources
Facility transfer
Royalty payments
Gas resources
Gas leases
Oil leases
Federal/state relations
IDENTIFIER: Naval Petroleum Reserve No. 1 (Elk Hills, CA)
Naval Oil Shale Reserve No. 1 (CO)
Naval Oil Shale Reserve No. 3 (CO)
Colorado
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Cover
================================================================ COVER
Before the Subcommittee on Military Readiness
Committee on National Security
United States House of Representatives
For Release on Delivery
Expected at
10:00 a.m., EDT
Wednesday
May 7, 1997
NAVAL PETROLEUM RESERVES -
TRANSFER OPTIONS FOR NAVAL OIL
SHALE RESERVES 1 AND 3
Statement of Martin J. Fitzgerald
Associate General Counsel
GAO/T-OGC-97-42
GAO/OGC-97-42T
Abbreviations
=============================================================== ABBREV
DOE -
NPR -
NOSR -
============================================================ Chapter 0
Mr. Chairman, Mr. Sisisky, and Members of the Subcommittee:
We appreciate the opportunity to provide our views on the Department
of Energy's recommendation to transfer Oil Shale Reserves 1 and 3 to
the Department of the Interior for leasing and surface management
under the Mineral Leasing Act of 1920 and the Federal Land Policy and
Management Act of 1976.
The Petroleum and Oil Shale Reserves were established by executive
orders in the early 1900's when the government began setting aside
large sections of public lands favorable for hydrocarbon production.
These lands are located in California, Colorado, Utah and Wyoming.
Although the reserves were originally intended as a source of
petroleum for the nation's military, the Naval Petroleum Reserves
(NPR) are now produced primarily for commercial purposes. By
contrast, the Naval Oil Shale Reserves (NOSR) have remained largely
undeveloped.
NOSR-1 is located in western Colorado and has estimated oil shale
resources of about 2.5 billion barrels of shale oil. Extraction of
this resource may be technologically feasible, but it will require a
high sales price to make the recovery economically attractive.
Additionally, in 1994 the U.S. Geological Survey estimated in excess
of 500 billion cubic feet of natural gas reserves that are continuous
through the region in which NOSR-1 is located. No natural gas,
however, is produced at NOSR-1.
NOSR-3 stretches along the eastern and southern flanks of NOSR-1 and,
unlike NOSR-1, essentially is devoid of oil shale reserves within its
boundaries. However, DOE has conducted protective gas drilling and
production since 1985 to prevent depletion of government resources
due to gas production on adjacent lands. This production totaled
approximately 10 million cubic feet of gas per day during 1996. The
gas was sold competitively and generated approximately $3.1 million
in revenues for the federal government for Fiscal Year 1996.
As you know, section 3416 of the National Defense Authorization Act
for FY 1996, Public Law 104-106, required the Secretary of Energy to
retain an independent petroleum expert to conduct a study to
determine which of four options, or combination of options, would
maximize the value to the United States of the five Naval Petroleum
and Oil Shale Reserves. The Naval Petroleum Reserve at Elk Hills,
which is to be sold, was specifically excluded from the study.
The four options specified in the Act for DOE's consideration and
recommendation to the Congress are:
1. Retention and operation of the Naval Petroleum Reserves\1 by the
Secretary of Energy under chapter 641 of title 10 U.S.C. (commonly
referred to as the Naval Petroleum Reserve Law), the current
statutory authority for managing and operating the reserves.
2. Transfer of all or a part of the reserves to the jurisdiction of
another federal agency for continued administration under chapter 641
of title 10 of the U.S. Code.
3. Transfer of all or a part of the reserves to the Department of
the Interior for leasing in accordance with the Mineral Leasing Act
(30 U.S.C. 181 et seq.) and surface management in accordance with
the Federal Land Policy and Management Act (43 U.S.C. 1701 et seq.).
4. Sale of the interest of the United States in the reserves.
Based on DOE's analysis of the consultant's report, DOE is
recommending to the Congress that NOSR-1 and NOSR-3 be transferred to
the Department of Interior and leased under the Mineral Leasing
Act.\2 Whether to enact legislation in accordance with DOE's
recommendation is a matter of policy for the Congress to determine
and we have no position to offer with respect to that determination.
Our comments today are merely for the purpose of apprising the
Subcommittee of another available option as it considers the DOE
recommendation.
DOE assumes in its report that after Congress transfers NOSR-1 and
NOSR-3 to the Department of the Interior for leasing under the
Mineral Leasing Act, 50 percent of the lease revenues will accrue to
the state of Colorado. It is our understanding that DOE has not yet
provided to the Congress proposed legislation mandated by section
3416 which would implement its recommendations. Accordingly, we
assume that DOE proposes to structure the transfer in such a manner
that NOSRs 1 and 3 would lose their identity as Naval Oil Shale
Reserves. This would result in the reserves losing the unique status
that they enjoy under current law whereby all of the receipts from
those reserves are and would continue to be retained by the
government. Instead, as envisioned by DOE, if NOSR-1 and NOSR-3 are
transferred to the Secretary of the Interior to be administered in
the same manner as the Secretary is obligated to administer other
leases under the Mineral Leasing Act of 1920, 50 percent of the lease
revenues will be paid over to the state of Colorado.
While DOE's recommendation to transfer NOSR-1 and NOSR-3 to the
Secretary of the Interior is one option, there is another option
which, with some technical conforming statutory revisions, would
allow the Secretary of Energy to retain those reserves and operate
them by leasing them in a manner consistent with commercial
practices. Revenues from such leases would be paid into the
miscellaneous receipts account of the Treasury and all of the
proceeds, not just 50 percent, would accrue to the U.S. government.
The Secretary of Energy currently has authority to lease NOSR-1 and
NOSR-3, although there are some limitations on the use of that
authority. In the Mineral Leasing Act of 1920 and the Naval
appropriations act for FY 1921, such authority was originally
reserved to the Secretary of the Navy. The Secretary of the Navy's
authority for administration of and jurisdiction over these reserves
was subsequently transferred to the Secretary of Energy on August 4,
1977, under the statute which established the Department of Energy.
An exemption to authorize the United States to retain all of the
proceeds generated from the NPRs and NOSRs is delineated in the
Mineral Leasing Act of 1920. Moreover, when the Act was amended in
1981 to allow states to receive 50 percent of revenues from minerals
on lands acquired for military purposes, the specific exception for
these reserves was repeated. As the House Armed Services Committee's
report on that legislation indicated, the Interior Department
supported this exception.
We have been advised by a DOE official that disposition of revenues
from various reserves over the years has been consistent with this
position. As I previously mentioned, protective drilling is
performed at NOSR-3 by the DOE resulting in revenues of $3.1 million
for FY 96. According to DOE, all of those revenues were deposited
into the Treasury and retained by the United States. In addition,
NPR-2 in Buena Vista, California, was originally leased by the
Secretary of the Interior in 1923 and managed by Interior until the
late 1970's when the Secretary of Energy assumed responsibility for
it. DOE officials told us that the U.S. government has retained all
of the proceeds from those leases since 1923.
Mr. Chairman, that concludes my prepared remarks. I would be happy
to address any questions you might have.
--------------------
\1 "Naval Petroleum Reserves" in Pub. L. 104-106 has the same
definition it has in title 10 of the U.S. code; it includes both the
petroleum and oil shale reserves.
\2 "Report and Recommendations on the Management and Disposition of
the Naval Petroleum and Oil Shale Reserves (Excluding Elk Hills),"
issued by DOE March 1997.
*** End of document. ***