Working Together for a More Secure Energy Future
Remarks by
Robert W. Gee
Acting Assistant Secretary for Fossil Energy
to the
National Ocean Industries Association
Annual Meeting
in Washington, DC
March 25, 1999
Good afternoon and thank you, Dave (Welch of BP-Amoco), for that kind introduction.
I am particularly pleased to be here today. This is actually my first "official" speech as the President's nominee to be Assistant Secretary for Fossil Energy.
During my confirmation process, my handlers kept be bottled up in the Department. Now that the process is approaching its conclusion - hopefully, the Senate will complete action in the very near future - I have been allowed to come address you today.
I also think that it's a positive reflection on this organization and this industry.
Secretary Richardson wanted to be here. These past few months, he has expended a great deal of time dealing with the problems confronting the oil industry. He recognizes significance of the industry - and the role that offshore producers play in producing and delivering the oil and gas needs of this country.
He regretted not being able to speak to you, and thus he asked me to represent him here today.
The Office of Fossil Energy has had an excellent working relationship with your Association, particularly with your former chairman, Bob Rose, (President & CEO of Diamond Offshore Drilling) and your President, Bob Stewart.
We look forward to continuing that relationship with Mr. Stewart, William Bradford (Chairman of NOIA's Board and CEO of Dresser Industries, Inc., Dallas) and the Association in the coming years.
Now, more than ever, we need to be working cooperatively - looking for solutions, identifying actions we can take, and perhaps most importantly, keeping our lines of communication open.
The Upside / Downside of Low Oil Prices
Today, consumers are reaping the benefits of a strong economy and stunningly low oil prices. But -- as you well know very well, and as you are likely to hear many times from this podium -- your industry is weathering an economic storm.
Today, it costs many domestic producers more to extract a barrel of oil than they make selling it. As a result, 140,000 U.S. oil wells have been shut in since November 1997.
You know the numbers. Daily domestic production has declined by 360,000 barrels. As many as 51,000 oil industry jobs - almost 1 out of every 10 - have been lost or are threatened.
Some people - outside this industry - ask "With the economy doing so well, why should we be concerned about the oil industry? Let the chips fall where they may."
They ask "why don't we just use up everyone else's oil - while it's cheap - and keep ours in the ground for a rainy day?"
To them, I would say that losing our capacity to produce oil and gas here at home is not the same as losing our capacity to build bicycles or to make sweaters.
We rely on oil and gas for 2/3rds of our energy needs. We have built an infrastructure based on this reliance - and it is not going to change overnight. In fact, our latest energy projections show that the share of both oil and gas in our Nation's energy portfolio actually grows over the next 20 years.
We already import over half our oil. If low prices persist, we could be looking - not at 50 or 60% of our consumption coming from imports in 2010 - but possibly 70% or more.
That's not just an economic concern. That's a national security concern. Defending distant oil supply lines is costly and unpredictable.
This week should have given us another indication that oil is not (quote) "just another commodity." Much of the business world was watching what was taking place in Vienna as representatives of OPEC - in a unified effort with non-members - formally agreed to reduce world oil production by about 2.1 million barrels, or about 2.7 percent.
Already, we've seen the effect of these actions on the psychology of the market. Crude prices increased almost $3 a barrel when the tentative agreement was first announced a couple of weeks ago. But there are still questions over whether individual countries will be willing to hold to their production quotas. So while oil prices have strengthened in recent weeks - and that trend is likely to continue in the short-term - there is still an underlying nervousness about the longer-term market.
There should be a subtle reminder in this for all Americans. When it comes to crude oil, we as a nation remain vulnerable to forces outside of our control. That's why it is important to protect our domestic production capacity. Lose it, and our vulnerability grows.
That's why we take the current situation in the oil industry very seriously.
But before I tell you what we are doing to specifically address the problems of the industry, let me tell you what we are NOT doing:
We are NOT trying to intervene in, or manipulate, markets. Secretary Richardson reiterated our position day before yesterday when he commented on the OPEC agreement by emphasizing that (quote) "The United States believes that the forces of supply and demand operating in competitive markets should dictate the price of oil and we do not support measures aimed at manipulating the market."
In the actions we have taken to date, we have NOT sought to put upward pressure on oil prices -- or to propose bail-outs for the industry.
Rather, we've focused our efforts on ways to preserve at-risk production -- a lot of it from marginal wells -- and on innovative ways to lower the costs of doing business.
The Emergency Oil Task Force
Late last year, the Secretary formed the Department's Oil Emergency Task Force. This group, which I chair, considered an extensive list of proposals for how the Federal government -- working with industry and the states -- can ease the economic and regulatory burden for your industry.
Several actions have been announced. I'm sure many of you have heard of most of them, but let me very briefly recap some of the most significant:
To enhance the nation's energy security, last month, Secretary Richardson announced plans to partially refill the Strategic Petroleum Reserve -- our nation's emergency oil reserve -- with federal royalty oil from production in the Central Gulf of Mexico. We will be replacing about 28 million barrels of oil which were sold from the Reserve in 1996 and 1997 for deficit reduction.
We have begun offering unused Strategic Petroleum Reserve capacity for commercial storage. Last month, we offered industry the opportunity to use up to 70 million barrels of unfilled storage space in the Reserve - provided they agree to leave the oil in the Reserve for at least a year.
The fees for storing the oil would be paid in-kind, adding to the size of the Reserve's inventory and enhancing our energy security.
We have received several proposals and are evaluating them. If we decide to make awards, we will announce them in April.
To preserve domestic oil and gas production capacity, the Administration has altered its requirements for federal lease holders to allow stripper well operators to suspend production temporarily, without losing their leases or having to plug their wells.
More recently - as I'm sure Carolita Kallaur will describe tomorrow - the Minerals Management Service has updated its guidelines for applying for deep-water and end-of-life royalty relief. This will give industry greater opportunity to make a project economic rather than being forced into premature abandonment.
To help lower the costs of production, the Energy Department - specifically, my office - has committed $18 million to restart a cost-shared program to encourage many domestic producers to test and adopt new technologies that can prolong the life of endangered oil fields.
This will be an extension of a program the Department initially began in 1992. It will focus on three of the largest geologic categories of reservoirs - reservoirs that, together, hold as much as one-half of all the Nation's recoverable domestic oil -- but that are at risk of being abandoned in the next five years or so.
To help lower the cost of regulatory compliance, we have begun a program with the Texas Railroad Commission and others to pilot on-line permitting - replacing paper with electronic processing.
This project has picked up so much momentum since we announced it last month that we are forming an umbrella group of state agencies to serve as observers for the pilot. Several states are telling us that they will move quickly to implement the same kind of streamlined online process, if the Texas model proves successful.
To help banks and other financial institutions assist domestic producers, we have begun a collaborative project with the U.S. Small Business Administration to make it easier for small producers and service organizations to use the SBA loan guarantee program.
The White House Interagency Working Group
To this point, these are the type of things that we could accomplish within our own individual agencies, or collaboratively between agencies. But last week, Secretary Richardson succeeded in elevating the discussion - to matters that the Administration, as a whole, might consider.
The Secretary brought senior representatives from the oil and gas industry to the White House to meet with senior economic policy officials, including Treasury Secretary Robert Rubin, Gene Sperling, Director of the National Economic Council, and White House Chief of Staff John Podesta.
The meeting went very well with candid discussion of a wide range of issues, from job losses and community disintegration in the oil patch communities to future energy demand and national security.
Peter Bijur, Chairman and CEO of Texaco, Jack Little, President and CEO of Shell's E&P company and others from the industry were extremely articulate in laying out some of the issues for the Administration.
As a result, the National Economic Council of the White House will chair an interagency working group on oil and gas related issues.
This group, which will include the Department of the Interior, the Department of Treasury, the Energy Department, and the White House, has effectively raised the level of consciousness within the Administration about the situation in the oil patch.
So I hope I can convey to you that the commitment is there -- at the highest levels of the Department and the Administration -- to look for reasonable and responsible actions that can preserve our domestic oil production capacity.
Are there more steps that can be taken?
I think so - and we're evaluating them.
Some ask about tax relief, for example. Yes, we're continuing to explore possibilities for targeted tax relief. But such relief would have to be cost-effective and would require cuts elsewhere in the Federal budget.
Any tax proposal would also require the concurrence of the rest of the Administration, and it must receive Congressional approval. That's going to require that we make an even more compelling case for the nexus between the future of our domestic oil industry and the future of our national energy and economic security.
We believe that case can be made, but we need your assistance.
The Potential of Technology
Before I conclude, allow me moment to make a pitch for technology -- and again ask for your assistance.
As the new, soon-to-be Assistant Secretary for Fossil Energy, I have a special interest in the technology of this industry -- and how we in government and you in industry can work together to ensure that technology continues to advance. It's one of the main aspects of my new job at DOE.
I remember reading that Lester Thurow, the economist, said or wrote a couple of years ago: "The oil industry...has been infused by so many new technologies that it should be thought of as one of the new manmade, brain-power industries like biotechnology." (Unquote)
There is no better example than what has occurred in offshore exploration and production.
Advances in drilling technology have tripled the water depth for oil and gas production from 1,760 feet in 1989 to 5,376 feet in 1997. Today, reserves in the deep water exceed those in shallow water.
Advances in computer technology - much of it developed at our National laboratories - have shortened the time needed for imaging large amounts of seismic data from a few months to literally a few days.
Four-D seismic technology - where time is added to the traditional 3-dimensional data - was pioneered in the Gulf of Mexico in one of the Reservoir Class field demonstration projects I mentioned earlier. Now, it's a $500 million a year business in the Gulf -- and likely to grow considerably in the future.
For the first time, advances in imaging technologies are now allowing producers to "see" below the salt structures that cover more than 40 percent of the Gulf Continental Shelf.
The first subsalt wildcats are being drilled. The first subsalt discoveries are being made. Several are showing reserves of 100 million barrels of oil equivalent or more -- perhaps part of a 15 billion barrel resource that has been hidden from past technologies.
In fact, industry experts predict at least a 30 percent success rate for subsalt drilling in the Gulf using enhanced seismic processing and modeling -- techniques that didn't exist just a few years ago.
But again, a lot of people - many in Congress - ask "Why don't we let the industry go it alone. Why should the government be involved in R&D?"
I'm sensitive to this since just last week, I went through my first Congressional hearing to defend the FY2000 Fossil Energy budget.
We can make a good case for continuing - and hopefully expanding - the government-industry partnerships that we've put into place to develop the oil and gas technology of the 21st century.
We're certainly going to need new tools if we hope to:
- slow -- or perhaps stop -- the decline in domestic oil production, recognizing that America's demand for oil is projected to grow by more than 35% percent by 2020.
or, for that matter,
- provide the 1/3rd growth in new demand for natural gas that we forecast for the next decade and the projected 45% increase that is likely to occur by 2020.
We're going to have to develop the capability to explore for, drill for, and produce hydrocarbons from deeper, denser, and more geologically complex reservoirs.
We're going to have to pay more attention - as we are in our FY2000 budget - to resources like methane hydrates. Not only because of the enormous long-term potential -- perhaps 5,000 times the world's known gas reserves -- but also because what we learn can also apply to improving the safety of conventional offshore drill rigs and undersea pipelines.
We can make the case for all of this. And I intend to do so -- vigorously and repeatedly.
But every time ONE of you speaks out in support of the Federal R&D program - every time ONE of you talks about the importance of government-industry technology partnerships - it's better than a dozen Assistant Secretaries making the case.
So let me conclude today as I started....by not being afraid to "take the point" in talking about the significance of your well-being to the well-being of this country and every one of its citizens.
But like anyone who is willing to walk up there at the front, I want to make sure that I have you behind me.
So let me ask you today to work with us.
Help us put forward constructive suggestions to the Administration's new interagency working group that will help preserve our economic base...and at the same time, be realistic in the way we manage federal dollars.
Help us put forward a constructive R&D roadmap that will guide the development of new technology that can tap the enormous potential of resources yet to be produced....and at the same time, reflect our obligation to preserve and protect our environment.
Help us put together those policies and programs that take advantage of government-industry partnerships. I am convinced that in times of both good and bad, these partnerships are the true energy and economic strengths of this country.
Thank you very much.
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