Remarks by
Robert W. Gee
Assistant Secretary for Fossil Energy
U.S. Department of Energy
at the
Society of Petroleum Engineers/Department of Energy
Twelfth Symposium on Improved Oil Recovery
Tulsa, Oklahoma
April 3, 2000

Good morning. It is a pleasure to be back in Tulsa again and to talk about oil.

Of course, oil is a hot topic of discussion a lot of places these days...everywhere there is a gas pump it seems. Oil is back in the national spotlight.

And if there is one positive aspect of the unprecedented swings in the price of oil during the last year, it is that a lot of people have been reminded, once again, that energy - and especially our traditional energy sources, like oil - plays an integral role in the everyday lives of every person on this planet.

Oil is truly the lifeblood of the world's economy - but until we have turbulence in the market or at the gasoline pump like we've had this year, I think that some folks tend to forget how important oil is to our way of life.

I have appeared before several committees of Congress in Washington during the last couple of weeks - representing my programs specifically, and in other instances, backing up Energy Secretary Richardson. In every hearing - and every Congressional meeting - most of the questions have dealt with oil. And not just what was happening in Vienna with OPEC, but what is happening in Tulsa and Midland and Bakersfield. "What is the state of our domestic industry? And what are we doing to improve it?"

A couple of years ago, almost no one was asking those kinds of questions. Instead, when we went to Capitol Hill, we got questions like "why do we need an Energy Department? Why should we care? Energy is cheap and plentiful. The economy is good...and growing. Why do we care?"

Well, those of you here today know why we should care. You know the dangers of complacency. You know that a sound energy policy is not just what we can do overseas diplomatically for the short-term - as important as that is - but what we can do domestically, not just for today but for the long-term future of oil production in places like Tulsa and Midland and Bakersfield.

That's why I'm pleased to be here in Tulsa today. That's why I'm pleased that the Department of Energy is one of the sponsors of this conference here in Tulsa.

It's also why we are working hard to build our front-line presence here in this city. A few years ago, we moved our key petroleum experts to Tulsa, and we established the National Petroleum Technology Office. Bill Lawson is the director of that office. Bill would you stand. And will other members of the NPTO staff who are here today stand.

Bill and his team are not only our links to you, but they should be your links back into the Department -- especially when it comes to technology. So use them as that. Don't hesitate to pull them aside here at this conference or drop by their offices after you leave here - or better yet, invite them out to your field operations. We wanted them in Tulsa so they could be accessible to the industry.

I'm a big believer in e-mail and the digital revolution, but I still believe that sometimes the most effective way for two people to communicate is still face-to-face. So get to know our people.... face-to-face.

Before I talk about technology, let me mention a couple of points about recent events.

I don't need to tell you what a roller coaster ride it has been over the last 18 months or so. Price swings from $9 a barrel to a high of $34 a barrel - now beginning to come down somewhat. It's been quite a whipsaw not only in the oil patch but in Washington DC and other capitals as well.

Last year, everyone was wondering what we could do to keep domestic oil production capacity from spiraling downward as prices had done. This year, everyone wondering what we could do to lessen the hardships of high oil prices on many families, especially those with modest incomes who have been caught in the grip of rising heating oil and gasoline prices.

Aid one group and antagonize the other. Say prices are too low, and the consumer says "So what's wrong with that?" Say prices are too high, and the producers echo the same question "What's wrong with that?"

I hope that one lesson that has come out of the last year of market turmoil is a new appreciation for the fact that, despite the short-term gains from either high or low prices - depending on which side of the spigot you're on - no one truly benefits from market volatility.

When prices are low, and domestic production drops, and rigs are scrapped, and workers leave for other jobs, it only erodes stability and increases the likelihood that prices will spike upward in the future.

And even when the price goes up - as we have seen - financial markets remain cautious, money remains tight, reinvestment in this industry doesn't materialize overnight. Some of the lost production never comes back on line.

Secretary Richardson has shouldered a considerable share of criticism over the last year-and-a-half - from both producers and consumers. But throughout this turbulence, he has held fast to one solid principle: that greater price stability was the overriding goal. Market intervention by the federal government - done solely to protect either producers or consumers - may be a short-term, "feel good" policy. But for the benefit of both producers and consumers, long-term market stability must be our national - and global - energy objective.

That's why, when President Clinton announced several steps to strengthen America's energy security on March 18, he proposed not only a regional heating oil reserve in the Northeast, but also a package of tax incentives to support new domestic exploration and production and lower the business costs of producers when oil prices are low.

As many of you are probably aware, the President proposed adjusting the tax treatment of geological and geophysical costs. By allowing the industry to expense these costs, we will be encouraging the discovery of new reserves.

He also proposed to clarify the tax law to allow the expensing of "delayed rental payments." This particular inducement is an amount paid by a lessee to the lessor of a petroleum resource when the lessee does not begin producing commercial quantities of oil or natural gas as soon as was agreed to. Prior to 1993 all delayed rental payments were allowed to be expensed in the year incurred. Since then, there have been inconsistent tax rulings for this item. Definitively allowing producers to expense delay rental payments will lower the cost of doing business.

Okay, you say, so far so good. But what about marginal well tax credits? I suspect that, for a lot of you, that's the tax break you care most about. After all, marginal wells account for more than 20 percent of onshore oil production in the lower-48 States, and yet these are the wells that are most often on the economic tightrope.

The President has not taken marginal well tax credits off the table. He stated that explicitly in his radio address. I don't think it's much of a secret that marginal well tax credits have been the source of considerable debate within the Administration. I know because I've been in a lot of those debates. And the discussion has gotten...well, let me say, vigorous at times. But the fact that the President specially called out the need to continue reviewing measures that can preserve marginal well production means that this option is definitely still on the table.

Let me turn to the focus of this conference: technology.

Perhaps another positive benefit that has resulted from the renewed public discussion about energy is a new look many are taking at technology - and the importance of technology to future market stability.

Another change that I've noticed has occurred in our Congressional hearings to date - in prior years, Members of Congress wanted to know primarily about energy technologies like solar, geothermal, wind - some of the more exotic energy ideas. These technologies excite the imagination, and there has been considerable progress in pushing these technologies toward the commercial threshold.

Until now, we haven't had a lot of questions about the technology of our traditional fuels - oil, gas, coal - technologies that supply 85 percent of the energy we consume in this country. That changed this year with the oil price spike.

Congressional energy hearings that used to attract maybe 1 or 2 Members are now being attended by virtually the entire Committee roster - 10, 15 or 20 Members - and most of them are asking questions about oil and oil technology.

I hope that there is a new recognition in Washington that while improved technologies aren't an overnight solution, they are nonetheless an essential part of any rational energy strategy. If we are going to have any hope of avoiding the roller coaster ride of oil prices 10 or 15 or more years into the future, it will be because we invested in technology today and were able to sustain that investment.

As we've met with Members of Congress this year, we've been able to convey a good story about the advance of oil field technology - from mudpulse telemetry in the 1970s, to polycrystalline diamond drill bits and horizontal drilling in the '80s, to 3- and 4-dimensional seismic imaging in the 1990s.

It has been the steady pace of technology that has helped keep this industry viable. In the 1970s, an exploratory well had about a 14 percent chance of finding producible hydrocarbons. Today, those odds have more than doubled. That exploratory well in the 1970s, on average, added about 10,000 barrels of oil in new reserves. Today, an exploratory well adds 4 times that amount, more than 40,000 barrels in new reserves.

But there is another part of the story of the last 15 or 20 years - since energy was last in the national spotlight - that also needs to be told.

It is the changing nature of our domestic industry.

You know it - but I'm not sure a lot of other people do - this is not the industry of the 1970s or even the 1980s. This is not the industry dominated by Big Oil that a lot of people in Washington cast as the villain a couple of decades ago. Increasingly today's modern-day domestic oil industry is an industry of independents - an industry of smaller companies, family-owned companies, in many cases.

Independent producers now drill 85 percent of all new wells in this country. They account for almost half of the crude oil produced in the lower 48 States and two-thirds of the natural gas. Increasingly, they are the stewards of the nation's oil resource, the ones that can benefit most from new technology, but the ones least able to afford its development.

Eighty percent of these companies employ less than 20 workers.

It is this changing makeup of this industry - an industry vital to our economic future - that must be a major factor in how we make investments in our energy future.

I am an advocate of government-industry partnerships in energy. I have been since I first became associated with the energy business back in Texas a quarter century ago. I hope that with this new interest in energy in Washington - and what we are doing for our long-term energy security - I can convey the increasing importance of government-industry partnerships in oil technology.

I hope that people who haven't paid attention to energy since the 1970s - and now suddenly are keenly interested once again - don't revert back to the mantra of "why are we funding the oil companies?" Times have changed, the industry has changed, and we must adopt a more progressive attitude in how we prepare for our energy future. I will continue to advocate that technology partnerships between government and our oil industry are more important than ever to that future.

I see our joint efforts with industry fitting into 2 categories. One is to maintain access to the resource. The other is to develop the longer-range technologies that can ultimately produce the full potential of that resource.

Both categories are important. In the time I've been in Washington, I've heard a lot of debates about whether Government should focus on near-term R&D or long-term R&D. When it comes to the U.S. oil industry, I don't think that is a particularly useful debate. It is a distinction without a difference.

If we don't maintain access to the resource - if we don't find ways to forestall the premature abandonment of still-productive oil fields - then developing longer-range technologies is of virtually no benefit. Most of the resource will be lost before those technologies are ready.

I'm not sure a lot of people understand that either. They still believe that when prices go up or technology improves, dormant fields suddenly spring to life. They don't recognize that when wells are plugged and abandoned, when drilling rigs are scrapped, when pumping units, gathering systems, storage tanks, and everything else that makes up decades of capital investment, are taken away, the resource is, for all intents and purposes, no longer accessible under any reasonable price or technology scenario.

That's why we have placed a high priority on keeping many of our endangered oil fields in production. Eight years ago we began a program to cost-share field tests of technologies that could prolong the economic life of fields threatened with imminent abandonment, yet known to contain considerable quantities of remaining oil.

The program achieved some major successes - revitalizing production in places like Utah and Michigan. It gave producers the opportunity to apply innovations that didn't exist a decade ago in fields that no longer were of economic interest to many of the larger companies.

Take, for example, an offshore reservoir in the Santa Barbara channel. Thirty (30) years of production had left a field that was of little interest to its original owner. But a small independent producer - armed with new ideas and new technology, and with risk-sharing assistance from the Government - was able to restore new life to a declining reservoir. And with improved reservoir characterization and horizontal drilling, that producer - Pacific Operators Offshore - doubled production from the reservoir.

For reasons like this, a little over a year ago, Secretary Richardson announced that he would restart our Reservoir Class Field Demonstration Program. In October, we selected 10 projects to receive $23 million in Federal funding. All of these projects, by the way, involved independent producers.

Also to maintain access to reservoirs, we have set aside funding to assist the smallest of our independent producers in solving specific field production problems. Since this program began in 1995 and was restarted last year, 45 companies have received targeted grants to apply innovative solutions that have kept many wells in production.

We are also kicking off a new effort we call the "Preferred Petroleum Upstream Management Practices Program" - or because everyone in Washington likes acronyms, the PUMP program. Our plan is to find out where geologic, regulatory or other factors have combined to hold back production, and then develop an integrated set of "best practices" - the key word here is "integrated" - that can untie the knots and get production back up quickly.

This month, we will issue a competitive solicitation to begin this program. We will be looking for proposals that identify these "best practices," show how they were used to overcome regional production constraints, how they improved the bottom line, and how they can be transferred to other producers.

These are some of the efforts that keep oil flowing that might otherwise be shut in. If we are successful - and perhaps a little lucky - we can halt the decline in domestic production during this decade. That is our goal - hopefully by the year 2005.

But that only keeps us running in place. I still hold out prospects that one day, we might be able to do more. Can we stimulate an upturn in domestic production?

That's why our second category of technology development is so important. It is the technology category that begins to maximize production - that allows us to tap the true potential of the considerable oil wealth that remains in this country and throughout the world.

Today, when you mention technology leadership, many people think of computers and the expanding digital economy. But I'm not sure that they aren't also talking about the future of the oil industry. The electronic revolution can have a major impact on the future of your business.

Already, the same technology that Steven Speilberg used to create the dinosaurs of Jurassic Park is being used to image the flow patterns of oil reservoirs.

3-D seismic became a more widely used tool when advances in computer technology brought down the cost of digital processing. And that has helped boost exploratory well success rates to as high as 50 percent. Now companies are adopting 4-D seismic - adding time to the data set - and beginning to see new production benefits. One company, for example, has seen recovery rates jump to 70 percent.

Artificial intelligence is just beginning to make its mark in the industry. That combined with micro-technology - perhaps one day, nano-technology - could lead to a new generation of "smart" auto-drilling systems.

A complete "logging and chemical laboratory-on-a-chip" might be in the industry's future. Fiber optics, perhaps embedded in composite drill pipe, could bring about quantum improvements in the way data is transmitted from the bit.

And the list could go on.

We can't be afraid to imagine the possibilities. But we also must be guided by industry's needs - what makes sense today and over the longer-term. That is why government-industry R&D partnerships are fundamentally important. They keep us on the right course.

As we have discussed the energy situation these past weeks in Washington, I've tried to make the point that there is just as much high-tech potential for tomorrow's oil industry as there is for tomorrow's solar, or wind, or geothermal industry. But it will take every bit of the ingenuity that you in this room - and your colleagues - can muster to develop and apply that technology to the increasingly complex and difficult oil resources in many of our countries.

Yet if we are going to smooth out the roller coaster - if we are going to have any chance of market stability a decade from now, or even the decade after that - we must make the investment. And we must sustain it.

Energy may - or may not - be at the top of the Nation's agenda when you return to this conference two years from now. But our commitment to petroleum technology must remain strong. I need you to help me make that point to anyone who will listen - and now is a good time to make that point because a lot of people are listening.

Thank you for listening to me, and enjoy the conference.