Remarks by Mark Maddox
Acting Assistant Secretary for Fossil Energy
to the IOGCC Midyear Issues Summit
Columbus, Ohio
May 24, 2004

"Meeting the Supply Challenge through Research and Development"

Good morning. It's a pleasure for me to be here to discuss the role of research and development in meeting the energy supply challenge - and the Office of Fossil Energy's contribution to the R&D effort.

And as always it's a personal pleasure to return to my home state of Ohio.

Meeting the supply challenge is another way of saying, guaranteeing our energy security. And energy security, or "dependable, affordable supplies of environmentally sound energy for the future," is the starting and end point of President Bush's national energy policy.

The means to reaching the goal of energy security is technology. When discussing energy supply, and particularly oil and gas, technology always takes center stage. We recognize the central, vital part technology has played, and must continue to play, in supplying the oil and natural gas that have fueled our growing economy and our rising standard of living for more than a century.

This Administration wants to make the most of our still-vast domestic reserves of oil and natural gas while we reduce our reliance on imported energy. To accomplish that, we are addressing both the long-term energy security challenge — the 21st century challenge — and the short- to mid-term challenge.

For the long term, we are working hard to develop the advanced clean coal, methane hydrate, nuclear, renewable and hydrogen and hydrogen-related technologies over the next 10 to 20 years that will gradually free us from dependence on imported energy and eliminate the energy-related environmental concerns that have preoccupied us for nearly 40 years.

Of more immediate interest to the IOGCC, and to the American people, are our short- to mid-term efforts to secure dependable and affordable supplies of oil and natural gas.

Oil and natural gas today supply more than 60 percent of America's and the world's total energy needs. That percentage will not decline over the next two decades.

The energy security challenge is immense but we believe it can be met by the application of the President's comprehensive, practical and at the same time visionary energy program.

On the international side, the Administration is dealing with the hard reality of growing demand for imported oil by promoting the expansion of existing oil trading relationships, and the creation of new relationships with oil-producing countries, to meet an overall 45 percent domestic increase in oil consumption over the next two decades. The Energy Information Administration forecasts that imported oil, which now accounts for 54 percent of our daily supply, will rise to account for 70 percent in 2025.

Similarly, on the natural gas side, we are promoting the growth of a global market in liquefied natural gas, which could supply a significant amount of the gas we will need to meet a 40 percent increase in demand over the next 20 years. Imports now account for 15 percent of our gas supply. In 20 years, we expect that to rise to 25 percent.

This growing reliance on imported oil and natural gas is far from ideal. But governments and oil and gas companies don't have the luxury of working with ideal situations. We work with realities and practicalities.

And in the real world, we know that every barrel of domestic oil that we can extract will help to reduce our reliance on imports. Eventually, the long-term strategy to create a hydrogen economy will begin to show results, reducing the transportation sector's reliance on oil-derived fuels. We believe that with the advent of mass market hydrogen-powered passenger vehicles by 2020, we could reduce our overall use of petroleum by a third over 20 years.

We would still need all the domestically produced oil we could produce, but a hydrogen technology, particularly if it were also adopted by our international partners in technology research, would vastly increase energy security by reducing our reliance - and world reliance - on the international oil market.

And every cubic foot of domestic natural gas that we can produce — whether from existing fields; from new, deep formations; from Arctic fields; from highly prospective fields in the Rocky Mountain region and elsewhere; or from the fantastically promising potential of methane hydrates — every cubic foot we produce in the U.S. will reduce our reliance on imports and make us that much more energy secure.

Here at home, our work is aimed at prolonging the life of existing domestic oil and gas fields, and gaining access to new reserves that are either beyond our reach with current technology or economically impractical - or both.

The oil and gas industry is founded on science and engineering. Research and development of new technology makes it go. And exploration and production R&D for oil and natural gas, along with our clean coal research program, is the main business of the Office of Fossil Energy.

Now that I've given you a very brief overview of President Bush's comprehensive energy plan and the critically important place of domestically produced oil and gas to energy security, I'd like to take a few minutes to explain the federal government's role in promoting oil and gas technology advances, and review some of the projects the Office of Fossil Energy is supporting.

There are three reasons for federal participation:

First, there is a pressing national security need for increased domestic oil and gas production. The federal government has a responsibility for assuring the most efficient and effective development of our oil and gas resources.

Second, a considerable portion of our oil and gas resources lie under federal lands. Finding ways to produce those resources with minimal impact on the environment will allow us to harmonize land use goals.

And third, the independent operators who drill and operate the majority of domestic oil and gas wells do not have the financial resources to develop and demonstrate increasingly sophisticated new technologies. Independent producers are critical to our energy supply.

The major oil and gas companies, which do have the financial resources to fund their own R&D programs, develop proprietary technologies and they are increasingly concentrating on overseas exploration and production opportunities.

Without federal participation, we might not get the maximum benefit from our vast domestic reserves. And the size of the prize is fantastic: 377 billion barrels of currently uneconomic and unrecoverable oil await cost-effective technologies, in addition to 22 billion barrels of proved reserves. For natural gas, proved reserves in the lower 48 states alone total an estimated 175 trillion cubic feet, and technically recoverable resources of all types total well over a thousand Tcf. Add in the potential of Arctic gas and methane hydrates and the prize grows to truly immense proportions.

The prize is enormous but the cost to the taxpayer of our cost-shared R&D programs to tap its potential is modest: our fiscal year 2005 budget includes $41 million for R&D — $15 million for oil and $26 million for natural gas.

Our goal for oil R&D is to develop the technologies that will add 1.4 billion barrels of economically recoverable oil to our resource base by the year 2015.

Through natural gas R&D, we aim to add 50 Tcf of economically recoverable gas by 2015 - and to make commercial production of gas from methane hydrate a reality by the year 2020, adding another 20 Tcf to economically recoverable reserves by 2025.

Our oil research program is divided into two areas. The first is exploration and production, where we are concentrating on enhanced oil recovery through CO2 injection and microhole drilling technology. The second addresses environmental solutions, where the emphasis is on produced water and gaining access to federal lands.

As you know, CO2 injection is a proven enhanced oil recovery practice that prolongs the life of some mature fields. Unfortunately, the cost of CO2 has prevented operators from taking full advantage of it.

Our role will be to encourage greater use of this EOR process by finding economic ways to bring CO2 produced at fossil fuel power plants to the oil fields.

I'm pleased to say that the Department of Energy was able just last week to announce an important technological advance that should significantly improve production from CO2-injected and other mature fields.

A new cross-well electromagnetic imaging tool, developed with funding from DOE, can "see through" the rocks between widely separated oil wells; distinguish the oil, water and gases in a reservoir; and measure changes over time.

The new tool is a significant advance over the technology that successfully monitored the movements of oil and injected steam at California's low-producing Kern River and Lost Hills fields several years ago.

The improved technology can be used in wells a half-mile or more distant from one another, saving time and reducing costs. Recently, as part of a three-year Department of Energy-funded project to monitor carbon dioxide injection by ChevronTexaco at the Vacuum Field in New Mexico, the tool produced a ten-fold improvement over previous logging techniques used at the field.

This technological advance and others like it will have a powerful cumulative effect on domestic production.

Microhole drilling technology is a research area that presents us with a major opportunity to increase domestic oil and gas production. And again I am pleased to say that the Department of Energy recently announced a major step toward the realization of commercial microhole technology – funding for six new projects to develop technologies that can drill wells of two-and-three-eighths inches in diameter or smaller.

Our industry partners are providing about 30 percent of the total $5.2 million dollar cost of the projects, proof of their belief in the microhole concept.

There is good reason for their enthusiasm. We estimate that microhole technology could reduce drilling costs by as much as 80 percent compared to a conventional well, and reduce disposal costs for drilling fluids and cuttings by 20 percent. In addition, the much smaller footprint of a microhole drilling rig, and the smaller volume of disposable materials, will significantly lower the environmental impact of drilling activities.

Microhole technology will offer a very low-cost alternative to current technology for exploration, reservoir characterization, and EOR chemical injection.

To take one very large example of microhole technology's potential, consider its attractiveness for drilling shallow, limited production wells into mature basins less than 5,000 feet deep. The total in-situ oil resource target for these focus areas is a least 218 billion barrels of oil from existing fields.

As I mentioned earlier, our environmental solutions program is aimed at the costly disposal of produced water and currently restricted access to federal lands.

Almost all of the very large quantity of water produced from oil and gas operations today is re-injected either to enhance production or to permanently dispose of it because of its typically very high salt content.

However, a substantial portion of produced water could be suitable for other uses with little or no treatment. Our goal is to make 10 percent of the produced water from Rocky Mountain States into a beneficial product, reducing operators' water handling costs and increasing economically recoverable reserves.

Federal lands contain most of our undeveloped and undiscovered oil and gas resources, yet more than 60 percent of the land in these oil and gas basins is significantly restricted or effectively off-limits to surface access due to environmental concerns that are not necessarily substantiated by scientific studies.

We believe that by doing the necessary science and developing the appropriate technology we will be able to increase access to 20 percent of the restricted oil and gas basins in the Rocky Mountain States, while protecting the environment.

As you have no doubt noticed, elements of our oil R&D program will also be beneficial for natural gas exploration and production.

But the natural gas resources story is a little more complicated than the oil story, so we are attacking it in pieces, beginning with existing fields that are operating at the margins of economic viability. We are studying ways to:

• Maximize gas recovery in tight and fractured formations;
• Develop composite drill pipe to re-enter and drill horizontally in existing wells, and
• Develop technologies to reduce the premature plugging of producing wells.

Vast, largely untapped unconventional gas resources such as coalbed natural gas, shale gas and tight gas sands lie just beyond the current limits of economically feasible development. To reduce costs and open up these technologically challenging resources, we are working to create smarter, faster drilling systems, and to improve fracture detection, prediction and characterization. If successful, we expect unconventional resources to add as much as 24 Tcf to recoverable reserves over the next 10 years.

Deep gas, or natural gas lying more than 20,000 feet underground, is the target of our Deep Trek program to reduce the costs and risks of deep drilling. We are working to develop both the high-temperature, high pressure materials and electronics needed to build a durable deep drilling system, and the diagnostic and imaging technologies specially designed for deep gas E&P.

We expect our deep gas program to yield approximately 15 Tcf of recoverable reserves by 2015.

And finally, we face the challenge and the potential of methane hydrate, the cage-like lattice of ice that holds molecules of methane, the chief constituent of natural gas. Large methane hydrate deposits have been identified and studied in Alaska; the West Coast from California to Washington; the East Coast, including the Blake Ridge offshore of the Carolinas; and in the Gulf of Mexico.

Estimates of the in-place gas contained in our methane hydrate resource are in the area of 200,000 trillion cubic feet, nearly 150 times the estimated 1,400 trillion cubic feet of conventional recovered gas resources and reserves in the United States. If we can tap the potential of methane hydrates, then we will have essentially eliminated any concerns about natural gas supply for the foreseeable future. Consider that if only 1 percent of the methane hydrate resource could be made recoverable, the United States would more than double its domestic natural gas reserve base.

This almost unimaginable potential requires a new look at advanced technologies that could bring this resource within reach.

Methane hydrate research is still in its relative infancy and there is still a great deal to learn. In addition to the obvious task of learning how to find and produce natural gas from hydrates, we also have to understand their place in the natural environment, including their possible impact on seafloor evolution, deep sea life and climate change.

Hydrates present a big challenge but we believe we are on the way to finding the key that will open the hydrate cage. That's why, as I mentioned earlier, we expect to add 20 Tcf to recoverable gas reserves from methane hydrates by the year 2020. Beyond that, the possibilities are limitless.

I have only touched on some of the many aspects of our oil and gas research programs in the time available this morning. There is much more.

As you have seen, our programs range from the practical to the visionary. We are helping to answer the questions and reduce the frustrations operators face every day in America's oil and gas fields, and at the same time we are working to crack the mystery and realize the extraordinary potential of methane hydrates.

The Office of Fossil Energy's people in the Washington office and at the National Energy Technology Laboratory; the National Petroleum Technology Office; the Rocky Mountain Oilfield Testing Center, and the Albany Research Center are dedicated to meeting the energy supply challenge. But we are only a small part of the story.

The real story is taking place in our oil and gas fields and in the offices of the thousands of companies that comprise the American oil and gas industry. It is the oil and gas industry's people who rise to the challenge every time. It is their creativity, ingenuity, practical experience, sheer hard work and persistence that will guarantee our energy security in the 21st century.

The least we can do is to help provide them with the right tools for the job.