Remarks by Mark Maddox
Principal Deputy Assistant Secretary for Fossil Energy
to the
National Ocean Industries Association
2005 Fall Meeting
Colorado Springs, Colorado
October 7, 2005

Thank you and good afternoon. Before I begin, let me say that it is an honor for me to find myself on a speakers’ roster that comprises distinguished Administration officials past and present, business leaders and internationally known authors and academics.

It is a great pleasure as well as an honor to be here to provide the Department of Energy’s perspective on the Administration’s energy policy, the vital role offshore oil and gas production plays in meeting our current supply requirements – and the equally vital role future exploration and production will play in meeting our growing energy supply demands.

No one could know when this meeting was scheduled and planned that every participant’s thoughts would be concentrated on one thing: the one-two punch delivered to Gulf of Mexico oil and gas operations beginning six weeks ago, and the all-out effort to get our exploration and production, refining, processing and transportation systems back on-line as quickly as humanly possible.

It is probably safe to say that few people remember the havoc created in the Gulf by Hurricane Ivan a year ago, or your efforts to get Gulf oil and gas operations back on line. 
It is also probably safe to say that few people outside your industry understand the awesome complexity of offshore operations, the magnitude of the task you are facing, or the magnitude of the challenge presented by Katrina and Rita.

As of last Friday, nearly 60 percent of the manned platforms and 25 percent of the rigs in the Gulf were still evacuated.  Ninety-eight percent of Gulf oil production and 80 percent of gas production was still shut in.  Since August 26, we have lost a total of 41 million barrels of oil production, well over seven percent of yearly Gulf production, and nearly 200 Bcf of gas, more than 5 percent of yearly gas production. 

Complete repairs to production platforms and associated facilities will take months and there are reports that damaged or lost drilling rigs – on which we depend for future production – could take longer to repair or replace. 

Finally, it’s probably safe to say that while every American has a vital interest in our energy system -- the economy and modern life itself depend on it – few understand how it works, or the critical role offshore operations play in it.

But our society wants what it wants when it wants it, and never mind the details. So while you will receive little praise for the colossal effort you are making to get operations back on line in what will no doubt be record time, rest assured that the people who know about these things stand in awe of both the challenge you face and your response to it.

I’d like to step back from the close-up picture of the hurricanes’ devastation this morning and discuss instead the bigger picture of oil and gas’s place in energy policy, and particularly the prominent place of offshore drilling and production, here at home and overseas.

First, let’s look at some plain facts about our energy environment. Oil and natural gas today account for about two-thirds of U.S. and world energy. As the U.S. economy and population grow – and as developing nations, particularly India and China, grow rapidly over the next two decades, oil and gas will account for… about two-thirds of total energy. 

In the U.S. alone, oil and natural gas consumption is projected to grow by more than a third by 2025. And most of the oil we need will be imported. We currently import about 10.6 million barrels of oil a day, a number projected to double to about 20 million barrels over the next 20 years.

Imports of natural gas in the form of LNG will also grow. U.S. natural gas demand could exceed 31 Tcf a year by 2025, and LNG could supply more than 20 percent of it – about a ten-fold increase in LNG imports from 2004’s volume.

There are some important conclusions to be drawn from these facts: The first is that we must produce every domestic barrel of oil and every thousand cubic feet of domestic natural gas that we can in order to reduce the rate of increase of our dependence on imported energy.

Let’s take a look at where we stand historically regarding domestic oil and gas production. U.S. oil production peaked at over 11 million barrels a day in 1970. Today we are producing 5.4 million barrels a day, with the roughly 1.5 million barrels a day from the federal offshore contributing about 28 percent of the total.

Looking ahead to 2025, we project oil production to remain flat if we develop the Arctic National Wildlife refuge; otherwise, production drops to 4.7 million barrels a day. That’s the bad news.

The good news is that there are 22 billion barrels of domestic proved reserves awaiting development and production, and about 25 percent of them lie in the federal offshore. We have an additional estimated 10-plus billion barrels in ANWR. Yet another 175 billion barrels of technically recoverable reserves of all types – almost half of them in the federal offshore --  await the advanced technology and price environment that will make them economic to produce.

The offshore is also estimated to hold as much as 60 percent of our undiscovered domestic oil reserves.

We are not running out of oil – and offshore oil has a pivotal role to play in meeting supply.
On the natural gas side, U.S. production peaked in 1974 at 21.7 Tcf for the year. We produced 19 Tcf last year and we project production to be about the same in 20 years.
Proved reserves total 187 Tcf, with offshore reserves of 25 Tcf accounting for about 12 percent of the total. Technically recoverable reserves of all types total more than 1,400 Tcf – about 30 percent of them offshore. As with oil, the federal offshore is estimated to hold 60 percent of undiscovered natural gas reserves.

To sum up the domestic offshore opportunities as we estimate them today:

• Total undiscovered technically recoverable oil and gas resources along the Atlantic Coast total 3.5 billion barrels of oil and 33 Tcf of gas – all of it under moratoria;
• In the Gulf of Mexico, estimated proved reserves of 4.5 billion barrels of oil and 22 Tcf of gas, as well as undiscovered technically recoverable reserves of 37 billion barrels of oil and 232 Tcf of gas, with 5 billion barrels of oil and 26 Tcf of gas under moratoria; 
• On the Pacific Coast,  proved reserves of 566 million barrels of oil and 500 Bcf of gas, and undiscovered technically recoverable reserves of 10.5 billion barrels of oil and 18 Tcf of gas, all of it under moratoria; and 
• Offshore Alaska, undiscovered technically recoverable reserves totaling 25 billion barrels of oil and 122 Tcf of gas, with a small amount in the North Aleutian Basin under moratoria.  

I don’t want to poach on the Department of the Interior’s territory so I will just quickly mention the provision of the new energy act that mandates a survey of all Outer Continental Shelf oil and gas resources currently in development or under moratoria. We want to nail down those resources as accurately as we possibly can. When the day comes that the American people decide we should open up some portions of the OCS that are currently off-limits to exploration and production, we and you will be ready.

That, in brief, is the domestic oil and gas situation. As the consultants like to say, it’s a big challenge -- and a big opportunity.

A glance at the situation worldwide shows that offshore oil and gas figures prominently on every continent: North and South America, Europe, Asia, Australia and even the Arctic.
Worldwide offshore oil and gas production totaled 39 million barrels per day of oil equivalent last year and industry experts forecast that production will increase by more than 40 percent in the next 10 years, to 55 million barrels per day of oil equivalent. That’s the international challenge and opportunity.

This Administration’s national energy policy and the recently enacted Energy Policy Act are aimed at one goal: energy security, or the provision of dependable, affordable and environmentally sound energy for the future.

To achieve that goal while fueling a growing, healthy economy we must increase the production of oil and natural gas as well as energy from every other available source: clean coal, nuclear, and renewables of all kinds, including hydrogen, which has the potential to someday transform the transportation sector and our economy. 

We must also continue our decades-long successful effort to make energy consumption more efficient, and we must ensure energy reliability by expanding and modernizing our aging, inadequate energy infrastructure.

In the oil and natural gas sector, our policy is to reduce the exploration and production challenges and increase the opportunities, both here at home and overseas, for you in the oil and gas industry to do your job.

The policy is based first on the belief that technology will, in the future as in the past, make what is impossible today possible tomorrow -- cutting costs, increasing efficiencies and bringing previously inaccessible oil and gas reserves within reach. The technological advances in your industry over the past two or three decades have been stunning, and they show no sign of stopping now.

Refinements to existing technologies or altogether new technologies are being and will be continue to be introduced in a number of areas, among them 3-D and 4-D seismology, directional drilling and deep drilling, down-hole data acquisition and processing, enhanced oil recovery, micro-drilling, down-hole oil-water separation and deep-trek drilling.

The size of the reward for technological innovation is certainly large enough to prompt industry to make the required investments in research and development.  The Department of Energy will follow the new direction of the Energy Policy Act and fund ultra-deepwater and unconventional natural gas and other petroleum resource research, development, demonstration and commercialization through a private consortium. This consortium-based effort will move fast. Under the terms of the energy act we must issue a solicitation for projects by next month and make awards by next summer.

The energy act also contains incentives for ultra-deep wells in both the shallow shelf and in deep water, as well as for the production of gas from hydrates.
To encourage domestic reserve development, the energy act streamlines the regulatory process and speeds up leasing and permitting on federal lands.

I’ve already mentioned the very important OCS survey the energy act directs the Department of the Interior to undertake.

Imported oil and natural gas, like it or not, are vital to meeting our energy needs; their importance will only grow with time. This Administration is working without letup to maintain and improve the strong, enduring and diversified energy trade relationships that are integral to our national energy policy. They will help make it possible for the U.S. to have the secure sources of imported oil and natural gas we need – and they will help you to compete for those exploration and production opportunities. 

The offshore industry is going to have plenty to keep it occupied for the next 20 years and more but, interestingly, there is another potential marriage of science and technology with one of today’s unrecoverable energy resources that could change the way we think about the nation’s – and the world’s – long-term energy supply-demand equation.  That domestic resource is an estimated 200,000 trillion cubic feet of methane, trapped in hydrates in the Alaskan permafrost and offshore. Compare that resource figure with the less than 1,400 Tcf of conventional natural gas estimated to exist in the entire United States.

I don’t mean to be flip but when we complete the research on methane hydrate characteristics and behavior, and develop the technology to produce gas from hydrates safely and cost-effectively, our energy worries will for all practical purposes be over.  The payoff in the great national hydrates sweepstakes is big enough to rivet the attention of your industry.

And we are not thinking only of a potential domestic gas resource 150 times larger than our entire conventional resource. Estimates of the worldwide natural gas potential of methane hydrate approach 400 million trillion cubic feet – an almost unbelievable figure compared to the 5,500 trillion cubic feet that make up the world's currently proven gas reserves. 

The Office of Fossil Energy and its industry partners are currently running about two-dozen hydrate-related R&D projects. Among the most important is the analysis of data acquired during last spring’s voyage of the semi-submersible “Uncle John” in the Gulf.

The Uncle John’s voyage was part of the Chevron “joint industry project” designed to characterize gas hydrates in the deepwater Gulf.  Other objectives are to better understand how natural gas hydrates can affect seafloor stability, gather data that can be used to study climate change, and begin to assess if and how gas hydrates act as a trapping mechanism for shallow oil or gas reservoirs. “

As I said, the stakes are high: Solving the hydrate puzzle will result in nothing less than a world blessed with a virtually infinite supply of natural gas – and a virtually inexhaustible source of work for your industry. 

The offshore industry is faced with enormous challenges, equally large opportunities – and great responsibility. You are expected to succeed in supplying a significant portion of America’s energy needs for the foreseeable future. All indications are that the public has faith in you to meet that responsibility.

Concerns about supply interruptions for oil, natural gas and products due to Katrina and Rita have made the markets jittery -- but not panicky. Prices have not risen beyond the levels we saw before the hurricanes because investors and traders have confidence in both the oil and gas industry’s ability to restore production, refining and transportation capacity rapidly, and in the overall health and resilience of the national economy.

The markets are handing you a ringing vote of confidence.

Representatives from four Cabinet departments have traveled here to tell you this morning that the federal government and this Administration also have complete confidence in your ability to do the job – and a commitment to help you do it.

Long-term energy security is the foundation of national economic security. This Administration’s comprehensive energy policy provides the combination of practical and visionary strategies that will ensure our energy future. We’re pleased to know that the vital offshore element of the broad national and international energy sector is in such good hands.