Statement of
Patricia Fry Godley
Assistant Secretary for Fossil Energy
U.S. Department of Energy
to the
Subcommittee on the Interior and Related Agencies
Committee on Appropriations
U.S. House of Representatives
April 9, 1997

Fossil fuels are fundamental to this country's future. We cannot expect to heat our homes, fuel our factories, power our automobiles or grow the economy without these fuels. In fact, in both the 1996 and 1997 editions of the Energy Information Administration's Annual Energy Outlook, one projection remains constant:

"Fossil fuels, which supply 85% of our nation's energy today, will increase their energy contribution in the 21st century. By 2010, the United States will likely rely on coal, petroleum and natural gas for up to 88% of its energy."

A future in which fossil fuels continue as the nation's energy mainstays can offer significant benefits affordable prices, abundant supplies, reliable delivery, increased employment, and enhanced environmental quality if we are willing to invest today in research and development and in the readiness of our Strategic Petroleum Reserve.

The Administration's FY 1998 budget request continues to make these investments. Traditionally we have presented our budget according to where funding would go: coal, oil, natural gas, petroleum reserves, etc. But to present a better picture of why we invest tax dollars in fossil fuel programs, consider that over 85% of the $672.4 million¹ we are requesting would be directed at the two highest priority national needs for the future use of fossil fuels: environmental protection and domestic oil security.

Protecting the 21st Century Environment

Americans are more environmentally conscious today than ever before. And America's leaders face a fundamental choice in responding to the public's demand for a cleaner, healthier environment: invest a relatively small amount today in new technologies that will be environmentally superior and affordable, or risk adding billions of dollars in additional consumer and ratepayer costs from more stringent regulatory strategies being proposed today and in the future. Our FY 1998 budget reflects our view that an investment in R&D today is the most cost-effective way to address future environmental concerns.

Almost the entire budget in this category would go for research into new technologies that can dramatically reduce sulfur, nitrogen oxide and particulate pollutants, cut carbon dioxide in half, and minimize liquid and solid wastes from energy facilities. Our R&D program also has the goal of reducing electricity costs by up to 20% and lowering oil/gas environmental compliance costs by up to 40%. Our budget for this priority area is:

FY 1998 Investments in 21st Century Environmental Protection

Cleaner Technologies for 21st Century Coal Plants - We believe our confidence in technological approaches to environmental protection is well-founded. Since 1970, for example, advances in power plant pollution control technology have reduced annual sulfur dioxide (SO₂) emissions from U.S. coal power plants by 25% and lowered particulate emissions by 90% while coal use has increased by 140%. The typical 500 MWe coal-fired power plant emitted more than 60,000 tons per year of SO₂ in 1970; today the same size plant emits only 20,000 tons per year. It once cost nearly $600 per ton to remove SO₂ from a power plant's flue gas; since 1970 technological advances have lowered the cost to $350 per ton, saving consumers nearly $25 billion.

More recently, low-NOx burners developed in DOE's R&D program and tested in our Clean Coal Technology Program have dramatically lowered the cost of complying with more stringent ozone and smog regulations. Nearly one-fourth of the coal-fired capacity in the U.S. now uses these advanced burners, and twice that number will be retrofitted over the next three years. Without this investment in R&D, previously available technology would have cost 10 times more to achieve the same air quality standards.

The next major advance in cleaner coal combustion is likely to be the low-emission boiler system, a redesigned coal boiler that incorporates innovations in combustion and pollution control. Our FY 1998 program moves into this boiler's final stage of development with one lead developer selected to build and test a prototype. If successful, this technology could reduce emissions to 1/6th of today's regulated levels, boost power plant efficiencies to at least 42% (compared to current levels of 33-35%), and be particularly attractive in a growing international market for coal-fired power plants as well as in the United States.

Efficiency improvements are especially important for 21st century environmental protection. Most people view energy efficiency in terms of how we use energy -- the fuel efficiency of automobiles, the energy consumption of household appliances, the energy used in making industrial products, etc. But energy efficiency also can be applied at the power plant with equally dramatic fuel savings and pollution prevention benefits.

Moreover, improving "front end" power plant efficiency is one of the most effective ways to reduce carbon dioxide emissions. We continue to believe that the United States can achieve substantial greenhouse gas reductions through a combination of "front-end" and "end-use" efficiency improvements. A 50%-efficient coal plant would emit 1/3rd less carbon dioxide as today's typical 33%-efficient plants. Given the likelihood that coal will continue to generate more than half the nation's electric power well into the next century, boosting average power plant efficiency is one of the best ways to meet greenhouse emission reduction goals while keeping energy costs affordable.

Our FY 1998 program continues to fund R&D to improve "front-end" efficiency. Our advanced pressurized fluidized bed combustion and integrated gasification combined cycle R&D efforts are pushing power plant efficiencies to 50% or greater while reducing emissions to 1/10th of today's permitted levels and lowering the cost of electricity.

In FY 1998 we will begin testing an advanced pressurized fluid bed module at our Wilsonville (AL) Power Systems Development Facility. This is a key test series that will feed data to the design of a 2nd-generation pressurized fluidized bed power plant to be built at Lakeland, FL, in our Clean Coal Technology Program. The Wilsonville facility will also be used in FY 1998 to test hot gas filters that will be needed for the next generation of fluidized bed and gasification combined cycle plants.

Filter development is still a major technological challenge. If we cannot develop reliable, long-lasting filters suited to the high-temperature environments of advanced fluidized bed and gasification based power systems, we cannot achieve the full efficiency potential of these technologies. While recent progress in hot gas filters has shown promise, we believe it is prudent to continue investing in an alternative to pressurized fluid bed and gasification-based technologies. In FY 1998 we propose to continue developing the indirectly fired cycle technology, a distinctly different approach to coal-based power generation. In an indirectly fired cycle, innovative high-temperature heat exchangers prevent the hot coal combustion gases from contacting downstream power equipment.

We also believe it is prudent to continue investing in technologies that can reduce the trace elements that form hazardous air pollutants. Our coal preparation and advanced environmental technology programs continue to emphasize research that can minimize the release of mercury and other air toxic precursors from power plants. Since no commercial technology exists today that can effectively reduce these emissions, our R&D program can provide important data and technological options should the Environmental Protection Agency issue future regulations governing these trace elements.

It may be possible in the long-term to eliminate emissions from a coal plant entirely. Through R&D, we are achieving 99% or greater reductions of the pollutants that cause acid rain and smog. The longer-range challenge is greenhouse gas reduction, especially carbon dioxide. Our FY 1998 budget supports a small program of fundamental research in ways to capture and sequester carbon dioxide from power plants. If one day it becomes possible to do this affordably, the global benefits could be enormous.

21st Century Innovations for Clean, Natural Gas-Fueled Power Plants. Natural gas is our cleanest fossil fuel. Increasing its use is an integral component of our 21st century environmental protection strategy. One of the largest growth markets for natural gas is in the electric power sector; therefore, our FY 1998 program continues major efforts to develop two technologies -- the advanced gas turbine and the next-generation fuel cell -- that could expand the use of natural gas to generate electricity.

Our FY 1998 budget was prepared with the intention to select one of the two current developers in our advanced gas turbine program to design, fabricate and test the prototype of a 21st century, ultra-clean, high efficiency turbine. We are currently examining options for restructuring the program's final phase to permit both development efforts to continue within planned federal budget levels.

The gas turbine we envision will be unlike anything on the market today. It will incorporate innovations in gas cooling, combustion, pollution controls and materials that are well beyond the incremental improvements that private companies -- even the largest companies -- would make on their own. If the R&D is successful -- and the technological risks are still very high -- the United States can maintain its lead in low-NOx, high-efficiency turbine technology. We are in a global contest, and it is important that we give our domestic developers the same advantages offered by highly-leveraged, government-industry R&D partnerships that other governments are giving their developers.

A high-efficiency, low-polluting natural gas turbine can also bring electricity generation to regions where stringent air quality standards might otherwise block new generating facilities. We have set a target of 9 parts per million or less for nitrogen oxide (NOx) emissions from the advanced gas turbine with power generating efficiencies of 60% or more (13-15% higher than today's best technology). At this ultra-clean performance level, an advanced turbine could be sited in such environmentally-constrained areas as the urban corridors of the Northeast and southern California. Without Government cost-sharing, U.S. developers would likely pursue a lower risk approach and opt for a less environmentally-effective turbine. Such a turbine would be marketable overseas but probably not capable of achieving its full potential in the United States for many years to come.

The advanced gas turbine also will be critical to other long-range, high-risk technologies in our R&D program. For example, advanced turbine technology will be necessary to achieve our efficiency goals for future gasification-combined cycle plants or for advanced configurations of pressurized fluidized bed technologies.

Likewise, our next-generation fuel cell program is also "pushing the envelope" of efficiency and environmental performance. Fuel cells are a radically different power technology, operating like a battery rather than using combustion. They offer the highest potential efficiencies and environmental cleanliness of any fossil fuel technology.

Moreover, like the gas turbine, fuel cells can operate as standalone power sources fueled by natural gas, or they can be integrated with advanced coal-based technologies. The first commercial fuel cells are being fueled by natural gas - a less expensive fuel source today than gas made from coal. As R&D advances, however, fuel cells could become part of an "ultimate coal plant"-- a plant with unprecedented levels of power generating efficiency and dramatically lower levels of CO₂ emissions.

In FY 1998 we have chosen to retain all three contractors in our fuel cell R&D program. To stay within the Administration's budget targets, however, we have had to stretch out development schedules by up to 2 years (from 2000 to 2002). Our decision to keep all three contractors in our program is based largely on the fact that two are small, entrepreneurial businesses, formed for the purpose of developing this new energy option. A government decision to withdraw from their cost-shared programs would likely result in their collapse or perhaps the entry of foreign investors to fill the gap. The third developer is pursuing a different type of fuel cell technology - an all-solid-state concept - which, if successful, could offer several advantages, particularly when integrated into a future gasification plant. We believe it is important to retain this option in our program.

In FY 1998, therefore, we propose to continue cost-shared projects with two developers to reduce the costs of molten carbonate fuel cells. For the third, we propose to share the cost of a small (100-kilowatt) solid oxide fuel cell power plant, the first time that all of the components of a complete fuel cell system of this type will be integrated.

Assuring Future Supplies of Natural Gas. If the United States is to take full advantage of the environmental and economic benefits of increased natural gas use, it must also invest in R&D that can assure long-term, competitively-priced natural gas supplies.

Since 1985, because of advanced drilling technologies, 3-dimensional seismic imaging and improved fracturing techniques, U.S. producers have been able to increase gas production by 14% despite a 50% decline in wellhead prices. It took only 9,000 wells in 1994 to find and produce what 14,250 wells found and produced in 1985. Today, because of technology, U.S. producers locate and produce more gas with fewer dry holes and at less cost than ever before.

In the 21st century, the need for technological advances will be even greater. U.S. demand for natural gas is expected to increase by more than 30% by 2015 (the equivalent of approximately 4 million barrels per day of oil). These projections assume that advanced technologies will be ready in time to keep gas prices affordable. If they aren't, the nation will lose many of the environmental benefits of increased natural gas use and will likely become even more dependent on imported oil.

Cost reduction is a critical R&D goal. Future gas supplies will have to come from deeper (greater than 15,000 feet), and more geologically complex formations. In coming years the vast, mostly untapped basins in the West, the mature reservoirs in Appalachia, and the large remaining deposits in the South and Southwest will become important sources of domestic natural gas. These gas resources are more difficult and therefore more expensive to produce. To keep costs down, exploratory drilling will have to become even more accurate, and gas extraction techniques even more effective. And unless more cost-effective environmental protection strategies and technologies are available, environmental compliance requirements could place an enormous burden on producers and put some natural gas resources out of economic reach.

To reduce costs and boost the economical production of natural gas, our FY 1998 program continues to invest in a new generation of drilling, completion and stimulation technologies. By 2010, our goal is to develop a more advanced array of key tools to help industry (1) reduce drilling costs by 13%, (2) lower operating costs by almost 20%, and (3) produce natural gas from formations that are beyond the reach of current technology and economics. If these technologies are deployed by industry, we believe it will be possible to boost domestic natural gas production by 3.7 trillion cubic feet per year in 2010.

We plan to extend the highly successful "secondary gas recovery" project into the Appalachian Basin. This project, which applies new technologies and methods to locate natural gas bypassed in older gas fields, already has revealed the potential for nearly 4 trillion cubic feet of additional reserves in Southwest Texas with an economic value that could approach $1.4 billion. We propose to continue our collaborative work with industry to test and accelerate the market acceptance of new drilling systems, such as lower-cost slimhole and underbalanced drilling technology, and new reservoir stimulation technologies such as CO₂/sand fracturing which has been shown in an Appalachian Basin test to produce two to five times more natural gas than other methods. We are currently testing jet-assisted drilling technologies applicable to deeper, harder formations and steerable air percussion drilling systems for drilling slant or horizontal wells (which intersect a greater cross-section of a gas-bearing formation than a traditional vertical well).

The relatively small increase we are proposing for natural gas supply R&D funding in FY 1998 will be used for small demonstrations of innovative ways to collect and use waste methane released from coal mining. Only a few (about a dozen) of the nation's large, gassy mines profitably collect methane for sale to nearby pipelines. At most mines, it is vented to the atmosphere. Methane is 25 times more potent than carbon dioxide as a greenhouse gas, therefore finding ways to collect and use it can help alleviate greenhouse gas concerns as well as add to the nation's domestic energy sources.

Improving natural gas storage can also lower costs and increase the use of natural gas. Many advanced drilling and stimulation technologies being developed for gas production will also be applied to improve reservoir storage well deliverability and reliability. For example, we have shown that horizontal drilling can improve gas deliverability that could not be sustained by present vertical wells. We have also supported the CO₂/sand fracture technology can boost deliverability from storage field wells by 600%.

Better Environmental Compliance in Oil/Gas Fields. The nation's increased environmental consciousness has led to numerous Federal and State regulations being imposed on oil and gas operations in the United States. While these regulations have led to many environmental improvements by the petroleum industry, compliance has been costly and is becoming increasingly complex.

Currently, the petroleum industry, including the refining sector, spends as much on environmental protection as it spends on searching for new domestic supplies of oil and natural gas -- nearly $10.6 billion per year. By investing in better compliance strategies and technologies, however, it may be possible to reduce the cumulative price tag by as much as $16 billion between now and 2010. This will permit more dollars to be invested by the private sector into actual oil and gas production without compromising environmental protection.

These huge benefits -- in cost-savings, environmental protection, and future domestic energy supplies -- are the reason why we propose to increase our funding in FY 1998 for environmental compliance research and regulatory improvements. Our independent industry advisory council agrees. This effort was singled out by the National Petroleum Council as the highest priority government initiative that could benefit the domestic oil and gas industry.

Some of the funding would go to improved environmental compliance technologies, including the development of remote sensing technology for natural gas leaks, and techniques for treating and disposing of naturally occurring radioactive materials (NORM) and waste water produced by gas and oil operations. We intend to apply some of the unique capabilities of our national laboratories to assist in developing better environmental compliance methods.

The majority of our program, however, is not concentrated on new technologies but rather on more "common sense" regulations. We believe that environmental protection in oil and gas operations can be made more affordable without decreasing its effectiveness. Much of our work in FY 1998 will be in the area of risk assessment -- ensuring that problems posing the greatest risks to the environment are being addressed while, at the same time, giving Federal and State agencies the analytical tools to evaluate whether costs of new regulations are commensurate with the environmental risks. We will complete work in four States to determine where variances for oil and gas injection wells can be granted in areas of low environmental risk, and implement risk-based data management systems for improved regulatory decision making in 10 States.

We also propose to continue research in FY 1998 that will provide new tools and techniques for petroleum refiners to identify and reduce pollutants from their operations. By improving refineries' yields of high value transportation fuels and petrochemicals, we are not only providing industry with the capability to produce more refined products domestically, we are also developing the means to reduce the amount of low-value products and waste materials that must be disposed of. This is an important environmental benefit, particularly in areas where land use and waste disposal are becoming major environmental concerns.

Between 2000 and 2010, U.S. refineries are expected to spend $152 billion for facilities and programs to meet air, water, waste, health and safety regulations. Even a small improvement in the cost of technology that reduces air emissions, treats waste water and makes effective use of residues and spent catalysts can make the difference in whether the United States has a vigorous refining industry in the 21st century.

Increasing Domestic Oil Security

The United States continues to import record rates of foreign oil. Currently the United States relies on imports for about half of its petroleum needs. By 2010 U.S. oil imports could grow to 60% of domestic consumption, and the Persian Gulf nations, with 2/3rds of the world's oil reserves, could be providing more than 70% of the world's oil exports, surpassing their peak of 67% in the embargo year of 1974. Most Americans today fill their gasoline tanks without remembering the long lines of the 1970s; yet, there have been three major oil disruptions in the past 23 years, each causing domestic and international turmoil.

The seriousness we assign to oil security requires our strategy to be both immediate and long term.

The "immediate" element is our commitment to a fully capable Strategic Petroleum Reserve. Also in the near term, we want to maximize the value and production of one of the nation's largest oil fields -- the Elk Hills Naval Petroleum Reserve -- by offering it for sale to the private sector.

The longer-term component is research and development to increase the recovery of domestic oil and to develop alternative liquid fuel resources that reduce our dependence on conventional petroleum.

Our proposed FY 1998 investment in these three Domestic Oil Security priorities is:

FY 1998 Domestic Oil Security Investments

Maintaining a Fully Capable Strategic Petroleum Reserve. The Strategic Petroleum Reserve is the centerpiece of our nation's energy security program. The Reserve embodies a commitment to energy security which is just as relevant in today's world as it was over 20 years ago when the program was first created:

"to reduce vulnerability to economic, national security, and foreign policy consequences of supply interruptions by discouraging supply disruptions as a tool of other nations, and by adding to crude oil supplies in the United States, in the event of a disruption due either to political, military, or natural causes."

As a member of the International Energy Agency, the United States is obligated to maintain strategic inventories, including private stocks, equivalent to 90 days of net imports. The peak of protection provided by the Strategic Petroleum Reserve alone occurred in 1985, when its inventory equaled 118 days of net imports. Since then oil imports have increased, fill of the Reserve ceased in 1994, and 28 million barrels of the Reserve's inventory have been sold. As a result, the protection afforded by the Reserve has been reduced to 67 days of net imports. When private inventories are counted, the total current import coverage is 156 days. As widely reported, however, private stock levels declined sharply in 1996. Based on recent EIA import estimates, the days of import protection from the Strategic Petroleum Reserve will decrease to 46 days in 2002, implying a significantly increased dependence on private stocks, over which the federal government has no control, to meet our international obligations.

Consequently, our budget proposes no further oil sales from the Strategic Petroleum Reserve in FY 1998. We recognize that the Administration's "outyear" budget forecasts continue to include a proposal to sell oil in the year 2002 to complete the President's balanced budget commitment. All things being equal, we would prefer to have more crude oil in the Reserve, not less. But fiscal conditions require that we make this proposal. As we move closer to FY 2002, the need for this sale may change. Additionally, if the Reserve drops below 500 million barrels, legislative statute further limits the President's authority to use the Reserve to respond to supply shortages.

We share the concerns of many Members of Congress that oil sales from the Reserve have occurred without a consensus on a minimum acceptable inventory. The Department expects to issue a Federal Register notice near the end of April, requesting comments on various aspects of Strategic Petroleum Reserve policy including its size, use, and future financing. Public input will be used to develop an Administration Statement of Policy, which is expected to include, among other things, a minimum acceptable inventory for the Reserve. The goal is to complete the policy statement by the end of the year.

Meanwhile, as part of our oil security investment, one of our major goals is to complete a life extension program by the year 2000 which will ensure the readiness of the Strategic Petroleum Reserve through the year 2025. In FY 1998, we will bring the life extension program to the 84% completion mark. Also, we will degas the final 39 million barrels of oil (that had been rendered temporarily unusable because of the slow intrusion of gas from surrounding geologic formations), and finish the decommissioning of the geologically-unsound Weeks Island storage site. By the end of FY 1998 all of the Reserve's current 563 million barrel inventory will be available with an initial maximum drawdown rate of 3.9 million barrels per day.

Maximizing the Value of the Naval Petroleum and Oil Shale Reserves. The Department remains on schedule to place the government's portion of the Elk Hills field on the market and determine if its market value exceeds the value of the field under continued government ownership. If such a higher value can be achieved through the sale, the Department intends to complete the divestiture by the Congressionally-directed date of February 10, 1998.

We have taken several steps recently to ensure that the best interests of U.S. taxpayers are met in the divestiture. We have retained world-class experts to prepare an updated reserve report for the field. We have hired an investment banking team that is among the best in the business, and it has devised a sales strategy that will maximize competition among potential purchasers and get top-dollar offers for the field. Finally, as required by the authorizing legislation, we have selected five experts in the valuation of oil and gas fields who will independently assess the value of the United States' interest in the field under continued Government ownership. Their assessments will provide the basis for establishing a minimum price. Together, these steps will maximize the market value of Elk Hills.

Given the divestiture schedule, the FY 1998 budget request provides sufficient funds to continue operations of the Elk Hills field for 7 months. Included in this is a 3-month transition to a new owner.

Also, as specified by the 1996 National Defense Authorization Act, the Administration is preparing a study of options, or combinations of options, for maximizing the value of other naval petroleum reserves (other than Elk Hills). A preliminary report is currently undergoing Administration review, and we expect to submit it to Congress shortly.

Boosting Domestic Oil Production Through R&D. A key element of our domestic oil security strategy is to develop the tools and techniques that can slow, or perhaps reverse, the downward slide of oil production in this country. Past operations have recovered only one-third of the U.S. oil resource -- just over 150 billion of the estimated 533 billion barrels thought to exist in domestic fields. Yet high operating costs cause more than 16,000 wells to become unprofitable each year. As these wells are abandoned, U.S. oil production continues to decline, and imports continue to increase.

This situation, however, does not have to portend the future. Much of the remaining oil in U.S. reservoirs could be produced if more effective, lower cost technologies can be developed. The problem, however, is that smaller independents are increasingly becoming the principal operators of U.S. fields. Already, they drill 85% of the new wells and produce 50% of the crude oil and 60% of the natural gas in the lower 48 states. The smaller, independent operators have neither the staffs nor the budgets for R&D. Often they must depend on service companies for innovative technology, and even then, many smaller companies are reluctant to invest in new advances without a proven record of success.

The days of "Big Oil" dominating the U.S. oil industry are fast fading, and our R&D program reflects the growing importance of the smaller producer. More than 95% of the research performers in our petroleum R&D program are non-major oil companies. They are independents, service companies, universities, state agencies and research institutions.

Our oil technology R&D program has one central goal: reducing costs of domestic oil operations. Lower exploration, production and environmental compliance costs will lead to greater domestic production. Already our program has produced valuable knowledge that is maintaining -- and in some cases, increasing -- the flow of oil from U.S. fields. The success of one project alone in our field demonstration program has stimulated enough new commercial activity to offset the entire Federal investment ($118 million) in the demonstration program.

In FY 1998 we propose to capitalize on the progress made to date. Half of the 32 projects in our field program will be producing data or will have been completed by next year. Many of the "Class I" projects -- the first to be funded -- have shown that modern-day improvements in hydrocarbon detection, well logging and production can add millions of barrels of additional oil reserves from fields that otherwise would have been abandoned.

We now have a demonstrated track record. We have shown that Federal cost-sharing -- coupled with a requirement for aggressive technology transfer -- can revitalize many endangered oil fields in this country. Based on this success, we are proposing a follow-on effort in FY 1998. We propose to target specific technology demonstrations in reservoir groups with the largest potential. If we can replicate prior successes in additional settings, we can keep oil flowing from literally thousands of domestic reservoirs and displace oil that otherwise would be imported.

We also propose to increase funding for the National Laboratory-Industry Partnership Program. This program has produced revolutionary advances -- such as downhole well-to-well tomography -- that offer greater resolution and accuracy than was believed possible just a few years ago. Guided by industry's input, one of the key partnership efforts we propose in FY 1998 will be to apply lab expertise in developing single-well seismic imaging technology. Our target is the 60% of Gulf of Mexico hydrocarbon resources that are in sub-salt or salt flank reservoirs. This huge potential find -- perhaps larger than Prudhoe Bay -- is virtually impossible to image accurately with conventional methods because of interference from the salt formations. But using technology and computer codes first developed for the nation's defense, we may be able to provide a key for unlocking billions of barrels of new oil resources from this frontier. We will also continue industry-laboratory partnerships in drilling and completion technology and in advanced oil recovery processes.

We also propose to increase funding in our exploration and drilling program. Our goal is to provide new subsurface geologic information and decision-making software to help small producers locate potentially productive zones in unexplored basins. We estimate that these new exploration tools could save operators $25 million per year in dry hole costs while expanding production in such areas as the Black Mesa Basin of Arizona and in the mid-continental portion of the United States. These regions may contain undiscovered resources of 140 million barrels of oil and 0.7 trillion cubic feet of natural gas.

Preserving the Option of Alternative Liquid Fuels. The final element of our "Domestic Oil Security" strategy offers a longer-range alternative to conventional crude oil. Today there is no technological reason why our abundant, indigenous supplies of coal and natural gas cannot be a source of high-value petroleum substitutes. The challenge is cost. And we are bringing costs down with R&D.

In the last five years, we have made remarkable progress in converting natural gas and coal to high-grade liquid fuels and chemicals that greatly exceed the best petroleum-derived diesel fuels in emission and engine performance. Recent technology advancements in natural gas-to-liquids conversion technology offer prospects for producing transportation-grade fuels at costs of $18-20 per barrel. New coal-to-liquid concepts that differ greatly from the old synfuel processes of the 1970s and 80s today show potential for producing liquids at $25 per barrel, or perhaps even lower when the coal is mixed with waste plastics, scrap rubber or low-value petroleum resid.

New markets could also be opening for these processes. With the tightening of motor vehicle emission requirements in environmentally-sensitive locations, market demands for high-quality fuel blending stocks are increasing. Both coal and natural gas can serve as the feedstocks for such high-grade additives. In addition, one or more gas-to-liquid conversion processes could be ready for economical application in Alaska's North Slope in the next several years when Prudhoe Bay's vast gas reserves will no longer be needed to aid oil production. This technology would make use of Prudhoe Bay's vast gas reserves to provide a vital supplement to declining oil production that will be needed to prolong the economic viability of the Trans-Alaska Pipeline.

Federal involvement remains essential if the nation is to benefit from these longer-range technologies. In FY 1998, we propose to continue the scaleup and process testing of new gas-to-liquid concepts: the development of a ceramic membrane that can convert methane to a syngas "building block" for conversion into liquids without the need for costly pure oxygen; the development of a process to produce methyl chloride compounds which can subsequently be converted into liquids, and the development of a "plasma quenching" process to make acetylene from natural gas which can also be further processed into liquid fuels and chemicals.

In the coal-to-liquids area, we will continue bench- and lab-scale development of both direct and indirect liquefaction. In addition, we plan to coordinate both our coal- and gas-to-liquids research with the DOE Office of Energy Efficiency and Renewable Energy program to develop more efficient engine technologies for heavy vehicles. The superb environmental and power characteristics of converted coal and gas liquid transportation fuels makes the linkage of these two research programs mutually beneficial.

Supporting our Goals

Two other funding categories support our primary objectives:

Supporting Research. We propose to spend $30.5 million in FY 1998 on crosscutting research and analytical support that provides the scientific knowledge and information to guide our main priorities. The elements that make up this effort are:

Program/Activity (Budget Authority in millions of dollars)	FY 1997 Approps.	FY 1998 Request
Advanced Research and Technology Development Coal-Specific Research and Support - Coal Utilization Science - Coal Technology Export Activities - Bioprocessing of Coal - University Coal Research Fossil Energy-Wide Research and Support - Materials Research - Crosscutting Analytical Support - Minority Institutions Research	$ 17.62 3.15 0.85 1.00 3.00 5.07 3.60 0.94	$19.73 3.03 1.05 0.99 3.97 5.23 4.35 1.13
Cooperative R&D at University of North Dakota, Western Research Institute	$ 5.57	$ 5.84
Materials Research at Albany (OR) Research Center	$ 5.00	$ 4.97
TOTAL	$28.19	$30.54

These programs provide the fundamental knowledge, analytical background, and insights into new concepts that guide our R&D efforts. This research provides a bridge between the fundamental research supported in our national laboratories and the development of specific components that make up the advanced energy systems being developed by the Office of Fossil Energy. Projects in this area also identify the potential breakthrough advances and revolutionary innovations that could open new technology paths for clean and efficient fossil fuel use in the 21st century.

Program Management. We continue to improve our management efficiency, doing more with less, and working to ensure that more funding goes to vital programs and less to administrative overhead. For example, since FY 1995 in our R&D program, we have:

• Reduced federal personnel by 148 full-time equivalents, an 18% reduction;
• Reduced support service expenses by 21%;
• Merged the management of two of our major field R&D centers;
• Begun privatizing our national oil research laboratory in Oklahoma.

These actions will save an estimated $153 million between 1995 and 2000.

We have completed similar streamlining and management improvements in our other programs. Since 1995 in our Naval Petroleum and Oil Shale Reserves, we have:

• Reduced operating personnel by 209 full-time equivalents, a 24% reduction;
• Reduced electricity costs by cogenerating electric power in the field (and selling excess production to the local grid);
• Reduced federal oversight personnel and implemented new management processes.

The result is a $64 million savings from 1995-1998 in our Naval Petroleum and Oil Shale Reserves program.

In our Strategic Petroleum Reserve program, we have since 1995:

• Reduced contractor personnel by 150 full-time equivalents;
• Reduced federal personnel by 30 full-time equivalents;
• Begun turning idle/underused facilities into a source of federal revenues.

The combination of these Strategic Petroleum Reserve initiatives will save or return to taxpayers nearly $138 million through the year 2000.

In total, our management initiatives in the Office of Fossil Energy will save taxpayers nearly $355 million over the 1995-2000 period. We are serious about doing our part to reinvent a government that works smarter and costs less.

The Clean Coal Technology Program - An Investment Paying Off

The FY 1998 budget proposal described in the preceding pages totals $672.4 million. We propose offsetting a significant portion of this funding by returning to the Treasury and deferring a total of $286 million from the Clean Coal Technology Program. This proposal does not affect our commitment to ongoing projects; rather, the funding will be available because some Clean Coal Technology projects have been cancelled or restructured, or are being restructured this year.

The funding profile for the Clean Coal Technology Program is as follows:

Clean Coal Technology Program (dollars in millions)

Program/Activity (Budget Authority in millions of dollars)	FY 1997 Approps.	FY 1998 Request
Previously Appropriated Funding - Rescission (Returned to Treasury) - Deferral to Future Years	$137.88 -123.00 0	$ 0 -153.00 -133.00
TOTAL	$14.88	-$286.00

As the chart shows, the Clean Coal Technology Program requires no additional funding to complete the demonstration program. In fact, it has already returned $323 million to the Treasury in prior rescissions ($123 million in FY 1997 and $200 million in FY 1995). With the proposed rescission of $153 million in FY 1998, the total Clean Coal funding returned to the Treasury will be $476 million. DOE is also proposing a deferral of $133 million from FY 1998 to FY 1999.

At the end of FY 1998, 26 of the 40 projects in the Clean Coal Technology Program will be completed or finalizing their reporting requirements, 7 projects will be operating, and 7 will be either in design or construction. Already 14 technologies demonstrated in the Clean Coal program are in commercial use, and repayment of the Federal cost-sharing has begun. In FY 1998 this program, which the General Accounting Office described as a "model" for government-industry collaboration, will produce important data from:

• operation of the nation's first three commercial-scale coal gasification combined cycle power plants -- at Tampa, FL; Terre Haute, IN; and Reno, NV -- each facility achieving 95% or greater sulfur removal and 90% nitrogen oxide reductions;

• operation of the world's first commercial-scale liquid phase methanol facility at Kingsport, TN, capable of producing 260 tons/day of clean-burning, 97%-pure methanol from coal;

• startup of a commercial-scale advanced combustor power plant at Healy, AK, which will reduce sulfur dioxide by 90% or more and nitrogen oxides by 70%;

• completion of tests at an advanced coal processing facility in Colstrip, MT, that produces a clean fuel with a sulfur content as low as 0.3% and a heating value of up to 12,000 Btus/lb; and

• initial design of an advanced pressurized fluidized bed power plant at Lakeland, FL, which will test two configurations that can reduce sulfur dioxide by at least 95% and nitrogen oxides by at least 80%.

We are requesting an advance appropriation for FY 1999 of $50 million to support an international clean coal technology project in China. The funding would be used as an incentive for an integrated gasification combined cycle power generation project to be built in China using U.S. technology as a model for future plants in this large, emerging market.

Conclusion

Our FY 1998 budget request maintains our commitment to a balanced fossil energy program while reducing funding requirements. We have made hard choices in this budget, reducing the number of contractors in some projects, stretching schedules in others. Nonetheless we believe this budget will produce results. The investments we are proposing will help us deliver to the nation:

• Superior electricity generating technologies that can dramatically reduce air pollution from power stations in the 21st century and give us an affordable way to reduce greenhouse gases;

• Technologies that release new supplies of clean-burning natural gas from formations that are beyond today's capability, assuring that this abundant domestic resource remains affordable;

• The technological tools that will give our domestic oil producers -- primarily smaller independent companies -- the capability to slow the decline of oil production in this country without expensive government subsidies;

• The maximum value for the giant Elk Hills oil field -- the nation's 11th largest -- that has the best chance of reaching its full production potential under the ownership and operation of the private sector; and

• A fully capable Strategic Petroleum Reserve, large enough to effectively counter the economic disruptions of an energy emergency.

We look forward to working with this Subcommittee to achieve these goals. We ask your support for investments that will provide the environmental protection and domestic oil security the American public expects from its government in the 21st century.