Statement of
Robert W. Gee
Assistant Secretary for Fossil Energy
U.S. Department of Energy
to the
Committee on Resources
U.S. House of Representatives
April 12, 2000

Mr. Chairman and Members of the Committee:

The recent announcement by OPEC and others that more oil will be flowing into global markets is good news for consumers and ultimately, for producers. It will build oil inventories and - as we have already seen in the past two weeks - it will lower prices. For producers, it will bring about greater price stability and enhance the confidence of lenders in financial markets.

But the recent price spike reminds us again that the availability and cost of energy remain an integral facet of everyday life, and that every American can still be affected by actions and decisions that occur well outside our borders.

The recent volatility in oil markets is yet another in a series of cycles. It is a cycle that actually began in 1997 when OPEC substantially increased production at about the time the economic downturn in Asia began to sharply reduce global oil demand. This led to unprecedented low oil prices - the lowest in 50 years - and much of our domestic industry suffered as a result.

The most recent price spike came as a result of a series of production cuts as both OPEC and non-OPEC producing countries attempted to compensate for the plunge in prices. Unfortunately, these cuts came at the same time recovery in Asia began to push demand back up. This led to the sharp price spikes we have recently experienced.

It is important to note that these dramatic swing in prices have largely resulted from an imbalance of less than 3 percent in world oil supply and demand. Today, the world consumes 75 million barrels of crude oil per day. A 2 million barrel supply overhang led to the price plunge in 1998. A 2 million barrel supply shortfall contributed to the price hike of this year.

This is the nature of the global oil market that affects every American. More than 50% of the oil consumed in the United States originates from outside of our borders. This is not only due to declining domestic production but from a continuing rise in U.S. demand. Our petroleum appetite has increased more than 20% since 1985.

Extreme market volatility negatively impacts several sectors of economy - both for energy producers and consumers. The rapid increase in the price of home heating oil created hardship for many families in the Northeast and Americans living on modest incomes. High fuel costs have hurt independent truckers, small businesses that are energy intensive, and farmers. Market volatility has also created difficulties for the nation's oil producers. When prices plunged in 1998-99, domestic production declined by more than 300,000 barrels per day. More than 30,000 oil workers - nearly 1 out of 10 - lost their jobs. Drilling rigs were scrapped. Even as prices rebounded, financial markets have remained cautious, money continues to be tight, and reinvestment in the domestic oil industry has not fully materialized.

U.S. Energy Policy

President Clinton and Energy Secretary Richardson have repeatedly urged policies that can help restore market stability by turning to markets and free market principles to set the future price of oil. Our overall energy policy is based on:

• Market forces -- not artificial pricing.
• Pursuing diverse sources of supply and strong diplomatic relations with energy producing nations.
• Working to improve the efficiency and environmental acceptability of production and use of traditional fuels through new technology development.
• Diversifying our energy sources through long-term investment in alternative fuels and energy sources.
• Investing heavily in increasing efficiency in the way we use energy.
• Maintaining and strengthening our insurance policy against supply disruptions - the Strategic Petroleum Reserve.

Increasing Domestic Oil and Gas Supplies and Reserves

There are some short-term global actions that can help. We have diversified our international sources of oil supply. Last year we imported oil from 40 different countries. We can engage in global diplomacy - and Secretary Richardson deserves a considerable amount of credit for the diplomatic efforts he has made in recent weeks. We will continue to maintain strong relationships with major oil and gas producing nations and continue to encourage their movement toward open markets, privatization, and regulatory reform.

But we must also continue to take actions that strengthen our own domestic energy security and protect those Americans that can be harmed most by sharp price fluctuations. That is what the President and the Department of Energy have been doing. For example, we have:

• Renegotiated delivery schedules for royalty crude oil coming in to our Strategic Petroleum Reserve so that this oil goes into the market in the short-term. The Energy Department has contracted for 28 million barrels of federal royalty oil taken in kind by the Minerals Management Service from leases in the Gulf of Mexico to be delivered to the Strategic Petroleum Reserve. About 10 million barrels have already been delivered. We have renegotiated contracts to shift the delivery of 5 million barrels from this spring to this fall and winter, when conditions are more favorable for putting crude oil in the Reserve. Postponing delivery dates until prices are expected to be lower has allowed DOE to negotiate greater than contracted-for quantities of crude oil.

• Urged Congress to reauthorize the Strategic Petroleum Reserve. The Reserve is our "first line of defense" against the threat of energy shortages that can cripple our economy; however, the organic authorities for the Reserve in the Energy Policy and Conservation Act expired on March 31st. Congress extended EPCA for only six months last September. Although the Senate has passed a 4-year extension last September, the House has not taken action since that time. It is critical that the Congress extend EPCA as soon as possible to ensure that the president maintains the ability to use all available tools to respond to the needs of the United States economy.

• Called on Congress to Establish a Regional Heating Oil Reserve. The President remains concerned about the effect that future shortages of heating oil may have on consumers, particularly in the Northeast and New England. To reduce the likelihood that future shortages will harm consumers, the President is:
  • Supporting the Establishment of a Regional Reserve: The President supports the creation of a two million barrel heating oil reserve in the Northeast with an appropriate trigger to combat future product shortages. In the event of heating oil shortages, heating oil can be sold from the reserve to increase the supply on the market.

  • Directing DOE To Undertake Necessary Environmental Reviews: The President has directed the Department of Energy to begin the appropriate environmental reviews for the creation of the heating oil reserve.

  • Calling on Congress to Establish a Reserve Through Legislation: The President has called on Congress to pass legislation that authorizes creation of a regional heating oil reserve and includes an appropriate trigger. The President has reserved his right to establish a reserve under his existing authority in the event that Congress fails to act.

• Proposed a Tax Incentive Package to Stimulate Domestic Oil and Gas Production. The President is proposing new steps to support new domestic exploration and production, and to lower the business costs of producers when oil prices are low. They include:
  • Expensing of Geological and Geophysical Costs: The President is proposing to support domestic exploration and production by adjusting the treatment of the costs of exploration and development -- geological and geophysical costs -- in the tax code. Under current law, geological and geophysical costs may be deducted if the related exploration activity was unsuccessful but must be capitalized if the exploration activity was successful. By allowing the industry to expense these costs, we will be encouraging the discovery of new reserves.

  • Allowing Expensing of Delay Rental Payments: A "delay rental payment" 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. The delay rental payment is intended to compensate the lessor for the royalties he does not receive while production is delayed. Currently, the federal tax code requires delay rental expenses to be capitalized under some circumstances. Allowing producers to expense delay rental payments in the year incurred will lower the cost of doing business and allow more dollars to be invested in finding and producing new domestic oil reserves.

  The Administration will also continue to examine measures to preserve marginal well production. Domestic marginal wells (which produce 15 barrels of oil per day or less) account for more than 20 percent of onshore oil production in the lower-48 States.

• Proposed Additional Tax Credits, Other Initiatives to Diversify Domestic Energy Supplies. The President believes that any tax package to improve the energy security of the country must include incentives to improve energy efficiency and promote the use of renewable energy. In his proposal, therefore, the President also included (1) tax credits for electric, fuel cell, and qualified hybrid vehicles, (2) tax credits for efficient homes and buildings, and (3) tax credits for efficient, non-petroleum based sources of power. He also reemphasized the importance of Congressional passage of his FY 2001 budget request which includes more than $1.4 billion to accelerate the research, development and deployment of alternative energy sources and more efficient end-use technologies.

  The President also directed the Department to conduct a 60-day study on converting factories and major users from oil to other fuels, to determine whether this will help to free up future oil supplies for use in heating homes.

• Continued the Federal Investment in Better Technology to Boost Domestic Oil Exploration and Production. If we hope to avoid the roller coaster fluctuations of oil prices 10 or 15 or more years into the future, we must invest in better oil exploration and production technology today - and most importantly, sustain that investment in the coming years.

  It has been the steady pace of technology that has helped keep the domestic 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. An exploratory well in the 1970s, on average, added about 10,000 barrels of oil in new reserves. Today, an exploratory well adds four times that amount, more than 40,000 barrels in new reserves.

  Major technological advances in oil exploration, such as three- and four-dimensional seismic drilling, are helping us to find more oil at greater depths, both on- and off-shore. At the same time, these technologies have reduced the environmental footprint left by exploration in some areas to 1/10th the size it was 25 years ago.

  Research and development partnerships between government and industry have become increasingly important in recent years. The domestic petroleum industry of the 21^st century is not the industry of the 1970s or even the 1980s. It no longer is dominated by "Big Oil." Increasingly today's modern-day domestic oil industry is an industry of independents - an industry of smaller companies. They are the ones that can benefit most from new technology -- especially technology that resolve production problems in the older, more complex U.S. fields -- but they are the ones least able to afford research and development.

  Our petroleum technology efforts at the Department of Energy fit into two primary categories:

  • Preventing near-term abandonment of still-productive resources through the transfer of existing and improved oil and gas production technologies to domestic producers, especially the smaller independents.

    When domestic wells are plugged and abandoned, the surface infrastructure - pumping units, gathering systems, storage tanks, and other equipment - that has been installed and financed over decades is dismantled. The capital investment to restore this infrastructure can be so large that few companies - especially the smaller ones - can obtain the necessary financing no matter the price of oil. The resource is, for all intents and purposes, no longer accessible under any reasonable price or technology scenario.

    To forestall the abandonment of still-productive oil fields Secretary Richardson, in February 1999, restarted the Reservoir Class Field Demonstration Program, a program to provide federal matching funds to producers willing to try improved approaches to keeping declining fields in production. In October, we selected 10 projects to receive $23 million in Federal funding, all of which involve independent producers.

    We have also set aside funding for our Technology Assistance to Independents Program which provides grants to the smallest of our independent producers to solve specific field production problems. Since this program began in 1995 and was restarted last year, 45 companies have received assistance in applying innovative solutions that have kept many wells in production.

    We are also beginning a new effort called the Preferred Petroleum Upstream Management Practices Program (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" that can get production back up quickly. This month, we will issue a competitive solicitation to begin this program.

  • The second aspect of our petroleum program is to develop the longer-range technologies that can ultimately produce the full potential of the U.S. resource.

    The potential for improved oil technologies is enormous. Many people are surprised to know that for every barrel of crude oil produced in the United States in the history of the domestic oil industry, nearly two barrels have been left in the ground. Technological improvements can help U.S. producers recover a much greater portion of the oil that is currently beyond the capabilities of today's exploration and production processes.

    Already, the same technology used by Steven Speilberg 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 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 that can reduce the costs and increase the success rates of future drilling.

    A complete "logging and chemical laboratory-on-a-chip" might be in the industry's future. This technology would analyze for hydrocarbons near the bottom of the hole while drilling is underway. Fiber optics, perhaps embedded in composite drill pipe, could bring about quantum improvements in the way data is transmitted from the bit to petroleum engineers on the surface.

    In the future, new polymers and other chemicals, along with different types of gas injection (including greenhouse gases such as carbon dioxide), could offer better ways to force previously unmoveable crude oil through the tight pores of reservoir rocks and to production wells. It may also be possible to use naturally-occuring microbes that live deep in reservoirs to produce substances that can aid in the future recovery of crude oil.

    These are some of the examples of technology that begins to maximize production - technologies that could provide a way for U.S. producers to tap the true potential of the considerable oil wealth that remains in this country.

The Issue of Access to Federal Lands

Much of the Nation's oil and gas resource resides on federal lands or beneath federal waters. The Federal government owns 657 million acres, or 29% of the onshore land area of the United States. Federal onshore lands in Alaska account for 31% of the government-owned acreage, while 62% of Federal onshore lands are located in 11 Western states (California, Washington, Oregon, Idaho, Nevada, Arizona, New Mexico, Colorado, Wyoming, Utah, and Montana).

Due largely to increased production from Federal offshore tracts, the share of domestic oil production from Federal lands has increased from 16.3% in 1989 to 26.9% in 1997; similarly, the federal share of natural gas production has increased from 30.2% in 1980 to 39.3% in 1997.

While the Administration supports production on federal lands where it is environmentally sound, there will be areas in which production is not appropriate. For example, development in the Arctic National Wildlife Refuge is not appropriate due to environmental concerns, and the same is true in certain other portions of the Outer Continental Shelf. However, there are other extensive Federal and State lands on the Alaskan North Slope that can be developed. Industry is currently conducting work to develop reserves in:

• the West Sak Reservoir "Core Area"
• the Alpine prospect area of the Colville Delta,
• the North Star prospect area in the Beaufort Sea,
• the Badami field, and
• the Schrader Bluff field.

The National Petroleum Reserve in Alaska. One of the most potentially significant areas for future oil production is the National Petroleum Reserve in Alaska (NPR-A), located on the western side of Alaska's North Slope. The U.S. Department of the Interior has estimated that the economically recoverable portion ranges from 500 million barrels at $18 per barrel to 2.2 billion barrels at $30 per barrel. (Note: There may be between 1.8 and 4.7 billion barrels of technically recoverable oil in the planning area, with a mean estimate of 3.1 billion barrels.)

In 1998, the U.S. Department of the Interior decided to make available most of the Northeast portion of the Reserve for leasing. The Department of energy strongly supported this effort. DOE's support was based largely on the significant advances in technology that have reduced the environmental impact of oil and gas activities in the arctic region. On May 5, 1999, Interior held the lease sale and accepted winning bids totaling $105 million for 134 tracts. The first exploratory wells are underway today.

As examples of improved technology, DOE cited the following:

• Drill pad size has decreased by more than 80%, from 65 acres with older pad designs used at Prudhoe Bay to less than 10 acres.

• Horizontal drilling has greatly reduced the number of pads required to access target oil-bearing zones. Reservoir targets miles away from the surface well head can be tapped by extended reach wells, further reducing the number of drill pads needed.

• Roadless development is now possible because of improvements in ice-road and drilling pad construction, eliminating long-term impacts to the tundra. Exploratory drilling can take place in winter on ice pads that leave no mark on the tundra after operations are completed.

• Used drilling fluids and rock cuttings can now be disposed of by injecting them into underground formations, eliminating surface discharges and mud-reserve pits.

• Advanced seismic imaging results in more successful wells and fewer dry holes.

• Production sites can be operated remotely with fiber optics, remote sensing, and robotics, minimizing human disturbance.

Many of these new technologies will be profiled in an upcoming workshop to be sponsored by the Department of Energy and the State of Alaska. Titled "Established Oil & Gas Practices and Technologies on Alaska's North Slope," the workshop will produce a compilation of the best approaches to carry out oil and gas operations in the NPR-A or in similar Arctic environments. It will be held April 25-26 in Anchorage.

Current and future advanced technologies and innovative operating practices should provide the requisite environmental protection for oil and gas activities within the available areas of the NPR-A. It is important to recognize, however, that the NPR-A was set aside as a potential site of future petroleum production. It is distinctly different than a wildlife refuge, and even within the NPR-A, there are areas that are off-limits to drilling because of wildlife issues. Improvement in technology can reduce environmental impacts, but it unfortunately cannot eliminate them. In the designated areas within a petroleum reserve, the impacts of state-of-the-art oil and gas operations are acceptable; in a pristine area such as ANWR, however, they would not be.

The Prospects for Increased Gas Production in the Rocky Mountains and Eastern Gulf of Mexico. The United States is facing the prospects that demand for natural gas, the cleanest of fossil fuels, is likely to increase by more than a third in the next 10 to 15 years. By the end of this decade, domestic gas demand could be at least 30 trillion cubic feet per year and will likely continue to increase in future years.

To supply this demand, producers will increasingly turn to more challenging sources of production. Recently, the National Petroleum Council - a private sector advisory panel to the Secretary of Energy - forecast that between 1998 and 2015:

• Deepwater production from the Gulf of Mexico, currently in its infancy, would increase more than five-fold (from 0.8 Tcf to 4.3 Tcf annually).

• Onshore production from nonconventional formations would increase by approximately 50% (from 4.4 Tcf to 8.5 Tcf), with most of the increase coming from tight, low-permeability reservoirs in the Rocky Mountain region.

• Onshore production from deep conventional formations greater than 10,000 feet could increase by approximately 20% (from 4.6 Tcf to 5.5 Tcf).

The National Petroleum Council report states that access to potential gas supplies on Federal lands is a key factor in determining whether the U.S. gas demand will be met. Two of the most promising regions for future gas production are the Rocky Mountains and the Gulf of Mexico.

The Council recommended that an Interagency Work Group on Natural Gas be established under the auspices of the White House to work with industry and other stakeholders to formulate a strategy for natural gas development, including the issue of access to federal lands. While plans are underway to establish this work group, the Energy Department is also working with several federal land management agencies to resolve issues that have restricted access to much of the land identified in the National Petroleum Council study. For example:

• The Federal Leadership Forum has been formed to address the environmental review processes that must be conducted before federal lands can be leased and again before actual drilling can occur. The goal of the forum is to ensure that the National Environmental Policy Act (NEPA) processes are carried out as efficiently as possible while still addressing the environmental issues required by law. In the Rocky Mountain region (Wyoming, Utah, New Mexico and Colorado), DOE, the Bureau of Land Management, the Forest Service, the Environmental Protection Agency, the Fish and Wildlife Service, the National Park Service, and the Bureau of Indian Affairs have joined to develop ways to streamline the NEPA process, develop a cooperative approach to analyzing the impacts of oil and gas development, and resolve disputes among agencies.

• A resource assessment is being conducted for Wyoming oil and gas. DOE is part of a collaborative effort with the Wyoming State Geological Survey, the Wyoming Oil and Gas Conservation Commission, the Bureau of Land Management, the U.S. Forest Service, the Bureau of Indian Affairs and the U.S. Geological Survey. When completed in late 2001, the project will produce a comprehensive, science-based regional assessment of oil and gas resources throughout the State based on resource occurrence, rather than ownership boundaries. It will also present scenarios for future resource development and establish a framework in which assessments can be kept current.

• Technology partnering continues with BLM. Since FY 1998, DOE and the Bureau of Land Management have jointly conducted research on technologies that can improve access to Federal lands. DOE provides funding while BLM nominates and prioritizes projects and helps manage them. Projects already funded include air quality monitoring in Wyoming and better ways to remediate damage from salty water produced at oil and gas sites on Native American land in Oklahoma. This year, we will support coal bed methane-related research in Colorado and Wyoming, a study on the impact of compressor noise on wildlife in New Mexico, the effects on oil and gas development on wildlife in Wyoming, and the development of a cultural resources predictive model for Nevada.

DOE's Initiatives to Transfer Federal Oil and Gas Properties to the Private Sector. For much of the last three decades, DOE has had direct responsibility for large tracts of federal oil and gas holdings within the land set aside for the Naval Petroleum and Oil Shale Reserves. In the mid-1990s, with these properties no longer needed for national security purposes, the Clinton Administration began an initiative to return them to the private sector.

In February 1998, the Department and Occidental Petroleum Corp. concluded the largest divestiture of federal property in the history of the U.S. government. The sale of the Elk Hills Naval Petroleum Reserve in California for $3.65 billion underscored the Administration's faith in the private sector to carry out responsible development of the Nation's 11^th largest oil and gas field. Subsequently, the Naval Oil Shale Reserves #1 and #3 in Colorado were transferred to the Department of the Interior for inclusion in the agency's minerals leasing program.

More recently, in coordination with the Department of the Interior, the State of Utah, and the Ute Indian Tribe, Secretary Richardson has announced plans to submit legislation to transfer the Naval Oil Shale Reserve No. 2 in Utah to the Northern Ute Indian tribe. The transfer of 84,000 acres would be the largest voluntary return of land to Native Americans in the lower 48 states in more than a century. The land was transferred from the Northern Utes to the Federal government in 1916 as a source of shale oil for the U.S. Navy. While it is unlikely that shale oil production will be an economically viable enterprise on the property, the land could contain significant quantities of natural gas. The transfer will give the Northern Utes - the original owners of the property - an opportunity to develop this potential.

Under the plan, 9 percent of any royalties from future energy resource production on the lands would help fund clean-up and disposal of uranium mill tailings at a site near Moab, Utah. Another provision would put into place additional environmental protection for a 75-mile stretch on the eastern side of the Green River under the jurisdiction of the Northern Ute Indian tribe.

Conclusion

It will take a combination of actions - both near- and long-term, both to encourage additional domestic oil production and to increase the efficiency in our future use of oil - to give the United States a more stable energy future.

The problem of market volatility will not be solved overnight. It will take continuing dialogue and a common understanding among both consuming and producing nations that stability in oil markets is a shared and desirable goal.

A fully responsive and capable Strategic Petroleum Reserve will also remain a key element of a more secure energy future, and we will continue to work with Congress to pass its reauthorization as soon as possible and to establish a regional reserve that will provide heating oil to help cushion future price swings.

We will continue to make investments in technology that can increase the amount of crude oil that can be produced in the future from our own domestic resources. If these programs are successful, we may be able to halt the decline in U.S. oil production by the mid part of this decade and begin to slow our growing dependence on imported oil.

Finally, we will continue to work with our colleagues at the Department of the Interior and at other federal and state agencies, sharing with them the advances being made daily in science and technology, as they make future decisions regarding development of Federal lands.

These steps are key elements of a sound, comprehensive energy strategy that has helped sustain the longest economic expansion in American history. They will enhance America's energy security, create jobs, protect the environment, and produce long-term benefits for both energy consumers and producers.

This concludes my prepared statement, Mr. Chairman. I will be pleased to answer any questions.