[House Document 107-272]
[From the U.S. Government Publishing Office]



                                     

107th Congress, 2nd Session - - - - - - - - - - - - House Document 107-272


 
         CONTINUED PRODUCTION OF THE NAVAL PETROLEUM RESERVES

                               __________

                                MESSAGE

                                  from

                   THE PRESIDENT OF THE UNITED STATES

                              transmitting

NOTIFICATION OF HIS DECISION TO EXTEND THE PERIOD OF PRODUCTION OF THE 
  NAVAL PETROLEUM RESERVES FOR A PERIOD OF THREE YEARS FROM APRIL 5, 
    2003, THE EXPIRATION DATE OF THE CURRENTLY AUTHORIZED PERIOD OF 
            PRODUCTION, PURSUANT TO 10 U.S.C. 7422(c)(2)(B)




  October 10, 2002.--Message and accompanying papers referred to the 
         Committee on Armed Services and ordered to be printed
To the Congress of the United States:
    In accordance with section 201(3) of the Naval Petroleum 
Reserves Production Act of 1976 (10 U.S.C. 7422(c)(2)), I am 
informing you of my decision to extend the period of production 
of the Naval Petroleum Reserves for a period of 3 years from 
April 5, 2003, the expiration date of the currently authorized 
period of production.
    Enclosed is a copy of the report investigating the 
necessity of continued production of the reserves as required 
by section 201(3)(c)(2)(B) of the Naval Petroleum Reserves 
Production Act of 1976. In light of the findings contained in 
the report, I certify that continued production from the Naval 
Petroleum Reserves is in the national interest.

                                                    George W. Bush.
    The White House, October 9, 2002.
 Continued Production of the Naval Petroleum Reserves Beyond April 5, 
                                  2003

                               BACKGROUND

    The Naval Petroleum Reserves Production Act of 1976 (Pub. 
L. 94-258) directed that what were then three Naval Petroleum 
Reserves be developed and produced, at their maximum efficient 
rates (MER), for an initial 6-year period beginning in April 
1976. Pub. L. 94-258 authorizes the President to extend 
production in increments of up to three years each provided the 
President submits to the Congress a report of an investigation 
that determines the necessity for continued production, along 
with a Presidential certification that continued production is 
in the national interest. President Reagan exercised his 
authority to continue production on three occasions. President 
Bush exercised his authority once, and President Clinton three 
times. As a result, production from the Reserves has been 
continuously authorized since 1976 and is currently authorized 
through April 5, 2003.
    Under Pub. L. 94-258 the President may:
     Continue production at the maximum efficient rate 
for up to three years beyond April 5, 2003, or
     Shut in production at a level that would protect 
the reservoirs from ultimately losing oil reserves, perhaps 
indefinitely or until national defense emergency required 
activation of the Reserves.
    The National Defense Authorization Act for Fiscal Year 1996 
(Pub. L. 104-106) required the Department of Energy (DOE) to 
sell the Government's interest in the Naval Petroleum Reserve 
No. 1 (NPR-1, or Elk Hills), located in Kern County, 
California. To comply with this requirement, DOE conducted a 
competitive bidding process, and in February 1998, sold all of 
its interest in Elk Hills to Occidental Petroleum Corporation 
for $3.65 billion.
    This report addresses the continuation of production 
operations at one of the two remaining Reserves, Naval 
Petroleum Reserve No. 3 (NPR-3, also known as Teapot Dome), a 
small, mature stripper field located near Casper, Wyoming. 
Continued production from Naval Petroleum Reserve No. 2 (NPR-2, 
Beuna Vista Hills, in Kern County, California) is not analyzed 
in this report because that Reserve is not covered by the 
relevant provision of Pub. L. 94-258 (10 U.S.C. 7422(c)), and 
the Government's productive acreage on NPR-2 has been leased 
since the 1920s. Production at NPR-2 is expected to continue 
under the terms of the applicable leases as long as it is 
commercially viable.
    The Strom Thurmond National Defense Authorization Act for 
Fiscal Year 1999 (Pub. L. 105-261) authorizes DOE to dispose of 
NPR-3 by sale, lease, or transfer to another Federal agency, 
after oil and gas operations are abandoned in accordance with 
commercial operating practices. That statute also authorizes 
DOE to dispose of NPR-2.

                     CONTINUED PRODUCTION OF NPR-3

Ecomomic impacts

    NPR-3 is a mature crude oil stripper field (i.e., 
production averages under 10 barrels per day per well) nearing 
the end of its economic life (the time during which revenues 
from the sale of produced oil exceed the costs of production 
and yield a positive net cash flow). During the first three 
quarters of FY 2002, total production from all wells averaged 
650 barrels of oil per day. Revenues from the sale of the 
produced oil are expected to yield a net positive cash flow to 
the Federal Government of approximately $2 million in FY 2002. 
NPR-3 should continue to yield a positive net cash flow through 
FY 2006 based on assumptions which include: (1) an estimated 
sales price of $26-$29 per barrel of oil; (2) implementation of 
a few capital investments (i.e., total cost between $500,000 
and $1 million) to maintain the annual decline rate in oil 
production at 10-12 percent; and (3) continued emphasis on 
reducing operating and overhead costs.
    In addition to continuing routine production operations at 
NPR-3 for the next three years, DOE also will continued a 
phased abandonment and reclamation of the facility. Included in 
this project, which began in 1998, are the sale of surplus 
equipment no longer needed for production operations and the 
use of equipment and staff for both ongoing production 
operations and reclamation to minimize the cost of each 
activity.
    While the net revenues from production operations at NPR-3 
and the salvage of surplus equipment, which are deposited in 
the U.S. Treasury, are not significant in the context of the 
overall Federal budget, they nonetheless help to offset 
abandonment and reclamation costs, which are estimated at $10-
$15 million for the entire field plus an additional $1-3 
million in annual overhead expenses. Discontinuing production 
at NPR-3 at this time would result in the loss of the net 
revenue stream and the acceleration of work and costs for 
abandonment and restoration of the field to comply with State 
regulations.
    Given the nature of its underground crude oil reservoirs, 
NPR-3 almost certainly could not be reopened economically if it 
were shut down. Once closed, it would remain closed, and 
several million barrels of oil that could be recovered under 
continuing production operations would likely be lost as 
unrecoverable.
    Co-located at NPR-3, and utilizing the same production and 
processing facilities, is the Rocky Mountain Oilfield Testing 
Center (RMOTC), a program initiated by DOE in 1994. Conducted 
largely in cooperation with private industry and academic 
institutions through cost-shared projects, RMOTC provides for 
the development and demonstration of enhanced oil recovery 
techniques, production tools and processes, and environmental 
compliance technologies.

Emergency preparedness

    NPR-3 production rates are so small that there is no 
defense value or other national benefit in conserving the oil 
field for future use. Although daily production from NPR-3 is 
less than 0.005 percent of daily consumption of crude oil in 
the U.S. and would have no measurable effect on mitigating oil 
supply interruptions, it is important in the local, State and 
regional context.

                               CONCLUSION

    Given the small but positive net cash flow to the U.S. 
Treasury, which would help offset the costs of abandoning and 
reclaiming the facility, continued production of NPR-3 is in 
the national interest.

                                
