[House Document 109-59]
[From the U.S. Government Publishing Office]



                                     

109th Congress, 1st Session - - - - - - - - - - - - - House Document 109-59


 
          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, 
    2006, THE EXPIRATION DATE OF THE CURRENTLY AUTHORIZED PERIOD OF 
            PRODUCTION, PURSUANT TO 10 U.S.C. 7422(c)(2)(B)




   October 6, 2005.--Message and accompanying papers referred to the 
         Committee on Armed Services and ordered to be printed
To the Congress of the United States:
    Consistent with section 7422(c)(2) of title 10, United 
States Code, 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, 2006, the expiration date of 
the currently authorized period of production.
    Attached is a copy of the report prepared by my 
Administration investigating the necessity of continued 
production of the reserves consistent with section 
7422(c)(2)(B) of title 10. 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 4, 2005.
 Continued Production of the Naval Petroleum Reserves Beyond April 5, 
                                  2006

                               BACKGROUND

    The Naval Petroleum Reserves Production Act of 1976 (Pub. 
L. 94-258) directed that what were then the 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 George H. W. Bush exercised his authority 
once; President Clinton three times; and President George W. 
Bush most recently in 2002. As a result, production from the 
Reserves has been continuously authorized since 1976 and is 
currently authorized through April 5, 2006.
    Under Pub. L. 94-258 the President may:
           Continue production at the maximum efficient 
        rate for up to three years beyond April 5, 2006, or
           Shut in production at a level that would 
        protect the reservoirs from ultimately losing oil 
        reserves, perhaps indefinitely or until a 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 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. 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. Continued production from Naval 
Petroleum Reserve No. 2 (NPR-2, Buena 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.
    In addition, section 331 of the recently-enacted Energy 
Policy Act of 2005 transferred administrative jurisdiction and 
control over all public domain lands in NPR-2 (with certain 
limited exceptions) from DOE to the Department of the Interior 
for management in accordance laws governing management of the 
public lands. Production at NPR-2 is expected to continue under 
the terms of the new Energy Policy Act.

                     CONTINUED PRODUCTION OF NPR-3

Economic 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). Actual production from all 
wells during FY 2005 has averaged 420 barrels of oil per day. 
As a result of an average crude oil sales price of over $49 per 
barrel, FY 2005 revenues from the sale of the produced oil and 
natural gas liquids will yield nearly $8 million. Based on FY 
2005 budget authority, direct and overhead operational costs 
are anticipated at $6 million, resulting in revenues to the 
U.S. Treasury which exceeds the cost to operate the field by $2 
million in FY 2005. NPR-3 should continue to generate revenues 
which exceed the cost to operate the field through the period 
of this report based on assumptions which include: (1) crude 
oil sales price assumptions included in the Mid-Session Review 
of the FY 2006 Budget; (2) suspension of all capital investment 
projects (although this would result in an annual decline rate 
in oil production of 9 percent); (3) the return of temporarily 
shut-in wells to production; and (4) continued emphasis on 
reducing operating and overhead costs.
    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 that can be transferred to and utilized 
by the domestic oil and gas industry. An additional benefit to 
NPR-3 is that testing successful technologies provides 
increased production and reduced operating costs directly to 
NPR-3, thus positively impacting the economic performance of 
the field.
    To decrease field operating costs and maintain a position 
of revenues exceeding costs for the oil field operations at 
NPR-3, 300 wells have been plugged and abandoned in the past 
seven years. The remaining 690 wells will continue to be 
maintained as long as they are economically viable. In 
addition, several test batteries and production facilities have 
been demolished and restored, further lowering operating costs.
    While the revenues from production operations at NPR-3 and 
the salvage of surplus equipment are not significant in the 
context of the overall Federal budget, they nonetheless provide 
a positive impact to the U.S. Treasury. Discontinuing 
production at NPR-3 at this time would result in the loss of 
the 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 in. Once closed, it would remain closed, and more 
than 500,000 barrels of oil that could be recovered under 
continuing production operations would likely be lost as 
unrecoverable.

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. Daily production from NPR-3 is only 
slightly more than 0.003 percent of daily consumption of crude 
oil in the U.S. and would have no measurable effect on 
mitigating oil supply interruptions.

                               CONCLUSION

    Given that the revenues generated and deposited into the 
U.S. Treasury exceed the cost to operate the Teapot Dome Field, 
continued production of Naval Petroleum Reserve No. 3 beyond 
April 5, 2006, is in the national interest.

                                  
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