[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



  THE ULTRA DEEPWATER RESEARCH AND DEVELOPMENT: WHAT ARE THE BENEFITS?

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 29, 2004

                               __________

                           Serial No. 108-77

                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


                               __________

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                            WASHINGTON : 2003
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                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
RALPH M. HALL, Texas                   Ranking Member
MICHAEL BILIRAKIS, Florida           HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
JAMES C. GREENWOOD, Pennsylvania     FRANK PALLONE, Jr., New Jersey
CHRISTOPHER COX, California          SHERROD BROWN, Ohio
NATHAN DEAL, Georgia                 BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING,       KAREN McCARTHY, Missouri
Mississippi, Vice Chairman           TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania        TOM ALLEN, Maine
MARY BONO, California                JIM DAVIS, Florida
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
LEE TERRY, Nebraska                  HILDA L. SOLIS, California
MIKE FERGUSON, New Jersey            CHARLES A. GONZALEZ, Texas
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
JOHN SULLIVAN, Oklahoma

                      Bud Albright, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Energy and Air Quality

                     RALPH M. HALL, Texas, Chairman

CHRISTOPHER COX, California          RICK BOUCHER, Virginia
RICHARD BURR, North Carolina           (Ranking Member)
ED WHITFIELD, Kentucky               TOM ALLEN, Maine
CHARLIE NORWOOD, Georgia             HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois               EDWARD J. MARKEY, Massachusetts
  Vice Chairman                      FRANK PALLONE, Jr., New Jersey
HEATHER WILSON, New Mexico           SHERROD BROWN, Ohio
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING,       GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
GEORGE RADANOVICH, California        LOIS CAPPS, California
MARY BONO, California                MIKE DOYLE, Pennsylvania
GREG WALDEN, Oregon                  CHRIS JOHN, Louisiana
MIKE ROGERS, Michigan                JIM DAVIS, Florida
DARRELL E. ISSA, California          JOHN D. DINGELL, Michigan,
C.L. ``BUTCH'' OTTER, Idaho            (Ex Officio)
JOHN SULLIVAN, Oklahoma
JOE BARTON, Texas,
  (Ex Officio)

                                  (ii)



                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    DeLay, Hon. Tom, a Representative in Congress from the State 
      of Texas...................................................    13
    Foss, Michelle, Executive Director, Institute for Energy, Law 
      & Enterprise, University of Houston........................    20
    Gruenspecht, Howard, Deputy Administrator, Energy Information 
      Administration, Department of Energy.......................     8
    Riordan, John, President and CEO, Gas Technology Institute...    35
    Sandlin, Hon. Max A., a Representative in Congress from the 
      State of Texas.............................................     1
    Weglein, Arthur B., Mission-Oriented Seismic Research 
      Program, University of Houston.............................    16

                                 (iii)

  

 
  THE ULTRA DEEPWATER RESEARCH AND DEVELOPMENT: WHAT ARE THE BENEFITS?

                              ----------                              


                        THURSDAY, APRIL 29, 2004

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:30 a.m., in 
room 2123, Rayburn House Office Building, Hon. Ralph M. Hall 
(chairman) presiding.
    Members present: Representatives Hall, Shimkus, Radanovich, 
Walden, Barton (ex officio), Boucher, and Allen .
    Staff present: Mark Menezes, majority counsel; Bill Cooper, 
majority counsel; Peter Kielty, legislative clerk; Sue 
Sheridan, minority counsel; and Bruce Harris, minority 
professional staff.
    Mr. Hall. All right, we will come to order. We do have a 
quorum here. We have the two main guys on the committee. They 
are here, and for most of you to know, there are no recorded 
votes today, and almost everybody is strapped to an airplane 
and went north, east, south and west last night. That is the 
reason it is not better attended. But it is taken down by a 
very capable young lady, and it will made available to 
everybody to read.
    In the interest of time, Ranking Member Boucher and I have 
agreed to waive our opening statements at this time in order 
for Congressman Sandlin to go ahead and testify if he wants to, 
and I know he is probably running for an airplane.
    So we recognize you, Max, at this time to take as much time 
as you would like. Mr. DeLay was supposed to be here, but I 
think he would like very much for you to be his substitute 
here. The Chair recognizes Max Sandlin.

STATEMENT OF HON. MAX A. SANDLIN, A REPRESENTATIVE IN CONGRESS 
                    FROM THE STATE OF TEXAS

    Mr. Sandlin. Thank you, Mr. Chairman. Mr. Chairman, ranking 
member Boucher, distinguished members of the subcommittee, 
first I want to thank you for the opportunity to appear before 
the subcommittee today. It is indeed a pleasure to join with 
the distinguished majority leader, Mr. DeLay, who is to be 
here, in advocating what we all know to be a truly nonpartisan 
policy goal, a comprehensive and innovative national energy 
strategy.
    This morning, in particular, I am here to express my 
support for the ultradeep water and unconventional natural gas 
and other petroleum resources program, which is included in the 
conference report on H.R. 6 as passed by the House last year.
    This provision is substantially the same as that contained 
in the bill that I was proud to co-sponsor with Chairman Hall 
in the last Congress. I commend you, Mr. Chairman, for your 
persistent efforts to pass this provision through the Congress. 
I believe it is important to the Nation for economic and 
security reasons to develop our domestic resources to limit as 
best we can our dependence on imported energy.
    The measure we discuss this morning would establish and 
fund new programs of research, development, demonstration, and 
commercial application of technologies for unconventional 
onshore and ultradeep water natural gas and other petroleum 
resource exploration and production, including safe operations 
and environmental mitigation.
    The legislation authorizes the Department of Energy, in 
partnership with industry, to advance the science and 
technology available to domestic onshore unconventional natural 
gas and oil producers, particularly independent producers, 
through advances in technology for production of unconventional 
resources.
    The legislation also establishes a program to benefit small 
producers by resolving issues associated with complex geology, 
low reservoir pressure, and unconventional oil and gas 
reserves.
    In addition, the legislation authorizes a program to 
develop technologies to produce natural gas and oil reserves in 
the ultradeep water of the central and western Gulf of Mexico 
with a focus on improving, while lowering costs and reducing 
environmental impacts, the safety and efficiency of the 
recovery of ultradeep water resources and subsea production 
technology used for such recovery.
    These new programs are designed to help the Nation meet its 
growing energy supply needs in the near and mid-term. In the 
1st District of Texas there are many independent producers and 
many small producers who could produce much more oil and gas if 
they could afford the research and development that is needed 
to resolve the technical issues that they now face in the 
field.
    This legislation will dramatically improve their 
opportunities to be successful and deliver new domestic natural 
gas and oil supplies to the Nation.
    Natural gas and other petroleum resources in unconventional 
onshore and ultradeep water reserves can provide a significant 
portion of the incremental supply of energy needed to meet 
growing demand over the next 20 years if the economic and 
technical impediments to development are minimized.
    Modeling by the Bureau of Economic Geology at the 
University of Texas shows that over the next 15 years, with a 
well funded program to develop advanced technology to increase 
production from the unconventional onshore and ultradeep water 
resources, we could economically add average productive 
capacity of at least 4.3 Tcf of natural gas per year.
    To offer another perspective on the extent of the resource, 
the unconventional onshore and the deep water and ultradeep 
water Gulf of Mexico resources are the largest opportunities 
remaining in the United States in areas that are currently 
available to be developed.
    There is clear and significant public purpose for the 
development of domestic resources. The costs and risks 
associated with this development are sufficiently high that, 
without a strong and focused public-private partnership, these 
resources will not be economically producible to meet our mid-
term energy needs.
    In order for our industry to develop these domestic 
resources to meet the Nation's energy requirements over the 
next 10 to 20 years, it is critical that we provide Federal R&D 
investment through public-private partnerships to lower the 
costs, increase safety, and mitigate the environmental impact 
of producing from these areas.
    For these reasons, Mr. Chairman, among many others, I hope 
that we are able to enact this critically important legislation 
as soon as possible, and I appreciate you, Mr. Chairman, and 
Mr. Boucher for having this hearing today, and appreciate the 
opportunity to appear.
    [The prepared statement of Hon. Max A. Sandlin follows:]

Prepared Statement of Hon. Max A. Sandlin, a Representative in Congress 
                        from the State of Texas

    Mr. Chairman, Ranking Member Boucher, distinguished members of the 
subcommittee: First, I want to thank you for the opportunity to appear 
before the Subcommittee today. It is indeed a pleasure to join with the 
distinguished Majority Leader, Mr. DeLay, in advocating what we all 
know to be a truly non-partisan policy goal--a comprehensive and 
innovative national energy strategy.
    This morning, in particular, I am here to express my support for 
the Ultra-deepwater and Unconventional Natural Gas and Other Petroleum 
Resources Program included in the Conference Report on H.R. 6 as passed 
by the House last year. This provision is substantially the same as 
that contained in the bill that I was proud to co-sponsor with Chairman 
Hall in the last Congress. I commend you, Mr. Chairman, for your 
persistent efforts to pass this provision through the Congress. I 
believe that it is important to the Nation for economic and security 
reasons to develop our domestic resources to limit, as best we can, our 
dependence on imported energy.
    The measure we discuss this morning would establish and fund new 
programs of research, development, demonstration, and commercial 
application of technologies for unconventional onshore and ultra-
deepwater natural gas and other petroleum resource exploration and 
production, including safe operations and environmental mitigation. The 
legislation authorizes the Department of Energy, in partnership with 
industry to advance the science and technology available to domestic 
onshore unconventional natural gas and oil producers, particularly 
independent producers, through advances in technology for production of 
unconventional resources. The legislation also establishes a program to 
benefit small producers by resolving issues associated with complex 
geology, low reservoir pressure and unconventional oil and gas 
reservoirs. In addition, the legislation authorizes a program to 
develop technologies to produce natural gas and oil reserves in the 
ultra-deepwater of the Central and Western Gulf of Mexico, with a focus 
on improving, while lowering costs and reducing environmental impacts, 
the safety and efficiency of the recovery of ultra-deepwater resources 
and sub-sea production technology used for such recovery.
    These new programs are designed to help the nation meet its growing 
energy supply needs in the near and mid-term. In the 1st District of 
Texas there are many independent producers and many small producers who 
could produce much more oil and gas if they could afford the research 
and development that is needed to resolve the technical issues that 
they face in the field. This legislation will dramatically improve 
their opportunities to be successful and deliver new, domestic natural 
gas and oil supplies to the nation.
    Natural gas and other petroleum resources in the unconventional 
onshore and ultra-deepwater reserves can provide a significant portion 
of the incremental supply of energy needed to meet growing demand over 
the next 20 years if the economic and technical impediments to 
development are minimized. Modeling (by the Bureau of Economic Geology 
at the University of Texas) shows that, over the next 15 years, with a 
well-funded program to develop advanced technology to increase 
production from the unconventional onshore and ultra-deepwater 
resources, we could economically add average productive capacity of at 
least 4.3 Tcf of natural gas per year. To offer another perspective on 
the extent of this resource: the unconventional onshore and the 
deepwater and ultra-deepwater Gulf of Mexico resources are the largest 
opportunities remaining in the United States in areas that are 
currently available to be developed.
    There is a clear and significant public purpose for the development 
of domestic resources. The costs and risks associated with this 
development are sufficiently high that without a strong and focused 
public/private partnership these resources will not be economically 
producible to meet our mid-term energy needs. In order for our industry 
to develop these domestic resources to meet the nation's energy 
requirements over the next ten to twenty years, it is critical that we 
provide federal R&D investment through public/private partnerships to 
lower the cost, increase the safety and mitigate the environmental 
impact of producing from these areas.
    For these reasons, among so many others, I hope that we are able to 
enact this critically important legislation as soon as possible.

    Mr. Hall. Thank you, Congressman Sandlin. I would note the 
presence of the chairman of the Committee on Energy and 
Commerce, Mr. Barton. We waived our opening statement. Mr. 
Chairman, if you have an opening statement you want to give.
    Chairman Barton. Mr. Chairman, I just thank you for holding 
this hearing. I want to thank Congressman Sandlin for 
testifying. I think this is an important issue and your 
leadership and Mr. Boucher's leadership is a good example of 
what bipartisanship should be all about.
    I ask unanimous consent that my formal statement be 
included in the record.
    Mr. Hall. Without objection, it will be included.
    [The prepared statement of Hon. Joe Barton follows:]

 Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy 
                              and Commerce

    Thank you, Mr. Chairman, for holding this hearing on ultradeep 
water research and development. There have been enormous technological 
advances in oil and gas exploration and production in recent decades. 
Offshore drilling and production platforms are so technologically 
advanced that one platform on the surface of the water can handle 
production from several different wells several miles apart, house a 
myriad of technologically advanced computer systems, employ scores of 
personnel, generate electricity, enable people to face and conquer the 
adversities of living in the middle of the ocean, and do so 24 hours a 
day, 7 days a week; all without so much as losing a gum wrapper over 
the side of the platform. It is truly amazing.
    However, with all of the latest technologies, more research is 
needed as companies are forced into ever-deeper water to meet our 
nation's energy needs. Ultradeep water has been characterized as water 
depths of 1,500 meters or deeper--roughly 5,000 feet of water. Who 
would have ever imagined that a driller would have to string together 
5,000 feet of pipe just to get to the dirt? Drilling at such depths 
will present a whole host of impediments to production that must be 
resolved through technology. American ingenuity will find the 
solutions.
    We need to explore the proper role of government in a program that 
advances cutting-edge technology to provide our nation's energy needs. 
I look forward to hearing the testimony from the panelists today--
including my friend from Texas, the distinguished Majority Leader, Mr. 
DeLay--and thank them for their participation on this important topic.

    Mr. Hall. Are there any questions of Mr. Sandlin? All 
right, Max. Looks like you presented it very well, and thank 
you very much for your time, and thank those that accompanied 
you.
    Mr. Boucher. Mr. Chairman, I don't have an opening 
statement. I agree with you that in order to expedite our 
proceedings this morning, it is best to move along. However, I 
would ask that you give Mr. Allen an opportunity to make a 
statement, if he desires to do so. I think he may have a few 
comments for us.
    Mr. Hall. Well, I will certainly agree to that. Will you 
allow me to make my opening statement? Then you might make 
yours, or put it in the record.
    Good morning to all of you, and I welcome everyone to this 
hearing on ultradeep research and development: what are the 
benefits?
    Actually, according to the Department of Energy, their 
Energy Information Administration, the United States will 
remain principally dependent on natural gas and oil for the 
foreseeable future to meet its needs. EIA projections show that 
natural gas and oil will provide for about 65 percent of 
domestic energy over the next several decades, and the demand 
for gas will rise 38 to 53 percent by 2025.
    Over the long term meeting domestic natural gas demand will 
require diversity of supply sources and behavioral changes. 
Most commonly mentioned are demand reduction; increased use of 
liquified natural gas; development of Arctic natural gas; 
improvement in the development of lower 48 resources; 
improvements in the development of offshore natural gas.
    First, demand reduction is unsustainable for our economy, 
the Nation's consumers, and the environment. We will increase 
our use of LNG, and we will need to develop the natural gas 
resources of the Arctic.
    These items are long term solutions, and near and mid-term 
the ultradeep and unconventional onshore natural gas and oil 
research and development program will bring unbelievable 
improvements in the development of the lower 48 gas resources, 
particularly in the unconventional resources, and will improve 
our ability to develop offshore natural gas resources.
    The program has been developed in response to the 
conclusions of the National Petroleum Council's 1999 natural 
gas study and other communicators that additional technologies 
need to be developed to produce incremental quantities of oil 
and natural gas. The program is a major component of the 
research and development title of the pending energy bill.
    The ultradeep water and unconventional onshore natural gas 
and oil research and development program is a 10-year, $2 
billion R&D program to develop the technologies necessary to 
substantially increase the production of natural gas and oil in 
the ultradeep waters of the central and western Gulf of Mexico 
and certain onshore areas of the United States.
    I am deeply concerned by the recent Standard & Poor's 
industry report card of last Friday, April 21, 2004. That 
report concludes, ``It is unclear that producers are investing 
enough to grow production materially'' and that such companies, 
``appear to be reinvesting only 30 percent to 40 percent of 
their domestic cash-flow in the U.S. have made strategic 
decisions to allow their shallow water and onshore natural gas 
production to deplete to deploy capital to international, 
mainly to oil, projects.'' I do not say this to criticize the 
business decisions of the industry. Rather, I say it to make 
the point that we must take action to create incentives for the 
industry to invest in the development of our domestic natural 
gas and oil resources. This new R&D program, by developing new 
technologies, will significantly lower the cost of finding and 
developing new natural gas and oil resources in this country. 
This additional production would come from areas already in 
production with infrastructure in place. So the environmental 
impact would be negligible.
    The continental U.S. has significant amounts of oil and 
natural gas in the ground and beneath the sea bed that cannot 
be produced due to limitations of technology. The ultradeep 
water and unconventional natural gas and petroleum R&D program 
is a fast paced technology program led by industry and academic 
consortia with government and industry sharing and doing a cost 
sharing program.
    Taking some advanced technologies off the shelf and 
accelerating developing of others could lead to increased 
domestic oil and gas production within 3 years. A study by 
petroleum experts at the University of Texas estimated that 
this program as we introduced it in the House could yield 86.7 
trillion cubic feet of natural gas and 6,143 barrels of oil by 
2025.
    The R&D program that we passed in the conference report is 
still large enough to generate significant new natural gas and 
oil production. The government's independent Energy Information 
Administration estimated that the R&D program would pay for 
itself form the increased royalty payments to the Treasury from 
production on Federal lands.
    I am looking forward to hearing from the panel this 
morning, and certainly look forward to hearing from the ranking 
member, Mr. Boucher, if he has an opening statement.
    Without objection, the Chair proceeds pursuant to committee 
Rule 4(e) and recognizes members for 3 minutes in opening 
statements. If they defer, this time will be added to their 
opening round of questions. With this attendance, we will be 
very generous with the time each of these members requires.
    Now is Mr. DeLay here? All right, we will start with the 
second panel. The Chair recognizes Mr. Allen for 5 minutes.
    Mr. Allen. Thank you, Mr. Chairman. I appreciate the 
opportunity to speak briefly, simply because my schedule today 
leads me to. I will need to gather what happened at this event 
through my staff and others. But I did want to make a short 
statement to indicate some of the concerns and issues that I 
think we ought to be addressing. I want to thank you for 
holding this hearing.
    As the co-chair of the House Oceans Caucus, which is a 
bipartisan group interested in the future of our oceans here in 
the House, I am happy this subcommittee is holding a hearing on 
ocean research. I am a strong advocate of research in our 
oceans.
    Just last week the U.S. Commission on Ocean Policy issued 
their preliminary report in which the authors state: ``Over the 
past two decades the declining health of our oceans and coasts 
has become evident. In those same two decades, however, Federal 
investment in ocean research has stagnated, while funding for 
other scientific program areas has increased. Ocean research 
efforts have fallen from 7 percent of the total Federal 
research budget 25 years ago to just 3.5 percent today. A 
strong commitment is needed to support and conduct high 
priority research and exploration, develop and enhance the 
needed technology, create ocean science infrastructure, and 
integrate data management facilities.'' That is all from the 
Commission.
    Ocean and gas research is important, but I hope the 
witnesses will address the broader needs for ocean research in 
their testimony. Both the Pew Report on Ocean Policy and the 
U.S. Commission report emphasize that the oceans are an 
ecosystem and need to be managed as such.
    If we discuss oceans only as the location from which to 
extract resources, we risk perpetuating past destructive 
policies. The offshore oil and gas industry has annual 
production valued at $25-$40 billion a year, but the commercial 
fishing industries' total annual value exceeds $28 billion 
annually, and the recreational salt water fishery is valued at 
over $20 billion. I hope the witnesses will address how their 
exploration will affect these industries.
    We do need gas. This week Federal Reserve Chairman Allen 
Greenspan again called for a major expansion in U.S. imports of 
natural gas to prevent the continued increase in energy prices. 
Mr. Greenspan reminded us that rising prices for oil and 
natural gas can significantly alter the path of the U.S. 
economy and could alter the magnitude of and manner in which 
the United States consumes energy.
    I ask our witnesses to address the following questions. 
First, can ultradeep oil and gas extraction reduce our 
dependence on foreign sources of oil and gas? Second, are 
government incentives necessary, considering the profits to be 
made and the significant private sector investment already 
underway? Third, what risks would ultradeep water oil and gas 
drilling pose to the ocean ecosystem?
    I thank you for your time and, Mr. Chairman, I thank you 
very much for allowing me to make this statement.
    Mr. Hall. I thank the gentleman for his time and for his 
presentation.
    All right. At this time, we will get underway with the 
panel, the third panel. I would ask you all, if you would 
consent, to allow the majority leader to interrupt. He has been 
in a meeting with people from all over the United States since 
about 9 o'clock this morning, and he is scheduled to be here at 
this time. If he comes in, I hope you would not object to us 
interrupting your presentation, but at the end of your 
presentation, in between the presentations, to ask the majority 
leader to come and make his presentation.
    Is that agreeable to the members present? Without 
objection, we will do it that way. All right. The Chair asks 
the following members, the members of the second panel, to come 
forward: Mr. Howard Gruenspecht, Deputy Administrator, Energy 
Information Administration, for panel 3; Dr. Arthur B. Weglein, 
Director, Mission Oriented Seismic Research Program, Professor, 
Department of Physics, University of Houston; Dr. Michelle 
Foss, Executive Director, Assistant Research Professor, 
Institute for Energy, Law and Enterprises, University of 
Houston; and Mr. John Riordan, President and CEO, Gas 
Technology Institute, of Des Plaines, Illinois. If you all 
would take your please. Thank you.
    Mr. Gruenspecht, we recognize you for 5 minutes, would 
allow you the first 2 minutes to tell why I mispronounced your 
name, if I did, and we are honored to have you here.
    We are having this meeting, even though I'd say 90 percent 
of the Congress is in an airplane, or in their districts right 
now or otherwise we would have a full panel to listen to you. 
In deference to your schedule and your changing your schedule 
to come here and be here present this day, we thought it would 
be better for you to go ahead and give us a testimony. It will 
be taken down. Everyone will receive a copy of it, just as if 
they were here. We appreciate you being here, and appreciate 
you staying the course.
    Mr. Gruenspecht.

 STATEMENTS OF HOWARD GRUENSPECHT, DEPUTY ADMINISTRATOR, ENERGY 
  INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY; ARTHUR B. 
WEGLEIN, MISSION-ORIENTED SEISMIC RESEARCH PROGRAM, UNIVERSITY 
 OF HOUSTON; MICHELLE FOSS, EXECUTIVE DIRECTOR, INSTITUTE FOR 
   ENERGY, LAW & ENTERPRISE, UNIVERSITY OF HOUSTON; AND JOHN 
      RIORDAN, PRESIDENT AND CEO, GAS TECHNOLOGY INSTITUTE

    Mr. Gruenspecht. Thank you, Mr. Chairman and members of the 
subcommittee. I certainly appreciate the opportunity to be here 
today to discuss the Energy Information Administration's recent 
analysis of provisions related to research and development of 
ultradeep water and unconventional technologies incorporated in 
last year's conference energy bill.
    EIA is a statistical and analytical agency within the 
Department of Energy. We are charged with providing objective, 
timely, and relevant data analysis and projections for use of 
the Department of Energy, other government agencies, the U.S. 
Congress, and the public. We do not take positions on policy 
issues, but we do produce data and analysis reports for use by 
policymakers. Our views should not be construed as representing 
those of the Department of Energy or the administration.
    In addition to collecting energy data and issuing data 
reports and baseline energy projections, the EIA also prepares 
service reports that estimate the impacts of proposed policies 
at the request of the Congress or the administration. The 
analysis I will discuss today was included in a service report 
on the recent conference energy bill.
    Before getting started, I should note that the Office of 
Fossil Energy has the lead responsibility for oil and gas 
technology research and development within the Department of 
Energy. Questions regarding the potential for technology 
advances or proposed funding to advance technologies in these 
areas are appropriately directed to that office rather than to 
EIA.
    I should also note, because EIA is an agency full of 
caveats, that our projections are not meant to be exact 
predictions of the future, but represent a likely energy 
future, given technology and demographic trends, current laws 
and regulations, and consumer behavior as derived from known 
data.
    Mr. Hall. Is that your reason for stating that you don't 
represent those folks that you said you didn't represent?
    Mr. Gruenspecht. It is very complicated. We have an 
interesting relationship, but you know that much better than I 
do. I actually testified before you 12 years ago in a different 
capacity.
    In any event, we recognize that projections of energy 
markets are highly uncertain and are subject to many random 
events that cannot be foreseen. Thus, our projections are not 
statements of what will happen but of what might happen, given 
certain assumptions.
    So with that, let me first address some of the key 
challenges related to the assessment of energy R&D programs. 
There are several key uncertainties that characterize the 
effects of proposed Federal R&D programs.
    First, the timing and level of the net change in Federal 
R&D spending is often different from the authorized amount, 
although in this program they may be different.
    Second, a statistically reliable relationship between the 
level of R&D spending for specific technologies and the actual 
outcome of that R&D is very hard to develop. In other words, 
even if we could easily figure out what the net Federal 
incremental funding input was, it is difficult to relate 
``dollars in'' to ``better technology out.'' There is no simple 
relationship that you can plug in.
    Even if both of those uncertainties could be definitively 
resolved, the analysis is complex because of the levels of 
private sector R&D expenditures that are usually unknown but 
often far exceed R&D spending by the Federal Government.
    So really, for all of these reasons, EIA cannot provide an 
estimate of the incremental impact of an increase in Federal 
R&D spending on technological change. Because of that, we did 
not include any R&D provisions in the main policy case, which 
we refer to as the ``CEB'' for conference energy bill case, 
that we developed for the service report on the conference 
energy bill. However, we did include the results of a 
sensitivity case using an assumption regarding the 
technological impact resulting from increases, basically, to 
the program you are looking at, the ultradeep water and 
unconventional R&D program that is contemplated in the 
conference energy bill, or included in the conference energy 
bill.
    Again, in those sections of the bill which are the subject 
of today's hearing, $150 million annually would be allocated 
into a fund for federally-sponsored R&D. The money, as we 
understand it, is to come from Federal royalty payments that 
are going to be allocated in each fiscal year from 2004 to 
2013, and would not go through the annual appropriations 
process.
    So dedicated funding outside the annual appropriations 
process implies relatively low funding related uncertainty for 
the program. That was one of the uncertainties that I mentioned 
earlier. However, you still have the issue of relating 
increased Federal spending, the input of dollars to the output 
of better technology.
    We turned to experts in the Office of Fossil Energy, and 
they suggested to us that the additional R&D funding, which is 
substantial, could plausibly be associated with an acceleration 
of technological progress for the technologies used to develop 
the affected resources--that is the ultradeep and the 
unconventional--by 50 percent over the value assumed in our 
reference case and our conference energy bill case, resulting 
in technological change rates that are roughly comparable to 
what we would consider to be a high technology case.
    So we basically turned to those people. We then ran the CEB 
case with the added FE assumptions regarding accelerated 
technological change, and we refer to that as the FE/CEB case, 
to look at what that technological change would mean.
    In this scenario we had the acceleration begin to affect 
natural gas for production and technology for onshore 2 years 
after the beginning of the program, and for the ultradeep 
offshore technologies it began to affect things in the field 5 
years after the start of the program.
    So we have the CEB case, and then we have the FE/CEB case, 
and the way we get insight into what the impact might be is to 
compare the two of them. So let me turn now to our results.
    Certainly, the pattern of natural gas wellhead prices in 
production in the FE/CEB case is what one might expect. If you 
have successful research and development for those 
technologies, you are going to increase the supply from the 
ultradeep and unconventional resources, and that is going to 
result in a lowering of wellhead prices in our forecasts.
    Again, I will just cite a few of the numerical results in 
the report. We provided as part of the testimony the summary 
table of some of those results. So let me just cite some of 
them.
    Mr. Hall. If you can, be winding down.
    Mr. Gruenspecht. In 1 minute, I should be done.
    Natural gas wellhead prices are as much as 30 cents per 
1,000 cubic feet lower than in the reference case and as much 
as 20 cents per 1,000 cubic feet lower than in the CEB case. 
Between 2009 and 2025, cumulative crude oil production from 
offshore is more than 850 million barrels higher than in the 
reference case.
    During this period cumulative offshore natural gas 
production is 3.8 trillion cubic feet higher than in the 
reference case, and onshore is 11 trillion cubic feet higher 
than in the reference case.
    So that is a summary of some of the main results. 
Obviously, if these FE assumptions regarding technological 
impacts prove to be accurate, the program could substantially 
increase offshore and unconventional onshore production.
    This in turn could have significant implications for 
Federal and State royalty revenues. Again, it is important to 
note that technological improvements assumed in this case could 
also have an impact in producing areas outside the U.S.
    As noted at the start of the testimony, there is 
significant uncertainty and, for reasons I described, there is 
an especially high degree of uncertainty with R&D.
    I thank you, Mr. Chairman and members of the subcommittee, 
and I will be happy to answer any questions you have.
    [The prepared statement of Howard Gruenspecht follows:]

Prepared Statement of Howard Gruenspecht, Deputy Administrator, Energy 
            Information Administration, Department of Energy

    Mr. Chairman and Members of the Committee: I appreciate the 
opportunity to appear before you today to discuss the Energy 
Information Administration's (EIA) recent analysis of provisions 
related to ultra-deepwater and unconventional technologies incorporated 
as Sections 941-949 of last year's Conference Energy Bill (CEB).
    EIA is the statistical and analytical agency within the Department 
of Energy. We are charged with providing objective, timely, and 
relevant data, analysis, and projections for the use of the Department 
of Energy, other government agencies, the U.S. Congress, and the 
public. We do not take positions on policy issues, but we do produce 
data and analysis reports that are meant to help policymakers determine 
energy policy. Because the Department of Energy Organization Act gives 
EIA an element of independence with respect to the analyses that we 
publish, our views should not be construed as representing those of the 
Department of Energy or the Administration.
    In addition to collecting energy data and issuing data reports and 
baseline energy projections, including the Annual Energy Outlook (AEO) 
with projections of domestic markets through 2025, the EIA also 
prepares Service Reports that estimate the impacts of proposed policies 
or review current energy issues at the request of the Congress or the 
Administration. In February 2004, in response to a request from Senator 
Sununu for an analysis of the CEB passed by the House in the Fall of 
2003, EIA issued a report entitled Summary Impacts of Modeled 
Provisions of the 2003 Conference Energy Bill.
    While my testimony will focus on EIA's analysis, it should be noted 
that the Office of Fossil Energy (FE) has the lead responsibility for 
oil and gas technology research and development (R&D) within the 
Department. Questions regarding potential for technology advances or 
proposed funding to advance technology in these areas are appropriately 
directed to that office rather than EIA.
    EIA projections are not meant to be exact predictions of the future 
but represent a likely energy future, given technological and 
demographic trends, current laws and regulations, and consumer behavior 
as derived from known data. EIA recognizes that projections of energy 
markets are highly uncertain, subject to many random events that cannot 
be foreseen. Thus, the projections are not statements of what will 
happen but of what might happen, given certain assumptions.
    In the interests of brevity, my testimony today does not review in 
detail the provisions of Sections 941-949 of the CEB that are the 
subject of this hearing. Rather, it starts with a brief discussion of 
the challenges inherent in modeling the impacts of R&D programs. Then, 
it describes the analysis of the Section 941-949 program included in 
EIA's recent Service Report.

      CHALLENGES RELATED TO THE ASSESSMENT OF ENERGY R&D PROGRAMS

    Two types of uncertainty characterize the effects of proposed 
authorizations of Federal R&D investments. First, the timing and level 
of the net change in Federal R&D spending is often different from the 
authorized amount. Second, a statistically reliable relationship 
between the level of R&D spending for specific technologies and the 
actual outcome of that R&D has not been developed. Even if both of 
these uncertainties could be definitively resolved, the analysis is 
complex because the levels of private sector R&D expenditures are 
usually unknown but often far exceed R&D spending by the Federal 
government. Consequently, EIA cannot provide an estimate of the 
incremental impact of an increase in Federal R&D spending on 
technological change. Because of the limitations outlined above, EIA 
did not include any R&D provisions in the main policy case, referred to 
as the CEB Case, developed for its Service Report on the CEB.
    However, EIA also provided the results of a sensitivity case using 
an assumption of the technological impact resulting from the increases 
in Federal spending on Ultra-Deepwater and Unconventional R&D 
contemplated by Sections 941 to 949 of the CEB. These sections of the 
bill would allocate $150 million annually into a fund (the Ultra-
Deepwater and Unconventional Natural Gas and Other Petroleum Research 
Fund) for Federally-sponsored R&D. The money is to come from Federal 
royalty payments that are allocated in each fiscal year from 2004 
through 2013 and would not go through the annual appropriations 
process. The R&D is to be targeted for the development of ultra-deep 
(greater than 1,500 meters water depth) offshore, unconventional 
natural gas, and other petroleum resources. Unconventional natural gas 
and other petroleum resources are ``natural gas and other petroleum 
resources located onshore in an economically inaccessible geological 
formation, including resources of small producers.''
    Dedicated funding outside of the annual appropriations process 
implies relatively low funding-related uncertainty for this program. 
However, the uncertainty in relating increased Federal spending to 
technological progress remains important. Experts in FE believe that 
the new R&D funding would accelerate technological progress for the 
affected resources (ultra-deep offshore oil and natural gas and 
unconventional natural gas production) by 50 percent over the value 
assumed in EIA's Reference and CEB Cases. They arrived at this 
conclusion by verifying that the proposed additional R&D funding would 
bring total Federal R&D spending back to the levels represented in the 
Reference Case of AEO1997, which used the same rates. (Coincidently, 
the Reference Case of AEO1997 has technological change rates that are 
comparable to the AEO2004 High Technology Case.) The CEB Case with the 
added FE assumptions regarding accelerated technological change due to 
the Section 941-949 program, referred to as the FE/CEB Case, assessed 
the impact of the assumed accelerated technological change on oil and 
natural gas supply and prices. This acceleration is assumed to begin 2 
years after the onset of R&D funding for unconventional technologies 
and 5 years after the onset for ultra-deep offshore technologies.

 IMPACTS OF THE ULTRA-DEEPWATER AND UNCONVENTIONAL R&D PROGRAM IN THE 
                                  CEB

    Comparisons between the FE/CEB Case and the main CEB Case provide 
insight into the impact of the Ultra-Deepwater and Unconventional R&D 
program based on the FE assumptions regarding the technology impacts of 
that program. The pattern of natural gas wellhead prices and production 
in the FE/CEB Case is as expected. Successful R&D increases supply from 
the ultra-deep and unconventional resources and lowers wellhead prices 
throughout the forecast. Natural gas wellhead prices are as much as 
$0.30 per thousand cubic feet lower than in the Reference Case and as 
much as $0.20 per thousand cubic feet lower than in the CEB Case.
    Between 2009 and 2025, cumulative crude oil production from the 
ultra-deep offshore is more than 850 million barrels higher than in the 
Reference Case and over 800 million barrels higher then the CEB Case. 
Cumulative natural gas production is 3.8 trillion cubic feet higher 
than in the Reference Case and 3.2 trillion cubic feet higher than in 
the CEB Case. Obviously, if the FE assumptions regarding technological 
impacts prove to be accurate, the expanded Ultra-Deepwater and 
Unconventional R&D program could substantially increase offshore and 
unconventional production. This, in turn, could have significant 
implications for Federal and State royalty revenues. It is important to 
note that the technological improvements assumed for this case would 
also have an impact in producing areas outside the United States, which 
would potentially affect world oil markets.
    The table below summarizes key comparisons between the FE/CEB Case, 
the CEB Case, and the AEO2004 Reference Case. As noted at the start of 
my testimony there is significant uncertainty surrounding all energy 
projections. For reasons discussed above, there is a particularly high 
degree of uncertainty surrounding estimates related to the impacts of 
programs intended to promote improvements in technology.
    Thank you, Mr. Chairman and members of the Committee. I will be 
happy to answer any questions you may have.

 Impact of Increased R&D Funded by Royalty Payments on Natural Gas and Oil Supply Using Office of Fossil Energy
                       Assumptions Regarding the Impact of Increased Federal R&D Spending
----------------------------------------------------------------------------------------------------------------
                                                   2010                    2015                    2025
                                         -----------------------------------------------------------------------
                                   2002     AEO             FE/     AEO             FE/     AEO             FE/
                                           2004     CEB     CEB    2004     CEB     CEB    2004     CEB     CEB
----------------------------------------------------------------------------------------------------------------
Lower 48 Average Wellhead Gas       2.95    3.40    3.41    3.32    4.19    4.10    3.90    4.40    4.40    4.35
 Price (2002 dollars per
 thousand cubic feet)...........
Natural Gas Production (trillion   18.62   19.90   20.25   20.42   20.98   21.01   22.00   21.29   21.54   22.20
 cubic feet) Lower 48 Production
    Onshore Conventional........    7.83    7.20    7.16    7.17    7.44    7.37    7.26    7.09    7.13    6.98
    Onshore Unconventional......    5.93    7.28    7.51    7.75    8.67    8.74    9.66    9.16    9.46   10.06
Offshore    ....................    4.86    5.41    5.57    5.50    4.87    4.91    5.09    5.03    4.96    5.16
Alaska Production...............    0.43    0.60    0.60    0.60    0.64    0.64    0.64    2.71    2.71    2.71
Natural Gas Consumption.........   22.78   26.15   25.94   26.04   28.03   27.92   28.30   31.41   31.54   32.09
Lower 48 Dry Gas Reserve            24.0    21.2    21.0    22.8    20.8    20.6    23.1    19.2    19.9    20.0
 Additions......................
    Onshore Conventional........     6.9     7.0     7.0     6.9     7.5     7.4     7.2     6.6     6.7     6.6
    Onshore Unconventional......    11.5     9.0     8.7    10.2     8.9     8.9    11.2     7.8     8.1     8.2
    Offshore....................     5.6     5.3     5.4     5.7     4.3     4.3     4.6     4.8     5.1     5.1
Lower 48 Offshore Crude Oil         1.53    2.40    2.42    2.42    2.21    2.20    2.31    2.06    2.09   2.10
 Production(million barrels per
 day)...........................
----------------------------------------------------------------------------------------------------------------
Sources: National Energy Modeling System date codes aeo2004.d101703e, nrgbill00.d011304d, and
  nrgbill50.d010904a.


    Mr. Hall. All right, we thank you.Dr. Weglein has agreed 
for the majority leader, who has appeared on the scene here, to 
give his testimony now, and we are honored to have Tom DeLay, 
my fellow Texan and Majority Leader of the U.S. Congress. We 
are honored to extend to you such time as you might use.

STATEMENT OF HON. TOM DeLAY, A REPRESENTATIVE IN CONGRESS FROM 
                       THE STATE OF TEXAS

    Mr. DeLay. Well, thank you, Mr. Chairman. I really 
appreciate you for holding this hearing and, Mr. Boucher, it is 
great that you are here, too.
    With today's energy issues utmost in the American people's 
minds, this hearing is vitally important, and I hope that 
people will see how important this hearing is, if we are ever 
going to get a handle on our energy policy for the future.
    As you know, Mr. Chairman, I am here today to speak in 
support of the ultradeep and unconventional natural gas and 
other petroleum supply R&D provisions of the Comprehensive 
Energy Bill, as included in the conference report passed by the 
House late last year.
    I want to personally thank you, Mr. Chairman, for all your 
personal work on this provision. If it weren't for you, I don't 
think we would have this provision in this form in the 
conference report, and I greatly appreciate it.
    These important provisions will establish a new research 
and development program for these technically challenged 
domestic resource provinces, unconventional resources such as 
coalbed methane, tight gas sands, and gas shales, as well as 
the ultradeep water of the central and western Gulf of Mexico 
to help the U.S. meet its mid-term gas demands. And most 
importantly, they would put the United States on a path toward 
greater energy independence, which is the clearest reason we 
need a comprehensive energy policy in the first place.
    Natural gas, of course, is a critical component of the 
Nation's energy security. Its use spans our entire economy. 
Natural gas was the broadest set of applications--or has the 
broadest set of applications of any of the fossil fuels. it 
heats our homes and runs out appliances.
    It is an important feedstock for our industry. It provides 
the United States with almost 20 percent of its electricity. It 
supplies heat and fuel for much of rural American, and it is a 
major energy source for the Nation's commercial sector.
    Today gas prices are at a historic high. Imports of 
products of which natural gas is a significant component such 
as fertilizer and ammonia are up 50 percent over the last 2 
years, and major industrial facilities are shutting down or 
moving overseas.
    These numbers are not theoretical, Mr. Chairman. American 
workers and consumers are paying the price. The United States 
is at a critical energy crossroads. Every day, we are growing 
more and more dependent on foreign sources of energy. Gas and 
oil supplies are tight. Infrastructure is constrained, and 
domestic production is flat.
    At the same time, the Energy Information Administration 
says demand for natural gas will rise significantly in the next 
two decades. We need more natural gas, and we have it.
    Let's be clear about our supply. The United States is not 
running out of natural gas. We have a significant natural gas 
resource base, more than 50 years of technically recoverable 
reserves at current found reserves and rates of consumption, 
but let us also be clear about the nature of these remaining 
reserves.
    Many of them are on Federal lands and are off limits to 
production by virtue of rules and regulations, and these legal 
access restrictions are addressed elsewhere in H.R. 6. But 
almost all of these reserve regions, with the exception of the 
shallow and deep water regions under various moratoria, are 
subject to technological access restrictions.
    Without new investment in research and development, 
physical access to these regions will not produce a single 
cubic foot of natural gas. We have an opportunity here to 
address this challenge through the ultradeep water and 
unconventional onshore natural gas supply research and 
development program in H.R. 6.
    This program would establish a unique partnership between 
government and industry to help ensure we meet mid-term gas 
demand through the development of technically challenged but 
potentially prolific provinces. Further, this new program would 
address the inadequacy of current research models, particularly 
in applied energy R&D.
    Too often, government research programs are limited in size 
and scope by the vagaries of the budget cycle and by the lack 
of adequate incentives of public-private partnerships. So in 
the energy arena especially, Mr. Chairman, industry leadership 
and input is critical.
    Modeling of the program by both EIA and the Bureau of 
Economic Geology at the University of Texas indicates a 
significant supply response from this investment, as well as 
moderation in prices.
    Finally, Mr. Chairman, the program is sunsetted after 10 
years and would at a minimum pay for itself. The increased 
production as a result of this R&D program would generate 
significant increases in royalties to the Federal treasury. A 
healthy royalty stream is critical to the future of other 
programs that rely on royalty funding, including those states, 
Wyoming, New Mexico, Colorado and Utah, for example, where 
there is a significant production on Federal lands.
    It is our job in Congress to help ensure that energy 
supplies will be abundant, responsible and reliable. We owe 
this to our energy consumers, Mr. Chairman, industry, 
commercial businesses, and individual households.
    It is also our job to make certain that every Federal 
dollar is spent wisely and accountably. The ultradeep water and 
unconventional gas supply R&D provisions in H.R. 6 would, in 
short, add significant new natural gas and oil supplies to help 
ensure our Nation's energy security, provide for maximum 
industry input, pay for themselves, and maximize the value of 
Federal resources in the form of additional royalties to the 
Federal treasury.
    So I just urge the subcommittee to support this program. 
Thank you very much, Mr. Chairman, for this opportunity.
    [The prepared statement of Hon. Tom DeLay follows:]

Prepared Statement of Hon. Tom Delay, a Representative in Congress from 
                           the State of Texas

    Thank you very much, Chairman Hall, for holding this hearing on the 
benefits of Ultra-deepwater Research and Development.
    As you know, Mr. Chairman, I am here today to speak in support of 
the Ultra-Deepwater and Unconventional Natural Gas and Other Petroleum 
Supply R&D provisions of the comprehensive energy bill as included in 
the conference report passed by the House late last year.
    These important provisions would establish a new research and 
development program for these technically challenged domestic resource 
provinces--unconventional resources such as coal-bed methane, tight gas 
sands, and gas shales, as well as in the ultra-deepwater (1500 meters 
of water or greater) of the Central and Western Gulf of Mexico--to help 
the US to meet its mid-term gas demand.
    And most importantly, they would put the United States on a path 
toward greater energy independence, which is the clearest reason we 
need a comprehensive energy policy in the first place.
    Natural gas, of course, is a critical component of the nation's 
energy security.
    Its use spans our entire economy. Natural gas has the broadest set 
of applications of any of the fossil fuels--it heats our homes and runs 
our appliances.
    It's an important feedstock for industry: it provides the United 
States with almost 20 percent of its electricity, it supplies heat and 
fuel for much of rural America, and it's a major energy source for the 
nation's commercial sector.
    Today, gas prices are at historic highs. Imports of products of 
which natural gas is a significant component--such as fertilizer and 
ammonia--are up 50 percent over the last two years, and major 
industrial facilities are shutting down or moving overseas.
    These numbers are not theoretical: American workers and consumers 
are paying the price.
    The United States is at a critical energy crossroads. Everyday, 
we're growing more and more dependent on foreign sources of energy. Gas 
and oil supplies are tight, infrastructure is constrained, and domestic 
production is flat.
    At the same time, the Energy Information Administration says demand 
for natural gas will rise significantly in the next two decades.
    We need more natural gas . . . and we have it.
    Let's be clear about our supply: the United States is not running 
out of natural gas. We have a significant natural-gas resource base--
more than 50 years of technically recoverable reserves at current found 
reserves and rates of consumption.
    But let's also be clear about the nature of these remaining 
reserves. Many of them are on federal lands and are off-limits to 
production by virtue of rules and regulations.
    These legal access restrictions are addressed elsewhere in H.R. 6.
    But almost all of these reserve regions--with the exception of the 
shallow and deepwater regions under various moratoria--are subject to 
technological access restrictions.
    Without new investment in research and development, physical access 
to these regions will not produce a single cubic foot of natural gas.
    We have an opportunity to address this challenge through the Ultra-
deepwater and Unconventional Onshore Natural Gas Supply Research and 
Development program in HR 6.
    This program would establish a unique partnership between 
government and industry to help ensure we meet mid-term gas demand 
through development of technically challenged but potentially prolific 
provinces.
    Further, this new program would address the inadequacy of current 
research models, particularly in applied energy R&D.
    Too often, government research programs are limited by size and 
scope, by the vagaries of the budget cycle, and by the lack of adequate 
incentives for public/private partnerships.
    In the energy arena especially, industry leadership and input is 
critical. Modeling of the program by both EIA and the Bureau of 
Economic Geology at the University of Texas indicates a significant 
supply response from this investment, as well as a moderation in 
prices.
    Finally, the program is sunsetted after 10 years and would, at a 
minimum, pay for itself. The increased production as a result of this 
R&D program will generate significant increases in royalties to the 
federal treasury.
    A healthy royalty stream is critical to the future of other 
programs that rely on royalty funding, including those states--Wyoming, 
New Mexico, Colorado, and Utah, for example--where there is significant 
production on federal lands.
    It is our job in Congress to help ensure that energy supplies will 
be abundant, responsible, and reliable.
    We owe this to our energy consumers--industry, commercial 
businesses, and individual households. It's also our job to make 
certain that every federal dollar is spent wisely and accountably.
    The Ultra-deepwater and Unconventional Gas Supply R&D provisions in 
HR 6 would, in short:

 add significant new natural gas and oil supplies to help ensure our 
        nation's energy security;
 provide for maximum industry input;
 pay for themselves;
 and maximize the value of federal resources in the form of additional 
        royalties to the federal treasury.
    I urge the subcommittee to support this program and thank you again 
for this opportunity.

    Mr. Hall. Mr. Leader, we thank you for your time, and we 
know how pressed you are for time, and we thank Mr. Gruenspecht 
for allowing you to move in between the two speakers, and Dr. 
Weglein, to give you this opportunity.
    I thank you especially for your statement that this is a 
payback program that the feds put the money in, the private 
sector does the work, and reserves and known reserves that are 
there will do the payback.
    I have heard figures even approaching $10 billion for the 
initial outlay that H.R. 6 would spawn. Now that has been cut 
back in conference committee for about how many months now. We 
don't really know what is going to come out, if anything does. 
But thank you for your part and your pushing that.
    It is certainly great to push, and all of you on the panel 
there who are doing your part to give us an energy solution, 
which is probably the most important buzz word that is going 
across the country right today. Thank you for your time, Mr. 
Leader.
    Mr. DeLay. Thank you, Mr. Chairman.
    Mr. Hall. All right. Dr. Weglein, thank you for letting us 
intervene there. We recognize you at this time for 5 minutes or 
as much time as you will take. Thank you.

                 STATEMENT OF ARTHUR B. WEGLEIN

    Mr. Weglein. Mr. Chairman, thank you for the opportunity to 
testify before your committee today. The purpose of my 
testimony is to raise issues and propose actions that would 
enhance the probability of H.R. 6 receiving the petroleum 
industry partnership and support required by the ultradeep 
water model.
    Before I start, a word about my background. After 22 years 
working as a researcher in the petroleum industry, I joined the 
University of Houston in 2001 and founded the Mission-Oriented 
Seismic Research Program. That program addresses problems whose 
solutions would have the biggest positive impact on the ability 
to locate and produce hydrocarbon.
    Our sponsors include all the major publicly traded 
petroleum companies worldwide; in addition, 4 foreign national 
petroleum companies and the largest service companies. Located 
in Houston, the energy capital of the world, we benefit from 
and leverage the highest concentration of brainpower in the 
industry. We partner with world class industry experts through 
working teams that focus on research projects within our 
program.
    Now how does this relate to deep water H.R. 6? The industry 
trend to deep and ultradeep water has an immediate associated 
increase in cost and every phase of exploration and production. 
For example, drilling costs are significantly higher in deep 
water. Hence, there is a reduced tolerance for dry holes as 
water depth and drilling expense rises.
    In addition, there are new and serious technical challenges 
occurring specifically in the deeper marine environment. When 
combined with higher deep water costs, this confluence of 
technical and economic factors provides a strong impetus for 
achieving greater technical capability and the support for 
fundamental R&D efforts directly aimed at those challenges.
    Heightened cost demands that fuel wells define and 
delineate reservoirs, and this must occur in the face of new 
geologic and geophysical challenges. The idea is, if this R&D 
is successful, it will deliver reduced risk and increased 
reliability in the prediction of new and definition of current 
reservoirs.
    In seeking an ultradeep partnership with petroleum 
companies in both manpower and resources, several points are 
worth keeping in mind. One, the challenges that deep and 
ultradeep water E&P face are best understood by the petroleum 
industry. Two, the experts are, for the most part, in the 
petroleum industry and, when they are not, they are already 
currently funded by the petroleum industry. Three, there is a 
great reluctance on the part of big oil and gas companies to 
partner with academic, government lab, and Federal agencies, 
and often for good reasons. Four, that reluctance and level of 
scrutiny increases with the amount of funding, or matching 
contribution being requested.
    Why this hesitation on the part of industry to partner? It 
certainly isn't that industry is risk averse, nor is it 
hesitant to try new ideas that aim to solve real problems, nor 
is industry against partnership. In fact, it is rare for any 
E&P player in the real world to have a single corporate player. 
So they clearly understand partnering.
    So why the hesitation when it comes to large scale Federal 
and academic cooperation? One is that the petroleum industry 
has its own brand of leaders, bureaucracy, motivation and 
responses, and rarely appreciate the added different form that 
Federal and academic bureaucracy can take.
    Two, there is also a view that academic and government labs 
often march to a different drummer than industry research, and 
that academic and government researchers often measure success 
in terms of number of published papers and reports. Industry 
measures success by the positive impact the research has on E&P 
effectiveness, and counting published papers is rarely a 
measure of that impact.
    Research that is directed, fundamental and impactful is the 
central objective and serves the aligned interests of forefront 
science and the petroleum industry's need for step improved 
prediction and reliability. A goal with that high bar can 
benefit from the pooling of industry and government resources, 
and that objective is what H.R. 6 is meant to facilitate.
    One of the key points and strengths of H.R. 6 is its 
explicit recognition of these issues reflected in the ultradeep 
water program being administered by DOE but managed by a 
consortium of academic-industry professionals.
    I would respectfully recommend that the management be under 
the authority and responsibility of industry experts with 
academics involved where appropriate to carry out the plan and 
help provide deliverables.
    Another factor to consider is that industry is already well 
aware of all academics who seek industry support and already 
selects to fund those considered capable of addressing their 
concerns.
    A reasonable question is--and Congressman Allen raised 
this--why should the Federal Government support R&D that can 
impact bottom line profit of the petroleum industry? Our 
response is that the technical challenges facing the large oil 
and gas producers in ultradeep water is of such a magnitude 
today that they can, and will at some point, shift their 
investment and exploration portfolio toward other 
opportunities; for example, the Middle East and Russia where 
other issues are present but not perhaps of such a daunting 
technical nature.
    The interests of the United States in energy, national 
security, economic growth and stability dictate a maximum 
amount of domestic reserves and production at an overall 
diversity of sources of hydrocarbon. Our U.S. Government 
investment in ultradeep water R&D truly partnered and managed 
by the best minds in the petroleum industry would, if carried 
out in an effective manner, help serve the near and long term 
interests of our country.
    That new capability would also benefit the entire global 
energy landscape and allow currently inaccessible resources to 
become accessible.
    Again, Chairman Hall, thank you for the opportunity to 
testify before your committee. I look forward to your 
questions.
    [The prepared statement of Arthur B. Weglein follows:]

     Prepared Statement of Arthur B. Weglein, University of Houston

    Mr. Chairman, thank you for the opportunity to testify before your 
committee today.
    My purpose and objectives in this testimony are to convey my 
impression of various factors that can influence the chances of H.R. 6 
receiving the petroleum industry partnership and support required by 
the Ultra-deep water research administration and management model. I 
will also make specific suggestions that would support and guide a 
successful execution of the important and worthwhile national energy 
objectives that this bill represents.
    In my career, I spent 22 years as a seismic research scientist and 
technical advisor in the petroleum industry before joining the 
University of Houston in 2001, where I founded the Mission-Oriented 
Seismic Research Program and industry consortium. The purpose of that 
educational and research program is to address and solve fundamental 
seismic problems whose solutions would produce the biggest positive 
step change in our ability to locate and produce hydrocarbons. Our 
sponsors include all the major publicly traded petroleum companies 
world-wide, four foreign national petroleum companies and the largest 
service companies. Located in the City of Houston, the energy capital 
of the world, we benefit from and leverage the highest concentration of 
brainpower in the industry. We partner with world-class industry 
experts through working teams that focus on research projects within 
our program.
    The industry trend to deep and ultra-deep water has an immediate 
associated increase in cost for every stage of exploration and 
production. For example, drilling costs and production facility 
investment are significantly higher in deep water. Hence, there is a 
reduced tolerance and lower ceiling for the number of dry holes as 
their expense rises.
    In addition, there are new and serious technical challenges and 
obstacles occurring specifically in the new deeper marine environment. 
When combined with intrinsic higher deepwater costs this confluence of 
technical and economic factors provides a strong impetus for greater 
technical capability and the support for fundamental R&D efforts 
directed at those challenges. Heightened cost demands that fewer wells 
define and delineate reservoirs, and this must occur in the face of new 
geologic and geophysical challenges. The idea is if this R&D is 
successful, it will deliver reduced risk and increased reliability in 
the prediction of new and definition of current reservoirs.
    In my particular technical area, deep water can all by itself cause 
the failure of certain traditional coherent noise reduction methods for 
removing multiply reflected events from seismic data. A complex 
subsurface adds another hurdle; e.g., the inability to accurately 
locate and define hydrocarbon targets beneath salt, basalt and other 
complex overburdens is a major obstacle to effective E&P in the Gulf of 
Mexico and elsewhere. Sub-sea sediments are often unconsolidated in 
ultra-deep water and can be markedly different from those in shallower 
depths, causing major drilling problems; and this is often not 
discernable using current seismic data analysis.
    In seeking an ultra-deep partnership with petroleum companies in 
both manpower and resources several points are worth keeping in mind:

(1) The challenges that deep and ultra deep water E&P faces are best 
        understood by the petroleum industry;
(2) The experts are for the most part in the petroleum industry or 
        outside and are already funded by the petroleum industry;
(3) There is a high level of hesitation and reluctance on the part of 
        big oil and gas companies to ``partner'' with academic, 
        government labs and federal agencies and often for good 
        reasons;
(4) That reluctance and level of scrutiny increases with the amount of 
        funding or matching contribution being requested.
    There are two basic types of funding channels in petroleum-academic 
partnership: (1) smaller essentially educational/research support 
grants that are often combined for impact as part of a consortium with 
other companies, and (2) larger investments which derive from a 
business unit or corporate strategic decision, and invite a greater 
scrutiny, oversight of direction, and clarity of managing the progress 
in providing impactful deliverables. The H.R. 6 Ultra-deep program 
falls in the second category.
    Why this hesitation on the part of industry to partner? It 
certainly isn't that industry is risk averse nor is it hesitant to try 
new ideas that aim to solve real problems. There is a view that 
academic and government labs often march to a different drummer than 
industry research, and can measure success in terms of number of 
published papers and reports. Industry measures success by the positive 
impact the research has on E&P effectiveness and counting papers is 
rarely a measure of that value and significance. Research that is 
directed, fundamental and impactful is the central objective, and 
serves the aligned interests of forefront science and the petroleum 
industry's need for step improved prediction and reliability. A goal 
with that high bar can benefit from the pooling of industry and 
government resources, and that objective is what H.R. 6 is meant to 
facilitate.
    There is a view in industry that these partnerships were often 
window dressing where industry was called in at the beginning to 
provide an imprimatur of solving real world problems, but never 
consulted afterward or kept informed. Technical service projects 
supported at universities were also generally frowned upon as 
inappropriate and inconsistent with their educational mandate, and 
better suited for commercial service companies. Petroleum companies 
have plenty of their own bureaucracy, and rarely see the need of 
additional federal bureaucracy unless a significant and unique 
overriding benefit can be delivered.
    One of the key points and strengths of H.R. 6 is its explicit 
recognition of these issues reflected in that the Ultra-Deep water 
program would be administered by DOE but managed by a consortium of 
academic/industry professionals. I would respectfully suggest that the 
management be under the authority and the responsibility of industry 
experts, with academics involved where appropriate to carry out the 
plan and help provide deliverables. A critical point in the success of 
H.R. 6 would be the quality of the industry people chosen to manage 
this program. Another factor to consider is that industry is already 
well aware of academics who seek industry support and already selects 
to fund those considered capable of addressing their concerns.
    A reasonable question is: Why should the federal government support 
R&D that can impact the bottom-line profit of the petroleum industry? A 
response is that the technical challenges facing the large oil and gas 
producers in ultra-deep water is of such a magnitude today, that they 
can and will, at some point, shift their investment and exploration 
portfolio towards other opportunities, e.g., the Mid-east and Russia, 
where other issues are present, but not perhaps of such a daunting 
technical nature. The interests of the United States in energy, 
national security, and economic growth and stability dictate a maximum 
amount of domestic reserve and production and an overall diversity of 
sources of hydrocarbons. A US government investment in ultra-deep water 
R&D, truly partnered and managed by the best minds in the petroleum 
industry, would, if carried out in an effective manner, help serve the 
near and long-term interests of our country. That new capability would 
benefit the entire global energy landscape and allow currently 
inaccessible resources to become accessible.
    Chairman Hall: Again, thank you for the opportunity to testify 
before your committee. I look forward to your questions.

    Mr. Hall. Thank you, and you said it very well. Thank you 
very much.
    The Chair now recognizes Dr. Michelle Foss; we are honored 
to have Ms. Foss here. She is Executive Director of the 
Institute for Energy, Law and Enterprise, but more important to 
me than that, she was a Director at Simmons & Company, and my 
friend, and this Congress's friend, Matt Simmons, who is 
probably one of the foremost authorities on OPEC expectations. 
We are honored to have you and recognize you at this time for 5 
minutes.

                   STATEMENT OF MICHELLE FOSS

    Ms. Foss. Thank you, and I must say, it is very nice to see 
you looking so well, Mr. Hall. Thank you for inviting me to 
participate in the hearing today.
    I would like to take a different look at things and offer 
some points from a bigger picture view of the United States' 
energy requirements and what we are dealing with in this 
hearing.
    First, I would like to state, the geological setting within 
the deep water subprovince is very favorable to the existence 
of large commercial hydrocarbon accumulations. As the oil and 
gas technology pathway continues to advance and costs and risks 
are reduced on a unit basis, deep water development projects in 
the Gulf of Mexico will continue to become more feasible, 
allowing companies to look to the ultradeep waters where depths 
exceed 5,000 feet.
    I would like to point out that the oil and gas technology 
pathway in the United States has been critical to sustaining 
domestic production. There is no way to ignore the role of 
technology and what we have been able to achieve in this 
country. On a barrel of oil equivalent basis, cumulative 
production in the United States continues to increase, and this 
is a really, really important fact to acknowledge for such a 
mature oil and gas province in the world.
    The oil and gas technology pathway has always rested on 
both industry entrepreneurship and government participation. I 
would like to point out for the subcommittee's consideration 
that this role of government includes not just research and 
development and government support of that through both direct 
and indirect ways, but also appropriate fiscal regimes for 
offshore regulatory arrangements and access.
    The U.S. Minerals Management Service is forecasting daily 
oil production rights of between 2 and 2.5 million barrels by 
the end of 2006, and daily gas production rates of between 
roughly 10 and 17 billion cubic feet by the end of the same 
year. I submit that these are not small numbers, given where we 
are in our energy markets today.
    These outlooks hinge on continued access to prospective 
areas for development, and they are driven by expectations with 
regard to the natural gas market. I agree totally with Mr. 
DeLay, the Majority Leader, on that point.
    The MMS has already taken some actions that will help spur 
development and innovation by allowing the use of floating 
production, storage and offloading systems. I also would like 
to observe that the Outer Continental Shelf Deep Water Royalty 
Relief Act represents an initiative or a type of government 
initiative that has had a significant impact on Gulf of Mexico 
activities.
    A few general points as well: U.S. energy security and 
access for exploration and production in this country are 
intrinsically linked. For both onshore and offshore activities, 
companies need to be able to get into prospective areas. I urge 
Congress to at least put on the table for discussion the 
offshore moratoria that are currently in place.
    I would like to point out that regulatory regimes for 
energy in general in the United States require attention. 
Demand side response is essential to be able to use energy 
wisely and efficiently, and in order to be able to do that, 
customers need to be able to get price signals in a very 
transparent and meaningful way.
    Fiscal regimes to support oil and gas development, not just 
offshore but onshore, are essential. There are several things 
under consideration right now, both for the offshore regime but 
also for onshore areas, nonconventional gas production, coal 
seam gas, deep coal production, and that sort of thing.
    Environmental management and transparency are critical. I 
am very sympathetic with Mr. Allen's points on those. I would 
like to point out that, in my view and based on my own 
scientific credentials, that deep water and ultradeep water oil 
and gas production can be very compatible with the 
environmental values we have in the United States.
    I would like to urge the committee to consider the impact 
on the oceans from coastal land use and urbanization. I think 
those things are actually as critical, if not more critical, 
than what we do directly in the ocean environments.
    Gas transportation corridors will be essential to make deep 
water and ultradeep water production work. We need to be able 
to land our products, get it to the beach, get it into the 
systems.
    I believe that also all of these transportation corridors 
are compatible with everything we are discussing now for 
liquified natural gas. LNG will be essential in helping to 
stabilize offshore production flows as we move into the deeper 
water environments.
    The continued effort to restructure, stabilize, provide 
effective oversight for natural gas markets also plays a role 
in this. Everything that is being done to provide and encourage 
ethical behavior in natural gas markets, restore credibility 
and creditworthiness for the energy merchant companies also 
plays a role in everything that we are doing with oil and gas 
production, because these companies have provided funding and 
capital support for all of the essential upstream and midstream 
activities that we have undertaken in the past few years.
    We believe there is a direct link between our ability to 
deliver natural gas, in particular, to the United States and 
the ability to have creative energy merchant capital flows into 
the industry.
    Those are my major observations. I thank you very much for 
your time.
    [The prepared statement of Michelle Foss follows:]

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    Mr. Hall. Very well done, and thank you very much.
    The Chair at this time recognizes Mr. Riordan, President 
and CEO of Gas Technology Institute for the long history of 
working in the industry as the CEO MidCon and senior executive 
at Occidental Petroleum, and has been a good advisor to this 
committee, and I thank him for his time.
    I think at this time we will thank Charlie Cook who is 
present here, has done major work on H.R. 6 and has been very 
valuable to us, as has Melanie Kenderdane and Kyle Simpson. 
They are no strangers to this committee, nor to this energy 
thrust. We thank them and, of course, you four once again many 
times. Mr. Riordan, we will let you do the closing argument. I 
recognize you at this time for as much time as you take.

                    STATEMENT OF JOHN RIORDAN

    Mr. Riordan. Thank you very much, Mr. Chairman, for this 
opportunity to testify today before your committee. I would 
like to commend you, as others have, for your leadership on 
addressing the critical need for new domestic gas supplies to 
meet growing U.S. demand.
    Mr. Chairman, as you know, this need is not trivial. Sixty 
million homes in the U.S. are heated with natural gas. Natural 
gas is a major industrial fuel and feedstock. The processing of 
natural gas provides much of the propane that fuels rural 
America, and a growing percentage of our electricity comes from 
gas fired generation.
    Finally, natural gas, as the cleanest burning fossil fuel, 
offers significant environmental benefits and lowers the cost 
of environmental compliance, benefits that will go unrealized 
if high gas prices and reduced supplies force us to switch to 
other fuel sources.
    The U.S. demand for natural gas is outpacing domestic 
production. In 2003 domestic natural gas production increased 
by only 0.6 of 1 percent. The Energy Information 
Administration, EIA, forecasts similar production profile in 
2004, and at the same time demand for natural gas in 2003 
increased by 2.4 percent, and that trend is expected to 
continue.
    As others have said, the U.S. is not--is not--running out 
of natural gas. We have got roughly 1250 Tcf of technically 
recoverable improved natural gas reserves in the lower 48. That 
is sufficient to meet 65 years of demand at the current rates 
of consumption, or 30-plus years of demand at 2025 forecast 
rates. We are, however, limited by those technologies that 
would enable us to actually produce those reserves at 
affordable prices.
    To meet the growing demand for natural gas, we generally 
have four options: Dramatically increasing ports of LNG; the 
building of a pipeline to Alaska; increased access to Federal 
lands; and then increased production of unconventional 
resources, both onshore and offshore.
    It is really critical that we resolve the issues associated 
with each one of those options, because we will ultimately need 
all of these sources of supply. In many respects, however, 
investing in research and development necessary to develop our 
unconventional ultradeep water offshore gas resources offers 
the most realistic and politically achievable option for 
helping to meet the midterm gas demand.
    These resources are within our borders, made in America, 
close to demand centers, and do not require substantial new 
infrastructure investments to develop. They do, however, 
represent very complex technical problems.
    These resources are large. The unconventional resources 
alone make up to 475 Tcf, more than one-third of the 
technically recoverable resources in the lower 48. As such, 
this option, to be successful, must embody programmatic and 
funding characteristics such as those found in the H.R. 6 
conference version of the Ultradeep Water and Unconventional 
Natural Gas Supply Research Program.
    This legislation would provide both the ways as well as the 
means of producing large volumes of domestic gas supplies at 
consumer friendly prices. Let me highlight what I believe will 
be the critical components of this program that will ensure its 
success.
    First, the program is grounded in sound public policy. The 
National Petroleum Council's 1999 natural gas supply study 
identified deep offshore and nonconventional onshore resources 
as the most likely sources of new gas supplies.
    It also recommended accelerated technology investments in 
these regions, and finally it recommended additional Federal 
collaborations with industry and academia to meet the gas 
demand. A 2003 NPC study also indicates significant price and 
supply benefits in high technology scenarios.
    Second, a new research model is necessary for program 
success. It is a program designed to help meet the midterm gas 
demand which will require a singular focus, as well as a 
ruthless program execution. The gas supply R&D program in H.R. 
6 encompasses these characteristics, to focus exclusively by 
meeting the midterm demand for the two most promising resource 
provinces, the ultradeep water, which is anything over 1500 
meters, and the unconventional onshore, coalbed methane, tight 
gas sands, gas shales, and deep drilling.
    Third, the establishment of a trust fund for the research 
program: The conference report passed by the House would 
establish a trust fund to pay for this research program. 
Specifically, it would place $150 million per year for 10 years 
from Federal oil and gas royalties into a trust fund program.
    I believe that a dedicated funding source for this program 
is probably the single most important element for program 
success. In this type of highly focused, expensive, time 
limited R&D program in which the government lacks much of the 
necessary expertise, the participation and cost sharing of 
industry is very critical.
    The program will not succeed without industry, and industry 
will not participate without stability and assurance of funds 
available.
    Analysis by the Bureau of Economic Geology, BEG, at the 
University of Texas indicates a much, much larger supply 
response than EIA's analysis. BEG is analyzing a larger 
program, estimates that this new research program would 
generate nearly 87 Tcf of incremental gas production and more 
than 6 billion barrels of incremental oil production by 2025.
    Finally, I would note that both EIA and BEG analysis 
indicate that the program would at a minimum pay for itself in 
the form of increased gas and oil royalties form production on 
Federal lands. BEG analysis also indicates that it is going to 
pay for itself several times over.
    Mr. Chairman, in closing I would like to make really one 
final point. The Gas Technology Institute, which is charged 
with developing and funding natural gas research, ultimately 
serves the natural gas consumer. In our Nation, the natural gas 
consumers and our economy are suffering from very, very high 
natural gas prices, which I think is very significant. It is 
imperative that public policymakers address these fundamental 
and critical concerns.
    Some people have criticized this program as corporate 
welfare. I am personally against corporate welfare, but I 
disagree in this area. Without passing judgment on the value of 
the following programs, the clean coal programs are funded at 
around $250 million a year, energy and efficiency by roughly a 
billion dollar a year, nuclear energy research at around $70 
million per year.
    The FutureGen program cost a billion dollars, incentives 
for ethanol use far outstripped any other single energy 
incentive. I strongly believe that meeting domestic gas supply 
needs has value to the Nation on par with any of these other 
items and, if we are going to remain economically strong, we 
are going to have to have lower gas prices, and the only way we 
are going to get that is to have more supply. I think research 
and development can play a part in that.
    Thank you very much, Mr. Chairman.
    [The prepared statement of John Riordan follows:]

 Prepared Statement of John Riordan, President and CEO, Gas Technology 
                               Institute

    Thank you for the opportunity to testify before your committee 
today. Mr. Chairman, I would like to commend you for holding this 
hearing and for your leadership on addressing the critical need for new 
domestic gas supplies to meet growing US demand.
    Mr. Chairman, as you know, this need is not trivial. Sixty million 
homes in the US are heated with natural gas. Natural gas is a major 
industrial fuel and feedstock. The processing of natural gas provides 
much of the propane that fuels rural America. A growing percentage of 
our electricity comes from gas-fired generation. Finally, natural gas, 
as the cleanest burning fossil fuel, offers environmental benefits and 
lower costs of environmental compliance--benefits that will go 
unrealized if high prices and reduced supplies force us to switch to 
other fuel sources.
    The US is not running out of natural gas. According to the Energy 
Information Administration's 2004 Annual Energy Outlook, ``the volume 
of estimated technically recoverable resources is sufficient to support 
increased reliance on unconventional natural gas sources.'' We have 
roughly 1250 Tcf of technically recoverable and proved natural gas 
reserves in the lower 48, sufficient to meet 65 years of demand at 
current rates of consumption or 30-plus years of demand at 2025 
forecast rates. We are, however, limited by those technologies that 
would enable us to actually produce those reserves at affordable 
prices.
    First, let's examine the price side of this problem. On April 13 of 
this year, natural gas prices at Henry Hub were $5.92 per million btu. 
Looking forward, the price of the average natural gas futures contract 
for next year is $5.99. This compares to historical prices in the $2 
range, as well as to this sampling of recent overseas gas prices: 
Western Europe, $3.20; North Africa, $0.40; and Russia, $0.70. Today's 
six-dollar gas prices racked up against these low-cost international 
options highlight the stark choice faced by gas-dependent US companies: 
do they stay here or move overseas? High prices are damaging our 
industrial base, hurting consumers, and inhibiting a more robust 
economic recovery.
    Let's now look at the supply/demand side of the equation. In 2003, 
domestic natural gas production increased by six tenths of one percent. 
The Energy Information Administration (EIA) forecasts a similar 
production profile for 2004. At the same time, demand for natural gas 
in 2003 increased by 2.4%.
    This trend is expected to continue. EIA forecasts a 38% to 53% 
increase in US gas demand by 2025, depending on the price of gas, yet 
gas recovery per well in both the US and Canada (our single largest 
supplier of imports) is declining rapidly and rising rig counts have 
resulted only in flat production at best. In other words, we are 
pushing harder but we are not advancing the ball.
    If we are going to continue to reap both the energy and 
environmental benefits associated with natural gas consumption, we must 
address this imbalance. To meet growing demand for gas supply, we 
generally have four options: dramatic increases in imports of liquefied 
natural gas (LNG); the building of a pipeline to move stranded Alaskan 
gas to the lower 48; increased access to the roughly 213 Tcf of natural 
gas reserves on federal lands currently off limits to production; and 
increased production of unconventional resources, onshore and offshore 
resources at greater water depths.
    Implementing each of these options is difficult and outcomes are 
very uncertain. Significant policy and political issues are raised by 
increased LNG imports as well as by opening up new federal lands to gas 
and oil production, particularly in those offshore regions that are 
under Congressionally- or state-directed production moratoria. The 
building of a gas pipeline from Alaska is not economic even at today's 
high prices and has a lengthy time horizon for development. Finally, 
development of unconventional resources is technically challenging.
    It is critical that we resolve the issues associated with each of 
these options because we will ultimately need all sources of gas supply 
in order to meet demand. In many respects, however, investing in the 
research and development necessary to develop our unconventional and 
ultra-deepwater offshore gas resources offers the most realistic and 
politically achievable option for helping to meet mid-term gas demand. 
These resources are within our borders, close to demand centers, and do 
not require substantial new infrastructure investments to develop. They 
do, however, represent very complex technical problems. These resources 
are large. Unconventional resources alone make up 475 tcf, more than 
one-third, of the technically recoverable resources in the Lower-48.
    As such, this option, to be successful, must embody programmatic 
and funding characteristics such as those found in the H.R. 6 
conference version of the Ultra-deepwater and Unconventional Natural 
Gas Supply Research program. This legislation would provide both the 
ways--as well as the means--for producing large volumes of domestic gas 
supplies at consumer-friendly prices.
    Let me highlight what I believe to be the critical components of 
this program that will ensure its success:
     The program is grounded in sound public policy. As I have noted, 
by 2025 the US will need between 38% and 53% more gas to meet demand. 
Domestic production has been flat for the last ten years and well 
depletion rates have increased from 25% to 45% annually. The US has a 
substantial gas resource base but these resources are increasingly 
difficult to produce at affordable prices.
    The National Petroleum Council's 1999 natural gas supply study 
identified deep offshore and non-conventional onshore resources as the 
most likely sources of gas to meet growing demand. It suggested that 
technology investments in these regions must be accelerated in order to 
meet demand. Finally, it recommended additional federal collaborations 
with industry and academia to meet gas demand.
    The 2003 update of the NPC Gas Supply Study, while highlighting the 
variety of options we must pursue in order to meet demand, identified 
both the supply and price benefits associated with high technology 
investment scenarios.
    Further, EIA indicates that the delta between rapid and slow 
technology investments in unconventional onshore production is a 21% 
difference in supply.
    The industry, for sound business reasons, is not investing in 
supply R&D sufficient to meet mid-term gas demand. The super-majors, 
while having large research budgets, have other more profitable options 
overseas. The service companies, which meet many of the research needs 
of large producers, do so at the direction of their clients. The 
smaller independents, which develop most of our onshore gas resources, 
do not have the money to invest in the R&D that will be required to 
further develop our unconventional onshore gas resources. Finally, the 
federal government's gas supply R&D budget of roughly $15 million per 
year is inadequate to alter the supply trajectory. Meeting the nation's 
mid-term gas supply needs will require a radically different approach.
    A new research model is necessary for program success. A program 
designed to help meet mid-term gas demand will require a singular focus 
as well as ``ruthless program execution.'' Such a program must 
necessarily and successfully graft the expertise and operational 
experience of the industry and the knowledge and creativity of academia 
onto an applied government research program, with all of its 
requirements and restrictions. It will also require that program 
managers integrate highly complex program pieces into new production 
architectures or production methods.
    The natural gas supply research program in H.R. 6 addresses these 
needs in a manner that would optimize opportunities for its success. It 
is focused exclusively on meeting mid-term demand from the two most 
promising resource provinces, the ultra-deepwater (+1500 meters) and 
the unconventional onshore (coalbed methane, tight gas sands, gas 
shales, deep drilling). The program implicitly acknowledges that 
private industry R&D investments are appropriately guided by business, 
not public policy concerns, and would accelerate federal technology 
investments, consistent with NPC recommendations. Also consistent with 
NPC recommendations, the program promotes maximum collaboration between 
the federal government, industry, and academia and it establishes a 
program that is an order of magnitude larger than the Department of 
Energy's existing gas supply R&D program. In addition, this program 
will address the geologic and other production issues that limit the 
capacity of small producers to efficiently develop their resources.
    More specifically, the program in H.R. 6 would establish two 
different research management models. The ultra-deepwater program would 
be administered by the DOE but managed by a program consortium of 
academic/industry professionals, similar to the DOE's existing 
management and operation contracting structure; this construct 
acknowledges that the federal government has never managed an ultra-
deepwater R&D program and that the management expertise resides outside 
the government. While allowing for appropriate government oversight, 
this management model will provide the program with maximum flexibility 
in meeting its program goals.
    Given its history of managing unconventional onshore research, the 
Department of Energy would directly manage this program component. 
Provisions in H.R. 6 would, however, require that DOE manage this 
program element largely through research consortia, seeking to 
replicate historically successful research models, such as the one that 
enabled the development of domestic coalbed methane resources.
     The Establishment of a Trust Fund for the Research Program. The 
conference report on this provision of H.R. 6 would establish a Trust 
Fund to pay for the research program. Specifically, it would place $150 
million per year for ten years from federal oil and gas royalties into 
a fund for this program. Further, it would authorize an additional $50 
million per year, subject to annual appropriations.
    A dedicated funding source for this program is perhaps the single 
most important element for program success. The nation needs 
additional, adequate and affordable gas supplies for both economic and 
energy security reasons. As has been already noted, the annual 
appropriations process for natural gas supply R&D has never resulted in 
funding levels sufficient to dramatically alter the gas supply 
trajectory through research investments.
    A fast-paced applied technology program requires predictable and 
readily available funding. Further, program success is highly dependent 
on the expertise and participation on the part of industry. The major 
technology investments envisioned for the program, particularly for the 
new architecture component of its ultra-deepwater component, requires 
extensive, commercial-type contracting and substantial cost sharing by 
industry (up to 40%). These necessary conditions for success will not 
be present without predictable and stable federal funding. In short, 
the program will not succeed without industry--and the industry will 
not participate without stability and assurance of funds availability.
    This type of funding mechanism is not without precedent. The DOE 
Clean Coal Technology Program, arguably one of its most successful 
research efforts, was ``forward funded'' in the 1980s. This mechanism 
guaranteed program funds for the program's duration and offered the 
stability the industry needed for participation in the program, as well 
as for large industry cost-sharing.
    Further, EIA, in analyzing the supply provisions of the conference 
report, noted that, ``dedicated funding outside the annual 
appropriations process implies relatively low funding-related 
uncertainty for this program.'' It went on to observe, ``the new R&D 
funding would increase the technological programs for the affected 
resources (ultra-deep offshore oil and gas and unconventional gas 
production) by 50% over its value in the Reference Case.'' This 
analysis shows additional gas production of four trillion cubic feet 
and oil production of 850 million barrels, assuming a program of one-
third the size. Analysis by the Bureau of Economic Geology (BEG) at the 
University of Texas indicates a much larger supply response. BEG, 
analyzing a larger program, estimates that this new research program 
could generate nearly 29 Tcf of incremental gas production and more 
than 4 billion barrels of incremental oil production by 2025.
    Finally, I would note that both the EIA analysis of this provision 
and similar analysis by BEG indicate that this program would, at a 
minimum, pay for itself in the form of increased gas and oil royalties 
from production on federal lands as a result of the program; the BEG 
analysis indicates that it would pay for itself several times over. 
This is not only important from the standpoint of the American 
taxpayer, but it is critical for ``growing'' the royalty stream in 
order to continue to pay for other important programs such as the Land 
and Water Conservation Program and the Historic Preservation Fund. 
Without the increased production and royalties from this supply 
program, the royalty stream will ultimately decline and be insufficient 
to fund these and other programs.
    Mr. Chairman, in closing, I would like to make one final point. The 
Gas Technology Institute is charged with developing and funding natural 
gas research that ultimately serves the natural gas consumer. 
Consumers--and the nation's economic health as well as its energy 
security--are also the ultimate focus of policy makers. In our nation 
today, natural gas consumers and our economy are suffering from high 
natural gas prices--it is imperative that we address these fundamental 
and critical concerns.
    Some people will criticize this program as corporate welfare. I 
disagree. Without passing judgment on the value of the following 
programs, I would note that the Congress funds clean coal programs at 
around $250 million per year, energy efficiency and renewable programs 
at around $1 billion per year, and nuclear energy research at around 
$70 million per year. Last year, the Administration announced its 
FutureGen program that would cost roughly $1 billion and is promoting a 
hydrogen research program of even greater size. Incentives for ethanol 
use far outstrip any other single energy incentive supported by the 
federal government. Comprehensive energy legislation includes a 
production tax credit for nuclear power and a similar credit for wind 
energy.
    I strongly believe that meeting domestic natural gas supply needs 
has value to the nation on par with these other federally supported 
programs, and that Congressional and Administration program and funding 
priorities should reflect that importance. The federal government and 
its partners in industry and academia, in supporting the critical 
research program we are discussing today would be acknowledging the 
economic, energy and environmental benefits of natural gas to the 
nation, to consumers and to taxpayers. I urge the Congress to support 
this program and this legislation, and again, Chairman Hall, I commend 
you for your leadership and insight in moving this program forward. 
Thank you and I look forward to your questions.

    Mr. Hall. Thank you, Mr. Riordan.
    We have with the committee now Mr. Shimkus of Illinois and 
Mr. Walden of Oregon. Would you gentlemen care to make an 
opening statement or would you want to just put it in the 
record. I'll give you your option at that. I will recognize Mr. 
Shimkus first for 5 minutes.
    Mr. Shimkus. Mr. Chairman, I will just waive, and we will 
go to questions, and I can address it then.
    Mr. Hall. Fine. We will add that 5 minutes to your length 
of time for examination of those who testified.
    The Chair recognizes Mr. Walden for 5 minutes.
    Mr. Walden. Thank you, Mr. Chairman. I, too, will waive an 
opening statement. Appreciate your hearing today, and look 
forward to questions.
    Mr. Hall. Thank you very much. All right, I thank the panel 
very much. We will get underway. I will ask some questions 
here, and I think I would start with Mr. Weglein.
    In your testimony you asked the question, I think, that 
hits at the heart of this hearing. Why should the Federal 
Government support R&D that can impact the bottom line profit 
of the petroleum industry?
    I think your short answer is the failure to do so will 
drive companies to easier places to drill, and even in foreign 
countries. Would you take some of my 5 minutes and elaborate on 
that, please, sir?
    Mr. Weglein. I would be glad to. The Federal Government has 
a different responsibility than an oil company responsibility. 
The responsibility of the oil company is to maximize profit for 
their shareholders. The government of the United States has a 
responsibility to look out for the betterment of the country. 
Those sometimes overlap, but not always.
    When the U.S. Government feels that they can weigh in and 
help steer the priorities and the economic decisions of oil 
companies to be better aligned with the Federal mandate of 
betterment for the U.S., that is not a contradiction. They are 
each serving different objectives, and it is entirely 
appropriate to try to be a stakeholder in that process for the 
Federal Government.
    Mr. Hall. All right. I thank you. I would ask Dr. Foss: in 
your testimony you state ``the combination of rapid depletion 
from new, fast gas wells and aging older fields has accelerated 
overall declines. Gas well productivity has flattened, the 
result of both new, quickly depleted fields and the maturity of 
prospects onshore and in shall waters of the Gulf of Mexico.''
    In your view, how would a research and development program 
such as this and as envisioned by H.R. 6--How would that help 
and assist in our goal of being energy sufficient? The Chair 
recognizes you.
    Ms. Foss. I think I largely agree with Dr. Weglein on this 
point. As I said, throughout the history of our industry in the 
United States and our experience as a country in oil and gas 
production, I think it would be foolish to argue that we have 
done all of that totally through the private sector. There have 
been very, very key strategic relationships between the public 
sector and private sector to get all of this done.
    I think that, as you move forward and look for larger 
resources, in particular--and that is the attraction of the 
Gulf of Mexico, the chance to find larger pools of hydrocarbons 
that can provide the kind of incentive and return on investment 
that companies need, as opposed to the smaller pools, faster 
producing pools that the companies go after now.
    So I think that a creative partnership, a role for 
government, a way to look at advancing and pushing the 
technology envelope a little bit to get this done, coupled, as 
I said, with appropriate frameworks that make companies feel 
like it is worth it to go into these new environments in the 
first place, I think, can actually do a great deal in adding to 
our asset base for the country as a whole.
    Mr. Hall. I thank you. I would ask Mr. Riordan, how will a 
research and development program help production in areas not 
only like east Texas but all over the country, and talk to us a 
little about the spin-off benefits that might indirectly help 
other industries in other parties of the country besides the 
oil and gas industry? Would you do that?
    Mr. Riordan. Mr. Chairman, before I answer that question, I 
wonder if I could insert the Bureau of Economic Geology 
analysis for the record?
    Mr. Hall. Without objection, it will be inserted.
    [The report appears at the end of the hearing.]
    Mr. Riordan. Ten percent of the funds in this program would 
go to small producers. For instance, in east Texas we have 
shale oil in that particular area. Other areas around the 
country would be Rocky Mountains, the Appalachian region, some 
areas in southwest Texas and Illinois. So there is a wide area 
where gas sands and, of course, with the ultradeep area we 
would be looking at the Gulf of Mexico, and also some of this 
technology could be used some day in Alaska.
    In terms of where the technology, there is no doubt that we 
want the initial effort to come with natural gas produced 
domestically in the United States, and I think that is what 
happened, but this technology certainly would benefit companies 
around the world.
    We would get a leg up, and I think it takes about 18 months 
to move those technologies into other parts of the area. So we 
would get a big head start, but I think it is a benefit to the 
United States, even though some of that gas--A major focus of 
this is the produced gas and oil in the United States, but it 
is a benefit to the United States to see oil and gas production 
increase on a worldwide basis, too.
    Mr. Hall. All right. I think my time probably has expired. 
The Chair recognizes the gentleman from Virginia, Mr. Boucher, 
for 8 minutes.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. I 
will not take 8 minutes. I want to join with you in thanking 
the witnesses for joining us here this morning and sharing 
their expertise with us on what I would agree with the chairman 
is a very important subject.
    I just have a couple of questions. I note that there are 
something on the order of 12 rigs in the Gulf today that are 
drilling to a depth of 5,000 feet or greater. Presumably, gas 
is being produced from these rigs. I guess it is gas, as 
opposed to petroleum, is being produced from these rigs.
    That is a commercial operation, and I don't mean to suggest 
any hostility to the R&D provision that is in H.R. 6 by asking 
this question. I was actually a major supporter of H.R. 6, and 
I hope that steps can be taken to conclude the conference and 
bring that measure to passage, and I supported the R&D 
provisions for deep water oil and gas research that are 
contained within H.R. 6, but I need to ask you, because some 
people undoubtedly will question this.
    Given the fact that you have 12 rigs drilling to a depth of 
5,000 feet or greater in a commercial capacity now, what is the 
appropriate role for the government to fund R&D in that 
environment, if this is a commercial technology and we are now 
drilling to that depth and producing that oil. What is your 
response to the question that some will ask about why we should 
be continuing to put research and development funding into an 
application that has achieved commercial status?
    Just a brief answer, I think, would be sufficient. Who 
would like to answer the question? Dr. Weglein.
    Mr. Weglein. One way to respond is I am hearing from the 
largest petroleum companies in the world throughout their 
sponsorship that they are losing patience with the number of 
dry holes they are drilling in the deep and ultradeep, and that 
is something that affects my program, because we are aiming new 
techniques for seismic.
    So they support us, because they are looking for new 
capability. It isn't coming fast enough. In other words, they 
have a certain tolerance for these dry holes, and the tolerance 
is waning, and the urgency of that only became clear to me very 
recently, in other words, through direct communication with 
their technical experts. I was surprised that it had reached 
that point.
    Mr. Boucher. Well, I understand that their patience may be 
waning with regard to drilling dry holes. How does the 
government provision of research and development funding 
provide an answer? What is the use of R&D funds that would 
increase their level of patience or perhaps assist them with 
the technology that some might argue was already commercial?
    Mr. Weglein. Yes. We need to first clearly define what the 
technical obstacles are, and then seek and fund those with a 
record of solving that level of difficulty. That is ongoing. 
That could be increased. It is going to take not only a new 
vision of seismic processing but a new level of computation. 
IBM and HP are weighing into this.
    So the government has a role in that as well.
    Mr. Boucher. I heard Dr. Foss earlier suggest that perhaps 
there is a need for a more refined and more appropriate 
technique for field characterization, so that you can identify 
to a higher degree of certainty where reserves are found. Is 
that the primary role for R&D or is it in the actual drilling 
and development technology?
    Mr. Weglein. I think drilling is making more progress than 
the location. The drilling technology is advanced. It is not my 
specialty, but my impression. The exploration obstacles to 
seeing beneath complex media--Much oil and gas occurs beneath 
salt or basalt, and in salt there is a very rugose boundary. In 
basalt it is very heterogeneous, and they can't locate with 
their seismic techniques what is underneath to know where to 
drill.
    What we are trying to do is develop techniques which can 
lift the requirement to know what is above the target to well 
identify what the target is and the extent of its value.
    Mr. Boucher. So your answer would be that characterizing 
the field and being able to determine with greater precision 
where the reserves are located would be the primary target of 
R&D funding.
    Mr. Weglein. That is my sense.
    Mr. Boucher. All right. Thank you. Does anyone disagree 
with that? All right, thank you.
    The other question I have, and I would ask this of anyone 
who wants to answer, is the potential effect that utilizing up 
to $150 million per year for 10 years for R&D for this endeavor 
might have on the pool of Federal royalties from development 
that now fund other programs, and some of the other programs 
funded are land and water conservation efforts, the Historic 
Preservation Fund. There are other targets of funding from this 
pool of Federal royalties that come from development.
    Also contained in H.R. 6 is a royalty relief provision that 
applies to deep water oil and gas development, if certain 
conditions are met, if you achieve a certain depth level to 
production, etcetera.
    So teamed with a draw of an additional $150 million from 
the revenue pool is a revenue relief provision. So in effect, 
the fund is diminished in two ways, from the vantage point of 
other programs that rely upon this pool for funding.
    Do you have any comment about how we could have the level 
of assurance we need that, if this provision becomes law, there 
would be adequate funding for land and water conservation, for 
historic resources and other purposes? Who would like to 
comment? Mr. Riordan.
    Mr. Riordan. At about $3.20 a 1,000, you generate somewhere 
between $5 and $6 billion and, as we all know, gas prices are 
higher than that now. Looking at all of the areas that are 
covered by the royalties, it looks to us like there is about $2 
to $3 billion left over for the general fund, if you keep that 
number at $5 to $6 billion.
    Mr. Boucher. Okay. Any other comment? Dr. Weglein?
    Mr. Weglein. Yes. I would like to say that I don't believe 
going into a problem you can decide 150 million is the 
solution. I think that the experts, industry experts coupled 
with government, DOE experts, need to sit down in a conference 
and decide what can money do, and how much would it take.
    Just putting more money in doesn't solve a problem. It is 
like asking for more people to rapidly increase--A child, it 
still takes a certain amount, 9 months roughly. So what money 
can do--I think that needs to be--There should be an amount, 
but it shouldn't be that that has to be spent. I think it 
should be prudent. I think it should be judicious, and it 
should be aimed at true delivery rather than we have this 
money, let's go spend it.
    Mr. Boucher. Okay. Thank you very much. Let me thank each 
of the witnesses and, Mr. Chairman, I yield back.
    Mr. Hall. I thank the gentleman, and recognize at this time 
the gentleman from Illinois, Mr. Shimkus, for 5 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. A great hearing, and 
important. I think it highlights a couple of things.
    First, I want to thank the ranking member. He does do his 
homework, and he asked some very good questions and issues that 
I think are important to get out.
    I want to welcome Mr. Riordan from Illinois, being an 
Illinois member, obviously, in some of the comments that have 
been made here. The importance of a comprehensive energy plan 
in H.R. 6, I think, was evident, whether it was meant to be, 
and we have a lot of incentives for a diversified fuel mix.
    People who follow this committee process, and I am now in 
my 8 years, know that I say multiple fuels, multiple 
generation, competitive marketplace, everyone benefits. If we 
through legislation or lack of legislation identify a fuel of 
choice, we distort the market, and we cause great problems.
    Not enacting a comprehensive energy plan continues in that 
method, because what we have now, I believe, is a distorted 
natural gas market, because of our inability to really 
effectively incentivize others.
    So we don't want to have our opponents divide us and 
conquer on this fuel, that fuel. What we want to do is 
incentivize through research and development, through new 
technologies, all our fuels and encourage all our different 
generations to meet the standards that we have set to keep our 
environment in the condition, or in a better condition. But we 
don't want to be divided and conquered.
    Of course, when you mentioned--again, the ranking member 
and coal. We fight a lot of coal battles together, soy diesel, 
and I am an ethanol provision guy, and natural gas has a big 
role at the table.
    I think in the testimony--A couple of things, and I just 
scratched it out--I am not an expert--but demand. The demand 
for natural gas, if we don't pass a comprehensive energy plan--
and the testimony talked about available supply now is 
plateauing here, if we don't have access. Demand will increase. 
Then we have this.
    We have the United States paying $5 and Russia paying 70 
cents. When we talk about the manufacturing sector of our 
country today, you know, we limit the political debate to the 
political causes du jour, which could be foreign competition, 
which could be wage rates. We don't talk about energy costs. We 
don't talk about litigation. We don't talk about siting 
provisions and those costs incurred.
    If we want our manufacturing to be competitive, we have got 
to address the fuel component now, and that is why these 
provisions are so important. That is why a comprehensive bill 
is critical.
    I know the debate from which the ranking member addressed, 
because, I mean, that is part of--That is why it is gone from 
the ``energy life'' provisions, and that is why a comprehensive 
plan has to be enacted so that we have that concern.
    The question, I think--One last example, and this is not 
natural gas, but the chairman would appreciate the fact that 
the largest operating oil well in the lower 48 is in my 
district. Mr. Chairman, did you know that?
    Mr. Hall. I will check on it. You know, President Reagan 
said, Trust but verify. Yes, I recognize the importance of your 
production. Thank you.
    Mr. Shimkus. But the issue is new technology, horizontal 
drilling, vertical insertion--We are now producing 1,000 
barrels a day under a State wildlife refuge. I mention it all 
the time, because we can have access to our natural resources 
through research, technology and development.
    We have available crude oil supplies, natural gas supplies, 
to meet the demand if we would only move to get access, and 
again do the research for the strata and the looking. I think 
that was a great answer, one that I am now going to use as I 
get asked that question.
    So my questions aren't really a question, since I missed 
the opening statements--we had another hearing on spyware. But 
I wanted to encourage and thank the chairman for this hearing, 
and I wanted to make sure that we do all we can in this 
Congress to really push for a comprehensive plan, so that the 
country will benefit and, again, for the record say that in a 
competitive market you want multiple fuels, multiple generation 
capabilities, and then allow private sector to compete to 
provide the best service at the lowest price.
    If we, through any litigation or legislation, distort that 
market, we are the ones--we harm ourselves. So, Mr. Chairman, I 
will use that as my closing statement. Thank you for the 
hearing, and I yield back.
    Mr. Hall. Thank you, Mr. Shimkus. The Chair recognizes the 
gentleman from Oregon, Mr. Walden.
    Mr. Walden. Dr. Foss, in your testimony you mentioned 
discoveries like Thunder Horse and Manatee. Do you have any 
production estimates for what those might be?
    Ms. Foss. No, I'm sorry, I don't have them right on hand, 
but it is available in the industry literature, and I would be 
happy to get back to you with all of that information.
    Mr. Walden. But these are pretty big. Does anybody have any 
estimates of what we are talking about in those?
    Ms. Foss. What I would do is point you to graphics that I 
did include in the testimony that shows distribution of fuel 
sizes offshore, so that you can see the pattern of discoveries 
and the extent to which, as the industry has pushed out into 
projects like those--What they have been able to do, again, is 
find the larger pools, and it is the larger pools that we are 
after here that help to stabilize our domestic production base.
    Mr. Walden. Okay. Thank you. Howard, I guess I would have a 
question for you. I believe you testified the experts of the 
Department of Energy's Office of Fossil Energy believe new R&D 
funding would accelerate technological progress by 50 percent 
over your base cases determined without R&D. Is that a pretty 
fair assessment, do you think? You want to hit your mike? I'm 
not sure it is on.
    Mr. Gruenspecht. Yes. I would not want to characterize 
those estimates as being either conservative or optimistic. In 
the testimony I talked about the high degree of uncertainty 
surrounding these type of things.
    The 50 percent is similar to, actually close to, what we 
have at our high technology case. So what they seem to be 
saying is, at least in those areas, the unconventional and the 
ultradeep water, this amount of additional R&D funding might 
take you in some sense from our base case to our high 
technology case.
    Mr. Walden. Does anybody quantify what we are looking at in 
terms of shoving jobs offshore if we don't do a better job here 
of developing a domestic supply? We hear a lot, and my 
colleague from Illinois, Mr. Shimkus, talked about a little bit 
the job losses. Do any of you all look at that as you make your 
arguments?
    Mr. Riordan. We have not looked at it, but I think it is 
something that we ought to look at. As far as I know, Melanie, 
we have not looked at that, but I think it is a good point, and 
we will.
    Mr. Walden. I hope you do, and I hope you do soon, because 
we are trying to pass an energy bill that gives us this--We 
have all talked access to our own domestic supply. I am tired 
of being held hostage, literally, by countries who are not 
necessarily friendly to us at critical moments, and our economy 
is being ravaged as a result sometimes of our own actions or 
lack of actions.
    On the one hand, we hear about jobs being shoved overseas, 
and on the other hand we never look at what are the base 
causes, and your map one of you had here, that John had, you 
know, when you are looking at the disparity in gas prices, why 
would you make a decision to stay onshore when you can pay 6 
bucks here or 30 cents somewhere else and ship it back.
    Mr. Shimkus. Would the gentleman yield?
    Mr. Walden. Yes, sure.
    Mr. Shimkus. I was trying to find this also, the U.S. 
natural gas wellhead price: In January 1999, $1.85; December of 
2003, 5.08. I think that is the number we have listed in this 
sheet. We are not doing better. We are doing worse.
    Mr. Walden. It gets worse. April 13 of this year, 5.92 at 
the Henry Hub.
    Mr. Shimkus. And that is part of the concern, and there is 
really a need for us to move. What I didn't address was in your 
ag sector, of course, fertilizer for my farmer going into the 
field, they tripled the price. We are lucky we have got good 
commodity prices now, but if we were 2 years, my farmers would 
be closing shop. They wouldn't be able to fertilize their 
fields, because natural gas is a primary commodity for 
fertilizers. I yield back.
    Mr. Walden. I think we are probably preaching to the choir 
here, but I hope somebody out there listens to this, because 
when you begin to analyze what is not working, you get right to 
core energy issues, and it is not that we have a lack of 
supply. It is that we are unwilling to go after it. Yes, 
Doctor? Go ahead.
    Mr. Weglein. I would like to add a word. Someone might get 
the impression that this R&D is going to affect the ultradeep. 
The ultradeep is in great need of better capability, because of 
the expense. So the technology has to rise to a high level. But 
we have had experience where, because of that need in the deep, 
very deep water, that technology is then brought to shallower 
and provides value to unseen and poorly located identified 
targets that the technology was not originally meant for.
    So this is--Even though the ultradeep drives it, the spread 
of accessible is not just in the ultradeep.
    Mr. Walden. Sometime in the middle of the night last night, 
I flipped on the History Channel, and there was the space race 
with the Sputnik and the U.S. It strikes me that are we not in 
a--We just don't know we are not in the race right now when it 
comes to trying to compete when it comes to energy against, in 
some cases, our competitors, certainly from a trade standpoint 
and sometimes from a geopolitical security standpoint.
    Mr. Weglein. Well, the French support their companies 
through national institutes of research, IPG it is called.
    Mr. Walden. Are they working on this type of technology?
    Mr. Weglein. Yes.
    Mr. Walden. Who else is?
    Mr. Weglein. But we need a competitive position.
    Mr. Walden. What other countries are engaged in this?
    Mr. Weglein. Italy, Brazil. They have national programs, a 
combination of the Brazilian government and Petrogas setting up 
centers of research all over the country. They have for years, 
to better their own capability and their ability to locate 
hydrocarbon elsewhere. So there are models.
    Why do they do it? They see it as an investment in their 
country.
    Mr. Walden. It is ironic. We do it for health care. We do 
it for agriculture.
    Mr. Weglein. Yes.
    Mr. Walden. Why wouldn't we do it for a base element that 
underpins our economy? I mean, we have to work out the dollars 
and all that.
    Mr. Weglein. I think part of the reason is that big oil has 
resisted it. I think, though, H.R. 6 is a first step at 
acknowledging and responding to their concern, meaning they 
want to be real partners rather than some kind of initial 
window dressing and then people go off and they never hear from 
them again.
    In other words, there have been experiences in the past 
where industry is brought into some conference with National 
Labs and academics to give some kind of imprimatur that it is 
practical they are after, and then industry never hears again, 
and things are done.
    This bill is meant to avoid that pitfall, and that is why I 
am enthused.
    Mr. Walden. Very good. Yes, Dr. Foss?
    Ms. Foss. If I could just add to something here, because I 
think there is a lot of--I think there may be a bit of a narrow 
view with regard to the industry's position on this.
    What I would urge everybody to think about is, first of 
all, as our oil and gas technology pathway, our energy 
technology pathway for the country has proceeded, we have 
multiple technologies at work. We haven't been able to always 
predict where the advances come from.
    Mr. Walden. Sure.
    Ms. Foss. Investment in R&D is an investment, period. In 
fact, a lot of what the oil and gas industry use right now 
comes not from direct investment in energy R&D but from 
investment in other things.
    All of the global positioning technologies that are used to 
be able to operate in deep waters, be able to navigate, to be 
able to position drilling activities and so on--that comes from 
other places.
    I think that the other thing that everybody needs to keep 
in mind as well, is that a large--a significant goal for the 
industry in these arenas is to reduce cycle time. What you want 
is to be able to get your knowledge faster, get your 
information faster, have your results come in faster, know 
where you stand with regard to the cost structure for the 
project, and that is really what the investment in R&D does.
    It is not just to be able to grease the wheels, I suppose, 
to get industry out there in the first place. It is to help 
them to be able to stay there in a sustainable way.
    I think your point about investment outside of the United 
States--One of the things I would like to note is that all of 
the very fine organizations outside of the United States that 
have done and have excellent reputations in oil and gas and 
energy technology research, whether it is Institute Francais de 
Petrol in Paris or everything that has been funded in Brazil, 
they would like to come here, actually. They would like to 
partner here. They would like to partner with us.
    Some of their companies, their national companies, 
participate here. We get the benefit not only of our U.S. 
industry base, but the global industry base. I think it is 
important to bear that in mind as well.
    Mr. Walden. All right. Thank you, and thank you, Mr. 
Chairman.
    Mr. Hall. Thank you. The last member just departed. So we 
will wind up by thanking you.
    I just have one last thing of Mr. Gruenspecht. You amply 
warned us that, and I quote you, ``there are significant 
uncertainties surrounding all energy projections.'' There is 
also a lot of uncertainty about whether or not we are going to 
have an energy bill, and I apply that to that.
    I think you testified that experts at the Department of 
Energy's Office of Fossil Energy believe, ``new R&D funding 
would accelerate technological progress by 50 percent'' over 
your base case determined without R&D. Is that a fair 
statement?
    Mr. Gruenspecht. Yes. In the deep water and in the 
unconventional, again we increase the technological progress 
rates.
    Mr. Hall. All right. I thank you very much for your 
appearance here, and I know it took time to prepare. It took 
time away from your thrust at your entities to give us this 
information.
    This is the way we write legislation. We ask people that 
know a lot more about it than we do to come and impart their 
information, and we thank you for it. Particularly, I thank 
these men and women who are no longer here who stayed for the 
committee. About four or five of them did, but the others had 
to depart because they had things that were set in their 
district for today.
    So with that, thank you very much, and appreciate what you 
have done.
    We are adjourned.
    [Whereupon, at 12:03 p.m., the subcommittee was adjourned.]

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