[Senate Hearing 109-35]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 109-35

                        OIL RESOURCE DEVELOPMENT

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   TO

   DISCUSS OPPORTUNITIES TO ADVANCE TECHNOLOGY THAT WILL FACILITATE 
    ENVIRONMENTALLY FRIENDLY DEVELOPMENT OF OIL SHALE AND OIL SANDS 
   RESOURCES, AND TO ADDRESS LEGISLATIVE AND ADMINISTRATIVE ACTIONS 
  NECESSARY TO PROVIDE INCENTIVES FOR INDUSTRY INVESTMENT, AS WELL AS 
EXPLORE CONCERNS AND EXPERIENCES OF OTHER GOVERNMENTS AND ORGANIZATIONS 
                     AND THE INTERESTS OF INDUSTRY

                               __________

                             APRIL 12, 2005


                       Printed for the use of the
               Committee on Energy and Natural Resources


                                 ______

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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho                JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming                DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee           BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska               RON WYDEN, Oregon
RICHARD M. BURR, North Carolina,     TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida                MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri            DIANNE FEINSTEIN, California
CONRAD BURNS, Montana                MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia               JON S. CORZINE, New Jersey
GORDON SMITH, Oregon                 KEN SALAZAR, Colorado
JIM BUNNING, Kentucky

                       Alex Flint, Staff Director
                   Judith K. Pensabene, Chief Counsel
                  Bob Simon, Democratic Staff Director
                  Sam Fowler, Democratic Chief Counsel
                 Dick Bouts, Professional Staff Member
                Patty Beneke, Democratic Senior Counsel


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Allard, Hon. Wayne, U.S. Senator from Colorado...................     3
Barna, Dr. Theodore K., Assistant Deputy Under Secretary of 
  Defense, 
  Advanced Systems and Concepts, Department of Defense...........    13
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     7
Bunning, Hon. Jim, U.S. Senator from Kentucky....................     1
Craig, Hon. Larry E., U.S. Senator from Idaho....................     9
Domenici, Hon. Pete V., U.S. Senator from New Mexico.............     1
Evans, Jim, Executive Director, Associated Governments of 
  Northwest Colorado, Rifle, CO..................................    42
George, Russell, Executive Director, Colorado Department of 
  Natural 
  Resources, Denver, CO..........................................    37
Hatch, Hon. Orrin, U.S. Senator from Utah........................     2
Lonnie, Thomas, Assistant Director for Minerals, Realty & 
  Resource Protection, Bureau of Land Management, Department of 
  the Interior...................................................    14
Maddox, Mark, Principal Deputy Assistant Secretary for Fossil 
  Energy, 
  Department of Energy...........................................     9
Murkowski, Hon. Lisa, U.S. Senator from Alaska...................     8
Mut, Stephen, CEO, Shell Unconventional Resources Energy, Shell 
  Exploration and Production Company.............................    31
Salazar, Hon. Ken, U.S. Senator from Colorado....................     7
Smith, Steve, Assistant Regional Director, The Wilderness 
  Society, Denver, CO............................................    48
Thomas, Hon. Craig, U.S. Senator from Wyoming....................     7

                               APPENDIXES
                               Appendix I

Responses to additional questions................................    63

                              Appendix II

Additional material submitted for the record.....................    69

 
                        OIL RESOURCE DEVELOPMENT

                              ----------                              


                        TUESDAY, APRIL 12, 2005

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:04 a.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Pete V. 
Domenici, chairman, presiding.

          OPENING STATEMENT OF HON. PETE V. DOMENICI, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. We are going to get started. I think one 
Senator is here. He is talking in the back room with a 
representative from Canada. I think what we will do, if it is 
all right with Senator Bingaman--we have two visiting Senators 
who have other hearings. At least we are scheduled here. So why 
do we not just start?
    As everybody knows, this is a hearing to get some kind of 
an overview about oil shale in the United States, and we all 
know that the Senators that are in front of us here, one from 
Utah and one from Colorado, represent States where most of the 
American shale is located. It is located more inland in 
America, but it is a different kind of shale and in proportion, 
it is a lot less than what is contained in your States.
    We have some opening remarks here, but in deference to your 
time--you know the nature of the hearing. We have no idea what 
you all are going to talk about, other than we assume it will 
be about oil shale in your States.
    Having said that, we will go with you, Senator Hatch, then 
Senator Allard.
    [The prepared statement of Senator Bunning follows:]
   Prepared Statement of Hon. Jim Bunning, U.S. Senator From Kentucky
    Mr. Chairman, I am pleased we are having this hearing today.
    The United States is currently facing a tight reserve of oil. Our 
domestic supply is not enough to keep up with our demand and so we 
import more than 55% of the oil we use.
    The price of oil has remained at over $50 a barrel. OPEC estimates 
that within 2 years the price of oil could jump to $80 a barrel.
    These high prices mean we are just throwing money needlessly at 
other countries.
    We need to stop this. Our economic and national security depend on 
our ability to provide our own resources.
    Using alternative fuels such as oil shale and tar sands is one good 
way for the country to increase its domestic supply of energy.
    The hearing today will help us determine how to increase our energy 
independence by using these alternative fuels. I firmly believe that 
this will help move our country forward in the 21st Century.
    I want to thank all the witnesses today for testifying on this 
important issue.
    Thank you Mr. Chairman.

          STATEMENT OF HON. ORRIN HATCH, U.S. SENATOR 
                           FROM UTAH

    Senator Hatch. Well, thank you so much, Mr. Chairman and 
Senator Bingaman. We are grateful that you are so courteous to 
us.
    Mr. Chairman, I want to thank you for holding this hearing 
today. I applaud you for your vision and leadership on energy 
policy issues in general and on oil shale and tar sands in 
particular.
    I am a strong believer and a promoter of the use of 
alternative fuels, as you know. As the author of the CLEAR Act, 
which has been a part of every energy bill over the last 4 
years, I have tried to promote a vision of a future that is 
less dependent on oil. The CLEAR Act has been an attempt to 
provide strong tax incentives for the use of alternative fuels, 
alternative fueling stations, and alternative and advanced car 
technologies. I still believe that alternatives are a critical 
component of our Nation's energy strategy. However, at the 
moment, our Nation continues to be dependent on a steady and 
cheap supply of oil. It is a fact I do not like, but it is a 
fact nonetheless.
    Mr. Chairman, I congratulate you for recognizing the 
gigantic domestic energy resource that is waiting to be 
developed in the tar sands and oil shale found principally in 
Utah, Colorado, and Wyoming. There will be some numbers thrown 
around today that are mind-boggling. Who would have guessed 
that in just Colorado and Utah, there is more recoverable oil 
than in the Middle East, except that we do not count it among 
our Nation's oil reserves because it is not yet being developed 
commercially.
    The government of Canada has recognized the potential for 
large tar sands deposits in the Province of Alberta, and they 
have developed a government policy to go promote their 
development. The result is that Canada has now increased its 
oil reserves by more than a factor of 10.
    I find it disturbing that Utah imports oil from Canada tar 
sands, even though we have a larger tar sands reserve or, 
should I say, resource within our own boundaries that remains 
undeveloped.
    Why has Canada moved forward in leaps and bounds while the 
United States has yet to take even a baby step in this 
direction? I believe the difference has been the government 
policies of the respective countries. I know, Mr. Chairman, 
that you are keen on changing that, and I fully support you.
    I cannot sit by while gas prices are going through the roof 
and while I hear from constituent after constituent about the 
disastrous effect gas prices are having on their livelihoods 
and their businesses, farmers included.
    As you know, I have been leading an effort by working with 
your staff and with the offices of Senators Bennett, Allard, 
Salazar to develop legislation that can be agreeable to all 
sides. We are in the early stages of our discussions, but I 
believe that with your leadership, we can change the mind set 
of our Government enough and open up a much more stable future 
in terms of our energy policy. So I commend you, congratulate 
you, and request your help in moving the United States forward 
in these great reserves that really could be developed and 
certainly developed, in time, at a lesser cost than actual oil 
extraction from the ground.
    So, thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Hatch.
    Senator Hatch. If you do not need me any further, I am 
going to head over to another----
    The Chairman. Maybe you could stay just a moment. Can you?
    Senator Hatch. Sure.
    The Chairman. Senator Allard.

         STATEMENT OF HON. WAYNE ALLARD, U.S. SENATOR 
                         FROM COLORADO

    Senator Allard. Mr. Chairman, I want to commend you for 
your forward-looking efforts as far as our energy sources here 
in this country. I think you agree with me that we simply 
cannot ignore any potential source of fuel for this country 
because of the shortages that we are facing, particularly long 
term. I agree with my colleague, Senator Hatch, that we need to 
look at renewables, we need to look at those other sources that 
perhaps maybe we have not utilized as well as we possibly 
could, and I think we can do that and still protect the 
environment.
    This hearing is on oil shale, and I have an opportunity to 
visit personally some of the new technology that is emerging. A 
lot of it is proprietary, so I do not think I can say too much 
about it other than the fact that I would just say that I feel 
oil shale is a promising fuel source and produces very light 
crude suitable to fill needs for jet fuel and similar pure 
fuels.
    In the Rocky Mountain area, there lies an area with a very 
large oil shale deposit. In the last several years, a handful 
of companies have worked to develop technology that will allow 
for the economical development of this resource. Some of the 
resource lies under private lands, but much of it, certainly 
the richest deposit, is under Federal lands. This area, now 
under the purview of the BLM, was formerly known as the Naval 
Oil Shale Reserve.
    In this discussion, we must remember that when my former 
colleague, Senator Ben Nighthorse Campbell of Colorado, 
authored the legislation to transfer the Naval Oil Shale lands 
into the keeping of BLM, the legislation specified that the 
resource remain available for development. Congress never 
intended to place the development of this resource off limits. 
Rather, Congress recognized that BLM was in a better position 
to manage publicly owned lands than was the Department of 
Energy.
    Many on the Western Slope remember the bust associated with 
oil shale that occurred in the early 1980's, the height of 
which became known as Black Sunday. Higher priced crude made 
oil shale more attractive, and there was a real rush to develop 
the resource. When crude prices fell, companies pulled out of 
the area just as quickly, leaving many jobless. I want to 
assure those in Colorado who remember and who were affected by 
this time, there is no rush to develop this time around. There 
will be no quick peaks and falls. The companies involved and 
the Federal Government are moving at a much slower and more 
deliberate pace.
    The legislation currently being drawn up allows for 
demonstration scale projects, as I understand it. These 
demonstration projects will have to move themselves before 
full-scale projects can go forward.
    Mr. Chairman, thank you for holding this important hearing. 
I intend to continue to work with you, Senator Hatch, and our 
colleagues to continue to develop this legislation to allow for 
deliberate and conscientious development of the resource. I am 
pleased that I have an opportunity to work with my esteemed 
colleague, Senator Hatch.
    Thank you, Mr. Chairman. I look forward to working with 
you.
    The Chairman. Let me ask both of you. From what we read, 
the experience that occurred heretofore kind of reminded people 
of a boom and bust, which put kind of a big shadow over shale 
and tar sands in your region. But it does seem that the price 
of oil has something to do with that. We were right down at the 
margins in terms of cost of oil. When the price of oil dropped, 
which they did back then, as you know, it obviously went from 
realistic to totally unreal, and out went the investment and 
the activity and down came the city or the communities and the 
jobs.
    Might I ask, in terms of the attitude of people in your 
States, is it fair to assume that they are concerned about this 
potential for an expedited development hurry-up and then fall 
again, but there is a genuine, positive interest in our 
proceeding in a gradual and guarded way to see what can really 
happen up there? Senator Allard, Senator Hatch, whichever.
    Senator Hatch. Well, let me say this, Mr. Chairman. Back 
when I was practicing law in Utah, I was the first attorney to 
obtain rights to mine the Saudi Arabia coal, the Kaiparowits 
Plateau. I also represented one of the top scientists in the 
world, Dr. Alex Oblad, who wound up at the University of Utah, 
who was developing systems for extracting oil from tar sands, 
and he believed that over time, they could do it as 
competitively with the then price of oil.
    And now I am fully aware that we have come a long way in 
the ability to extract oil from not only tar sands, but also 
oil shale. We had abilities back then, but we are far advanced 
over those abilities today. And I think you will hear some of 
the leaders talk about that today.
    But we can no longer sit back.
    The Chairman. But, Senator, my question is, is there any 
reason for the people of your States to be opposed to this?
    Senator Hatch. Not any reason at all, other than you might 
find a few environmental extremists who might try to give it a 
difficult time, but they should not because these are lands 
that long have been considered available for development of oil 
resources.
    The Chairman. Senator.
    Senator Allard. Mr. Chairman, I think you will find strong 
support in western Colorado. That is where all this oil shale 
is located. The community that originally was formed with the 
oil shale development has evolved into a retirement community 
now, and I suspect that there may be some opposition that would 
come from that. I suspect that the extreme environmentalists 
perhaps will try and raise some concerns in that regard.
    But we have in the State of Colorado an organization called 
Club 20. It is made up of the 20 counties from the whole 
western part of the State of Colorado. They have passed a 
resolution, I understand--and I was at their meeting just about 
10 days ago--where they have endorsed an effort to try and see 
if there is not a way to utilize the oil shale that is in that 
area. So my impression at this point in time is that there is 
strong support through that resolution from the Club 20 
counties, and they support the approach that Senator Hatch and 
myself are talking about where we look at it on a minimal basis 
and then let it prove itself and then move forward from there.
    I have seen some of the technology, and I am convinced that 
the technology that I saw is not going to damage the 
environment.
    The Chairman. Senator Bingaman.
    Senator Bingaman. I have no questions, Mr. Chairman.
    The Chairman. I just would like to say to both of you and 
for the record here, while you are still here, I think we do 
have in Canada an opportunity to learn so that we will not make 
as many mistakes up front as we might otherwise, and also with 
reference to the value of this being public land as compared 
with private ownership in terms of accessibility and control 
over leases and the like, it turned out to be a big positive up 
there. But they have taught us a few things in the few moments 
we have spent with them that we ought to take a look at.
    Senator Hatch. I agree with that.
    Senator Allard. I think that is important, Mr. Chairman. 
Again, I would just remind you that when this was set up, it 
was never designed--when we had the transfer from the Naval Oil 
Shale over to the BLM management, it was never intended that we 
preclude the ability to go ahead and develop those resources if 
technology was made available.
    Senator Hatch. I might add that in eastern Utah, it would 
uplift that economy tremendously. I think people really want to 
develop these natural resources, and they want to do it not 
just for the betterment of our country, but for the betterment 
of their economy in that area as well.
    The Chairman. Well, I want to thank you both. I also want 
to tell you, without you having to spend a lot of time--and 
your staff and you will because it is very important to your 
States--the one thing that is predominant in the Canadian 
experience is that they do not, up front, have a lot of 
government expenditure. To the contrary, they give a lot of tax 
benefits to involvement, but they did not have a plan to go out 
and spend a lot of money developing things. They left that up 
to companies that received the benefit through tax treatments 
and royalty treatments that I thought, in the brief 
discussions, we would need to look at for the tax committees. 
But I think it is a rather exciting approach. We will see if 
applies to shale. It applies clearly to tar sands. No question.
    We thank you both.
    Senator Hatch. Thank you, Mr. Chairman.
    Senator Allard. Thank you, Mr. Chairman.
    The Chairman. All right. Having said that, let me make my 
few remarks, and then I will yield to Senator Bingaman. I want 
to thank you, Senator Thomas, for coming today.
    First, Congress has not passed comprehensive energy 
legislation since 1992, and it is the U.S. consumers, in my 
opinion, who are paying for our failure to act. We are going to 
have to do something to show that we are seriously concerned 
about what is happening to our consumers and what is happening 
to our country's security by this growing dependence upon crude 
oil.
    Over the last few weeks, Senator Bingaman and I have been 
working as hard as we can to try to draft the beginnings of a 
bill and the major portions of a bill so that we might move as 
rapidly as possible and have at least a significant portion of 
the bill that has been worked over by both sides and these two 
Senators and the legislative assistants of all the Senators. 
Hopefully, the bill is going to provide a comprehensive 
strategy to help produce more energy, conserve more, that moves 
us toward new, nonconventional energy sources, where we have 
the resources and technology to do so.
    It is my intention to include language that would lead, 
hopefully, to the development of vast shale resources and tar 
sands in the United States. We have short notice on that, and 
we are clearly not going to hold up the bill until we learn 
everything about it, but we are going to do what we can from 
what we know.
    There is no question in my mind that our Nation must, where 
economically and environmentally viable, maximize energy 
production as the outlook is not very bright for global oil 
prices falling at least dramatically very soon. In this 
country, we have a vast oil shale reserve. It is estimated to 
be 2 trillion barrels of oil from oil shale, and that is just 
an estimate, with nearly 80 percent on Federal lands. I expect 
that getting this oil is not going to be very easy. In fact, I 
expect that it is going to be very difficult, but I am very 
confident, that with the prices being what they are, that we 
will try to make it work. And I am hopeful that American 
companies will get more interested day by day than they have in 
the past 10 or 15 years.
    We just had a brief meeting in the back room with the 
Canadian minister. He could not testify himself because of 
problems of comity that address his particular position in the 
country of Canada.
    But today, believe it or not, Canada supplies more oil to 
the United States markets than any other country, and much of 
it comes from oil that is garnered from tar sands. Their 
experience up there in the north, which they have gained on 
this nonconventional oil source, is something that I think we 
could benefit from.
    I note that in your State, Senator, there is also a very 
big inventory of this raw material, along with coal. You are 
very much like Alberta, in fact. You have both. You have all of 
those.
    With the demand for energy increasing, the need for us to 
understand what it will take to encourage development of this 
resource is very important. Our witnesses today are going to 
share their perspectives on these challenges, and we thank 
those who are here to do that.
    With that, I would yield to Senator Bingaman for his 
comments and then to you, Senator Thomas and Senator Salazar, 
and then we will proceed with the witnesses.
    Senator Bingaman.

         STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Bingaman. Thanks very much, Mr. Chairman. Thanks 
for holding this hearing. Obviously, this is a very important 
issue. We do have a very large supply of oil shale and oil 
sands that we need to look to to see if we can develop these at 
a price that makes them competitive in the market today.
    I do think the issue of technology development is 
absolutely crucial here, what point are we at in the 
development of the technology that will be needed to extract 
the oil from these resources, and then, of course, just the 
economics of producing oil from this source. Obviously, we are 
anxious to learn all we can about that and then try to 
understand whether there are incentives that we can provide 
that will encourage actual development in a way that is 
responsible and helps meet our energy needs.
    Thank you very much for having the hearing.
    The Chairman. Thank you, Senator.
    Do either of the two Senators want to comment?
    Senator Thomas, you are first. Senator Salazar, you follow.

         STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR 
                          FROM WYOMING

    Senator Thomas. Thank you, Mr. Chairman. Very briefly, you 
all have covered I think where we are.
    Certainly there is great potential in oil shale. Wyoming is 
in the triangle with Utah and Colorado and the opportunity 
there.
    This, of course, was done some back in the 1970's, and 
there was quite an effort to do something with oil shale. It 
did not turn out to be economic at that time. Now I am anxious 
to hear whether the processes have changed, whether it is 
simply the values that are changed. But I think certainly we do 
need to go forward with this.
    It is kind of interesting that DOE's oil gas research and 
development thing has been zeroed out, at a time when perhaps 
it is very useful.
    I guess I would observe that in our last energy bill, we 
had a tremendous amount of financial incentive. I think it was 
something like $30 billion over some time. That is not going to 
happen this time. I hope we have some incentives, but we are 
not going to be able to have that kind of money in there.
    So it will be interesting to hear what the private sector 
feels in terms of making the kind of long-term investment that 
is going to be here. At the prices there are now, obviously it 
is a good deal. Whether those prices are going to be that way 
is another question.
    So I am glad we are having this, Mr. Chairman, and I think 
it is one of the alternatives and one of the directions we need 
to be looking. It makes more sense that some of the kinds of 
sources that we talk about in my view. So thank you, sir.
    The Chairman. Thank you.
    Senator Salazar. I think before you came, Senator, Senator 
Allard was here. Did you catch him before he left?

          STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR 
                         FROM COLORADO

    Senator Salazar. I caught him in the hallway.
    Thank you very much, Senator Domenici. Let me just say, 
first of all, that there are a number of people from Colorado 
who we will hear from today, and I wanted to welcome them and I 
am sure we will all welcome them as a committee. But Russ 
George, a wonderful person from Garfield County, right in the 
heart of the oil shale capability in Colorado, will be here, as 
well as Jim Evans, who has worked on this issue for a very long 
time now, for some 30 years, and Steve Smith from The 
Wilderness Society, along with Steve Mut from Shell who has 
been working on the Mahogany Project. I just personally wanted 
to welcome them here as Coloradans.
    I want to make one comment, Mr. Chairman, about oil shale 
because Colorado in the 1970's and the 1980's was probably at 
the focal point of the Nation in terms of the possibility of 
oil shale development. While times were good, it seemed that 
the Western Slope of Colorado and many rural communities were 
thriving on the potential for oil shale development only to end 
up in the mid-'80's, realizing that the billions of dollars 
that had been spent by private industry and by government ended 
up going nowhere. I still remember the unemployment rates in 
places like Mesa County, Garfield County, other counties on the 
west slope that went up to as high as 20 percent, as I recall, 
because we felt in Colorado that the rug had been taken out 
from under our feet as we were moving forward with oil shale 
development.
    So as we look at the possibility of developing oil shale in 
the West, as part of the comprehensive energy package that 
Senator Domenici, Senator Bingaman, and the rest of this 
committee are working on, I would only urge some caution as we 
move forward. I believe that oil shale does create a potential 
opportunity and has great promise, but it is still a technology 
that needs to be tested to see how we can move forward with the 
development of oil shale.
    So I would only say that as we move forward, hopefully we 
can recognize that the development of oil shale itself is not 
going to be the end all or all the answers that we need in this 
energy legislation, that it can be part of a much larger 
package. My hope is that we can move forward in a thoughtful 
process, more of a marathon as opposed to a sprint, in how we 
look at the development of this great energy resource in the 
West.
    Thank you very much, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Murkowski, did you want to comment?

        STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Mr. Chairman, I just wanted to thank you 
for your ongoing series in the focus on different sources of 
energy. We have had some great briefings to this point in time. 
I am looking forward to the opportunity this morning to 
understanding a little bit more about the technology that is 
being utilized in the process as we derive significant 
quantities of oil from oil shale and oil sands. So just thank 
you to you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Craig, do you want to comment? You are the last 
Senator here, and we will close the door after you.

        STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR 
                           FROM IDAHO

    Senator Craig. Why do you not get your witnesses going? 
There is a lot more about this I need to know, but I am glad 
you are holding this hearing. I know it is critical, and these 
projects become more and more competitive. Let us get them on 
line and get them going.
    The Chairman. Thank you.
    We will get started now with the panel. Mr. Mark Maddox, 
Principal Deputy Assistant Secretary for Fossil Energy, 
Department of Energy; Dr. Ted Barna, Assistant Deputy Under 
Secretary of Defense for Nuclear, Biological, Chemical 
Technology. And then I guess we have another witness here that 
I did not catch, Tom Lonnie. Is that how you say it?
    Mr. Lonnie. Yes.
    The Chairman. Assistant Director for Lands and Minerals, 
Bureau of Land Management from the Department of the Interior.
    I assume we are going to proceed, starting with you, Mr. 
Maddox. Would you please start? Remember the 5-minute rule. 
Please proceed.

STATEMENT OF MARK MADDOX, PRINCIPAL DEPUTY ASSISTANT SECRETARY 
            FOR FOSSIL ENERGY, DEPARTMENT OF ENERGY

    Mr. Maddox. Mr. Chairman, members of the committee, thank 
you for the opportunity to testify on oil shale and its 
potential for increasing our Nation's energy security by 
mitigating our dependence on imported oil.
    Our domestic total oil shale resource is more than 1.8 
trillion barrels, with perhaps 100 billion to 200 billion 
barrels commercially viable, to play a significant role in 
meeting the Nation's future demand for liquid fuels.
    With high oil and gas prices, industry has strong 
incentives to develop technologies that can bring shale oil and 
other non-conventional fuels into production on an economically 
and environmentally sound basis.
    The Nation's oil shale resource is concentrated in pockets 
in Utah, Colorado, and Wyoming, and 80 percent of the nearly 2 
trillion barrel resource is owned by the Federal Government. 
The resource is so large that even if only partially developed, 
it could deliver 2 million to 3 million barrels of oil per day 
for decades.
    But in order to tap this enormous energy resource, industry 
must develop economically and environmentally sound 
technologies as we attempted to do at the oil interruptions and 
price shocks of the 1970's when the Federal Government 
encouraged the development of oil shale and other 
unconventional domestic resources. Those efforts were abandoned 
when both government and industry concluded that the world oil 
market could provide adequate supplies, reasonable prices, and 
sufficient excess capacity.
    While the benefit of 2 million to 3 million additional 
barrels a day of secure domestic oil from shale is obvious, 
there are numerous challenges to development, including the 
attitude of the public, business investment considerations, and 
land access and usage and environmental concerns.
    The shale oil development work of 30 years ago left a 
legacy of uncertainty for industry and the public, particularly 
the people living in the centers of development. The affected 
areas enjoyed a boom period during development, followed by a 
devastating bust, and has left them understandably wary. 
Nevertheless, they seem to be ready to support a new 
development effort, only with more planning and support for 
infrastructure and development.
    The oil industry today is finding most of its attractive 
investment opportunities overseas, but as conventional oil 
plays become more difficult and conventional oil production 
peaks, industry is again looking to develop a higher cost 
resource such as shale oil. How long this process will take is 
an open question. The answer will depend on economics and the 
economics will be determined by projected oil price trends, tax 
rates, resource access, royalty regulations, permitting 
requirements, and the receptivity of State and local 
populations to development.
    Looking down the list, it is clear the Federal Government 
and State governments have a large role to play in shale oil 
development. A key development concern will be the 
environmental impact of extracting oil from shale by using 
technologies to heat the rock either above or below ground. 
Despite the significant research and development concluded 20 
to 30 years ago, the industry has not reached consensus on the 
best technology to use. Regardless of the process, there will 
be environmental impacts to land, water, and air as a result of 
shale oil operations.
    Fortunately, we have a very successful model for the 
development of oil shale to broad production of over 1 million 
barrels per day of oil from Canada's Alberta oil sands, where 
production is expected to exceed 2 million barrels per day in 8 
years.
    Many parallels exist between shale oil and oil sands 
technologies, markets, and economics. We cannot be certain that 
oil shale economics will parallel those of Alberta tar sands, 
and there are important physical differences between oil sands 
and oil shale, and the extraction technology for one cannot 
directly be transferred to the other. But some comparisons 
suggest the domestic oil shale industry in some ways is similar 
to the Canadian oil sands industry of 30 years ago.
    As part of its energy security goal, the Department is 
committed to improving energy security by developing 
technologies that foster a diverse supply of reliable, 
affordable, and environmentally sound energy and improve our 
mix of energy options. This prospect of adding 2 million to 3 
million barrels of secure domestic oil to our Nation's energy 
supply for decades to come demands our attention. The 
Department will work to achieve this goal in support of the 
economic security of the United States, in line with our 
commitment to deliver results for the American taxpayer.
    Mr. Chairman and members of the committee, this concludes 
my statement. I will be happy to answer questions. Thank you.
    [The prepared statement of Mr. Maddox follows:]

Prepared Statement of Mark Maddox, Principal Deputy Assistant Secretary 
                for Fossil Energy, Department of Energy

    Mr. Chairman, Members of the Committee, thank you for this 
opportunity to testify on oil shale and other non-conventional oils, 
and their potential role in elevating our Nation's energy security by 
mitigating our dependence on imported oil. U.S. energy security is 
important by virtue of the crucial role it plays in achieving economic 
security.
    I would like to share with you today our thoughts on the oil shale 
resource in these areas--first, oil shale's magnitude and potential; 
then, the history of past unsuccessful attempts to develop it; and, 
finally, barriers to development as they exist today. In addition, I 
will compare the prospects for oil shale with the commercial 
development experience of another non-conventional resource, Alberta's 
vast oil sand resources.
    Ensuring the present and future energy security of the United 
States is a primary goal of the Office of Fossil Energy, and we are 
committed to the President's goal of elevating our energy security 
through increased economic domestic production. Domestic oil shale 
represents a resource of more than 1.8 trillion barrels and is a 
resource which if economic, could play a significant role in meeting 
the Nation's strategic needs for more liquid fuels over the next 
several decades. We also have potential domestic sources of non-
conventional liquid fuels such as the technologically mature but 
uneconomic Fischer-Tropsch coal liquefaction, recovery of stranded oil; 
undiscovered oil and other currently uneconomic resources. With high 
oil and gas prices, industry has strong incentives to develop 
technologies that will facilitate exploration of non-conventional 
domestic resources, and in fact there is evidence that they are doing 
so.

                              THE RESOURCE

    The total U.S. oil shale resource is estimated to be 1.8 trillion 
barrels and is primarily concentrated in the Green River formation in 
northeastern Utah, northwestern Colorado, and southwestern Wyoming. 
Over 50% of the world's oil shale resources are in this area, 80% of 
which are owned by the Federal government. It is estimated that over 
400 billion barrels will be found in shale at concentrations greater 
than 30 gallons/ton. In 1980, the Office of Technology Assessment 
published An Assessment of Oil Shale Technologies, which estimated that 
between 189 and 315 billion barrels of oil would be recoverable from 
this high quality shale. Oil and Gas Journal, in its August 9th 2004 
issue, suggested that 100 billion barrels of oil from domestic oil 
shale could be reclassified as proven reserves if the technology became 
commercially viable. Suffice it to say, if it were economic to even 
partially develop, the resource could sustain an industry of 2-3 
million barrels per day for decades.
    The factors that limit the development of oil shale have nothing to 
do with the potential quantity of the resource. Historically, oil shale 
production hasn't been economic. The cost of production has been too 
high compared to the cost of producing from conventional resources. 
This problem has been compounded by the need to build an infrastructure 
to support oil shale and the cost of disposal of byproducts. Although 
the federal government attempted to make oil shale economic in the late 
1970's and early 1980's, this effort was abandoned because shale oil 
production could not be sustained in the face of abundant and cheap 
conventional crude oil. This was true even though the government 
embarked on this effort at a time when oil prices were higher in real 
terms than they are today. The failure of the government's efforts in 
the 1980's was not due to the failure of the resource, the technology, 
or environmental problems; economically it was simply too expensive. 
Recently, however, industry has shown renewed interest and has begun 
committing resources.

   WHAT IS THE COMMERCIAL HISTORY OF OIL SHALE IN THE UNITED STATES?

    After the oil interruptions and price shocks of 1973-74, the 
Federal Government encouraged the development of unconventional 
domestic resources including oil shale. The Department of the Interior 
offered commercial leases for development in 1973. Bonus bids totaled 
$450 million for four oil shale leases and industry began development. 
Economic incentives were later offered for oil shale development 
including a guaranteed price floor, and a production tax credit of $3 
per barrel. In total we estimate $5 billion was invested in oil shale 
facilities beginning roughly in 1975. Major players at that time 
included Exxon, Shell, Mobil, Occidental, Atlantic Richfield, Chevron, 
and Unocal. In the early 1980's these projects began to close and the 
last closed in 1992.
    The consensus of the industry was that oil prices simply did not 
stay on a price path over the long term that would assure a reasonable 
return on investment for an unconventional crude oil. In addition, 
policy changes accompanying new administrations removed the subsidies 
for synthetic fuels. Witness the demise of the Synthetic Fuels 
Corporation, which was chartered during the Carter Administration but 
allowed to expire during the Reagan Administration. The oil price 
collapse of 1986 assured the end of the U.S. synthetic fuels industry.
    The general impression left following the demise of the U.S. oil 
shale industry was very negative. During the boom period, the influx of 
workers into Western Colorado strained and ultimately overwhelmed the 
local infrastructure and housing, producing lasting socioeconomic 
effects. When the industry collapsed, the local towns were left with 
infrastructure in excess to their needs, shrunken property values and a 
tax base incapable of supporting the infrastructure.
    It will be instructive to include a very brief description of the 
two basic oil shale extraction processes at this point.

                  HOW IS OIL PRODUCED FROM OIL SHALE?

    Kerogen, a low grade form of immature oil, is extracted from oil 
shale in a process called ``retorting'', which requires heating of the 
rock to about 900 degrees Fahrenheit. Two generic methods of retorting 
have been developed:

   In situ: This method leaves the rock in place and injects a 
        heat source that releases the oil from the kerogen. The shale 
        oil then flows to a well and is pumped to the surface. The 
        source of the heat is a technical issue still open to research 
        and testing. The only active pilot project in the U.S., owned 
        by Shell Oil, is using down hole electric resistance heaters, 
        but optional technologies involve steam, microwaves, and fire.
   Surface retorting: This technology depends upon mined ore 
        for a feedstock. The ore can be either surface mined or mined 
        underground. The ore is brought to the surface, crushed and 
        placed into a retort. The shale oil is removed and the spent 
        shale sent for disposal. The shale oil is upgraded by the 
        addition of hydrogen and then is conventionally refined to 
        produce finished products. Several different retort designs 
        have been constructed and tested in the United States as a part 
        of earlier development efforts. However, there are currently no 
        commercial surface retorts in the U.S. processing oil shale.

                    CHALLENGES TO COMMERCIALIZATION

    Perceived Risk: Shale oil activities in the late 1970s and early 
1980s have left a legacy of uncertainty. Members of industry and the 
citizenry alike are uncertain about the risks associated with 
commercial development.
    Current Oil Industry Economics: U.S. domestic oil production is 
high cost compared to many parts of the world because our fields are 
mature and declining. Private investment dollars are directed to the 
most economic areas where costs of production are low, like West 
Africa, Brazil, the Middle East, Russia and Central Asia. As long as 
current geopolitical and market conditions persist, we expect more 
money to flow to energy extraction on a world wide basis; however, not 
a large share of it is expected to be invested in the United States in 
the immediate future. As conventional oil plays become more difficult 
to find, and as conventional domestic oil production peaks, industry 
will again begin to focus on the development of the resources that can 
be extracted profitably at higher prices, including oil shale.
    Prospects for commercial oil shale production will depend on the 
private sector's perception of the relative profitability of oil shale 
versus competing resources. Factors that will determine economics are 
projected oil price trends, tax rates, cost of production, resource 
access, royalty regulations, permitting requirements, cost of byproduct 
disposal, and the willingness of the state and locals populations to 
host a new industry.
    The size of the industry will be limited by existing distribution, 
pipeline capacity, water availability, power distribution and refining 
capacity in this region of the Rocky Mountains. If the oil shale 
industry develops to any appreciable size, investments will be required 
to expand the limited infrastructure.
    Land Access and Usage: A major driver of shale oil extraction 
economics is the concentration of the resource. Movement of ore to the 
retort can be very expensive, because the ore is mostly rock with only 
a little oil (more than one ton of ore per barrel of oil). Therefore, 
the ore must be processed at or near the geologic formation where it is 
found. While the natural resource is very concentrated in Colorado, 
Utah and Wyoming, the ownership is not. The Federal Government owns 80 
percent of the resource base, and the remaining tracts are broken up. 
At this time the Department of the Interior does not have a commercial 
leasing program, although it recently solicited comments on a leasing 
program for research and development.
    Environmental Impact: The environmental impacts of shale oil 
development are significant. Like the resource, they will primarily be 
concentrated in small geographic locations. Because oil shale is mined, 
there are surface impacts. Oil shale production is water intensive, 
which is an important limited resource in the regions with oil shale 
deposits. Because the retorting processes are energy intensive, there 
are combustion emissions in areas where the air is currently very 
clean. The mining or in-situ technologies may also disturb the local 
water tables. In the case of the in-situ technology, the spent shale in 
place may contain toxins that need to be kept away from ground water. 
In the case of surface retorting, the spent shale, processing water, 
and other byproducts must be disposed of in a safe manner. How to do 
that on a massive scale has not been defined. To produce a million 
barrels of oil would require disposal of more than a million tons of 
byproducts. Finally, because shale oil production is energy intensive, 
the industry could add significantly to green house gas emissions 
during production Similarly, greenhouse gas emissions will be released 
when the fuel is consumed.
    The positive aspect of the resource is that its density is so great 
that the environmental impacts can be restricted to a relatively small 
area within two or three states.
    Extraction Technology: Despite the significant research and 
development conducted 20-30 years ago, there is no accepted benchmark 
for the best technology to use. Furthermore, because of modern 
developments in environmental appreciation and resource conservation, 
it will be important for the existing technologies to improve from an 
efficiency, and environmental impacts perspective. Companies will have 
to advance extraction technologies through research development, and 
demonstration.

           COMPARISON WITH ALBERTA OIL SAND COMMERCIALIZATION

    Commercial production from formerly uneconomic resources occurs as 
markets change and drive technology development. Oil from Alberta oil 
sand, once considered to be an unconventional resource, is being 
commercially produced today. Oil was first produced at a commercial 
scale from Alberta oil sand more than 35 years ago. Today, oil sand 
production is over one million barrels per day and is expected to 
exceed 2 million barrels per day within the next eight years. A strong 
partnership between government and industry stimulated more than $65 
billion in private investment to accelerate development and achieve 
industry scale operations during this decade.
    Like oil sands, U.S. oil shale is rich, accessible, geographically 
concentrated, and well defined. However, the technologies required for 
exploitation of oil shale are very different from those required for 
oil sands. The richness of the respective resources are similar, with 
oil sands yielding approximately 25 gallons per ton of bitumen while 
some oil shale deposits yield an average of about 30 gallons per ton. A 
comparison of the qualities of the two oils shows them to produce a 
similar product after processing. The Athabasca sand produces 34 degree 
API oil and the oil shale produces 38 degree API oil. However, there 
are important physical differences between oil sands and oil shale and 
the extraction technology for one cannot directly be transferred to the 
other.

                                SUMMARY

    In summary, we need to examine all of our resource bases if we are 
to do a credible job in protecting the United States energy security 
interests. As part of its energy security goal, the Department is 
committed to improving energy security by developing technologies that 
foster a diverse supply of reliable, affordable, and environmentally 
sound energy and improve our mix of energy options. The Department will 
work to achieve this goal in support of the economic security of the 
United States, in line with our commitment to deliver results for the 
American taxpayer. Mr. Chairman, and members of the Committee, this 
concludes my prepared statement. I will be happy to answer any 
questions you may have at this time.

    The Chairman. Thank you very much.
    Let us proceed now with Dr. Ted Barna, and then we will 
come to the Interior Department.

  STATEMENT OF DR. THEODORE K. BARNA, ASSISTANT DEPUTY UNDER 
SECRETARY OF DEFENSE, ADVANCED SYSTEMS AND CONCEPTS, DEPARTMENT 
                           OF DEFENSE

    Dr. Barna. Mr. Chairman and members of the committee, I am 
Dr. Ted Barna. I am Assistant Deputy Under Secretary of 
Defense, Advanced Systems and Concepts. I thank you for the 
invitation today to appear and discuss opportunities to advance 
the technology that will facilitate environmentally friendly 
development of oil shale and oil sands resources for the 
Department of Defense.
    I would like to preface my remarks by highlighting DOD 
involvement thus far. In 2003, I was asked to manage a program, 
originated by Senator Inhofe of Oklahoma, to research synthetic 
fuels produced via the Fischer Tropsch process. I initiated a 
joint program with the Army's National Automotive Center in 
Detroit to investigate the military use of these fuels and 
evaluate the potential of producing and using a new generation 
of clean fuels for the military.
    The Army formed a collaborative program with the Air Force 
Research Lab in Ohio, the Naval Air Systems Command, the 
Department of Energy National Technology Lab, as well as the 
Southwest Research Institute, San Antonio, several universities 
and industry, to conduct preliminary evaluation of the 
technological potential of these fuels for use in aircraft, 
tactical vehicles and ships. This effort did not address the 
economics of using clean fuels for the military or whether or 
not it is ever likely that commercial scale production by the 
private sector will occur.
    The research, though, did provide me with exciting results 
since fuel made via this process produces lower pollutant 
emissions from diesel engines, reduces particulate emissions 
from jet engines, has superior high temperature and low 
temperature characteristics, and provides improved storage 
characteristics on Navy ships. Even the use of clean fuel 
blends, designed to counter problems like lubricity and seal 
swell, provide significant--by that, I mean about 50 percent--
reduction in tailpipe emissions.
    So based on this earlier work, in 2004 I have expanded this 
initial effort into a wider variety of resources for the 
production of clean fuels, notably oil shale, oil sands, coal, 
biomass, renewables, and petroleum coke, by looking at the 
broader picture of alternative fuels. And I established a clean 
fuels initiative. This program looks at the total energy 
picture.
    So that is where we stand in DOD, Mr. Chairman. I look 
forward to working with you and members of the committee as we 
pursue our mission of providing energy security. And I would be 
more than happy to answer any questions. Thank you.
    The Chairman. Mr. Lonnie from the Interior Department.

 STATEMENT OF THOMAS LONNIE, ASSISTANT DIRECTOR FOR MINERALS, 
   REALTY & RESOURCE PROTECTION, BUREAU OF LAND MANAGEMENT, 
                   DEPARTMENT OF THE INTERIOR

    Mr. Lonnie. Mr. Chairman and members of the committee, 
thank you for the opportunity to appear here today to discuss 
the Bureau of Land Management's efforts to facilitate and 
promote oil shale research and development on public lands.
    America faces an energy challenge.
    For a considerable time, many have believed that oil shale 
has the potential to be a major source of domestic energy 
production, especially since it is suited for refinement as jet 
fuel for the military and the airline industry. Recently the 
BLM, which has the authority to issue leases for oil shale 
under the Mineral Leasing Act and to receive rental payments 
and royalties, has received expressions of interest from 
industry for conducting research and development projects, 
particularly on public lands in the Green River formation in 
the tri-State area of Colorado, Utah, and Wyoming. It is the 
BLM's hope that renewed interest in oil shale research and 
development efforts will lead to environmentally responsible 
ways of unlocking the vast oil shale resources contained in the 
United States, potentially helping to reduce the imbalance in 
domestic energy consumption and production that currently 
exists in this country.
    The current BLM efforts. The President's National Energy 
Policy outlined a number of recommendations to diversify and 
increase energy supplies, encourage conservation, and ensure 
environmentally responsible production and distribution of 
energy. In response, the BLM developed a plan containing 54 
tasks designed to implement the President's directives, 
including efforts to promote the development of oil shale 
resources on the public lands. To carry out this task in an 
environmentally responsible manner, in keeping with our 
multiple-use mandate, the BLM established its own Oil Shale 
Task Force.
    The Oil Shale Task Force was established to, one, address 
access to unconventional resources, such as oil shale, on 
public lands; two, to address impediments to oil shale 
development on public lands; three, assess industry interest in 
research and development and commercial development 
opportunities; and finally, provide the Secretary with options 
to capitalize on opportunities. The task force has prepared a 
draft report containing recommendations on designing an oil 
shale leasing program that will make public lands available to 
industry to conduct research and development activities and 
determine if Federal oil shale resources can be developed 
economically and in an environmentally responsible manner.
    In addition, on November 22, 2004, the BLM published a 
proposed oil shale lease form and request for information in 
the Federal Register to solicit comments and suggestions from 
interested parties about the design of the oil shale leasing 
program. The BLM is now reviewing the comments it received. The 
draft report recommendations and BLM's analysis of the 
responsive comments to the Federal Register notice form the 
basis of policy options the Department is now considering for 
making lands available for oil shale research and development 
projects and subsequent commercial operations, all in support 
of the President's National Energy Policy.
    Thank you for the opportunity to testify today about the 
BLM's oil shale development efforts. I would be happy to answer 
any questions you may have.
    [The prepared statement of Mr. Lonnie follows:]

 Prepared Statement of Thomas Lonnie, Assistant Director for Minerals, 
Realty & Resource Protection, Bureau of Land Management, Department of 
                              the Interior

    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to appear here today to discuss the Bureau of Land 
Management's (BLM) efforts to facilitate and promote oil shale research 
and development on public lands.
    America faces an energy challenge. As recently as April 5, 2005, 
Federal Reserve Chairman Alan Greenspan commented extensively on this 
challenge. He stated,

          ``Markets for oil and natural gas have been subject to a 
        degree of strain over the past year not experienced for a 
        generation. Increased demand and lagging additions to 
        productive capacity have combined to absorb a significant 
        amount of the slack in energy markets that was essential in 
        containing energy prices between 1985 and 2000.''

    For a considerable time, many have believed that oil shale has the 
potential to be a major source of domestic energy production, 
especially since it is suited for refinement as jet fuel for the 
military and the airline industry. Recently, the BLM, which has the 
authority to issue leases for oil shale under the Mineral Leasing Act 
and to receive rental payments and royalties, has received expressions 
of interest from industry for conducting research and development 
projects on public lands in the Green River Formation in the tri-state 
area of Colorado, Utah and Wyoming. It is BLM's hope that renewed 
interest in oil shale research and development efforts will lead to 
environmentally responsible ways of unlocking the vast oil shale 
resources contained in the United States, and presents a potential 
means of helping to reduce the imbalance in domestic energy consumption 
and production that currently exists in this country.

                               BACKGROUND

    Oil shale is a type of rock formation that contains large 
concentrations of combustible organic matter. When processed, oil shale 
can yield significant quantities of shale oil. Various methods of 
processing oil shale to remove the oil have been developed. A common 
element among those methods is the use of heat to separate out the oil 
from the rock.
    The United States has significant oil shale resources, primarily 
within the Green River Formation in Wyoming, Utah and Colorado. These 
oil shale resources underlie a total area of 16,000 square miles and 
represent the largest known concentration of oil shale in the world. 
Federal lands comprise roughly 72% of the total oil shale acreage in 
the Green River Formation.
    In the latter years of World War II, several tests were conducted 
to determine the economic viability of oil shale extraction 
technologies. However, in the years following World War II, petroleum 
producers looked to more easily accessible and economically viable 
supplies and interest in oil shale extraction declined. More recently, 
during the mid 1970s through the late 1980s, the Department of the 
Interior and the BLM made oil shale resources on public lands available 
through the Oil Shale Prototype Program, which was designed to allow 
companies to develop and refine the technology for extracting oil from 
oil shale. Additionally, in the 1980's, the U.S. Geological Survey 
(USGS) had an active oil shale mapping program, which mapped the major 
oil shale fields of the United States and conducted geological research 
on the Green River deposits. The USGS also conducted mineralogical and 
geochemical studies aimed toward characterizing oil shale for the 
commercialization of this resource.
    Precipitated by the oil price spikes of the early 1970s, companies 
showed significant interest in exploring domestic oil shale 
development. Previous oil shale research showed some promise from a 
technological standpoint, but the extraction process was energy-
intensive and costly. Through a series of experiments, industry 
attempted to extract shale oil from oil shale rock, but the easing and 
subsequent collapse in petroleum prices led the companies to conclude 
their efforts to extract oil from oil shale were not economically 
viable. The participants in the Oil Shale Prototype Program withdrew 
from their research efforts before the BLM could promulgate permanent 
regulations for oil shale leasing and operation. As a result, BLM 
currently has no regulations for oil shale leasing, and no oil shale 
leasing program.
    Most USGS activities related to this commodity have also diminished 
significantly. However, since the latter half of the 1980s, the USGS 
has maintained a small effort in oil shale studies, both domestically 
and abroad, which included evaluation of world oil shale resources and 
a cooperative effort funded by the Department of Energy to create a 
National Oil Shale Database, in which shale oil analyses and other data 
were entered and compiled. With the recognition that oil shale is a 
potentially important domestic fossil energy resource, the USGS has 
continued in these efforts to the present day. Although no national oil 
shale assessment has been done, there have been USGS oil shale resource 
studies done on a local or regional scale. One example of this is 
``Thickness, oil-yield, and kriged resource estimates for the Eocene 
Green River Formation, Piceance Creek basin, Colorado'' USGS Oil and 
Gas Investigations Chart OC-132. Another example is USGS Open-File 
Report 91-0285 ``Oil-Shale Resources of the Mahogany Zone in eastern 
Uinta Basin, Uintah County, Utah.'' USGS is currently working with the 
State of Utah to evaluate all oil shale lands in eastern Uinta Basin, 
compiling, among other things, geologic maps, cross sections, 
geophysical and lithologic logs, and drill hole information.
    Elsewhere in the world, continuing efforts have resulted in the 
successful development of oil shale resources. For example, in 
Gladstone, Queensland, Australia, there is a large-scale demonstration 
project where, from June 2001 through March 2003, 703,000 barrels of 
oil, 62,860 barrels of light fuel oil, and 88,040 barrels of ultra-low 
sulphur naphtha were produced from oil shale. In January 2003 alone, 
the operation produced 79,000 barrels of oil. Significant oil shale 
reserves also exist in the Republic of Estonia, where active oil shale 
deposits amount to about 1,200 million tons and, at current levels of 
consumption, are forecast to last one hundred years.

                          CURRENT BLM EFFORTS

    The President's National Energy Policy outlined a number of 
recommendations to diversify and increase energy supplies, encourage 
conservation, and ensure environmentally responsible production and 
distribution of energy. In response, the BLM developed a plan 
containing 54 tasks designed to implement the President's directives, 
including efforts to promote the development of oil shale resources on 
the public lands. To carry out this task in an environmentally 
responsible manner in keeping with our multiple-use mandate, the BLM 
established its own Oil Shale Task Force.
    The Oil Shale Task Force was established to address: 1) access to 
unconventional resources (such as oil shale) on public lands; 2) 
impediments to oil shale development on public lands; 3) industry 
interest in research and development and commercial development 
opportunities on the public lands; and 4) Secretarial options to 
capitalize on the opportunities. The Task Force has prepared a report, 
which is currently under review within the Department, concerning the 
development of oil shale resources on Federal lands in order to 
determine whether technological advances have reached the point where 
it is possible to those resources economically and in an 
environmentally responsible manner.
    In addition, on November 22, 2004, the BLM published a proposed oil 
shale lease form and request for information in the Federal Register to 
solicit comments and suggestions from interested parties about the 
design of the oil shale leasing program. The BLM is now reviewing the 
comments it received. The report recommendations and BLM's analysis of 
the responsive comments to the Federal Register notice form the basis 
of policy options the Department is now considering for making lands 
available for oil shale research and development projects and 
subsequent commercial operation, all in support of the President's 
National Energy Policy.

                               CONCLUSION

    Thank you for the opportunity to testify today about the BLM's Oil 
Shale Development efforts. I would be happy to answer any questions you 
have.

    The Chairman. Thank you very much.
    Well, let me say to you, first, Mr. Maddox, and then I will 
proceed with the others, I do not know why I gather from 
reading your testimony that you are not very enthused about 
moving ahead with oil shale from the standpoint of the Federal 
Government's activities. Are you or are you not?
    Mr. Maddox. We are enthused about this resource and would 
very much like to see it come on line and be produced.
    The Chairman. So your testimony is not intended to be any 
different than this Strategic Significance of American Oil 
Shale which you have issued under date of March 14? Your 
testimony is not in any way intended to be inconsistent with 
this?
    Mr. Maddox. I am not familiar with that document, so I 
could not comment on that document.
    The Chairman. What is your name?
    Mr. Maddox. Mark Maddox.
    The Chairman. Well, this says Mark Maddox.
    Mr. Maddox. I am vaguely familiar with it. No, I am not 
intending to be counter to that. However, I am trying to make 
certain that the committee has a full picture of the challenges 
to development. I think that is probably the point of my 
testimony.
    The Chairman. Let me ask all three of you. Have any of you 
tried to evaluate and look at in any detail how the Canadian 
program is working and what are the significant features that 
made it workable?
    Mr. Lonnie. I have not, Senator.
    The Chairman. How about you, Mr. Maddox?
    Mr. Maddox. I have looked at it generally but not in 
detail.
    The Chairman. How about you, Mr. Barna?
    Dr. Barna. No, I have not.
    The Chairman. Well, who do you think would be doing that if 
you are not?
    Mr. Maddox. I have asked my staff to look at it. I can 
speak to it in general terms. One of the hallmarks was the 
Province of Alberta took very close ownership of this resource 
and actually became an equity owner in the resource and its 
development. So that was probably the single biggest factor, 
that they actually were partners in literally every sense of 
the word.
    The Chairman. Do any of you have any other observations on 
that? None?
    Well, I would say, Mr. Maddox, my brief encounter with it 
would say that was one part, but the most significant thing was 
tax policy that affected the companies that were making these 
major investments, without which it would have been very risky 
for them to do that. I wonder if we might ask if your 
Department could look at the Canadian plan in some detail and 
report to us, as soon as possible, what you think about their 
ideas.
    Mr. Maddox. We would be happy to, Senator.
    [The information follows:]

    The Canadian government provides the following tax treatments for 
development of oil sands within the general Canadian corporate income 
tax code:
    Exploration expenses are treated as fully deductible in the year 
they are incurred. For this purpose the pre-production development 
costs for mines are treated as exploration expenses.
    Development expenses are deductible at the rate of 30 percent per 
year. Property costs are deductible at the rate of 30 percent per year.
    A resource depletion allowance is provided equal to 25 percent of 
net income before interest, exploration, property and development 
costs.
    The depreciation schedule for most machinery and equipment is 25 
percent of the declining balance.
    An accelerated capital cost allowance: Certain eligible capital 
expenditures for new mines or major expansions and capital costs 
exceeding 5 percent of gross project revenue may be deducted to the 
extent of income from a particular mine.
    In sum, these tax incentives, plus the equity position taken by the 
Alberta Government in Suncor, and a liberal leasing policy for resource 
access have served to preserve and stimulate a commercial Canadian oil 
sands industry. While the Canadian experience with incentives provides 
us with insights on the potential to stimulate oil shale production, 
any specific tax proposal would require scrutiny by the Department of 
Treasury, the Department of Energy, the Office of Management and Budget 
and possibly other agencies of government to determine its 
effectiveness as an incentive, its impact on competition and its impact 
on government revenues, all within the context of our existing tax 
code.

    The Chairman. As chairman of this committee and as a member 
of this committee, if we were to ask about tax policies as it 
refers to the development of either tar sands or shale in the 
United States, would that question be asked of you, OMB, or the 
Treasury Department, or where would we get the information?
    Mr. Maddox. Probably a combination of the three, but I 
would assume eventually OMB would play into the mix, as well as 
Treasury.
    The Chairman. Let me suggest right off that I am quite 
convinced that unless there is a major tax change with 
reference to the investment, that we are not going to get a 
significant involvement unless we choose to invest huge amounts 
of money in some kind of a demonstration project wherein the 
Federal Government puts the money in. I think Canada explored 
that and decided not to do that. It decided to do it with a 
series of expeditious write-offs and the like with reference to 
the major investments that were made and an alteration in the 
royalty policy so as to capture more at the end rather than at 
the beginning and give incentives, depending upon what you 
invested and what you produced.
    In any event, let me move to the environment, again, with 
you, Mr. Maddox. You outline a series of environmental issues 
that are significant to overcome. You included a comparison 
with Alberta oil shale. I think you would agree that the 
principal similarities are that at one time both resources were 
considered uneconomic as unconventional resources. Is that 
correct?
    Mr. Maddox. That is correct.
    The Chairman. The oil sands succeeded due largely to a 
strong effort on the part of that province to move ahead and 
getting some significant tax assistance. Is that correct? 
Forget the tax part. But they made a real serious----
    Mr. Maddox. Very much so. They embraced their resource and 
made a commitment to developing it, yes.
    The Chairman. Is it possible that the Government of the 
United States can move, together with industry, to develop a 
similar emphasis with reference to shale? And is that currently 
the status of things?
    Mr. Maddox. It is very possible. The administration is 
reviewing its options on how to support this industry. I know 
there is a great deal of interest at very senior levels in how 
it is we bring this oil shale to market.
    The Chairman. Now, what does that mean, at very senior 
levels? I mean, we thought we had senior levels here.
    Mr. Maddox. Well, as you know, there is a large policy 
process at the White House and at DOE, and I think everyone is 
engaged in it in trying to figure out how best to support this 
industry.
    The Chairman. I will yield now to Senator Bingaman.
    Senator Bingaman. Thank you very much, Mr. Chairman.
    As I understand it, we are all, I guess, in agreement that 
the economics of producing oil from this resource is going to 
ultimately determine whether or not it is done. But in 
determining whether the economics work, obviously the 
technology that is used is absolutely essential.
    I am concerned that as I read the President's budget 
request to us, there is absolutely nothing requested for the 
Department of Energy to pursue the technology development in 
this area. Maybe I am missing something, but the only thing I 
found in your budget request is under petroleum oil technology, 
and I assume that is all oil and gas-related activity. You have 
asked for an over 70 percent cut from current year's levels, 
and there is nothing I can find that relates to oil shale or 
oil sands or anything like that. Am I missing something, Mr. 
Maddox, or is it the judgment of the Department of Energy that 
this is not worth investing taxpayer dollars in?
    Mr. Maddox. I think the sense of the budget was that at 
current price levels, there is adequate private sector capital 
to go forward on commercially viable projects, and that was the 
basis for developing the budget.
    Senator Bingaman. So this is R&D that, if it makes sense to 
do it, it ought to be done by the private sector is basically 
your position.
    Mr. Maddox. I think that is the general belief, that 
industry is better able to assess its potential opportunities 
and invest accordingly.
    Senator Bingaman. Well, let me just give you my 
perspective, which is that we have some very capable Department 
of Energy laboratories around this country. Some of them are 
focused directly on energy issues and others are certainly 
active in those areas. My own view is that the private sector 
suffers somewhat the same problem that those of us in politics 
suffer from, and that is we have a short planning horizon. We 
are not able to look long-term as well as we should, and that 
is one reason why Government support for research and 
development, particularly long-term research and development, 
makes so much sense.
    I am just disappointed that we do not have a commitment to 
have some of our capable scientists and engineers in the public 
sector in these DOE national laboratories working on this 
issue. It would seem to me to make a lot of sense if there is 
any potential there. If there is not any potential, obviously 
they should not be fooling with it.
    What is your reaction to that, Mr. Maddox?
    Mr. Maddox. I think you have a great deal of legitimacy in 
your comments. As I think Secretary Bodman testified in various 
committees, there have been a lot of budget constraints this 
year, and unfortunately, oil and gas research is not the 
priority based on some of the private sector activities and the 
relative wealth they are feeling right now.
    Senator Bingaman. Well, I know when Secretary Bodman was 
here testifying on the budget, he made the point that the high 
prices of gas were adequate justification for the cutbacks in 
Federal support for research and development in the oil and gas 
sector. I would think that this is a sufficiently challenging 
area, though, the technology in this area, that it is not 
realistic to just think that every oil and gas company would be 
willing to take on the job of developing the new technologies 
that are going to be needed to pursue this because this is a 
resource that is not currently under lease, as I understand it, 
and it will never be under lease unless the technology is 
developed that will make it economic to develop it in the eyes 
of industry. Am I right in that thinking?
    Mr. Maddox. I will defer to Mr. Lonnie on the leasing 
questions. But I would argue that clearly you look at our next 
set of testifiers, at least one private sector company who is 
involved in this research now. I think that a lot of issues 
need to be explored, including what the appropriate leasing 
structure is, and I think BLM is doing a good job right now 
putting out feelers on what it is industry needs to move 
forward on this. But it goes hand in hand. Research dollars 
will flow in the corporate sector to places where they think 
there is a likelihood that they can actually apply this 
research. So it has got to be a complete package.
    Senator Bingaman. Mr. Lonnie, let me ask you. As I 
understand it, the Department of the Interior did have two 
previous instances where they tried to lease. One was during 
the 1960's. The other was a Federal prototype oil shale leasing 
program established in the 1970's. Could you tell us what went 
wrong in those circumstances or what the experience was in 
those cases? Do you think there is a demand out there? Are 
there companies that are contacting you saying we want to lease 
this land for development of this resource?
    Mr. Lonnie. Senator, many companies have contacted us 
indicating they have an interest in access to the Federal oil 
shale resource, particularly in the Green River formation in 
the tri-State area that I mentioned in my oral testimony.
    In terms of what occurred earlier in the oil shale program, 
I think what has been identified is that the volatile prices 
that occurred during the 1970's and early 1980's required that 
companies pull out of that program at the time.
    In terms of what we received in more or less broad terms 
from the comments we received on the R&D proposal that we put 
out in the Federal Register back in November, we received 32 
different commenters submitting comments, and the vast 
majority, well over 90 percent, were very positive about R&D 
availability of the Federal resource for research and 
development. That included in situ, as well as mining and 
retorting, which basically was what was occurring in the 1970's 
and early 1980's.
    Broad comments associated with incentives. Most commenters 
indicated that royalties should not be applied during at least 
the research and development phase.
    Senator Bingaman. Mr. Chairman, maybe my eyesight has given 
out on me, but I cannot see the lights down there anymore. Is 
my time up?
    Senator Thomas. Yes.
    [Laughter.]
    Senator Bingaman. Senator Thomas evidently can see the 
lights. So I will go ahead and quit. Thank you.
    The Chairman. The reason they are not on is you passed up 
your time and the light went out.
    [Laughter.]
    The Chairman. No. They never were on. I am sorry, Senator.
    Now, we are going to proceed. Let us see. Senator Thomas, 
you are next.
    Senator Thomas. I really did not mean to get into that one, 
Senator.
    Mr. Barna, you mentioned wanting a clean fuel. Were you 
exploring a clean fuel where there was not any production?
    Dr. Barna. We had limited production going on in the United 
States, and we used that fuel to----
    Senator Thomas. When? When was that?
    Dr. Barna. Starting in 2003, sir.
    Senator Thomas. Where is the production?
    Dr. Barna. It is in Syntroleum Corporation in Tulsa, 
Oklahoma. It is a plant that was developed by DOE to make clean 
fuel. That particular plant makes it from natural gas, although 
it can be made from----
    Senator Thomas. But were they using oil from shale?
    Dr. Barna. No, they were not at that time. Our initial 
involvement was just looking at clean fuels, and then we have 
now expanded to look at all fuels.
    Senator Thomas. Oh, I guess I did not quite understand what 
your role was here.
    Why have these resources not been brought forward before in 
the Department in terms of looking for new sources? Mark, yes.
    Mr. Maddox. I think the issue has been the commercial 
viability of the project. One of the issues from a commercial 
standpoint is not just profitability, but the return on 
investment rate, and you need a high price in the $40 to $50 
range to really make this commercially viable. It is not just 
enough to make profit. I mean, if you make 10 cents, it is not 
enough for a company to go back and justify to their 
shareholders. So I think the belief that prices would not 
support a profitable venture or a commercially viable venture 
has been a pretty large barrier to people looking at this 
resource.
    Senator Thomas. Are we pretty well persuaded that this $50-
plus price is there forever?
    Mr. Maddox. I do not know if the industry is ready to 
concede that. I know most companies are still looking from a 
planning number in the 20's somewhere, so I do not know if that 
price confidence is there at this time.
    Senator Thomas. Mr. Lonnie, the policy of the BLM has been 
to restrict the size of leases. As I understand, that has been 
something that the shale people are concerned about. Have you 
done any thinking about that?
    Mr. Lonnie. Under the R&D proposal that was in the Federal 
Register, we solicited comment on lease size, at least for the 
research and development leases. The comments that we got 
ranged from 40 acres would be enough for an R&D lease all the 
way to we need at least 1,200 acres for R&D. The Mineral 
Leasing Act, the statute, only allows up to a 5,120-acre lease. 
So anything beyond that would require legislation.
    Senator Thomas. Some of the private folks believe that it 
should be beyond that. Is that correct?
    Mr. Lonnie. For commercial operations, that is what we have 
been told.
    Senator Thomas. What do you think, Mr. Maddox, is necessary 
to provide the necessary incentive for the private sector?
    Mr. Maddox. Kind of referencing back to my earlier 
discussion, I think probably the industry needs to know they 
are going to have access to the resources in a timely manner. 
R&D does not make sense if you cannot apply it, and there has 
got to be confidence that you can apply your R&D and your 
technology once you develop it. I think you need access to land 
in order to test your technology, which is the path BLM is 
pursuing right now.
    Senator Thomas. Thank you, Mr. Chairman.
    The Chairman. Let us go to Senator Salazar. Thank you, 
Senator, for coming.
    Senator Salazar. Thank you, Senator Domenici.
    Let me just say from my point of view I think this 
committee is doing the right thing in terms of having oil shale 
on the radar screen of our country as a potential avenue to 
help us deal with our over-dependence on foreign oil and the 
rest of the energy crisis that we are dealing with.
    I will tell you, frankly, I am somewhat disappointed, Mr. 
Maddox, that the Department of Energy is not coming before this 
committee saying this is our program and our effort with 
respect to oil shale development, whatever that might be. It 
seems to me you are still very much in the development phase, 
and I think what you are going to see from this committee is 
action and moving forward with an energy bill. I think oil 
shale will be a part of that in some way.
    Let me ask a question of Mr. Lonnie, because so many of 
these resources are located on our public lands, two questions. 
One is the comments that you received concerning the BLM oil 
shale leasing program that you asked for in the November 
Federal Register, if you could summarize what those comments 
have been back to the BLM and the Department of the Interior, I 
would appreciate that, No. 1.
    No. 2, Senator Domenici has requested a $2 million 
appropriation for the oil shale leasing program. If that gets 
approved by the Congress, what will that do then with respect 
to the BLM moving forward? What capacity will that allow you to 
develop? How will you use the $2 million that Senator Domenici 
has suggested be given to the BLM for this purpose?
    Mr. Lonnie. Thank you. Let me summarize the comments. As I 
have mentioned, actually 32 different individuals or entities 
commented on the proposed regulations. What that included was a 
lease form and then how should we go forward with research and 
development leases and opportunities for access.
    The main areas of comment were lease size, lease duration, 
royalty amounts, including bonus bid amounts, research and 
development transition to commercial operations. Let me just 
give you the general scale of the comments.
    As I mentioned earlier, lease size ranged from 40 acres to 
1,250. This is just research and development component of it.
    In terms of duration, it was anywhere from 30 months to 20 
years for R&D leases. There were concerns expressed associated 
with duration from the standpoint of speculation and requiring 
some diligence associated with the R&D. Some of those comments 
dealing with lessees should be required to submit a plan of 
operations that the BLM would approve and review and then 
monitor to assure that a particular lessee was continuing 
research and development at an approved rate.
    Royalty amounts. Most commenters said that royalties should 
not be charged for at least the first 5 years of a research and 
development lease, that to charge a royalty would be a 
disincentive.
    Rental was identified in the same way, but similar to the 
statute that limits the size of an oil shale lease from the 
standpoint of commercial development, the statute also requires 
a 50 cent rental payment per acre. So the BLM would not have 
discretion there.
    In terms of R&D to commercial transition----
    Senator Salazar. If you could get us a summary of those 
comments, that would be, I am sure, appreciated certainly by me 
and I think by members of the committee, if we could just get a 
summary.
    Speak briefly to my second question, that is the $2 million 
appropriation request from Senator Domenici. How would the BLM 
intend to use those dollars if they are, in fact, appropriated 
by Congress?
    Mr. Lonnie. Well, depending on the final decision of the 
Secretary in terms of reviewing the options that she has to go 
forward with, R&D leasing, based on the comments we received in 
the Federal Register notice, also based on the draft report 
that was completed by the Oil Shale Task Force, I think that 
how additional funding for oil shale could be used would range 
from a speedier approach to making oil shale available, or we 
have identified that some additional alignment or analysis in 
terms of the National Environmental Policy Act will have to be 
completed. So those would be two potential areas, I would 
assume.
    Senator Salazar. Dr. Barna, if I can ask you this question. 
In terms of the difference between the successful effort in 
Canada concerning the development of the oil sands and the 
recovery effort there of oil shale, can you describe to us, in 
a very general way, what the differences are with respect to 
the two kinds of resources that we are looking at here?
    Dr. Barna. Well, from DOD's perspective, we are looking at 
shale oil primarily as a jet fuel. We have a lot experience 
with that from back in the 1970's when it started and then fell 
apart, and we are using that.
    Also, you are going to hear from Shell Oil Company here 
later on. They are also shipping us some of their fuel that 
they got from the Shell project in Mahogany sands. So we can do 
further testing for DOD so that if and when these become 
available, we are ready to use them as a source of fuel for us.
    Senator Salazar. Do you have any preliminary sense of how 
those fuels are working for you that you have gotten from the 
Mahogany project?
    Dr. Barna. We have not actually gotten them from the 
Mahogany project. The ones that we got earlier, I understand, 
were excellent jet fuels.
    Senator Salazar. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator.
    Senator Murkowski, then Senators Craig, Burns, and Burr.
    Senator Murkowski. Thank you, Mr. Chairman.
    Mr. Lonnie, this is a question directed to you. In 
reviewing your testimony, you were talking about trying to 
determine what is it that we have, and I have always been 
fascinated that we do a lousy job with our natural resources in 
terms of inventorying them. As I understand, you have done 
regional assessments of the areas that have potential for oil 
shale, but you have not done a national assessment. Is that 
correct?
    Mr. Lonnie. Was that question directed at me?
    Senator Murkowski. Yes.
    Mr. Lonnie. No, we have not done a national assessment in 
the BLM.
    Senator Murkowski. So how do we know what it is that we 
have?
    Mr. Lonnie. Well, I think there are estimates the 
Department of Energy has put together in terms of total 
resources.
    Senator Murkowski. Okay. Maybe my question is directed to 
the wrong person then. Mr. Maddox, can you help me out?
    Mr. Maddox. Total resources?
    Senator Murkowski. Do we have a national assessment of the 
oil shale and the potential here in this country?
    Mr. Maddox. Yes. We are estimating about 1.8 trillion based 
on an early 1980's assessment and approximately 300 billion 
available that has the right depth and formations to be 
relatively easily and economically available, which is 
significant by any standard.
    Senator Murkowski. I guess I was getting this from your 
testimony, Mr. Lonnie, about the national oil shale data base 
and the national oil shale assessment. So that was why I 
directed it to you. So I do not know whether it was an issue on 
BLM lands or not.
    Mr. Maddox, you are telling me that we, in fact, do have 
analysis that comes to us from the early 1980's on a national 
level.
    Mr. Maddox. That is correct.
    Senator Murkowski. I guess I will go back to the chairman's 
initial questions about what we know and what Alberta has 
demonstrated in terms of the incredible potential coming out of 
that province and how they have figured out a way to make this 
process economic and to truly provide a benefit. If we have had 
this level of assessment for the past 25 years, I understand 
the realities very, very well of the market, but we kind of do 
this boom and bust. We get going with a little bit of 
technology, somebody gets a good idea, and then it goes flat.
    If we recognize the potential here in this country, we can 
look to other countries where they are making a difference, 
whether it is in Canada or someplace else, I guess we have a 
project going in Australia, in Estonia, what can we do in this 
country to eliminate or even out this boom and bust and 
actually get this technology moving forward?
    Mr. Maddox. Clearly, there needs to be a full commitment by 
all the stakeholders, the Federal Government, State 
governments, local communities. We do have a problem that we do 
tend to live on today's level. From the Government's 
standpoint, we all have budget pressures. We are feeling them 
this year. But I think the commitment needs to be made to 
developing these nontraditional resources and bring them to 
market. Some grew up and came of age in the oil situation of 
the 1970's. We have got to, I think, embrace as a Nation that 
energy is an ongoing issue, regardless of today's price, and 
make a commitment to policies that understand that, that even 
if we dropped to $20 tomorrow, it could be again $50 the day 
after. We have a very tenuous supply situation around the world 
and a highly competitive one, and I think we need to sit down 
and say, okay, what do we need to do to make certain that we do 
not zig and zag.
    Senator Murkowski. I guess maybe that is my frustration. We 
have recommendations coming out of DOE that call for us to 
develop a Federal oil shale program plan, but there is no real 
hard specifics in terms of what it is that we do to advance 
that policy. Do we need tax incentives? Do we need a Federal 
financial policy? What is it that we need in order to provide 
some leveling?
    Mr. Maddox. I would argue what we really need is a 
regulatory policy that allows people to explore for oil and 
extract oil. We have seen a large number of large producers 
leave the country, and if you talk to them--I am sure you have 
heard it too--they do not have any confidence that they are 
going to be able to bring their resource to market ultimately 
because of various regulatory issues, public concern issues. 
And I think that you have got to essentially tell people that 
we want to produce oil in this country.
    The United States is the third largest oil producer in the 
world, 5.5 million barrels a year. 80 percent of that is from 
independents. Some of these resources--you want to see money 
involved in oil shale, for example. That is not going to be 
developed by an independent. It is going to be developed by a 
major producer just because of the sheer amount of money 
involved, I mean, billions and billions of dollars. But right 
now, I think most oil companies' senior people would tell you, 
at least privately, that they have concerns about whether the 
United States will support development of domestic resources.
    Senator Murkowski. Let me ask just one very quick question, 
if I may, Mr. Chairman. This is in regard to the balance 
between oil and natural gas. The process, as I understand, to 
release these hydrocarbons, we have got to use a considerable 
amount of natural gas in order to allow this process to move 
forward. As we all know, the price of natural gas is sky high. 
The demand in this country is very high and growing higher 
every day. At some point in time, does this process get stopped 
because we do not have the natural gas that we need in order to 
allow this process to go forward if the price of natural gas is 
just too high?
    Mr. Maddox. A byproduct of this process, at least in the 
in-situ process, once it gets up and going, is natural gas, and 
it will self-generate natural gas adequate to create the energy 
and the heat necessary. So there should not be any net loss of 
natural gas in this process to the market. So there should not 
be any kind of price pressures as a result of the natural gas 
being used.
    Senator Murkowski. Thank you. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator.
    I am going to turn the meeting over for the next 15 minutes 
to Senator Craig.
    But I wanted to ask you, Mr. Maddox, did I hear that you 
have a plan or do not have a plan? Which was right?
    Mr. Maddox. We are developing a plan now.
    The Chairman. Could you tell us what that means? Will we 
have one pretty soon?
    Mr. Maddox. Hopefully in the next several months. We are 
trying to identify both regulatory barriers and market barriers 
to developing this resource.
    I want to leave no misimpression with the chairman. We 
actually do believe that this resource should be developed. We 
are trying to avoid the mistakes of the past and make certain 
we do not run down any blind alleys. I apologize if I have left 
some sort of misimpression.
    The Chairman. Well, I want to just make this point. Then I 
will quit on this subject. But the biggest problem in the past 
was the price of oil was too low. Of all the arguments you want 
to make, that is it. We started at time and those communities 
he spoke of fell apart because the price was so low, and every 
time it got up, the companies noticed, it came down.
    So now the question is, is it going to come down from its 
$50-plus to a settlement level that is so low that it does not 
justify this production? And I do not know what that is, but we 
have got to ask the companies and you all have to find out, if 
you are going to put a plan together, what is the general 
expectation on the supply demand piece. Is supply demand still 
relevant? Is there still a great supply, or is it all a demand 
question?
    I would say to the Defense Department I do not speak for 
you all, but I would tell you if I were in charge of the 
defense of the United States, I would have them involved in 
this. Speaking of a demonstration project, the Defense 
Department ought to be building one consistent with 
environmental conditions right now. At least they could say 
here is an alternative. We are sitting here. You probably do 
not even know today how much we are spending out of the defense 
budget for oil and related projects, but it is an enormous 
amount of money. Right, Senator Craig? We probably cannot even 
figure out in the defense budget what it is. We could probably 
guess.
    Senator Craig. Yes, we do not know.
    The Chairman. We do not know. If we put it in at 30, it 
ends up at the end of the year at 50. They have got to spend 
it. Right? They have got to take out of something.
    But anyway that is my comment, and now we will turn it over 
to you, Senator.
    Senator Craig [presiding]. Well, Mr. Chairman, consistent 
with that comment, I had a price shock on Sunday evening. My 
family had rented a 24-foot Penske diesel truck to haul a 
family member across country. So at the end of the day, the 
keys were handed to me and dad was going to take it and refuel 
it and take it back to Penske. I hunted around town for the 
cheapest diesel. I grew up at a time when diesel was by far 
less expensive than gas by almost a factor of half. Well, in 
Boise, Idaho, this past Sunday evening I found $2.45 diesel, 
and I had to fill a 50-gallon tank.
    I am not used to that. But it was a reality check about 
input cross in the economy in this country that we are still 
sleeping with today that is amazing to me. I suspect if more 
consumers and more, shall I say, anti-folks as it relates to 
resource development had the similar price shock that I had 
this past Sunday, maybe--maybe--they would change their 
thinking.
    Let me ask this question of you, Mr. Maddox and Mr. Lonnie. 
We had the chairman of the Federal Reserve before us recently 
talking about natural gas and a variety of other issues as it 
relates to energy and the impact on our economy. I was not able 
to ask all the questions I wanted, so I have just received 
response to some questions as it related to growth of resources 
in the market.
    Here is the chairman's observation. I thought it was pretty 
valid, and I suspect it is underlying and it is a bias within 
our agencies of the Federal Government today, especially those 
who sometimes view themselves as the protector of the resource 
instead of the manager, guardian, and reasonable facilitator of 
the resource.
    He said this. In a sense, there are two value systems, the 
economic value system and the environmental value system, and 
there is no mechanistic tradeoff. As an economist, I cannot 
provide a clear mathematical formulation to allow you to 
compute the tradeoff. This is a judgment call the Congress will 
have to make.
    It is also a judgment call that the administration will 
have to make and should accelerate their facilitating of all 
that we need to know to make the judgment call here. We are 
about at a time to make that judgment call, I hope, again and 
that we can get it completed.
    But my guess is that one of the reasons our oil shales have 
not come to development yet is that we have spent more time 
guarding them than we have facilitating their value as a 
resource. Would you disagree with that?
    Mr. Maddox. I would not disagree with it. I think it is 
also a little bit of benign neglect more than anything else or 
as much as guarding them.
    Senator Craig. Mr. Lonnie.
    Mr. Lonnie. I think from the BLM standpoint, we think--and 
the Director speaks to this quite a bit--quality of life type 
issue in terms of access to public lands and impacts on local 
communities. So I think from, at least, the perspective that I 
have we are anxious to make the resource available and the 
economics will help determine what can actually occur in terms 
of its ultimate production.
    Senator Craig. But the Secretary and the Director have not 
come up with any form of mechanistic tradeoff, have they?
    Mr. Lonnie. I think through our land use planning process, 
we attempt to do that in terms of soliciting public comment and 
involving local communities.
    Senator Craig. Mr. Barna, what other fuels is DOD looking 
at, any alternative fuel interests that you are looking at?
    Dr. Barna. Right now we are looking at synthetic fuels 
produced by Fischer Tropsch primarily from coal. We are looking 
at getting the fuels that will be produced by shale and also 
just redefining what our specifications for fuels are so that 
we can cut down on the number of fuels that we have to use 
during deployments. So we are looking very hard at the 
specifications so that perhaps we can get one fuel or two 
fuels, where right now in Iraq we have, I think, nine fuels.
    Senator Craig. Has DOD at all spoken about biomass, 
cellulose biomass or any of the biomass----5
    Dr. Barna. We are looking at biomass. We are looking at all 
fuels. We do have biodiesel right now and we do use it. It does 
have some limitations based on temperature that we could 
perhaps get around by blending it with Fischer Tropsch type 
fuels. That is one of the things we are investigating, but we 
are in fact using biodiesel.
    Senator Craig. Thank you.
    Senator Burns, you are up.
    Senator Burns. Yes, sir. I just got a couple of questions 
with regard to Mr. Barna and the work that you have done. I 
have been to that plant, by the way, and also reviewed the 
situation with coal gasification to go into diesel. It is my 
understanding that they can take all the environmentally bad 
stuff out of that. With the people you mentioned, the Fischer 
Tropsch people--clean fuels--is that important to you?
    Dr. Barna. Absolutely.
    Senator Burns. Or just fuel general?
    Dr. Barna. Well, just fuel generally. While we are doing 
just fuel generally, clean fuel is certainly important to us 
from an environmental standpoint. The problem is it is such a 
clean fuel that we have to investigate its impact on the fleet. 
It is especially true of our legacy fleet, the older things as 
opposed to the new ones.
    Senator Burns. Do you plan to continue to support that idea 
down there in your research dollars?
    Dr. Barna. Absolutely.
    Senator Burns. Thank you. I appreciate that.
    I was just looking here and you were talking about 
research, Mr. Maddox, and you have cut your research dollars on 
fuels and especially in this area and on oil and gas, saying 
that the companies are making enough money and they should be 
investing in research and development in their own right. Are 
they doing so? Have they increased their resources into their 
R&D to a level that satisfies you?
    Mr. Maddox. I do not think I would ever be satisfied with 
enough research especially at a $50 level or $55 price level. 
However, we do have significant budget issues in the Federal 
Government, and we have all been asked to tighten our 
bootstraps.
    Senator Burns. Do you monitor those companies on the amount 
of dollars that they spend in research?
    Mr. Maddox. We have discussions. Can I give you a number? 
No, I cannot. In discussions with them, my impression is that 
they are looking very hard at research and are funding every 
possible avenue they can, but I cannot give you a hard number 
on that.
    Senator Burns. Well, I think maybe if they are not, I would 
suggest you work with them a little more to make sure that they 
do, and if they do not, I think it is irresponsible from our 
standpoint that we are not picking up that slack. Now, I do not 
want to throw that out there and let them off of the hook, but 
nonetheless, I think the time has come to look at what 
Syntroleum and those people are looking at, gasification and 
fuel cells, anything. But we know that there is nothing in the 
near future that would replace diesel as far as a 
transportation fuel is concerned. Is that correct?
    Mr. Maddox. Correct.
    Senator Burns. Then I would suggest that we accelerate some 
of these programs because the impact of high transportation 
costs is being borne by, of all people, my farmers. I know you 
do not think much about my little farmers out there in Montana, 
but I will tell you what, high natural gas, fertilizer costs, 
because you got to remember that we are in an industry that we 
sell wholesale by retail and we pay the freight both ways. I do 
not know. If you keep commodity prices at the present level, we 
cannot make it. So your Department and the Bureau of Land 
Management becomes very important to us in production 
agriculture.
    So I would suggest that you find out what they are 
spending, how much they are spending, and where they are 
spending it and work with them to make sure that those 
resources are used in that area. And if not, then we should be 
looking at actions on our part to make sure that it is 
happening. We are at wits end. We cannot operate under 
circumstances like this. So you may not have a crisis in some 
areas, but boy, you have got one on the farm, I will tell you 
right now. That is very, very important.
    I am going to look at this budget and the appropriations, 
as far as we are concerned, to the Department of Energy. That 
used to be under my chairmanship. But, nonetheless, I would 
hope that I would have some suggestions to make to that.
    But I would get a little more enthusiastic about what you 
guys are doing down there and make damned sure they get done 
because we are in a crisis. Any way you look at it and any way 
you want to turn it, we are in a crisis. I just do not see 
anybody getting very excited about it down there.
    End of comment. End of questions. Thank you very much, Mr. 
Chairman.
    The Chairman [presiding]. They got the message.
    Senator Burns. They better get it or we will have a new 
Department.
    The Chairman. Senator, go ahead.
    Senator Burr. Mr. Chairman, thank you. To the witnesses, I 
will not ask questions, but I want to take this opportunity to 
make an observation, having come late.
    I have heard all of you answer questions and I have heard 
looking at, working on, considering changes. Let me fast 
forward for a second to some of Mr. Mut's testimony, who will 
come up in the next panel. I just want to use half of his 
recommendations to this committee.
    ``Shell believes that the United States recognize oil shale 
as a strategically important domestic energy source. We believe 
that Congress and the administration should officially support 
public policy initiatives that encourage and support 
accelerated commercial oil shale development and use as a 
feedstock for transportation fuels and other products.
    ``Two, Shell believes that the Secretary of the Interior 
should develop a commercial oil shale leasing program on an 
expedited basis. We support the BLM's proposed R&D leasing 
program as a small but important first step in the right 
direction. BLM should be urged to finalize and implement that 
program on an expedited basis.''
    I want to just highlight the differences. Looking at, 
working on, considering change. Shell: accelerate, expedite, 
finalize, remove. A huge difference here. There is a canyon 
between what they are saying and what we are doing.
    I commend all of you.
    If there has ever been a crisis in my young life, we are in 
it. I am not sure--I will turn to some of the more senior 
members in their lifetime--whether we have had a more defined 
crisis as it related to our energy needs in this country. If 
there is, I am not aware of it.
    I am not willing to accept $50 a barrel plus is the norm 
and not the exception. But we cannot wait to figure out which 
one is right before we focus our efforts on how we come up with 
alternatives. I understand the stop and start and exit from the 
marketplace in prior years, but we have to restructure in a way 
that we cannot allow that to happen. We cannot expect an 
industry to be created in shale if there is not somebody that 
is leading it.
    I think the one thing that is highlighted in this testimony 
that I read was it has to be the U.S. Government. That is us. 
That is us up here and it is you down there. I am not sure that 
looking at, working on it, and considering change displays 
leadership.
    And clearly if we have got agencies that are not in 
agreement with us that there is a crisis, then Mr. Chairman, we 
need to work on that. But I am hopeful, in a bipartisan way, we 
will do our job at producing an energy bill. We cannot solve 
finalizing regulations. We can but you do not like it when we 
do it. There are a lot of things that are pointed out in there 
that are administrative matters. It does not take us for these 
things to happen. It takes you expediting, and I think that 
this has to be a partnership if we want to make this 
possibility at least reach a point where we can determine its 
viability and whether, in fact, for somebody like Mr. Barna, 
whether it is an opportunity for military security and for the 
security of this country.
    I thank you, Mr. Chairman.
    The Chairman. Thank you, Senator. Thank you very much. I 
assume you do not have any comments on what the Senator said.
    Do you all agree there is a crisis in terms of the United 
States being so dependent upon foreign oil? Mr. Maddox?
    Mr. Maddox. Yes, sir.
    The Chairman. Mr. Lonnie?
    Mr. Lonnie. I think we certainly need to diversify our 
energy supply, and I think oil shale could be a big part of 
that.
    The Chairman. Dr. Barna?
    Dr. Barna. Absolutely.
    The Chairman. All right. Let us go. Thank you very much. 
Whatever you have agreed to get us, get us as soon as possible.
    The next panel: Steve Mut from Shell; Jim Evans, Associated 
Governments of Northwestern Colorado, a friend of Senator 
Salazar; Mr. Russell George, Colorado Department of Natural 
Resources from Denver; Steve Smith from Denver. All of these 
Coloradans are here to visit with you, Senator.
    Senator Salazar. Thank you, Senator.
    The Chairman. Mr. Steve Mut from Shell, we are glad you are 
here. You have heard a little bit of the rumblings up here. 
While you are not the whole solution, clearly you have got to 
shed a little light on things for us, if you can, please. Your 
testimony will be made a part of the record and you can 
proceed.

 STATEMENT OF STEPHEN MUT, CEO, SHELL UNCONVENTIONAL RESOURCES 
        ENERGY, SHELL EXPLORATION AND PRODUCTION COMPANY

    Mr. Mut. Thank you. Good morning, Mr. Chairman and members 
of the committee. I am Stephen Mut, CEO of the Shell 
Unconventional Resources group of Shell Exploration and 
Production. It is a real pleasure to be here to discuss 
progress we are making on a new technology called in-situ 
conversion process. I want to state unequivocally it is not the 
1970's technology. It is a new path.
    We have three specific goals for this: to exploit shale oil 
in an environmentally friendly fashion, to make it economically 
viable, between $25 and $30 of crude price, and to be of scale. 
That means having a significant part of the U.S. energy 
production matrix.
    In-situ conversion means just what it says. It is in the 
ground, and conversion, converting from one form to another. We 
insert many electric heaters into holes drilled down into the 
rich oil shale layer and heat to 650 degrees plus. During that 
time, immature oils are matured. In 3 or 4 years' time, we do 
the work, with a little assistance from electricity, that 
nature takes tens of millions of years to do. In the process 
smaller, light compounds are sheered away from the dense mass 
that was the original material. The majority of the hydrogen 
present in the resource is concentrated in those lighter 
molecules. At that temperature, these lighter molecules are in 
the gaseous phase and move more readily in the subsurface to a 
well bore than they would have if they were in liquid phase.
    We form an ice wall around this heated zone to do two 
things: to keep water out, which destroys the thermal 
efficiency of the process, and to keep the products that we 
have produced contained, thus protecting the groundwater. We 
project that about 70 percent of the carbon that is in the 
subsurface is recovered through this process. Of that which 
comes to the surface, at room temperature, you will have one-
third that is gas and gas liquids like propane and butane, and 
two-thirds that will be transportation fuels.
    Through modest upgrading, relative to refining, this liquid 
can be treated to form gasoline, jet fuel, and diesel in about 
a third and a third and a third ratio by the injection of 
hydrogen. This injection of hydrogen also removes sulfur and 
nitrogen that are the key contaminants. Nitrogen can be used, 
in fact, to create urea or fertilizer.
    The carbon left in the ground is very dense. Is it not 
movable and contains the majority of the nitrogen and sulfur 
that was originally there, as well as all the metals that were 
in place originally.
    The resource is the most concentrated resource that we know 
in the world, and therefore, in exploiting it, we are going to 
have a relatively small footprint relative to the production. 
In addition, because of reduced processing, there are lower air 
emissions. Because we produce only clean products, we are going 
to have much less carbon dioxide impact. Because there is no 
mining, there are no tailings piles, significantly less water 
use than previous technologies. And that, combined with a 
robust system developed to protect groundwater, gives us an 
environmental package that is a sense of pride to the 150 
people working on this on the Western Slope and in our offices 
in Denver and Houston.
    The DOE reports that in the Green River basin alone there 
are a trillion barrels of reserves that could be recovered 
using various technologies. That size and this technology are 
consistent with some descriptors of the future. That would be 
large scale developments, high capital intensity, and high 
volumes that are obviously produced far distant from markets. 
In our initial views, we believe that the first markets for 
this material will be in southern and central California where 
these clean products can act to reduce supply constraints and 
give the people of the west coast an alternative supply of 
light products.
    Shell has made a great deal of progress over the last few 
years. We have tested and proved all parts of our technology on 
an individual basis. We have, in fact, built one of those 
freeze walls or ice walls taller than the Empire State Building 
and have produced out of this recent experiment referred to 
earlier at the Mahogany project 1,200 barrels of very light 
crude oil type material.
    There is still much to be done, however. We need to test 
this process in an integrated fashion to make sure that all the 
pieces of the technology work together so that we can make a 
commercial decision by the end of the decade to develop oil 
shale. While we are doing this, we have to keep the people 
informed as we go.
    Shell believes that there is a role for government too and 
some of that is already going on. We are working with the Oak 
Ridge Labs, the Sandia Labs, and Morgantown Labs in developing 
the mix of technologies we believe are required. As stated 
earlier, we believe that oil shale should be recognized as a 
vital part of the future energy mix of this country.
    The DOI should provide access via commercial leasing 
programs and land exchanges, in addition to the fine work that 
has already gone on in developing an R&D leasing program.
    We believe that some change or removal of the acreage 
limitations associated with the 1920 Act regarding oil shale 
should be made.
    We hope that a simple royalty mechanism can be developed, 
one which encourages development but provides significant 
revenue as well to the State and Federal Governments.
    We believe we need a regulatory regime that protects the 
environment but is devoid of duplicate processes and extracted 
delays due to sequential processes.
    And finally, we believe that clarity is required on the 
fiscal side such that oil shale is treated for tax purposes 
like any of the other nonconventional fuels.
    We at Shell are very excited about ICP, the process, and 
the part it might play in the U.S. energy mix.
    That concludes my remarks. It is a summary of the written 
statement I sent. And I would be happy to answer any questions 
that you may have.
    [The prepared statement of Mr. Mut follows:]

                Prepared Statement of Stephen Mut, CEO, 
                 Shell Unconventional Resources Energy

    Good morning, Mr. Chairman and Members of the Committee.
    My name is Stephen Mut. I am CEO of the Shell Unconventional 
Resources unit of Shell Exploration and Production Company. I am 
delighted to appear before you today to describe Shell's initiative to 
develop and advance, hopefully to commercial success, a unique and 
innovative technology which we are increasingly optimistic can open up 
the vast oil shale resources in the Western United States. This 
technology, once thoroughly proven technically, will allow Shell to 
produce clean transportation fuels such as gasoline, jet fuel and 
diesel as well as clean burning natural gas from oil shale in an 
economically viable and very environmentally sensitive fashion. Because 
the oil shale resource in the United States is extensive, this 
technology holds promise for significantly increasing U.S. domestic 
energy production.
    For decades, energy companies have been trying, without success, to 
unlock the large domestic oil shale resources of northwestern Colorado, 
eastern Utah and southwestern Wyoming. Oil shale can be found in large 
parts of the Green River Basin and is over 1,000 feet thick in many 
areas. According to DOE estimates, the Basin contains approximately 1 
trillion recoverable barrels of hydrocarbons locked up in the shale. It 
is easy to see why there have been so many attempts to unlock this 
potentially enormous resource in the past.
    Some 23 years ago, Shell commenced laboratory and field research on 
a promising in ground conversion and recovery process. This technology 
is called the In-situ Conversion Process, or ICP. In 1996, Shell 
successfully carried out its first small field-test on its privately 
owned Mahogany property in Rio Blanco County, Colorado some 200 miles 
west Denver. Since then, Shell has carried out four additional related 
field tests at nearby sites. The most recent test was carried out over 
the past several months and has produced in excess of 1,200 barrels of 
light oil plus associated gas from a very small test plot using the ICP 
technology. We are pleased with these results not only because oil and 
gas was produced, but also because it was produced in quantity, quality 
and on schedule as predicted by our computer modeling. With this 
successful test, Shell is now ready to begin work on the final tests 
that will be required to prove the technology to the point where there 
is sufficient certainty so as to make a decision to proceed to 
commercial development.
    Most of the petroleum products we consume today are derived from 
conventional oil fields that produce oil and gas that have been 
naturally matured in the subsurface by being subjected to heat and 
pressure over very long periods of time. In general terms, the In-situ 
Conversion Process (ICP) accelerates this natural process of oil and 
gas maturation by literally tens of millions of years. This is 
accomplished by slow sub-surface heating of petroleum source rock 
containing kerogen, the precursor to oil and gas. This acceleration of 
natural processes is achieved by drilling holes into the resource, 
inserting electric resistance heaters into those heater holes and 
heating the subsurface to around 650F over a 3 to 4 year period. During 
this time, very dense oil and gas is expelled from the kerogen and 
undergoes a series of changes. These changes include the shearing of 
lighter components from the dense carbon compounds, concentration of 
available hydrogen into these lighter compounds, and changing of phase 
of those lighter more hydrogen rich compounds from liquid to gas. In 
gaseous phase, these lighter fractions are now far more mobile and can 
move in the subsurface through existing or induced fractures to 
conventional producing wells from which they are brought to the 
surface. The process results in the production of about 65 to 70% of 
the original ``carbon'' in place in the subsurface. The carbon that 
does remain in the sub-surface resembles a char, is extremely hydrogen 
deficient and if brought to the surface would require extensive energy 
intensive upgrading and saturation with hydrogen. Chart 1 illustrates 
the ICP process.*
---------------------------------------------------------------------------
    * All charts have been retained in committee files.
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    The ICP process is clearly energy intensive as its driving force is 
the injection of heat into the subsurface. However, for each unit of 
energy used to generate power to provide heat for the ICP process, 
about 3.5 units of energy are produced and treated for sales to the 
consumer market. This energy efficiency compares favorably with many 
conventional heavy oil fields that for decades have used steam 
injection to help coax more oil out of the reservoir.
    The produced hydrocarbon mix is very different from traditional 
crude oils. It is much lighter and contains almost no heavy ends. Its 
quality can be controlled by changing the heating time, temperature and 
pressure in the sub-surface. The production mix generally seen from 
Colorado oil shale is about two thirds liquids and one-third natural 
gas and gas liquids such as propane and butane. On the liquid product 
side, the typical split encountered is about 30% each of a gasoline 
precursor called naphtha, jet fuel and diesel with the remaining 10% of 
the barrel being slightly heavier. These fractions can be easily 
transformed into finished products with significantly reduced 
processing when compared with traditional crude oils.
    Because the ICP process occurs below ground, special care must be 
taken to keep groundwater away from the process, as its influx would 
seriously reduce thermal efficiency. Special care must also be taken to 
keep the products of the process from escaping into groundwater flows. 
Shell has adapted a mining and construction technology to isolate the 
active ICP area and thus accomplish these objectives and to safe guard 
the environment. For years, freezing of groundwater to form a 
subsurface ice barrier has been used to isolate areas being tunneled 
and to reduce natural water flows into mines. Where groundwater 
intrusion is a problem in the ICP process, the subsurface adjacent to 
the rich oil shale layers is frozen forming a container of sorts thus 
preventing the influx of water while at the same time containing the 
products formed. Shell has successfully tested the freezing technology 
and determined that the development of a freeze wall prevents the loss 
of contaminants from the heated zone. During this same test, Shell was 
able to demonstrate that traditional subsurface reclamation 
technologies such as steam stripping, pumping and treating and carbon 
bed stripping were able to remove contaminants developed in the ICP 
process from the subsurface to levels sufficient to meet stringent 
permit requirements. Though freezing the subsurface while 
simultaneously heating it is clearly a counter-intuitive application of 
technology, it is a good example of the creativity and unconstrained 
thinking that necessarily has been a major contributor to solving 
potentially vexing problems in this complex Research and Development 
project. A schematic of the basic freezing technology is shown in Chart 
II.
    Because the ICP process involves no mining, no large or 
contaminated tailing piles are created. Water usage is expected to be 
considerably less than is required for traditional retort methods. 
Because the technology has the potential to recover in excess of 1 
million barrels of oil per acre in the richest parts of the Basin, or 
about ten times that possible from conventional mining and retorting, 
temporary land disturbance associated with ICP during production will 
be significantly less. This smaller and cleaner footprint, the reduced 
water needs, the reduced processing needs, a robust system for 
protecting groundwater from contamination and the production of clean, 
less Green House Gas intensive products creates an environmentally 
attractive package about which we at Shell are very proud.
    It is through well-established technologies and constant monitoring 
that Shell expects to ensure proper and transparent stewardship of the 
environment. Shell is already working closely with local communities, 
NGOs, elected officials, and regulatory agencies to ensure that our 
research addresses community needs and sensitivities while ensuring 
strong environmental protection.
    Shell is currently focused on reducing the remaining risks and 
uncertainties that could affect the commercial viability of this 
technology. For this reason, Shell has a research staff in Colorado of 
approximately 55 personnel in addition to approximately 100 Houston and 
Denver based employees assigned to the oil shale project. The focus of 
these efforts is to insure the technical, commercial and environmental 
viability of the technology via a relatively large integrated 
demonstration project. This project would represent the final step 
required before a financial investment decision would be taken by Shell 
for a commercial scale unit.
    While Shell has spent many tens of millions of dollars on research 
and development for this technology and has learned a tremendous amount 
while reducing risk and uncertainty, much work and expenditure still 
remain before the ICP process can be commercialized. Shell is anxious 
to proceed with ICP research so as to help unlock the significant 
potential that oil shale holds to increase indigenous energy supply in 
the United States. Achievement of this objective on a timely basis will 
require the active support of Congress and the Administration
    Because the commercial development of oil shale would yield many 
benefits to the U.S. economy, Shell supports responsible policy 
initiatives that will facilitate early commercial production of shale 
oil and associated gas via methods that minimize industry's footprint 
and protect the environment. Shell is committed to working with 
Congress, with the Department of Energy, the Department of Defense, the 
Department of Transportation, the Department of Homeland Security and 
the Department of Interior, which has stewardship responsibility over 
approximately 80% of the oil shale bearing lands in the Green River 
Basin of the Rocky Mountain West, in order to accomplish this 
objective.
    Key to the early development of oil shale technology is early 
access to appropriate Federal oil shale deposits to allow for pilot 
field tests to be carried out. The leasing of tracts of federal land to 
encourage research and development is an essential next step. As a 
private company, Shell supports appropriate lease terms and incentives 
for the development of new oil shale development technologies.
    As the Department of Energy has pointed out in a recently released 
two volume report entitled ``Strategic Significance of America's Oil 
Shale Resource'', that while oil shale is located in many countries 
throughout the world, the Green River Basin of northwestern Colorado, 
eastern Utah, and southwestern Wyoming contains the largest, most 
concentrated quantities of potentially recoverable shale oil in the 
world. The Report indicates that the Basin may have as much as 1.6 
trillion barrels of oil in place, of which an estimated 1 trillion 
barrels ultimately may be recoverable using various recovery 
technologies. This latter number is roughly equivalent to all the 
combined proven conventional oil reserves in the world today, (see DOE 
Charts 3, 4 & 5).
    Given the size of the resource, Shell is committed to pursuing 
commercially and environmentally viable technologies that can unlock 
the enormous potential for oil shale that exists in the Rockies. 
Shell's advancing ICP research is getting us close to being able to 
help unlock these resources. We believe that successful utilization of 
the ICP technology could yield substantial economic impacts to 
Colorado, the rest of the Rocky Mountain West and to the United States 
as a whole.
    Clearly, Shell believes there is a role for the appropriate 
development of oil shale deposits as part of America's overall energy 
and conservation mix to meet increasing energy demand. We are committed 
to the principles of Sustainable Development, to ensuring that our 
activities minimize the impact on the environment and to enhancing 
opportunities for local communities while facilitating our business 
objectives.
    Ironically, despite the fact that the United States clearly has the 
largest and most concentrated oil shale resources in the world, several 
other countries have ongoing oil shale Research and Development 
projects. Australia, China, Estonia and Brazil are all progressing 
projects that are governmentally assisted or driven in one fashion or 
another.
    It is Shell's belief that the time has come for the United States 
to join these other nations so as to encourage, facilitate, and 
accelerate the development of this potentially vast domestic energy 
resource.
    A range of options should be seriously considered in order to 
accelerate responsible U.S. oil shale development that would enhance 
national security and protect our Nation's economy. We would offer the 
following six recommendations for this Committee's consideration. While 
we are not including specific legislative language, we are willing to 
work with the Senate Energy and Natural Resources Committee, as well as 
all other relevant Senate and House Committees of jurisdiction on 
specific language to create the proper mix of incentives and 
opportunities for accelerated, but responsible, oil shale development.
    Recommendations for the Senate Energy and Natural Resources 
Committee:

    1. Shell believes that the U.S. government should recognize oil 
shale as a strategically important domestic energy source. We believe 
that Congress and the Administration should officially support public 
policy initiatives that encourage and support accelerated commercial 
oil shale development and use as a feedstock for transportation fuels 
and other products.
    2. Shell believes that the Secretary of the Interior should develop 
a commercial oil shale leasing program on an expedited basis. We 
support the BLM's proposed R&D leasing program as a small but important 
first step in the right direction. BLM should be urged to finalize and 
implement that program on an expedited basis.
    3. Congress should act to lift the current federal acreage 
limitation under Title 30, Section 241(a) of the Mineral Lands Leasing 
Act that restricts a lessee to acquisition of but one lease of 5,120 
acres nationally. In order to facilitate commercial development for oil 
shale production, Shell believes that this acreage limitation should be 
removed. Otherwise, companies who wish to build facilities and produce 
shale oil from federal lands will forever be limited to one project. 
Such a limitation, which dates back to 1920, until changed will create 
an impediment to even first-generation projects where the costs and 
risks will be greatest.
    4. Congress and the Administration should work to develop royalty 
rates that encourage investment in oil shale development giving 
particular recognition to the extraordinary costs involved in literally 
bringing a new energy industry into existence. In particular, Shell 
believes that government should develop a royalty regime for first 
generation commercial oil shale production that: 1) is simple to 
administer and to enforce and eliminates the need for interpretation or 
the likelihood of litigation; 2) would deliver significant revenue to 
the U.S. Government, and thus 50% of that amount to the impacted 
states; and 3) would not involve royalty rates that are steep enough to 
create another obstacle to the acceleration of large scale commercial 
oil shale projects.
    5. Shell believes that Congress and the Administration should work 
to ensure that an appropriate system is put in place to provide 
certainty and timeliness in the permitting process for oil shale 
development without waiving substantive environmental performance 
standards. A concern is that sequential overlay of multiple federal and 
state permitting processes has the potential to add many years to what 
will already be a complex and protracted permitting process.
    6. Congress and the Administration should identify appropriate tax 
incentives that encourage investment in oil shale technology and 
development, that recognize the research and development hurdles 
involved in oil shale technology and development, and that 
appropriately treat oil shale production as the development of a ``non-
conventional resource'' in a manner similar to other non-conventional 
energy resources. Specifically, where ambiguities may now exist 
relative to determining whether or not in-situ oil shale recovery 
technologies will qualify for tax benefits in the same manner as do 
existing mining tax regimes, those ambiguities should be cleared up as 
soon as practicable.

    In summary, the United States has a huge energy resource in the 
form of oil shale. The time has come for Congress and this 
Administration to consider appropriately targeted legislative and 
regulatory measures to allow oil shale to be developed at an early 
date, provided that such development can occur in an economically 
feasible and environmentally acceptable manner. We are increasingly 
encouraged and optimistic that our ICP technology may very well 
represent the first available technology to do so.
    This completes my written testimony. I will be happy to respond 
orally or in writing to any questions any Committee member may have.

    The Chairman. Thank you very much. We have some questions, 
but let us proceed with the witnesses.
    Mr. George, please.

   STATEMENT OF RUSSELL GEORGE, EXECUTIVE DIRECTOR, COLORADO 
          DEPARTMENT OF NATURAL RESOURCES, DENVER, CO

    Mr. George. Thank you, Mr. Chairman. I appreciate your 
invitation to participate in this hearing. I am Russell George, 
executive director of the Colorado Department of Natural 
Resources. As the lead State agency responsible for natural 
resource management, I appreciate the opportunity to be here 
and provide our perspective on the potential for renewed oil 
shale development in northwest Colorado.
    The State of Colorado is excited to be partners in this 
effort to move our great Nation closer to energy independence. 
With perhaps as much as 2 trillion barrels of oil locked in the 
shale of the Western States, this vision of energy independence 
may well be achievable in our lifetimes.
    As a lifelong resident of shale country, I would like to 
share some thoughts with you on the three decades of lessons 
that we have learned regarding impacts and possible tools to 
manage the resource successfully in the future.
    The State of Colorado has consistently supported the 
development of oil shale resources in northwest Colorado since 
the early 1970's. Our focus has been on making sure that the 
projects are fiscally and environmentally sound and that the 
communities do not incur extraordinary economic burdens.
    Over the last 30 years, several concepts have worked. These 
included oil shale lease bids, the Synthetic Fuels Corporation, 
the Colorado Joint Review process, the Cumulative Impacts Task 
Force, and the DOE Technology Partnership. These efforts 
provided funds to mitigate impacts, provided incentives for 
private investments, supports and grants to fund private sector 
technology development, a coordinated permit review process 
that allowed adequate public input into the environmental 
impact analysis process and the permit process at the State and 
local level, and accessible economic analysis tools to model 
local economies to determine what projects would be causing 
what impacts in what communities in what years. These processes 
and procedures were critical, given the enormity of the issues 
facing western Colorado, primary concerns that focused on how 
to dispose of the spent shale, the cost of production, the 
impacts to local communities, and the water requirements that 
would be needed to carry out large scale operations.
    While we do not know the specifics of the technologies that 
may be pursued over the next decade, we do know water 
availability, materials handling, power requirements, and 
transportation networks must be assessed in detail and the 
impacts mitigated appropriately.
    The Chairman. Mr. George, could I just interrupt for a 
minute?
    Mr. George. Certainly.
    The Chairman. I am going to excuse myself for just a few 
moments. I am going to let Senator Salazar preside until I 
return. Thank you for doing this for me. I appreciate it.
    Senator Salazar [presiding]. Thank you, Mr. Chair. It is a 
great honor for me to actually do this since Russ George is not 
only executive director of the Department of Natural Resources, 
which is a position that I previously held, but also a very 
esteemed statesman in Colorado, former Speaker of the House of 
Representatives, and a person whose wisdom ultimately will be 
what I believe will guide the whole future oil shale and a 
whole host of other things in Colorado. So please proceed.
    Mr. George. Well, thank you, Senator Salazar. Mr. Chairman, 
the honor is all mine.
    Again, talking about where we think we are today, times 
have changed, but the circumstances are proportionately the 
same. As in the 1970's, we have record coal production that is 
straining existing transportation networks. We have record 
natural gas production levels and increased permitting for 
coalbed methane development. This development overlaps an area 
with increasing tourism and recreation opportunities and an 
expanding urban population. There are many competing issues at 
play here.
    To that end, technology and environmental oversight must be 
rigorous. Technology must employ the best available practices 
to minimize impacts. State and local needs must be anticipated 
and funded. Development of public land must be prioritized by 
resource and by region, and the cumulative impacts of mineral 
and energy development on both public lands and private lands 
must be mitigated.
    So where should we go from here? We have some suggestions 
to propose.
    Given the complexity of multiple uses and demands already 
present in oil shale country, for example, natural gas, 
recreation, wildlife, coal, the Federal Government must 
determine those areas where oil shale development could be 
accommodated in a manner that is least disruptive to 
communities and existing activities. The Federal Government 
should provide this cumulative impact analysis and 
identification of areas suitable for oil shale development 
through a public process.
    Any Federal leasing program to be implemented in this new 
effort should ensure that the bonus bid concept continues and 
the proceeds are distributed to the State in which the lease is 
located.
    Any financial incentive program must have a duration 
comparable with the timeframes for private investment that 
include a realistic timeframe for technology development and 
implementation or the private dollars will not come.
    Given the economic transformation of northwest Colorado in 
the past 20 years, coupled with the increasing level of coalbed 
methane development, a coordinated and integrated permitting 
process is essential. The Colorado Joint Review Process is an 
option that the Federal Government should consider fully 
funding or partially funding, along with industry, to assure a 
rigorous review with adequate public input and consultation.
    It is essential that Congress consider the full life cycle 
of oil shale development as it contemplates a renewed national 
oil shale effort. We must understand the complete picture.
    The State of Colorado looks forward to ongoing discussions 
and being a partner in this process.
    [The prepared statement of Mr. George follows:]

  Prepared Statement of Russell George, Executive Director, Colorado 
                    Department of Natural Resources

    Mr. Chairman, thank you. I appreciate your invitation to 
participate in this hearing. I am Russell George, Executive Director of 
the Colorado Department of Natural Resources. As the lead state agency 
responsible for natural resource management, I appreciate the 
opportunity to provide our perspective on renewed oil shale development 
in Northwest Colorado.
    We are excited to be partners in this effort to move our great 
nation closer to energy independence. With perhaps as much as two 
trillion barrels of oil locked in the shales of western states, this 
vision is achievable in our lifetimes.
    As a lifelong resident of ``Shale Country'', I would like to share 
some thoughts with you on three decades of lessons learned regarding 
the impacts and possible tools to manage the development of the 
resource successfully.

                          BACKGROUND PRINCIPLE

    The State of Colorado has consistently supported the development of 
oil shale resources in Northwest Colorado since the Arab Oil Embargo of 
the early 1970's. Our focus has been on making sure that the projects 
are fiscally and environmentally sound, and that the communities do not 
incur extraordinary economic burdens. As history has shown, if 
development pays its way, the community impacts are less if the 
projects do not materialize.

                                HISTORY

    Let me summarize the key elements of the oil shale development 
cycles of the last three decades.
    Oil Shale Lease Bids. The federal government leased two tracts in 
each state--Colorado, Utah, and Wyoming--in the early 1970's. Bonus 
payments accompanied each of these leases--that determined the winning 
bid for the lease. Half of those bonus payments were distributed back 
to the state. The General Assembly established the State Oil Shale 
Trust Fund and Program which developed planning and coordination 
mechanisms for federal, state, and local governments and provided 
funding for designated local government services and projects ($100+ 
million). The goal was to mitigate the ``boom town'' syndrome.
    The Energy Mobilization Board. As the energy crisis worsened in the 
late 1970's, the Executive Branch of the Federal Government pondered a 
national board that could declare the development of a resource in the 
national interest--thus preempting local land use regulations and much 
of the state permitting process. The Western Governors, in particular, 
led the effort to oppose this preemptive measure by the federal 
government. The Board never materialized.
    Synthetic Fuels Corporation. Congress funded the Synthetic Fuels 
Corporation to initiate oil shale projects in a manner that would allow 
several technologies to develop simultaneously. Congress allocated $15 
billion in price guaranties and price incentives that were 
competitively awarded on a multiple year cycle. In a large part, this 
approach made the federal government a partner in accelerated 
technology development.
    Joint Review Process. In response to the national focus on the oil, 
gas, oil shale, coal and uranium resources in Northwest Colorado, 
Colorado developed the concept of a Joint Review Process. That process 
consisted of a centralized facilitation of the permit process at the 
local, state, and federal level. The Joint Review Process Program 
determined the timelines of the various required permits, coordinated 
the scoping process for the environmental impact statements, and 
facilitated public hearings and public comments. The overall 
coordination of the effort could allow for the application of several 
permits for an individual project to occur simultaneously. All the 
major oil shale projects, associated power plant projects, and coal 
mines used the Joint Review Process.
    Cumulative Impacts Task Force. In addition to the permitting and 
environmental analyses related to the simultaneous development of 
multiple resources, the State of Colorado was also concerned about the 
fiscal impact to individual communities and counties in high 
development areas. To that end, the state developed the concept of the 
Cumulative Impacts Task Force that modeled the budgets, revenues and 
expenditures of 104 jurisdictions in Northwest Colorado. The key task 
was to determine what projects would cause what economic impacts to 
what jurisdictions in what years based on different population and 
development scenarios.
    The effort proved to be extremely valuable when Exxon closed its 
Parachute Creek facility. At that time, because of the front-end 
analysis work, the distribution of energy impact funds, and the use of 
the Oil Shale Trust Fund, long-term economic impacts were manageable. 
At the time of the Exxon pullout, only one school district had a 
multiple hundred thousand dollar residual impact.
    DOE Technology Partnership. In the late 1980's, Occidental Oil 
under the leadership of Armand Hammer, proposed the cooperative 
development of an improved oil shale technology at the C-b Oil Shale 
Tract in Northwest Colorado. This was to be a 50-50 partnership of 
Occidental and the Department of Energy. Through the work of the state, 
the Department of Natural Resources, and the Associated Governments of 
Northwest Colorado, a seven-year commitment of funds was secured from 
the Department of Energy for this demonstration project. The other oil 
shale states contributed to the technology analysis for the project. 
The primary market was not for processing shale oil into motor fuels, 
but as chemical feedstocks for other uses. The project terminated upon 
the death of Armand Hammer when corporate directions were changed.

                     TECHNOLOGY AND THE ENVIRONMENT

    In the 1970's and 1980's, the Project Independence Technology 
Assessments and the Synthetic Fuels Corporation financial plan focused 
on both in-situ (in the ground), surface, and modified in-situ 
technologies. The goal for synthetic fuels was an industry that would 
convert coal, tar sands, and oil shale to liquid fuels at a level of 
two million barrels per day by 1992--the majority of which would have 
come from western oil shale.
    The dimensions of the proposed technologies were immense. A surface 
oil shale mine associated with a minimum-sized (50,000 BPD) commercial 
plant would be comparable in size to the largest iron and copper mines 
in the world. This scale was necessary since it required 2.5 tons of 
rock to produce one barrel of oil.
    Underground (in-situ) processes would have recovered less resource. 
Such mines would need to produce as much as 100,000 tons of rock each 
day to support a 50,000 BPD facility. The ore would be processed 
(retorted) above ground. Disposal of the spent shale in some cases 
would have filled valleys.
    The most advanced technology was modified in-situ. That technology 
mined a portion of the deposit by conventional methods for surface 
processing. The remaining shale was then fractured by underground 
detonations, the rubble ignited, and the oil transmitted to the 
surface. This process would recover less, but with less surface impact.
    As you can see, the surface area requirements for mining, 
retorting, or spent shale disposal were significant. Costs were 
enormous even in 1980 dollars--an average of $2 billion for each 50,000 
BPD plant. Based on the applicable 1977 Clean Air Act standards, 
production in NW Colorado would have been limited to 400,000 BPD. Water 
requirements for a 50,000 BPD facility would require 8500 acre-feet per 
year of water.
    In the end, the oil shale industry collapsed of its own weight--
given the volumes of material to be removed and processed, the 
enormously fluctuating world oil price, and the lack of a consistent 
national vision for the development of this resource that could focus 
private capital investment.
    While we do not know the specifics of the technologies that may be 
pursued over the next decade, we do know water availability, materials 
handling, power requirements, and transportation networks must be 
assessed in detail and the impacts mitigated appropriately.

                     WHAT WORKED--WHAT DIDN'T WORK

    If the Federal Government is to contemplate a renewed oil shale 
effort, it must do so based on the lessons learned over the past thirty 
years. While the technologies are changing, so are the characteristics 
of ``energy country'' in Northwest Colorado.
    As in the 1970's, we have record coal production that is straining 
existing transportation networks. We have record natural gas production 
levels and increasing permitting for natural gas development. The 
diverse development of this resource has dotted the landscape, 
increased truck traffic on county roads, and access to the resource has 
impacted many private landowners where the surface and mineral estates 
are severed. Additionally, there is a growing public sensitivity to in-
situ activities, such as fracking with ``proprietary fluids''.
    This development overlaps an area with increasing tourism and 
recreation opportunities and an expanding urban population. Oil shale 
leasing on top of this existing network of energy development and 
changing land uses may put more pressure on an already fragile 
ecosystem and public temperament.
    We do not control world oil markets, nor do we control the actions 
of OPEC. Therefore, the development of oil shale cannot be purely price 
driven. It must be a commodity of national interest developed on public 
lands in the national interest. That implies a prioritized use of 
public lands for the development of specific resources. Federal 
financial support must be sustainable over several decades to encourage 
private sector investment. An environmental review process must be 
thorough. A financial safety net for local governments that allows for 
growth to pay its way, and allows front-end financing of some 
infrastructure needs and analytical tools, is essential.
    All this said, the implication is that bonus lease payments from 
federal leases for local government facilities and services are good. 
Long-term federal financial support that fosters private investments is 
good. A coordinated permit process with adequate public input is good. 
And analytical tools that allow state agencies and local governments to 
anticipate the timing and amount of revenues for impact mitigation are 
essential.
    What will not work are processes that preempt or supersede local 
and state land use and environmental permit processes. What will not 
work is the development of technologies without adequate oversight to 
insure both public acceptance and environmental compatibility. What 
will not work is a national effort that does not address financial and 
infrastructure needs at the local level.

                        COLORADO RECOMMENDATIONS

    Colorado is excited to be a partner in the development of a 
resource that is both abundant and in the national interest. But it 
does intend that technology and environmental oversight be rigorous, 
that development use the best available practices to minimize impacts, 
that state and local needs are anticipated and funded, that development 
on public land be prioritized by resource and by region, and that the 
cumulative impact of mineral and energy development on both public 
lands and private lands be mitigated.
    Oil Shale Lands Suitable for Development. Given the density of 
natural gas and coal development in some areas of NW Colorado, the need 
for recreational/wildlife habitat/undeveloped areas, and the network of 
privately held oil shale lands that did not exist in the last boom, the 
federal government must determine those areas where oil shale 
development could be accommodated in a manner that is least disruptive 
to communities and existing activities. Not all types of resource 
development can occur everywhere. The carrying capacity of the land, 
communities and infrastructure must be evaluated. That will determine 
the suitable areas for coal, natural gas, and oil shale development.
    One type of mineral and energy development today, may preclude or 
limit another type of resource development tomorrow. We cannot forget 
that a consequence of the oil shale pull-out of the 1980's, and the 
sustained soft energy market in the 1980's, has been the transformation 
of the NW Colorado economy from an energy base to a tourism, 
retirement, second home and recreation base--and public attitudes have 
changed as well. That cannot be underestimated if accelerated 
development is to resume.
    The lead federal agency in this new effort should provide this 
cumulative impact analysis and identification of areas suitable for oil 
shale development as an element of any development and leasing plan.
    Oil Shale Lease Bids. Along with an oil shale lease process that 
generates front-end revenue and production royalties for the federal 
government, the 1970's concept of the bonus bid should be applied to 
any oil shale leases in the future. For the tracts leased in Colorado, 
a sum of over $100 million was collected and distributed to the 
impacted counties. This economic cushion is essential to community 
stability, and the ability to withstand the economic shock of a project 
termination.
    The federal leasing program to be implemented in this new effort 
should insure that the bonus bid concept continues, and the proceeds 
are distributed to the state in which the lease is located.
    Federal Financial Support. Several options have been pursued 
through the years to fund technology development. Tax credits have been 
one avenue that proved very successful for coalbed methane development. 
Incentives like those of the Synthetic Fuels Corporation have been 
another. The DOE Demonstration Project route like that at Logan Wash is 
another. And the DOE cost-share like the Occidental C-b Oil Shale 
Project is another.
    Oil shale technology development is still fraught with uncertainty. 
Once a technology appears promising, it must be field tested. And then 
limited commercial scale production may occur. Collectively, this could 
span a decade or more. But the lesson learned from the 1970' and 1980's 
is that any financial incentive program must have a duration comparable 
with the timeframes for private investment that include a realistic 
timeframe for technology development and implementation, or the private 
dollars will not come.
    The Department of Energy should poll the industry prior to the 
passage of any legislation to determine the adequate minimum timeframe 
to encourage private investment.
    Coordinated Permitting Process. Given the economic transformation 
of NW Colorado in the past 20 years, coupled with the increasing level 
of natural gas development, a coordinated and integrated permitting 
process is essential. The environmental and land use permitting process 
can be complex and time-consuming when all the local, state and federal 
requirements are considered. Coordinating the process is essential, and 
cannot be underestimated. For the requirements in place 20 years ago, 
the average timeframe to permit an oil shale project was about 42 
months. Some processes have become more complex since then--and 
certainly public interest is more organized and focused.
    As a reminder, the Colorado Joint Review process grew out of the 
concerns raised over the concept of the Energy Mobilization Board. That 
Board would have had the power to preempt local and state regulatory 
requirements in the national interest. The reaction in the West was to 
coordinate and streamline, not dismantle, the existing process. And it 
worked. Attempts in recent years to truncate the process have been met 
with public criticism and lawsuits. Such efforts have proven to be 
counterproductive to the goal of developing these important resources.
    The Colorado Joint Review Process is an option that the federal 
government should consider fully funding, or partially funding along 
with industry, to assure a rigorous review with adequate public input 
and consultation.
    Economic Impact Analysis. Once the development area is determined, 
a procedure must be established to evaluate economic impacts at the 
local level. The federal government should fund, either through the 
bonus bid process or authorizing legislation, a concept similar to the 
tools used by the Cumulative Impacts Task Force. This analysis would 
not only guide the timing of needed permanent and temporary community 
services and infrastructure, but also allow local governments to 
establish fiscal tools that would insure that growth could pay its own 
way.
    The true cost of the development of strategic resources such as oil 
shale must be evaluated not only in the context of their technology and 
development costs, but also the costs and benefits to the community. 
Securing a safety net is the primary lesson of the last bust.

                               CONCLUSION

    It is essential that Congress consider the life cycle of oil shale 
development as it contemplates a renewed national oil shale effort. 
Only this view will portray the complete picture, so that the 
appropriate technology, environmental and economic structures can be 
defined and funded for a successful long-term effort. I look forward to 
working with you in the months ahead.

    Senator Salazar. Thank you, Mr. Speaker. I appreciate your 
comments here this morning.
    Mr. Evans.

    STATEMENT OF JIM EVANS, EXECUTIVE DIRECTOR, ASSOCIATED 
          GOVERNMENTS OF NORTHWEST COLORADO, RIFLE, CO

    Mr. Evans. Thank you, Mr. Chairman. My name is Jim Evans. I 
am the director of the Associated Governments of Northwest 
Colorado, a local government association of cities and counties 
that was formed 30 years ago as the regional oil shale planning 
commission, and it was formed specifically to deal with the 
impacts of oil shale development in our five-county region.
    I am here in support of the DOE strategy that was 
referenced earlier by the chairman for a research and 
development approach rather than a commercial scale venture 
that was premature in the last cycle. So my testimony, that 
submitted, references some of the things we learned from the 
last cycle and some of the things we would like to be addressed 
as we go forward now. I would just like to hit those highlights 
and actually start with the statement that I am here from the 
local government and I am here to help you. You know, that is 
what we hear from the Federal agencies when they come out to 
help us. This time I would like to repay that because I have 
some specific recommendations.
    Senator Salazar. Usually when it is the local government, 
it is very helpful, Mr. Evans.
    Mr. Evans. Well, we appreciate all the comments of the 
members of the committee about that concern and the Department 
of Energy and Department of Defense have all indicated that as 
well.
    The Club 20 resolution that has been submitted that Senator 
Allard referenced earlier basically sets forth what our local 
position is. We do not want to wait for another crisis mode 
like the Arab oil embargo of 1974 and go for premature 
commercial scale development. We very much appreciate Shell Oil 
Company's efforts going forward with a steady research and 
development effort, and we think that that should be encouraged 
by the Department of the Interior and the Department of 
Defense, as well as DOE.
    Specifically, with some of the recommendations that are 
contained in our testimony, we would like environmental impacts 
as part of this effort, and I think Mr. Smith will go into that 
in more detail.
    We would like the socioeconomic impacts that Russ George 
has just indicated considered as part of that effort, and my 
written testimony goes into more details.
    At the State level, we would encourage those things the 
Colorado Joint Review program already referenced, the 
Department of Natural Resources. Also their wildlife and 
reclamation programs should be utilized. And the Colorado 
Department of Public Health air quality--I also sit on the 
State Air Quality Control Commission--I think the State is in a 
position to the air quality and we are encouraged by Shell's 
experience so far.
    Then I would like to get to money. I have a suggestion for 
the Federal Government. You have an opportunity before you. 
Congress approved the transfer of the Naval Oil Shale Reserve 
lands in our State from the Department of Energy to the 
Department of the Interior. I have attached a letter from the 
Secretary of the Interior on the status of the funds that now 
have been accumulated from the natural gas leasing that that 
triggered. That is the current natural gas leasing, Mr. 
Chairman. I am not talking about the proposed additional 
leasing. There is a $38 million fund accumulated now from the 
Federal and State share that is being transferred over to the 
Department of Energy in a special account, and it is referenced 
in that letter. I think those funds should be made available 
for the oil shale program in some mechanism.
    Then estimates of future leasing on the Naval Oil shale 
Reserve. There is a lot of discussion on whether there should 
be additional drilling on top of the area or from the side. 
Technology will eventually get at that resource, but it is an 
$8 billion natural gas resource in estimates, of which one-
eighth, or $1 billion, in royalties will occur that both Shell 
and the Governor's representative here have referenced. That 
would be split 50-50 with the State and the Federal Government. 
So there is a $500 million potential for the Federal Government 
and a $500 million State share over a 20-year period estimated 
for that resource.
    I believe--and our association and local governments 
believe--that a statement in legislation you are considering 
should reference that some of these mineral leasing funds 
should go toward oil shale impact, as well as other energy 
impacts. There is already priority language in the Mineral 
Leasing Act, but I think it should be strengthened. There would 
be a good source of funds for the research and development 
efforts that you are considering.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Evans follows:]

  Prepared Statement Jim Evans, Executive Director of the Associated 
              Governments of Northwest Colorado, Rifle, CO
   A Local Government Perspective on Federal Oil Shale Research and 
                          Development Efforts

    Mr. Chairman and Members of the Committee:
    My name is Jim Evans, Executive Director of the Associated 
Governments of Northwest Colorado (AGNC), representing cities and 
counties in the 5-county region of Garfield, Mesa, Moffat, Rio Blanco 
and Routt Counties in Northwest Colorado. On behalf of our local 
governments I want to express our appreciation to your committee for 
asking our local government views on the development of oil shale 
technology.
    Our local government association was formed at the start of the 
last oil shale development cycle as the ``Regional Oil Shale Planning 
Commission'' with the specific charge to address the socioeconomic and 
environmental impacts of a potential commercial scale oil shale 
industry. Now, renamed as the Associated Governments of Northwest 
Colorado, we are still concerned with this issue. This time around it 
appears that our region will need to address the potential growth and 
infrastructure impacts of oil shale development on top of the 
socioeconomic impacts already occurring in our region from record 
levels of natural gas, oil and coal production. With estimates of from 
600 billion barrels to 1.8 trillion barrels of recoverable oil from 
shale in our region, we recognize the national interest in developing 
the technology for this resource. In particular, the needs identified 
for the Department of Defense for a secure domestic source of fuel make 
us realize that the importance of the resource cannot be ignored. We 
also understand the potential economic benefit development of this 
resource can play on our national balance-of-trade and G.N.P.
    Since more than 80% of the oil shale resource is located on 
federally-owned public land and recognizing that the future development 
is driven by national interests, local governments in our region 
believe the federal government must play a lead role in addressing 
these socioeconomic and environmental impacts and costs. We do not want 
to see local governments (and local taxpayers) stuck with the costs of 
new infrastructure and the mitigation of environmental impacts. So we 
are pleased to see that your Committee and the Department of Energy as 
we begin this next cycle in Oil Shale development are addressing these 
issues up front. This is a refreshing difference than the start of the 
last cycle. Back then, with an oil embargo facing the country, Congress 
first responded with a proposal for an Energy Mobilization Board with 
the power to declare Northwest Colorado as a ``National Sacrifice 
Zone''. Fortunately, that proposal did not make it all the way through 
Congress and as my following testimony indicates, we learned a lot 
during a fairly painful 18-year boom/bust cycle prematurely attempting 
to develop commercial scale projects.
    This time we appreciate the ``Research and Development'' type 
approach being put forward by the Department of Energy, and by the 
recognition of your Committee up front that you are looking for 
development of an environmentally friendly technology, and an approach 
not dependent upon the price of oil.
    Because we support your stated approach it gives me the opportunity 
to say, ``I am from the Local Government, and I am here to help you.''
    I would like to start my help by submitting for the record the 
following resolution from Club 20, the community based Colorado 
organization representing cities, counties, businesses and citizens 
throughout Western Colorado. This resolution was unanimously adopted by 
the Club 20 Board of Directors endorsing a Research & Development 
program as being considered by your Committee.
              club 20 support for an economically viable 
            and environmentally sound oil shale r&d program
          Whereas Oil shale may still be the largest untapped resource 
        available for transportation fuels;
          Whereas the richest deposits of oil shale in the world are 
        located in Northwestern Colorado and Eastern Utah;
          Whereas a DOE report indicates that oil shale development may 
        still be important for our country's National Security (as an 
        alternative to imported oil) and for our Economic Security (to 
        improve our balance of trade); and
          Whereas without a well conceived federal R&D program this 
        region may again someday be faced with another crisis oriented 
        commercial scale oil shale program.
          Now therefore be it resolved that Club 20 supports research 
        and development efforts leading to an economically viable and 
        environmentally sound oil shale program.
          Further, Club 20 supports DOI/DOE/DOD efforts to develop a 
        national oil shale policy and long-term R&D plans.
            Approved, Feb. 15, 2005,
                                  Club 20 Energy Committee,
                               Club 20 Natural Resources Committee.
            Approved, April 1, 2005,
                                        Club 20 Board of Directors.

Background: Last Oil Shale Development Cycle 1974-1992

   The last oil shale cycle started with the Arab Oil Embargo 
        in 1974. This was a Sudden Oil Shortage, resulting in long 
        lines at gas pumps, temporary high gas prices, and a staggering 
        impact on the U.S. Auto Industry and U.S. economy, aggravated 
        by gasoline rationing.
   Congress responded in a crisis mode.
   The first industry proposal to local government was: Get out 
        of the way and we will develop Oil Shale! Congress responded 
        with a Proposal for Northwest Colorado to be declared a 
        ``National Sacrifice Area'', including an Energy Mobilization 
        Board with power to override Federal, State and Local 
        environmental and land use laws. State and Local governments 
        responded on an adversarial basis.
   President Jimmy Carter instead got Congress to establish the 
        Synfuels Corp. with $15 Billion in price guarantees and price 
        incentives.
   In our region 12 projects were underway at peak of cycle 
        (either in planning, permitting or construction).
   An Exxon White Paper suggested a socioeconomic impact of a 
        one-million population increase in NW Colorado by 1990. It 
        appeared that all the construction workers in U.S.A. would be 
        required for the effort if all the companies went forward at 
        the same time.
   The Colorado projects reaching construction or testing: 
        Exxon Colony Project, Unocal, Oxy (CB), CA consortium. The DOE 
        Anvil Points facility in the meantime was pretty much 
        abandoned, except for a look at an asphalt additive byproduct.
   The cycle collapse (Bust) started May 2, 1982 with an abrupt 
        Exxon Colony closure. In the Boomtown Blues book, this event 
        was blamed for the U.S. and worldwide recession.
   The Unocal project & Oxy continued their efforts through 
        1990-92. This somewhat mitigated the ``bust'' cycle. At the 
        peak of the cycle, the combined population of the 2 most 
        impacted counties (Garfield and Mesa) increased from 1981 to 
        1983 by 12%, from 112.0 thousand to 125.6 thousand. Then in the 
        next 2 years the combined population dropped back to 111.8 
        thousand.
   Congress then overreacted and shut down virtually all oil 
        shale research programs, despite recommendations from many 
        sources that research and development activities should 
        continue.

Was Anything Learned During This Cycle? Yes!

   Congress in 1975-76 enacted Mineral Leasing Act Amendments 
        at the urging of States and Local Governments. The State share 
        of federal royalties increased from 37% to 50% with priority 
        for local governments impacted by Mineral Leasing activities, 
        such as Oil Shale, Oil, Natural Gas and Coal.
   Congress enacted Payments-In-Lieu of Taxes (PILT) Act to 
        compensate counties for tax exempt federal land thereby giving 
        direct assistance to rural public land counties.
   States in turn enacted Severance Taxes, also with a priority 
        to address socioeconomic impacts.
   Local governments in turn enacted Major Impact Land Use 
        Mitigation Ordinances.
   The Colorado Joint Review Process (CJRP) was initiated. This 
        was a voluntary program designed to coordinate and speed up 
        federal, state and local permitting.
   Local Government Energy Impact Programs were established by 
        States with the new Revenue from Mineral Leasing and Severance 
        Taxes. These programs today address the ongoing impacts of 
        mineral development. The Energy Impact Program in Colorado 
        actually started with the formation of the Regional Oil Shale 
        Planning Commission (now AGNC) and the enactment of the Oil 
        Shale Trust Fund (OSTF). From the OSTF $75 million plus 
        interest was allocated to NW Colorado counties. The $75 million 
        was Colorado's 37.5% of federal Oil Shale leasing bonuses.
   Negative impacts of the abrupt Exxon Colony Project closure 
        actually resulted in a positive turnaround on State/Local/
        Industry relationships and communications as Unocal and Oxy 
        proceeded with their projects with local support.
   Local governments also supported continuation of the Unocal 
        and Oxy projects, including proposals to turn them into federal 
        oil shale technology demonstration projects.
   Support for a Federal Oil Shale R&D program was generated in 
        Colorado, Utah, Wyoming, Kentucky, Illinois and California, but 
        to no avail.
   New Paraho Corp. temporarily continued oil shale asphalt 
        testing at Anvil Points to demonstrate the byproduct approach 
        to make oil shale economically viable. Some of the asphalt test 
        strips are still in place with no repairs required.

Local Government Advice to Industry for the Next Oil Shale Development 
        Cycle: Communicate! Communicate! Communicate!
    The Shell Oil Shale Project is on the right track. Shell Oil is the 
only company in Colorado who is currently continuing with field-
testing. Local governments appreciate these efforts. Their efforts have 
included ongoing meetings with County Commissioners, Cities, school 
districts and citizen groups. They have sponsored and organized town 
meetings. These were very successful from a local perspective. These 
should continue at the beginning of each phase of an R&D program.
    The Department of Energy also appears to be on the right track. The 
Naval Petroleum and Oil Shale Reserve Office of DOE has prepared a well 
documented and thorough report indicating the National interest in 
developing the oil shale resource (trade deficit impact on the economy 
and national defense interest in a secure oil source.) We believe 
addressing the socioeconomic and environmental issues in the DOE 
proposal for a National R&D program and demonstration facility is on 
target. Virtually all groups and industry involved in the last oil 
shale cycle have recommended the need for an ongoing federal oil shale 
research program.
    These Groups and individuals back in 1991 were: The Rocky Mountain 
Oil & Gas Association, The Western Oil Shale Action Committee, Club 20, 
Associated Governments of Northwest Colorado, The Garfield County 
Citizen Alliance, Governor Roy Romer, Senator Tim Wirth, Representative 
Ben Campbell, The Rebuild America Foundation, The Alternate Energy 
Research Institute, and The Rocky Mountain Institute. There may have 
been others. These were the ones that I was aware of.
Recommendation to Address the Socioeconomic Impacts of the Next Oil 
        Shale Cycle
    With the renewed interest in oil shale development, the Department 
of Energy needs to provide funding for socioeconomic programs to:

   Assemble and update impact data from the last cycle.
   Identify appropriate computer systems/models to assess 
        projected impacts.
   Development of baseline economic data for current 
        activities.
   Help identify and provide revenue streams for local/state 
        government services/infrastructure potentially impacted by oil 
        shale development.

    DOE also needs to identify and recommend appropriate federal, state 
and local policies to encourage prudent and environmentally sound oil 
shale development.
Recommendation to Address Environmental Impacts of Oil Shale 
        Development
    The DOE Demonstration program/projects should address:

   Surface disturbance impacts and ongoing reclamation 
        requirements.
   Air Quality impacts.
   Water Quality and Quantity impacts.
   Wildlife protection and mitigation requirements.
   Employee health, safety and training needs.

    Regular communications with news media and environmental groups 
should address the potential environmental impacts of various oil shale 
technologies.
    The Colorado Department of Public Health and Environment should be 
actively involved in monitoring air quality and water quality impacts.
    The State of Colorado Department of Natural Resources and its 
Wildlife Division should be actively involved in these reclamation and 
wildlife issues.
    The Department of Interior should develop a leasing program to 
accommodate access to oil shale for research and demonstration project 
purposes. Any commercial scale leasing proposals must include 
provisions that recognize the ``carrying capacity'' concepts for 
socioeconomics and the environment that are part of the BLM Piceance 
Basin Resource Management Plan.
Recommendation to Provide the Funding for Oil Shale Research Costs and 
        Incentives
    We believe it is fortunate that Congress may have already provided 
a potential source of funding for Oil Shale R&D efforts. This revenue 
may be currently available from the Naval Oil Shale Reserve (NOSR) 
lands themselves located in Northwest Colorado. As indicated in the 
attached letter from the Department of Interior, some $43.7 million may 
be accumulated by March 2007 in a U.S. Treasury account from the 
current natural gas leases on their NOSR lands. These NOSR lands were 
transferred by Congress from DOE to the Department of Interior with a 
Congressional priority established for natural gas leasing.
    Some of these funds, estimated at $5.8 million, are earmarked for 
environmental cleanup of the Anvil Points spent shale pile. Otherwise, 
we believe Congress has the opportunity for the remainder of these 
funds to be made available to address the socioeconomic and 
environmental aspects of oil shale development in Northwest Colorado.
    In the future, more revenue should be available from this source. 
According to industry estimates, additional leasing of the NOSR lands 
could produce leasing bonuses of up to $360 million (to be shared 50% 
federal and 50% state) plus ongoing production leases of an estimated 
$32 million annually for at least 20 years. That would be another $640 
million total also to be split 50/50 federal and state. Congress should 
establish a priority to address oil shale and other energy development 
impacts in Northwest Colorado from these leasing revenues.
    We believe this type of funding is necessary to make sure the DOE 
research and demonstration projects can proceed without interruptions 
from fluctuations in the price of oil.
    Thank you for this opportunity to testify. I would be happy to 
answer any questions you may have.
                                 ______
                                 
                        Department of the Interior,
                                 Bureau of Land Management,
                                     Lakewood, CO, February 9, 2005
Hon. Forest Nelson,
Chairman, Associated Governments of Northwest Colorado.

Hon. Jim Evans,
Executive Director, Associated Governments of Northwest Colorado.
    Dear Mr. Nelson and Mr. Evans: This is in response to your letter 
dated January 5, 2005, regarding the state share of federal mineral 
royalty payments related to the Roan Plateau area (formerly Naval Oil 
Shale Reserves Nos. 1 and 3). Your letter requested a response to two 
questions.
    1. Have sufficient funds been accumulated to satisfy the 
reimbursement provisions of the legislation?
    Sufficient funds have not yet accumulated to cover the 
reimbursement provisions of the legislation. As of December 28, 2004, 
the treasury account has accumulated $23,087,790 while the total 
reimbursement amount is estimated to be $43,735,001. This leaves a 
difference of $20,647,211. There are two components of the reimbursable 
costs, environmental restoration and cost recoupment of the United 
States investment in wells and gathering lines. The cost for 
environmental restoration is estimated to be $5,800,000 (-15% to +30% 
accuracy). The costs to be recouped for the investment in wells, 
gathering lines, etc., is established at $37,935,001.\1\
---------------------------------------------------------------------------
    \1\ $37,935,001 includes past DOE costs as outlined in a May 5, 
1999, DOE memorandum, entitled, ``NOSR Cost Recovery Model and Results"
---------------------------------------------------------------------------
    2. When will the states share of royalty revenues resume?
    The lands currently leased are producing royalties of approximately 
$799,000 per month, based upon a fourteen month average of royalty 
payments for fiscal years 2004 and 2005. Based upon this average, the 
remaining $20,647,211 to be reimbursed will be accumulated in about 26 
months, or approximately March 2007. Under the current schedule, the 
Engineering Evaluation/Cost Analysis of the environmental restoration 
work is anticipated to be completed by May 2005; with cleanup completed 
by July 2007.
    Since sufficient funds still have not accumulated to satisfy the 
reimbursement provisions of the legislation, we do not believe that we 
can initiate or expedite sharing of the royalty payments sooner than 
March 2007.
    We understand and appreciate your concern with this issue.
    If you have any questions on this issue, please feel free to 
contact any of the following: Jamie Connell, Field Manager, Glenwood 
Springs Field Office at 970-947-2800; Lynn Rust, Deputy State Director, 
Energy Lands and Minerals, BLM Colorado State Office at 303-239-3885; 
or Duane Spencer, Chief, Branch of Fluid Minerals, BLM Colorado State 
Office at 303-239-3753.
            Sincerely,
                                                Ron Wenker,
                                                    State Director.

    Senator Salazar. And we have that letter, Mr. Evans?
    Mr. Evans. Yes. That is in the written that was submitted.
    Senator Salazar. Thank you very much, Jim.
    Mr. Smith.

  STATEMENT OF STEVE SMITH, ASSISTANT REGIONAL DIRECTOR, THE 
                 WILDERNESS SOCIETY, DENVER, CO

    Mr. Smith. Good morning, Mr. Chairman. It is a pleasure to 
be here this morning and especially to address you on the dais 
as our newest Senator and with your new, if momentary, title.
    Senator Salazar. It is momentary, let me assure you.
    [Laughter.]
    Mr. Smith. My name is Steve Smith. I appreciate very much 
this opportunity to address the committee. I also appreciate 
the interest shown by Colorado's other Senator, Senator Allard, 
in this remarks and questions presented earlier.
    I am assistant regional director for The Wilderness Society 
Four Corners States Office. My testimony today, however, 
reflects thoughtful research and recommendations compiled by 
staff and volunteers from an array of conservation and citizen 
organizations.
    Perhaps uniquely relevant to today's topic, I live in 
Glenwood Springs, Colorado, 30 miles from one of America's 
richer deposits of oil shale. I am also an active member of 
Club 20's Energy Subcommittee where, along with Mr. Evans and 
others, we crafted the details of the resolution mentioned 
several times about the deliberate, but very cautious and 
careful encouragement of looking into the possibility of oil 
shale development.
    Over the past 17 years living in Glenwood Springs, I have 
watched the local people and communities there slowly, 
steadily, and sometimes bitterly crawl out from under what was 
the disaster of the last oil shale experiment in our county. 
Generally, our communities are thriving now, building economies 
that are diverse, enlightened, and based in large part on the 
preservation and enjoyment of the unique scenic and untrammeled 
public lands surrounding us.
    We in western Colorado are aware of oil shale's potential, 
its potential to help provide for the Nation's energy needs, 
but also its potential to engender false hopes, exaggerated 
claims, and unfilled promises.
    There are at least three basic environmental issues that 
oil shale development presents, and we urge that this committee 
of the Senate and Congress proceed carefully in considering any 
commitment of Federal land or resources in this endeavor.
    First, this technology may threaten groundwater quality and 
the supply of water in the Upper Colorado River Basin.
    Second, the current version of the new in-situ process 
requires very tightly spaced drilling shafts to treat and 
produce fuel, with surface impacts that approach 100 percent.
    Third, the process consumes more energy than it produces by 
a significant margin.
    If other companies decided to pursue development of oil 
shale using conventional mining and above-ground processing or 
retorting, the environmental and water resource issues would be 
multiplied 10- or 100-fold.
    An even more immediate concern to the people and 
communities near oil shale deposits are the impacts that a 
revived oil shale industry would have on the growth, social 
structure, public facilities, transportation systems, 
watersheds, tourism, and public land recreation opportunities 
that are crucial to our daily lives. Local people have a strong 
concern about these issues and need to have a strong voice in 
their governments' decisions.
    We commend Shell Oil Company in particular for the careful 
and deliberate approach the company has pursued so far. We hope 
that other companies will emulate their model of slow, small 
research using private financing.
    Most basically, Mr. Chairman, we do not really believe that 
any new Federal funding or significant action is needed at this 
time. Private research is continuing. The Mineral Leasing Act 
grants the Secretary of the Interior authority to issue new 
leases, if interest warrants, and the Department of the 
Interior is, indeed, in the midst of promulgating rules for a 
limited public lands leasing program for oil shale research and 
development.
    Those oil shale research and development leases, by the 
way, should be for truly new research. Companies leasing 
Federal lands for this research should pay full market value 
for the use of the land. Leasing tracts should be tightly 
constrained in size, require continuous and comprehensive 
environmental monitoring, provide baseline data on energy 
producing techniques, and on environmental protections 
necessary to minimize any effects on natural and public values. 
No lease for research and development should be converted to a 
commercial production lease.
    Such are the small, cautious, and smart steps appropriate 
to this technology and the limited impact it might have on our 
energy future. Let the free market work. Be cautious with 
limited Federal dollars and especially careful with 
irreplaceable Federal land, and learn from small, smart 
experiments before embarking on anything larger.
    If there is one thing that might be done, we recommend 
specifically that the Department of the Interior enter into a 
cooperative agreement with the States of Colorado and Utah to 
develop a comprehensive, programmatic, environmental impact 
statement under the auspices of the National Environmental 
Policy Act, to evaluate economic, technical, environmental, and 
socioeconomic issues regarding oil shale development before 
public lands or resources are committed. This detailed NEPA 
analysis should be conducted even before implementation of 
research and development leasing program, certainly before 
undertaking any larger scale use of public lands or resources 
for oil shale production.
    Thank you again for this opportunity and this generous 
length of time to discuss and address with the committee this 
fascinating discussion about this unique resource. Please let 
us know at any time how we can assist with further 
congressional discussion of these important questions. Thank 
you.
    [The prepared statement of Mr. Smith follows:]

    Prepared Statement of Steve Smith, Assistant Regional Director, 
                         The Wilderness Society

    Good morning, Mr. Chairman and senators. My name is Steve Smith. It 
is a pleasure to be with you today, and a special pleasure to see my 
newest senator, Senator Salazar, on the dais.
    I am Assistant Regional Director for The Wilderness Society's Four 
Corners States Office. My testimony today, however, reflects thoughtful 
research and recommendations compiled by staff and volunteers from an 
array of conservation and citizen organizations, including Biodiversity 
Conservation Alliance, Center for Native Ecosystems, and Colorado 
Environmental Coalition, and Oil & Gas Accountability Project, among 
others.
    I am especially grateful for the very able advice and assistance 
that I have received from Jim Martin of Western Resource Advocates, 
Randy Udall of Community Office for Resource Efficiency, air quality 
expert Robert Yuhnke, and Kevin Markey.
    Perhaps uniquely relevant to today's topic, I live in Glenwood 
Springs, Colorado, 30 miles from one of America's richer deposits of 
oil shale. Over the past seventeen years living there, I have watched 
the local people and communities slowly, steadily, sometimes bitterly, 
crawl out from under what was the disaster of the last oil shale 
experiment in our county.
    Generally, our communities are thriving now, building economies 
that are diverse, thriving, and based in large part on the preservation 
and enjoyment of the unique scenic and untrammeled public lands 
surrounding us.
    With recent news stories about increasing oil and gasoline, and 
with our continuing and increasing reliance on oil--especially oil 
imports--to fuel our vehicles, it is apparent that some Members of this 
Committee and other policy makers have a renewed interest in the 
development potential of the oil shale resources in Colorado, Utah, and 
Wyoming. However, there is an old and enduring saying in Colorado about 
oil shale, ``Oil shall has a fantastic future--it always has and it 
always will.''
    Almost exactly a month ago today, The Wall Street Journal carried a 
story that reiterated both the enormous resource that is tied up in the 
shale of the Mahogany Zone of the Green River Formation, and the 
challenges that are entailed in literally extracting oil from rock. We 
who live in western Colorado, who lived through the last oil shale 
boom--and bust--are well aware of this resource's potential. We are 
aware of its potential to help provide for the nation's energy needs, 
but we also are aware of its potential to engender false hopes, 
exaggerated claims, and unfulfilled promises.
    Other witnesses appearing before you today are far better qualified 
than I am to assess both the quantity of shale oil that is potentially 
recoverable and the quantity that may prove to be economically 
recoverable. While considering their presentations, however, it seems 
important to recall that producers and their investors sank $5 billion 
into oil shale last time around, and then abandoned the field on May 2, 
1982.
    It is important to put today's oil and gasoline prices into 
perspective. As the last oil shale venture in northwest Colorado was 
coming apart in 1980, the Office of Technology Assessment projected 
that the production of oil from oil shale might be economically viable 
at a market price of $61 per barrel, and an internal Exxon memo pegged 
the number at $108 per barrel, both those numbers in 1980 dollars. Even 
our current prices of $50-$58 dollars per barrel, adjusted for 
inflation, do not come close to those levels.
    I would like to use my time before you today to identify some of 
the environmental issues that oil shale development entails, and 
ultimately to urge that this committee, the Senate, and the Congress 
proceed carefully and deliberately in considering any commitment of 
federal land or resources to this endeavor.
    There are two basic variations of oil shale developments currently 
contemplated--in-situ processing and mining and surface retort 
processing. Each raises unique concerns.
    The technology that Shell and others are pursuing is, as we 
understand it, an in-situ process that heats shale rock to 650-700 
degrees Fahrenheit to release the petroleum compounds that are bound to 
that rock. I have been very impressed by presentations about the 
imaginative and innovative experimentation the company is conducting on 
private land in northwest Colorado. That process raises at least two 
immediate issues, however.
    First, from what we understand, this technology may threaten ground 
water quality. Shell is proposing to prevent ground water contamination 
through the use of something called an ice wall--in short, they propose 
to super-cool the area around the extraction cone. This represents a 
potentially ingenious solution to a very serious issue--but it should 
go without saying that this committee and the Department of the 
Interior should insist upon thorough testing, analysis, and peer review 
of the technology's use before committing the nation to an unproven 
technology that irretrievably contaminates ground water across. a wide 
swath of Colorado or other western states.
    Second, the current version of the new in-situ process requires 
very tightly spaced drilling shafts to treat and produce fuel. The 
surface impacts of such a process approach 100%; this is a highly 
industrial operation imposed on previously natural landscapes. The 
cumulative effects that such a process might have on public lands, were 
the technology to be transferred there, bear close scrutiny.
    Third, the process consumes more energy than it produces, by a 
significant margin. This heating and cooling process will create huge 
new demands for energy to extract oil from shale.
    The experience in Alberta should be a cautionary note for us. Tar 
sands development in Canada could not occur without the use of large 
quantities of natural gas--potentially much of the entire production to 
be carried by the new pipeline from the MacKenzie Delta. Tar sands 
development in Canada is one of the principal reasons natural gas 
exports to the United States will not increase and may even decline 
over the next ten years.
    The question this committee should pose is--where will this energy 
come from? If the answer is natural gas, that decision will further 
exacerbate a structural gap between natural gas supplies and natural 
gas demand between now and 2025. If the answer is new coal-fired 
electric power plants, then I hope the Committee and the Environmental 
Protection Agency will be directed to assess the air quality impacts 
that inevitably will result from both new energy sources and the oil 
shale process itself. As the Bureau of Land Management's analysis for 
natural gas development in and near the Roan Plateau suggests, the 
cumulative impacts of energy and other resource development in this 
part of Colorado, combined with emissions from nearby areas, threaten 
air quality in a wide range of Class I areas. At a minimum, we should 
understand the air pollution impacts of full field development and have 
in place a mechanism for mitigating those impacts.
    Meanwhile, we must put the prospect of a relatively minor 
contribution that oil shale might make to the nation's energy supply 
into the larger context of energy production, energy use, and 
efficiencies in both.
    Another recent Wall Street Journal article, from March 28, 
described the discussions and recommendations of 26 former national 
security advisors who, in essence, encouraged the nation to recognize 
the full cost of our continuing, disproportionate, and, some would say, 
debilitating dependencies on oil from any source.
    One way to address the increasing cost of oil and the slowing pace 
of oil production is to use it more efficiently. According to the 
Community Office on Resource Efficiency, an improvement in the fuel 
efficiency of the United States' automobile fleet would save 400,000 
barrels of oil, more than oil shale is ever likely to produce.
    Certainly, efficiency alone will not replace our need for physical, 
usable fuels. Just as certainly, it can make the sources we have go a 
lot farther in supplying the sustenance, mobility, and products that we 
need. My point is that before considering any significant investments 
in promising but unproven and expensive technologies like oil shale, we 
need to be sure that we have taken all the easier and less expensive 
steps possible in improving the way we produce and use fuel from 
existing sources.
    As a Coloradan and a long-time resident of the Western Slope, I 
also hope this committee will carefully assess how full field 
development would impact water rights and water-related issues in 
Colorado and in the upper Colorado River basin. I raise just a few of 
the many questions that must be asked. Is any water available for a new 
energy industry in drought years? If so, would the withdrawals for oil 
shale result in a reduction of flows--or even a loss of flows--in the 
critical reach just upstream of Grand Junction? If so in turn, what 
endangered species issues are implicated? If any water is available in 
drought years, how would oil shale development affect the total amount 
of water remaining for Colorado's use under the Law of the River?
    The recent conversation about oil shale development has revolved 
around the in-situ processes being developed by Shell. However, if 
other companies decide to pursue development of shale oil using 
conventional strip mining and above-ground retorting, the environmental 
and water resource issues would be multiplied ten or one hundred-fold. 
The retorted material contains a plethora of toxic substances that 
would pollute ground and surface water. The material expands during 
processing, creating massive waste storage problems. The processing 
itself requires staggering amounts of energy and emits large quantities 
of both criteria pollutants and hazardous air pollutants. In addition, 
it goes without saying that the mining areas are near the Colorado 
River, which provides drinking water to literally millions of people 
downstream.
    One of the factors that must be addressed for any above-ground 
retorting operations is the control air pollution. Primary among 
pollution types is the inevitable generation of sulfur and, once that 
element is exposed to air, the generation of sulfur dioxide. That was 
an important issue in 1980, when the court held that oil shale 
operations must comply with direct and regional incremental degradation 
of air quality. The technologies for control of sulfur dioxide has 
improved in the past two decades, but not all sources of the pollutant, 
primarily electric power plants, have taken measures to use them. If 
oil shale operations add sulfur dioxide to the regional mix, oil shale 
operators may be able to mitigate those additions by investing in 
pollution control technologies at existing power plants. Such exchanges 
of so-called pollution credits must, however, be investigated and 
integrated into any expanded oil shale program.
    An even more immediate concern to the people and communities near 
oil shale deposits are the impacts that a revived oil shale industry 
would have on the growth, social structure, public facilities, 
transportation systems, watersheds, tourism, and public lands 
recreation opportunities that are so crucial to our daily lives. Local 
people must be assured that they will have a strong voice in their 
government's decisions, especially those that have such a potential, 
based on past experience, for terrible consequences.
    We commend Shell for the careful and deliberate approach the 
company has pursued to date. We hope that other companies will emulate 
their model of slow, small, research, using private financing. 
Meanwhile, we urge, in the strongest terms, that this committee and 
Congress adopt a policy of carefully looking before we leap. There are 
myriad questions--not just environmental--to be addressed. As Shell's 
Mr. Terry O'Connor said in the Denver Post just last week, ``we think 
we're about a decade from making a decision on commercial production.'' 
We hope that Shell's research is successful and they can find a way to 
develop this process in an economic and environmentally responsible 
way. While research by Shell and others continues, we encourage the 
Congress to take a hard look, based on careful and incremental research 
and experimentation, at the natural resource and environmental issues 
that shale oil development poses and begin to identify ways in which 
impacts can be prevented, avoided, and mitigated.
    Most basically, Mr. Chairman, we do not believe that any action is 
needed at this time. Private research is continuing, and by Shell's own 
description, the company--operating on private land with its own 
financing--is years from making the go/no go decision about full field 
development. Several companies already hold leases. Meanwhile, the 
Mineral Leasing Act grants the Secretary of the Interior authority to 
issue new leases if interest demands. Indeed, the Department of the 
Interior, in cooperation with other departments, is in the midst of 
promulgating rules for a limited public lands leasing program for oil 
shale research and development.
    Those oil shale research and development leases, by the way, should 
be truly new research, not continuation of old, unsuccessful 
techniques. Companies leasing federal lands for this research should 
pay full market value for both the use of the land and for any minerals 
extracted from it. Leasing tracts should be tightly constrained in 
size. Continuous and comprehensive environmental monitoring must be 
implemented by both the leasing companies and by federal land managers. 
The research should provide detailed and comprehensive baseline data on 
energy producing techniques and on environmental protections necessary 
to minimize any processes effects on natural and public values. No 
lease for research and development should be converted to a commercial 
production lease without competitive bidding and additional payments to 
the treasury.
    Such are the small, cautious, smart steps appropriate to this 
technology and the limited impact it might have on our energy future. 
Let the free market work, be cautious with limited federal dollars and 
especially careful with irreplaceable federal land, and learn from 
small smart experiments before embarking on anything larger.
    Specifically, we recommend that, before Congress considers any 
commitment of federal public lands or resources, beyond research and 
development projects on very limited financial and geographic scale, 
the Department of the Interior enter into a cooperative agreement with 
the States of Colorado and Utah to develop a comprehensive, 
programmatic Environmental Impact Statement under auspices of the 
National Environmental Policy Act (NEPA) that would evaluate and review 
all relevant economic, technical, environmental, and socioeconomic 
issues regarding proposed oil shale development policies and 
development proposals.
    This detailed NEPA analysis should be conducted even before 
implementation of a research and development leasing program, certainly 
before undertaking any larger scale use of public lands or resources 
for oil shale production.
    We think this approach would be valuable for several reasons. For 
one thing, the most recent comprehensive evaluation of the 
technologies, economics, resource demands, socioeconomic impacts, and 
environmental impacts of oil shale development that we could find was a 
1980 assessment by Congress's Office of Technology Assessment (An 
Assessment of Oil Shale Technologies, Office of Technology Assessment, 
June 1980, available at http://www.wws.princeton.edu/ota/ns20/
topic_f.html). Though an interesting and comprehensive document, with 
much useful information, it was published two and a half decades ago. 
In the intervening years, much change has taken place, both in terms of 
the technology of oil shale extraction, and within the region itself.
    An environmental impact statement would afford an opportunity for 
the relevant government entities to evaluate the potential advantages 
and disadvantages of various technologies and policy approaches, and 
the potential impacts of various scales of development on the 
communities and environment of western Colorado and eastern Utah.
    Some of the questions to be addressed in an EIS that I mention 
above. A larger list of questions also would include: What scale of 
development are we considering: 50,000 barrels/day; 100,000 b/d; 
1,000,000 b/d? What are the water requirements of oil shale projects at 
these different levels? What water quality impacts might we anticipate? 
What are the potential impacts on air quality? Are their unique 
pollution control challenges with oil shale technologies? What is the 
new regional context for regional air pollution and pollution control, 
compared to 1982? What are the energy requirements of various levels of 
oil shale development? Will development require the construction of new 
power plants elsewhere? Will these be coal plants, natural gas, or 
both? What will the impacts of energy demands for oil shale development 
be on fulfilling energy demands from other user sectors? What are the 
workforce requirements? Will new public infrastructure be required, 
i.e., roads, schools, police protection, etc.? Who will pay for this? 
These are some of the issues that need to be addressed, and that 
citizens and policy-makers need to be informed about, before we put 
policies in place that seek to commercialize the development of oil 
shale.
    These are important issues for our region to understand. For 
example, the 1980 OTA report noted with respect to socioeconomic 
impacts of a 1,000,000 barrel per day program the following:

          A 1-million-bbl/d industry could not be accommodated without 
        major Government involvement and massive mitigation programs. 
        The participation of Federal, State, and local agencies, the 
        public, and the developers would be essential to minimize the 
        adverse living conditions that would inevitably arise. [Chapter 
        1, p. 5]

    With respect to water demands, the report noted that the region 
could sustain a 500,000 bbl/d program until the year 2025, ``after 
which water scarcities may limit all regional growth.'' [Chapter 1, p. 
4]
    With respect to water pollution, the report noted that, ``The 
potential leaching of waste disposal areas and in-situ retorts after 
the plants are abandoned is a major concern. If it occurs, the 
leachates could degrade the water quality in the Colorado River system, 
a vital water resource in the Southwest . . .'' [Ch. 1, p. 4]
    These are just three examples of a wide range of issues that need 
to be addressed before we adopt policies to encourage the development 
of oil shale.
    Of special importance, the framework of an EIS affords the people 
of Colorado, Utah, and American citizens in general an opportunity to 
become informed about the status, promise, risks, opportunities and 
impacts of oil shale development. Because state and local governments 
will have to shoulder much of the responsibility for dealing with both 
the socioeconomic and environmental impacts of this industry, they need 
to have as much information as possible to make informed decisions. 
Finally, it is to the advantage of policy-makers here in the Congress, 
as well as within the Executive Branch, to have as much information 
available as possible about the promise and perils of oil shale 
development, before any final policy decisions are made.
    Whatever our various views on the policy choices before us, I hope 
that we all can agree that developing as much information as possible, 
and affording the citizens of the communities affected the opportunity 
to learn more about the consequences and opportunities of oil shale 
development, is necessary before we make any hard and fast decisions 
about the direction we will take. Such an approach is in the best 
interest of all of us, including industry proponents, the federal, 
state and local governments, and the people of Colorado and Utah. I 
hope that this time around, we will be more careful than we were the 
last time. I urge that we use the framework provided by the National 
Environmental Policy Act, combined with cautious, sensible 
deliberations, to inform the decisions we make, before we make those 
decisions.
    Thank you again for this generous opportunity to address the 
committee and the fascinating discussion that this hearing has 
promptly. Please let us know at any time how we can assist with further 
Congressional discussion of these important questions.

    Senator Salazar. Thank you very much, Mr. Smith, and on 
behalf of the Energy Committee, I thank all of you for 
participating and giving us your testimony and this information 
today.
    I will ask some questions of the panel for a few minutes 
here.
    First, Mr. Mut, if you can tell us a little bit more about 
the time line with respect to the project that you currently 
are working on. I heard in your comments that you were planning 
on being in a position where perhaps by the end of the decade, 
you would be able to develop a plan after you have completed 
your research and development. Can you tell us a little bit 
more about your time line with respect to getting to a point of 
whether or not you can decide if this in-situ technology is, in 
fact, going to work to develop oil shale?
    Mr. Mut. Yes, Senator. There are still a number of things 
that we need to test, some on a sequential basis and some in an 
integrated test. To design, construct, and then conduct that 
integrated test will take on the order of 4 years. In the most 
optimistic case, if we get the type of response that we are 
designed to and see the recovery efficiency that we need to see 
in order to make the process economic, the time between now and 
the end of the decade would be totally consumed with that 
process, designing, building, conducting, and evaluating the 
results of the experiment.
    Senator Salazar. Mr. Mut, if I may, what are the factors 
that are requiring the amount of time to be taken to do the 
further research and development? The reality is that we do 
know a lot about oil shale. The experiences of the past did not 
work. This new in-situ process which you have underway is a new 
process, where you have been working on it for a while. Are 
there things that could be done to try to speed up that 
process, or do you think that you are doing everything that is 
worldly possible in terms of your schedule so that it is still 
to the end of the decade before we will know whether or not 
this will work?
    Mr. Mut. Our belief is that our level of knowledge today is 
insufficient to make a commercial decision today. So one larger 
scale and almost a magnitude larger integrated test is 
required.
    The real issue, Senator, with getting the quality of 
information you need is that you need to model the commercial 
process. By that, I mean you have to have the well spacing far 
enough apart that you can emulate the commercial process. In 
order to get the heat transferred to get the type of recovery 
that you need to measure, it takes about 3 years. So if we made 
tighter spacing of those heaters in the experimentation, we 
could get an answer quicker, but then we would have a larger 
extrapolation to make into commercial. So we are trying to 
balance the time that it takes to do the experimentation so as 
to get the information that would be required to make that leap 
at time of commercial.
    Senator Salazar. So in summary, then you essentially, from 
the point of view of Shell Oil out there on the ground building 
this R&D project, believe you will not be in a position until 
about 2010 to determine whether or not this technology will 
work to commercially develop oil shale. Is that correct?
    Mr. Mut. That is correct.
    Senator Salazar. Let me ask a question both of you and Mr. 
Smith, if I may, Mr. Chairman. Mr. Smith raised a question 
about the amount of energy that it actually takes to produce 
the fuel from the in situ heating up of the oil shale. Give us 
a sense of that concept. How much energy does it take to 
actually heat up the oil shale to the point where it is 
commercially producible, and are we putting more energy into 
the ground to heat up the oil shale than ultimately what we are 
taking out of the ground? What is your sense of that equation?
    Mr. Mut. Well, Senator, I could never make those economics 
work. If you take the electric energy that is input into the 
ground, we produce seven times as much energy coming out. When 
you take the thermal inefficiency involved in power generation 
into account, that number is cut to about 3\1/2\ to 1. So the 
energy balance is, say, 3\1/2\ to 1 when everything is 
calculated into the whole process. So for every bit of basic 
energy required to process and to generate power, we yield 3\1/
2\ units of energy out.
    Senator Salazar. I have just one more question, and this is 
of Mr. George. You lived through oil shale probably like nobody 
else has in this room, watching what happened on the Western 
Slope back in the 1970's and the 1980's. What is your view of 
the development currently underway by Shell Oil? Generally how 
do you respond to some of the concerns that Mr. Smith raised 
from an environmental perspective?
    Mr. George. Thank you, Senator. Pretty clearly, we would 
have no interest in repeating the boom/bust cycle. If that was 
the option and if we go forward based solely upon the influence 
of price of oil, then we are destined to repeat the same 
mistake. So even though we have a changing culture and 
increasingly sophisticated population in western Colorado, it 
is hard to try to speak for everyone. So we are always going to 
have people at a different place on the spectrum of how can we 
anticipate they would react to some change in the oil shale 
process in industry.
    But I think we could probably say these things, that most 
of us recognize the role that our part of the country plays in 
national security in the future. I think we have an 
understanding, an appreciation for the role that our part of 
the State needs to play in its own economic growth, but in 
particular and in addition to the State's and the Nation's 
economic growth. So I would say most of us would be willing to 
take a look at a different future than we have seen in the 
past.
    I think most people would say we probably wasted the last 
20 years. We should not have quit the science. We should have 
kept doing what a number of companies did do for a while, to 
learn as much as we can about the chemistry, the geology, all 
of these things that we have been talking about today. It is 
important to do that, and it is going to take a significant 
role from the Federal Government to lead us to do that. So it 
would be our thought that stepping up that pace has a lot to be 
said for it. This would need to be done in many of the ways 
that Mr. Smith has indicated.
    I think all of us have become more sophisticated as the 
years have gone by about the interconnectedness of the things 
we do for business, the things we do in the development of 
natural resources, and how you protect and keep all the other 
values you have. I think we are getting pretty good at that, 
and it is the right way to do it. I think many of us believe 
that the way we would step up the pace in the proper 
development of oil shale can be done consistent with the use of 
these other resources and the protection of wildlife and water 
quality, air quality, and a way of life.
    So I think it is a matter of timing and how we have 
included the population, everybody, in the discussion and the 
partnership of the State and the Federal Government and 
everyone else that lives there.
    Senator Salazar. Thank you, Mr. George.
    Mr. Chairman, I just want to make one comment because I 
said something about Russell George in your absence, and that 
is that he is truly a model of bipartisanship. He is a good 
Republican, a wonderful Republican, who was Speaker of the 
House of Representatives in our State of Colorado, went on to 
be the director of the Division of Wildlife and now executive 
director of our Department of Natural Resources, a Harvard 
graduate, and someone who has done a lot to contribute to the 
well-being of the people of the State of Colorado. I am just 
honored to have him here before our committee today and honored 
to have the rest of the members of this panel as well. Thank 
you very much.
    The Chairman [presiding]. Well, thank you, Senator, and 
thank you for doing what you did for me just now. I was not 
very pleased, but I had another appointment that I should not 
have had because of this hearing but I had to go do that.
    I have a couple of questions. Working with the 
laboratories, as you have--and you indicated the ones you have, 
which would have been the ones I would think you would be 
working with--would you give me a sense? Do they think this is 
the most practical and feasible and most appropriate technology 
for the development of shale?
    Mr. Mut. Well, Senator, I can only speak to the discussions 
that we have had about it, which has been limited to our 
process. We have not opened up the discussion quite that large. 
But in generic terms, relative to older technologies or other 
things that were being considered, yes, they believe this is 
far and away the most logical way to proceed.
    The Chairman. Now, you mentioned numbers in terms of people 
and the like, and I do not know that you can tell me this, but 
how much are you investing in some period of time, annually, in 
this research, this development?
    Mr. Mut. Well, we spend tens of millions of dollars each 
year on this process, and in order to move to an objective of 
having this technology commercial by the end of the decade, we 
would have to significantly ramp that expenditure level up.
    The Chairman. What would be the deciding factor in terms of 
whether that ramp-up occurs or not?
    Mr. Mut. It would be a function of the results of our 
testing, the determination of whether or not environmental 
protection is accomplished as we have seen in individual 
experiments and determine whether or not the recovery 
efficiency that drives the economics and is the whole reason 
for doing it in the first place is as projected. That is what 
takes the greatest amount of time.
    The Chairman. Now, I know there is a lot of proprietary 
interests and potential patent involvement, but I assume that 
as you work on the environmental part, that you will bring the 
communities of interest in to at least verify what you are 
finding.
    Mr. Mut. Yes.
    The Chairman. It does not do any good for you to come up 
with it and then have 3 years of litigation as to whether it is 
any good, which you might have anyway.
    Mr. Mut. That is absolutely correct, Senator. In fact, for 
the last many years, since 1997 when we started in earnest 
working in the area on our own lands, we have taken a very 
steadied approach, informing the community of what is going on, 
seeking their input, seeking their advice, and keeping them 
informed as we go along the way.
    The Chairman. Now, where is your demonstration project now? 
Public or private land?
    Mr. Mut. It is on private land.
    The Chairman. That decision was made intentionally, or 
there was no alternative, no way to do it on public land?
    Mr. Mut. I cannot speak for that exactly. Shell has some 
35,000 to 40,000 acres in that particular area, so there was no 
need at that particular point in time to seek Federal lands.
    I might add, Senator, that we are not in this as a science 
experiment. We started this research when oil prices were 
considerably lower than today, and our objective is to produce 
oil and gas at prices significantly lower than today's price as 
well.
    The Chairman. Are there other companies, to your knowledge, 
that are involved in any way of significance in developing 
technology in this area?
    Mr. Mut. We are unaware of anyone who is doing the types of 
field experimentation that we are doing. There have been 
mentions. I have seen patents and public statements by other 
companies that would indicate that they are also interested.
    The Chairman. In the area that you are involved in, you 
would require a considerable amount of energy to heat the 
furnaces. What would be the source of that? Electricity or 
what?
    Mr. Mut. Yes. They are electric resistance heaters, much 
like a hair dryer or a toaster, but significantly more exotic 
metallurgy. The source of it would be electricity that is 
generated from a source. It does not really matter where the 
energy to generate power comes from.
    In our process, the assumption we make is that we produce 
about two-thirds liquid fuels and one-third gaseous fuels. For 
simplicity, we assume we take a portion of that natural gas and 
burn it in power generation operations to supply the 
electricity to heat the subsurface.
    The Chairman. So if this scheme works, you would not be 
looking for an outside source of energizing power plants. You 
could do it from within.
    Mr. Mut. We could do it from within. We are somewhat 
agnostic to that. In fact, we would be looking for the best 
environmental and economic solution. It is very possible that 
we could use alternatives, including coal that is located in 
the vicinity, or nuclear in the future. We look at this as a 
very long-term project because the resources will stretch for 
decades and decades.
    The Chairman. Now, I was here when we did the Synthetic 
Fuels Corporation. I am not sure you were, were you?
    Mr. Mut. I know of it.
    The Chairman. I was not one of those who thought it was a 
total failure. I thought we made some bad mistakes, but that 
was the result of so many people wanting to have input that the 
ultimate legislation looked more like a Christmas tree than a 
law. So everybody had to go through too much to build anything.
    But the whole reason given then for capture of shale 
failing was the price of oil, although Mr. George suggests that 
we will never in the future rely upon price, but that was given 
as the reason we could not.
    I still assume that with your very brief response a while 
ago to a question where you said that would not be economic or 
used some nice words like that, you clearly meant that you had 
to include your company's evaluation of where the price of oil 
would be at the point in time that you started producing this 
and thereafter. Is that not correct?
    Mr. Mut. That is absolutely correct.
    The Chairman. So it is going to rise and fall, more or 
less, on whether we have high enough prices of oil. Right?
    Mr. Mut. That is correct. The volatility of the market is 
certainly bound to continue, and I do not either have a 
personal opinion, nor does our company at this point in time 
have a position as to whether the types of price levels we are 
seeing today are sustainable. But this technology was developed 
for oil prices to be stable in the $25 range.
    The Chairman. Right. Maybe I am wrong, but I do not know 
anybody that is really predicting that, even in the rise and 
fall, it is going to go back down to $25. I assume some 
companies are still expecting that.
    Mr. Mut. I do not know.
    The Chairman. You do not have to say.
    Mr. Mut. I can only say as a former crude trader, when 
everybody has an opinion, it is definitely wrong.
    [Laughter.]
    The Chairman. Well, the problem is we would love that, but 
on the other hand, it seems to me that we are beginning to be 
realistic on the supply demand side, although something like 
tar sands and shale would add significantly to the 
understanding of where the reserves were. It would be rather 
long-term, but it would certainly change it.
    Canada has changed it already. They went from a 6 million 
or 8 million barrel reserve to 180 million almost overnight, 
which incidentally, Mr. George, was totally related to price. 
It was plenty high. There was a lot of extra money. They figure 
they will come in at $12 after they have been at it for a 
while. Right now it is $25-$30. It seems it is going to happen 
in this area. It is going to come in less 15 years from now. 
There is no doubt about it. Is that not correct?
    Mr. Mut. I think that is probably directionally correct.
    The Chairman. Yes, just because that is what happens when 
technology gets perfected.
    The other question I have, while you have operated on 
private land, I think it is really important and I hope that 
you will consider helping the Federal Government with input as 
they develop the demonstration research leasing that they are 
talking about. Clearly, one of the advantages expressed by our 
Canadian friends for our development is that large parcels of 
this are owned by the Federal Government, not because of the 
ownership concept, which somebody expressed, but rather because 
of the ability to manage access, where people can drill and 
where people can use land. But that is not going to be very 
important if we do not handle the leasing right. We do not want 
to get in a muddle where we have been delaying things 5 years 
because we have leases that are all messed up. So whatever the 
industry has to add to what would be right, we would hope that 
you would consider doing that.
    Mr. Mut. Yes, Senator. In fact, we have been very involved 
with the Department of the Interior, Department of Energy, and 
Department of Defense in discussions about how to move this 
process forward. We do see some significantly attractive lands 
that are currently in BLM hands, and one of our reasons for 
suggesting moving forward with commercial leasing regimes and 
land swaps was to determine whether or not an acceptably large 
tract of land can be put together for commercial utilization.
    The Chairman. Mr. Smith, I do not want for you to think 
that I have been only interested in technology. I understand 
what permeates all of this is can it be done in this manner 
satisfactory to the community and the public lands, the nature 
of public lands and its relationship to the public ownership, 
can it be done right, clean.
    Was anything said here in my questions that deserve some 
retort or thought by you? I noticed you wrote down a few 
things. Does that mean there are some things you would like to 
call to the committee's attention that have been talked about?
    Mr. Smith. Thank you, Mr. Chairman. Just a couple.
    The Chairman. Please.
    Mr. Smith. One would be the scale of the amount of land 
needed. Mr. Mut describes some public lands that might be 
suitable for a larger scale version of this process. We are 
very concerned and strongly recommend that the committee and 
Congress itself and the administration take the very careful, 
slow, thorough steps of review that each of the members of this 
panel have recommended before going to a large scale commercial 
version of oil shale production and especially on public lands 
because there are so many public and natural values that those 
contain. So if, indeed, we are looking at the kinds of 
thousands of acres just described by Mr. Mut, we need to do 
that slowly and very thoughtfully, using the tenets of the 
National Environmental Policy Act and other tools available to 
the administration.
    The Chairman. Well, I do not think anybody would think that 
if you were moving in the direction you just said, that that 
would not be a major Government activity as covered under NEPA, 
whatever those words are.
    Mr. Smith. Thank you.
    The Chairman. I do not see how it could be otherwise, but I 
am not passing judgment on that now. It seems like that is the 
case.
    Well, let me say that even though it seems like a long way 
out there, whenever you think that could be, I am interested in 
making sure that we do things right so that not only your 
company would be interested, but any company that has a big R&D 
potential and has a lot of money, a lot of resources would be 
interested also.
    My last observation. We were talking about the price of 
oil, and I talked about the fact that I did not think that 
investments would be made on the probability that oil would 
drop dramatically in the $25 range or $20. I would make an 
observation about your company and most of the major oil 
companies. They are acting like they expect it to come back 
down because of the amount of money they are holding in 
reserve, which is not going unnoticed. It is extremely large in 
terms of how much is being accumulated. Some hope that it will 
be invested. That is not our business, but pretty soon it will 
be and especially when we need R&D in some of these areas. This 
is not a primary thing on your horizon. It is a minor 
investment compared to some other investments you are making. 
Well, I should not say that, but it is not one of your major 
ones.
    In any event, I will, for myself, tell you--and I say this 
to environmental community too--we are not engaged any longer 
in some modest debate about the problem America has. This is a 
big problem. If I were to list crises, I cannot avoid listing 
this among the three or four that are confronting this country 
that are apt to bring us to our knees and cause some major 
disruption. I have got to put this one in there. The dependence 
on energy has got to be in there. For those who have other 
interests, which are legitimate, I think we have to understand 
that there is this big interest of what happens to our country. 
If we do not find some alternatives here and maximize our own, 
while conserving to the maximum extent, we as leaders are just 
fools because you cannot escape the fact that this is a sorry 
state of affairs for our great country. Just look at one little 
thing.
    We were speaking of a million barrels a day and the 
environmental community said that is not very much in Alaska. 
Canada is going to produce 1 million barrels in their tar sands 
effort. They hope to get up to 2 million in 3 or 4 years and 
then maybe 5 million in 7 or 8 years. They think that is 
terrific and tremendously important. Well, I would just take 1 
million. On a yearly basis, that is $38 billion in foreign 
trade dollars. 1 million barrels a day is $38 billion, which is 
a huge amount and going up. So I think it is important that we 
pursue this.
    My last question is, would your company have any feelings, 
whether it is here today or in further discussions, about what 
the tax policies might or might not have to do with your 
investing in this activity?
    Mr. Mut. Well, I think there are a number of things that we 
would like stability on. We talked about regulatory, et cetera. 
From the standpoint of taxes, we believe that this type of 
resource and the technology that is required to exploit it and 
the R&D that is required to develop that technology would 
justify treatment of this resource as a nonconventional fuel. 
We believe that and items like the depletion allowances may be 
appropriate for this type of really unusual resource.
    The Chairman. We seriously ought to consider that.
    Our neighbors have a very expedited depreciation for not 
only the R&D but the actual investment in production. It is 
written off in the first year. Imagine that. We do not do 
anything like that around here, but they do. That is how they 
got a lot of money invested. Then, of course, they pick it up 
in their scheme over the next 10 or 15 years, and the royalty 
goes up dramatically too. We do not have enough coordination to 
do anything as rational as that around here, I do not think. 
But it made some good sense. We ought to be asking some 
companies whether it makes sense out there too. I would think 
we might need more than the depletion allowance.
    Mr. Mut. Well, I was referring to section 29 credits as 
well.
    The Chairman. Correct, which should be broadened to cover 
it. We are not sure it does not cover it.
    Mr. Mut. We think there is ambiguity at this point. We are 
not sure it is covered either.
    The Chairman. Senator, did you have anything else?
    Senator Salazar. I just want to thank the panel.
    The Chairman. I thank you all also.
    We stand adjourned. Thank you very much.
    [Whereupon, at 12:27 p.m., the hearing was adjourned.]


                               APPENDIXES

                              ----------                              


                               Appendix I

                   Responses to Additional Questions

                              ----------                              

                            The Wilderness Society,
                       Four Corners States Regional Office,
                                           Denver, CO, May 9, 2005.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Chairman Domenici: Thank you for sending supplemental 
questions on the topic of oil shale following the Senate Energy and 
Natural Resources Committee's April 12 hearing. Bill Meadows, President 
of The Wilderness Society, forwarded to me your letter and questions 
asked me to respond.
    I appreciate the opportunity to comment further on this potential 
energy source and on environmental precautions that must be included in 
any discussion of it. I apologize for the delay in responding and hope 
that the following information is still timely and helpful to the 
committee.
    Thank you again for the opportunity to address the committee, both 
at the hearing and in this form. Please let us know if we can provide 
additional clarification or assistance.
            Sincerely,
                                               Steve Smith,
                                       Assistant Regional Director.
[Enclosures.]

                    Questions From Senator Domenici

    Question 1. In your testimony, you referred to ``the potential to 
engender false hopes, exaggerated claims, and unfulfilled promises'' as 
was done in the last effort to develop oil shale 25 years ago. Nobody 
wants to repeat that experience.
    How would you suggest we avoid this possibility and keep these new 
efforts focused on realistic approaches?
    Answer. The primary factor that prompted exaggerated claims and an 
unrealistic pace of oil shale development in the late 1970s was the 
provision of federal subsidies and inadequately controlled access to 
federal public lands for companies pursuing the technology. In the end, 
the production of oil shale could not be sustained, even with 
artificial federal support, let alone without it.
    Any new oil shale research program should be based only in direct 
investment by interested companies. The production of fuel and other 
useful products from oil shale must meet the basic test of 
profitability and sound business investment, best measured by 
individual companies willingness to use their own resources.
    This emphasis on private investment would be even more important in 
any commercial oil shale development ventures. Full production of oil 
shale, if it occurs, should be financially sustainable.
    That financial sustainability should be calculated at reasonable 
energy equivalent market prices and not based on high oil price spikes, 
such as those seen recently, lest the industry again fail when prices 
drop.
    Similarly, access to federal public lands for oil shale research 
should be very limited in scope and tightly controlled to protect other 
public lands values. Research tracts should be limited, as contemplated 
in the Bureau of Land Management's draft oil shale research 
regulations, to 40 acres or less. Total leased land held by any one 
company for research purposes should be limited, and individual tracts 
should not be combined into larger operations.
    These cautious approaches are especially important in that oil 
shale leasing and activities have been largely dormant for two decades. 
Federal land managers and Congress should be very careful not to launch 
or even encourage crash programs in oil shale research or development. 
It is important to take the time to get companies, scientists, and 
citizens familiar with both the failures of the past and with any new 
approaches that higher potential for sustainable success.
    Research tracts leasing should be limited in duration, no more than 
five years. Research leases should not be converted to commercial 
production leases without additional federal environmental, scientific, 
and financial review and associated public comment. Transition to 
commercial production leasing, if it occurs, should be based on 
competitive bidding and should include stipulations providing for the 
payment of royalties at least in the amount of 12.5% as with other oil 
development--possibly higher to account for the intensity of surface 
impacts on federal land.
    Perhaps the most basic consideration in any oil shale leasing 
program--for research or for commercial operation--is the involvement 
of local citizens and local elected officials in each stage of review 
and activity. Extensive citizen review and comment on oil shale 
proposals will help temper any unrealistic boosterism and will pose 
fair, realistic, and practical questions about the sustainability of 
any particular technology.
    Any oil shale leasing program--for research or for commercial 
operation--should require the use of best and evolving management 
practices, and research leases should be offered only for the testing 
of genuinely new technologies that overcome the environmental, 
technical, and financial shortcomings of those used in the past.
    The Bureau of Land Management, or other appropriate federal agency 
or agencies, should conduct a full programmatic analysis of oil shale 
research and development activities, under the provisions of the 
National Environmental Policy Act, prior to the issuing of any leases. 
That analysis should review both potential individual field operations 
and the compounded and cumulative effect of potential development over 
the multiple states where oil shale ore lies.
    Question 2. You commented on Shell Oil's ``careful and deliberate 
approach''. How would you suggest we ensure that other companies do the 
same?
    Answer. The approaches, precautions, and requirements outlined 
above will encourage only serious investment by companies with the 
resources, talent, and long term commitment to a sound and sustainable 
program. By basing oil shale development on private funding and on 
careful planning programs of companies serious about developing sound 
technologies and committed to protecting the larger environment, the 
use of federal lands for oil shale research and possible production 
will be more likely to find success.
    Question 3. You have provided a long litany of issues that need 
analysis before decisions are made to commit land and resources to any 
project.
    Do you think the environmental community can support an oil shale 
program on public lands if these issues can be adequately addressed?
    Answer. Energy production for the general benefit of the nation is 
a legitimate use of select federal public lands, both under the 
provisions of the Federal Land Policy and Management Act and other 
relevant statutes and in a sound approach to the husbanding and use of 
valuable public resources.
    Correspondingly, it may be possible to engage in careful research 
into the potential of oil shale as an energy source while still 
protecting the many other, more enduring values found on federal public 
lands. If oil shale research projects demonstrate that oil shale can be 
produced commercially in an energy efficient manner and while 
continuing to protect those other public lands values, many 
environmental organizations are likely to support the careful 
transformation from research to production.
    Some threshold considerations, in addition to those mentioned 
above, for a limited research program on federal public lands include:

   Leasing should be offered only for research and development 
        of clearly new technologies and not for continued use of old 
        technologies or minor variations on them;
   Leasing must not be a license for speculation. Potential 
        lessees should be required to demonstrate, in advance, how 
        their proposed activities in the particular areas proposed for 
        leasing reduce the environmental impacts of oil shale 
        development or how their technologies or processes improve 
        energy efficiency, contribute to resource conservation, make 
        development of oil shale 'more economic, or reduce waste 
        outputs;
   No research leases should be offered on any lands in 
        Colorado, Utah, or Wyoming that any federal agency has 
        identified as having wilderness characteristics--wilderness 
        study areas, wilderness inventory areas, or lands with a 
        reasonable probability of wilderness characteristics;
   No research leases should be offered on any lands proposed 
        for wilderness designation in legislation pending before 
        Congress (examples from past Congresses include America's 
        Redrock Wilderness Act, Colorado Wilderness Act, Northern 
        Rockies Ecosystem Protection Act, and Wyoming Wilderness Act;
   No research leases should be offered on any lands designated 
        as Area of Critical Environmental Concern;
   The Bureau of Land Management (BLM) and other federal 
        agencies involved in oil shale research leasing should fully 
        consider new information supplied by citizens' groups or 
        generated by the agencies themselves regarding potential 
        wilderness values before leasing any lands for oil shale 
        research, and the BLM should continue inventorying wilderness 
        characteristics and appropriately managing wilderness quality 
        lands;
   Leases for oil shale research should include strictly 
        enforced non-waivable stipulations mandating that lessees 
        submit a reclamation plan to the appropriate state and federal 
        agencies prior to authorization of any ground disturbing 
        activities. Those stipulations should include the requirement 
        that reclamation activities begin promptly upon lease 
        expiration, termination, or relinquishment. Leases should be 
        issued only in exchange for genuinely adequate bonding or other 
        advance mechanism to ensure the completion of reclamation;
   Leases should contain stipulations requiring lessees to 
        conduct air quality monitoring to establish baseline 
        conditions, modeling to anticipate impacts from lease-based 
        activities, and continuing monitoring to measure and control 
        impacts on air quality, visibility, and human health.
   Similar monitoring and precautions should be required 
        relative to water quality, watersheds and streamflow, wildlife 
        habitat, and the protection of plants and plant communities.

    Similar precautions and practices should be applied even more 
stringently in the event any federal lands are considered for leasing 
for commercial development of oil shale.

                     Questions From Senator Bunning

    Question 1. What do you think the federal government needs to do in 
order to increase development of these resources?
    Answer. Any development of oil shale--for research or for 
commercial production--should be based in requirements that ensure the 
financial sustainability of such development, respect the wishes and 
long term needs of affected communities, and complete and enduring 
protection of other natural and public values on federal lands.
    The development of oil shale and tar sands can be increased, and 
such increase sustained, only if those key principles are considered 
and engaged in all decisions about the use of federal lands or 
resources, lest any temporary increase in research or production be 
just that--temporary.
    Some details of this careful approach, emphasizing sustainable 
increase in development, are suggested above in responses to questions 
from Senator Domenici.
    Question 2. What do you think are possible hindrances to developing 
oil shale and oil sands in this country?
    Answer. The primary historical limitations on development or oil 
shale and oil sands have been financial, social, environmental, and 
energy efficiency.
    Past efforts to develop these resources have been based on 
extensive federal subsidy, momentarily high oil prices, and 
inadequately constrained access to federal public lands. Without those 
artificial supports, sometimes even with them, the financial 
practicality of development has not been realized. The development of 
oil shale and oil sands must be based in technologies that are 
sustainable without subsidy and at reasonable market prices.
    Past efforts at development have been crash programs that 
artificially raised the expectations of affected communities, skewed 
municipal and state land and services planning decisions, and left 
individuals and communities hurt financially and socially when the 
programs failed.
    The environmental impacts of technologies used so far have been 
severe and largely uncontrolled. Resistance to a revival of development 
will be strong until new techniques are proven and employed for 
protecting the long term health of the natural and human environment.
    The relative inefficiency of extracting liquid fuel from rock is 
perhaps the most basic technical constraint on development. While 
recent private experimentation suggests that the proportion of energy 
produced to energy used is improving, such advances must consider 
before development can be seen as practical or appropriate.
    In addition, energy and government planners must anticipate the 
comparative value and expense of various energy sources. For example, 
an increase in the fuel economy of the nation's car and truck fleet, by 
just one mile per gallon, would, at lower total expense, save 400,000 
barrels per day of oil, the equivalent of oil shale's potential 
contribution at full production.
    Question 3. Do you know of any problems with developing oil shale 
and sands in Kentucky?
    Answer. I have not found materials specific to the development 
potential of oil shale or sands in Kentucky, and I recommend relaying 
this question to the Department of Energy for more detailed response.
    Meanwhile, I offer two observations. First, to the degree that 
deposits in Kentucky arc found on public lands, the considerations and 
constraints suggested above would be appropriate.
    Second, whether located on federal, state, or private land, the 
precautions about careful pace, scale, financial sensibilities, and 
impacts on local communities, also as outlined above, would be 
important in any location where these resources might be researched or 
developed.
                                 ______
                                 
       Responses of Jim Evans to Questions From Senator Domenici

    Question 1. What is the current population of the area we are 
discussing for oil shale development?
    Answer. The Western U.S. oil shale resources are located in 
Northwest Colorado, Eastern Utah and Southwestern Wyoming. The areas of 
greatest concentration where oil shale development has been proposed 
specifically are within Garfield and Rio Blanco County, Colorado and 
Uintah County, Utah. In Colorado the latest (2003) population estimates 
are:

------------------------------------------------------------------------
                                               2003
                                            Population     Square Miles
------------------------------------------------------------------------
Primary Development
Garfield County.........................       48,000           2,947
Rio Blanco County.......................        6,000           3,221
                                         -------------------------------
    Sub Total...........................       54,000           6,168
Secondary Impact
Mesa County.............................      125,000           3,328
Moffat County...........................       13,000           4,742
Rout County.............................       21,000           2,362
                                         -------------------------------
    Sub Total...........................      159,000          10,432
                                         -------------------------------
        5-County Total..................      213,000          16,600
                                         ===============================
------------------------------------------------------------------------

    This is approximately double the population of 25 years ago. Most 
of the growth has occurred in Garfield and Mesa Counties (along the I-
70 corridor) and in Routt County (in the resort/ski town area of 
Steamboat Springs).
    Question 2. How would you describe the economic base for this 
region of the State and how does this compare to the base of 25 years 
ago?
    Answer. The economic base of the Northwest Colorado region was, and 
still is, a mixture of energy/mineral development, tourism and 
agriculture. The energy/mineral sector includes more than half of 
Colorado's coal production (about 20 million tons per year), the 
largest oil producing county in the State (Rio Blanco with the Rangely 
Oil Field producing about 7 million barrels per year), and the most 
active natural gas development county (with 21 drilling rigs now 
operating in Garfield County--more than half of the state total).
    There is currently a labor force of 116,000 in the region with $5.7 
billion annual personal income total, and retail sales of $5.2 billion. 
Tourism is important in each county, especially in Steamboat Springs 
which is recognized internationally as Ski Town U.S.A. Mesa County is 
the major retail center of Western Colorado and has an active economic 
diversification program.
    Question 3. Do you feel the socioeconomic problems associated with 
the oil shale development of 25 years ago can be overcome and can we 
ensure they are not repeated?
    Answer. I am optimistic that the socioeconomic impacts of oil shale 
development can be dealt with adequately in Colorado once a cost-
effective and environmentally sound technology (or technologies) is 
developed The key to this type of development is the federal government 
since the federal government owns more than 80% of the oil shale 
resources. DOE, DOI and DOD should be encouraged by Congress to develop 
as oil shale strategy or plan that is not dependent solely upon a high 
price of oil. From a socioeconomic point-of-view we do not want to wart 
far another oil crisis (lake the Arab Oil Embargo of 1974) that fosters 
another crash development program with unproven technologies. Such an 
approach would invite another boom/bust cycle in our region.
    Therefore, the federal government should encourage an orderly 
development of cost-effective technologies. Then, with the Local 
Government Impact Mitigation Ordinances, Colorado Local Government 
Energy Impact Program, and Colorado Joint Review Process now in place 
local governments will have the tools to deal with the socioeconomic 
impacts of oil shale development
    However, I am concerned that this approach may not be achieved with 
the aggressive timetable now included in the House-passed Energy Bill. 
HR6 calls for a commercial scale oil shale leasing program by the end 
of 2006. This timetable by itself may be OK since BLM is almost ready 
to initiate an oil shale R&D leasing program which could set the stage 
for a commercial scale leasing program. However, H.R. 6 also calls for 
oil shale leases (oar sales) within 180 days after adoption of the 
leasing program. I believe this may be too fast and too inflexible. It 
also may be unnecessary since the BLM R&D leasing program proposes to 
allow conversion of R&D leases to commercial leases once a cost-
effective technology is demonstrated. I believe expansion of this R&D 
conversion to commercial scale concept should be encouraged by 
Congress, rather than a tight; inflexible timeline tor commercial scale 
leases.
    To ensure that the mistakes of 25 years ago are not repeated 
Congress should also encourage industry to move forward with 
demonstration projects, like what is being done with the Shell Oil 
Mahogany Project Congress should consider enactment of many of the 
recommendations submitted by Shell Oil Company, including a commercial 
scale oil shale leasing program. Local governments in our region are 
encouraged by the Shell Oil R&D project which is moving forward 
independent of the price of oil and which is clearly attempting to 
minimize potential socioeconomic and environmental problems.
    I believe the overall key to a successful oil shale leasing program 
is already embodied in the adopted ELM White River Resource Area RMP 
(Resource Management Platen). This RMP has an oil shale resource 
leasing objective to ``provide for a prudent and planned future leasing 
and development program for the oil shale resource.'' The 1997 White 
River RMP includes and carries forward the oil shale management 
decision developed in the 1985 Piceance Basin RMP for oil shale leasing 
and Management to be based upon a ``carrying capacity'' concept for 
socioeconomic and environmental impacts. Local government believes 
Congress should recognize and reinforce these management plans rather 
than specifying a fixed inflexible leasing timetable of 180 days.
    Attached, for your consideration, is a copy of the Record of 
Decision and Approved White River Resource Area RMP, including the oil 
shale resource decision with Appendix D summarizing the critical 
carrying capacity thresholds to oil shale development.*
---------------------------------------------------------------------------
    * All attachments have been retained in committee files.
---------------------------------------------------------------------------
    Question 4. You referenced a fund made up of Naval Oil Shale 
Reserve receipts of about $44 million. Is this already committed to any 
other use?
    Answer. Approximately $6 million is committed to DOI for 
environmental clean-up of spent shale tailings at the former DOE Anvil 
Points oil shale R&D facility. This is outlined in the February 9, 2005 
letter from BLM submitted April 12 with my Congressional testimony. 
That leaves $38 million as uncommitted to any other program. However, a 
Congressional appropriation would be required to access the funds.
    Question 5. Would you see this funding going solely to 
socioeconomic and environmental study and compliance?
    Answer. No. But I would hope a portion of these finds could be 
utilized for socioeconomic and environmental impact studies and 
mitigation, especially prior to the flow of any royalties from future 
oil shale leases. I believe this would be an appropriate use for these 
funds because half of the funds are the 50% state share of natural gas 
royalties now being produced from the Naval Oil Shale Reserve (NOSR) 
lands. Congress required the state share of these royalties to be 
withheld until DOE is fully reimbursed for its investments associated 
with the NOSR lands. This was established as a condition of the 
transfer of these NOSR lands to be managed by DOI with priorities for 
natural gas leasing. It would also be appropriate for use of these 
minds as a source for DOI oil shale leasing costs and for the costs of 
DOE oil shale development strategies and programs.
    In addition, the natural gas industry has estimated that potential 
increased future leasing of natural gas resources from the NOSR lands 
could produce up to $1 Billion in additional royalties over a 20-year 
period. Half of these natural gas royalties would accrue to the federal 
government and 50% would be the state shale. I encourage your Committee 
to establish a Congressional linkage or priority for use of these funds 
to address the potential socioeconomic and environmental mitigation 
costs of oil shale development in addition to existing Congressional 
priorities already included in the Federal Mineral Leasing Act.
    Question 6. What do you think the federal government needs to do in 
order to increase development of these oil shale resources?
    Answer. I believe that DOE has detailed a prudent coarse of action 
in its Strategic Fuels Analysis released last year. This analysis 
recommended a coordinated DOE/DOI/DOD program for developing secure 
domestic energy resources, similar to the effort utilized to develop 
oil sands in Canada.
    Question 7. What do you think are possible hindrances to developing 
oil shale and oil sands in this country?
    Answer. The number one problem remains the development of a cost-
effective technology. Since 80% of the resource is owned by the federal 
government, it should be a federal government program to provide 
incentives to develop the technology.
    Question 8. Do you know of any problems associated with developing 
oil shale and sands in Kentucky?
    Answer. No. I would hope that any technology that is developed for 
Western oil shale would also work for Eastern oil shale.

                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

                    Anadarko Petroleum Corporation,
                                 Western Region Operations,
                                       Houston, TX, April 25, 2005.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: Anadarko Petroleum Corporation (Anadarko) 
applauds you and the Senate Energy and Natural Resources Committee for 
initiating discussions on environmentally-acceptable development of 
domestic oil shale and oil sands. Anadarko believes the United States 
should undertake immediate action to maximize efforts to identify and 
produce domestic oil shale, oil sands and all other petroleum 
resources. In our opinion, prolonged inaction in that regard will only 
exacerbate current threats to our economy and security fostered by 
increasing worldwide energy demand, rising imports and diminishing 
conventional resources.
    Anadarko is a publicly traded independent oil and gas exploration 
and production company with active operations in the Gulf of Mexico, 
Gulf Coast States, Mid-Continent, Western States and Alaska. 
Internationally, we operate in Canada, Algeria, Qatar and Venezuela. In 
2004, the company produced 190 Million BOE and our year-end reserves 
amounted to 2.37 Billion BOE.
    One of the strategic assets in Anadarko's portfolio is the land 
acquired by the Union Pacific Railroad under the Pacific Railroad Act 
of 1862 and 1864. Anadarko acquired. these lands through its merger 
with Union Pacific Resources in 2000. The area includes four million 
three hundred thousand privately-held mineral acres and over eight 
hundred thousand surface acres within the state of Wyoming. Much of 
this acreage traverses the Green River and Washakie Basins, long known 
for their extensive oil shale resources. Consequently, Anadarko is one 
of the largest private owners of oil shale resources in the world.
    Anadarko believes the forthcoming Energy Bill should contain 
mandates that would make commercial oil shale production a reality 
within the next decade and provide the momentum needed for private 
enterprise to commit to domestic projects of sufficient magnitude to 
make this happen. We believe there are five important actions which the 
federal government could institute to advance oil shale production. 
Those include

   developing a federal oil shale leasing program,
   developing a stream-lined land exchange program to block up 
        federal and private acreage of sufficient size to support 
        commercial oil shale projects,
   fast tracking and streamlining regulatory and NEPA 
        processes,
   facilitating technological research, and
   providing incentives which recognize the tremendous initial 
        capital requirements involved in projects of this magnitude.

    Anadarko encourages Congress to direct the Department of the 
Interior to develop regulations governing oil shale leasing and 
development. In addition, Congress should amend the Mineral Leasing Act 
to increase the maximum allowable acreage for oil shale holdings. The 
current law restricts oil shale leases to one per company and to a 
maximum five thousand one hundred twenty (5,120) acre lease. These 
leasing restraints and limitations on lease size will constrain 
development opportunities.
    For example, Anadarko's oil shale acreage in Wyoming is located in 
a checkerboard pattern wherein federal and some state acreage 
alternates with the company's private acreage. Because the federal 
acreage is currently off limits to leasing, Anadarko is limited for 
potential oil shale development to its own sections of land and only 
that for which we have access. In addition, the oil shale resource in 
Wyoming is thinner and more widely distributed than those in Colorado 
and Utah which puts even more importance on securing larger federal 
leases.
    The Department of the Interior should be provided the authority to 
streamline the land exchange process involving oil shale resources. We 
believe such action would promote resource development possibilities 
and efficiencies as well as create opportunities for responsible 
environmental management alternatives. In order to make the commitment 
to initiate a commercial-scale oil shale development project, 
proponents must first be confident that acquisition of the acreage 
necessary to justify substantial capital investment will be possible. 
Pursuant to this need, Congress should appropriate the money necessary 
to fund an oil shale exchange program.
    Congress should also investigate ways to streamline the regulatory 
and National Environmental Policy Act (NEPA) processes. Consistent and 
predictable regulatory requirements and dependable specific NEPA 
timelines must be established to allow investors to enter into sizable 
financial commitments with the conviction that their investment will 
not linger due to untimely staff workloads or frivolous objections.
    Anadarko prides itself on putting a high priority on protection of 
the environment and developing energy in a manner compatible with the 
natural surroundings. By streamlining and establishing definitive 
timelines, we are not suggesting circumvention of this nation's 
environmental laws or goals. Our objective is simply to improve the 
current process and establish a predictable permitting system upon 
which investors can rely.
    Technological advances in this emerging energy opportunity can be 
vital to reserve maximization, production volumes and product quality. 
Through its vast networks with private industry, academia, qualified 
scientists and engineers, the federal government, through the 
Department of Energy (DOE), is properly positioned to encourage and 
reward research and technological improvements which attract and 
stimulate oil shale developers. We believe the current data base and 
potential oil shale production scenarios of the DOE should be expanded.
    Congress should also explore the possibility of financial 
incentives to help private enterprise manage and endure the tremendous 
up-front capital burdens associated with oil shale development. The 
magnitude of these costs can and will discourage potential developers 
and reduce competition. Incentives that may be worthy of adoption 
include, but are not limited to:

   production tax credits
   additional federal royalty relief
   accelerated depreciation
   investment tax credits
   depletion allowance
   loan guarantees

    Anadarko concurs that it is in the best interests of the nation to 
secure this vast, stable, long term domestic source of oil. With 
assistance from Congress in the aforementioned key areas, private 
enterprise can be stimulated to do its part in realizing that goal.
    The men and women of Anadarko Petroleum look forward to working 
with federal, state, and local governments as well as the key 
stakeholders to see that these strategic national resources become a 
viable and dependable part of our nation's economy.
            Sincerely yours,
                                            James L. Fuchs,
                                                   General Manager.
                                 ______
                                 
    Statement of Department of Energy, Government of Alberta, Canada

    The Government of Alberta, Canada, is pleased to provide this 
written submission on the Alberta Oil Sands to the U.S. Senate Energy 
and Natural Resources Committee.
    Included herein is a brief overview of the Province of Alberta; our 
role in North American energy security; the extent of oil sands 
resources in Alberta including reserves based on currently available 
extraction technologies; the role the Government of Alberta plays in 
bringing these valuable resources to market; and, importantly, the 
direct effect this has had on increasing investment and production. 
Production of crude oil from Alberta's oil sands has the potential to 
close the U.S. energy gap.

                        THE PROVINCE OF ALBERTA

    Albertans are a breed apart. They are driven by the pioneering 
spirit that first settled the land. They hold dear the ethics of hard 
work and personal responsibility. They cherish the ideals of family and 
community that built the province.
    Our policies focus on free trade and competitive markets as the 
best way to allocate scarce resources. Provincial law prevents the 
government from subsidizing any commercial business entity. The 
Province has no sales tax, a 10% flat income tax, and no debt--
something that has not been achieved anywhere else in Canada, and 
something of which Albertans are justifiably proud.
    Year after year, Alberta's economic growth leads Canada, averaging 
3.7% annually over the past 10 years. We lead the nation in job 
creation, and our unemployment rate is consistently among the lowest in 
Canada. Alberta's per capita disposable income and standard of living 
are the highest in Canada. Not surprisingly, we continue to experience 
the strongest population growth in Canada, with people from all over 
Canada and around the world migrating to our province to experience the 
Alberta Advantage for themselves and their families.

                     NORTH AMERICAN ENERGY SECURITY

    Alberta is rich in hydrocarbon resources--producing over 1.6 
million barrels per day of crude oil, and over 15.2 billion cubic feet 
per day of natural gas.
    Both Alberta and Canada are vital to the energy security of the 
United States--we are reliable, secure and, importantly, stable 
suppliers of energy to the U.S. In 2004, for the sixth year running, 
the U.S. Energy Information Administration recognized Canada as the 
largest supplier of oil (crude and refined) to the U.S.
    Approximately 11% of U.S. crude oil imports and 15% of its natural 
gas consumption come from Alberta alone.*
---------------------------------------------------------------------------
    * Appendix and Figures 1-5 have been retained in committee files.
---------------------------------------------------------------------------

                          WHAT ARE OIL SANDS?

    Oil sands are deposits of bitumen, a molasses-like viscous oil that 
requires heating or dilution with lighter hydrocarbons in order to 
flow. Second only to the Saudi Arabian reserves, Alberta's oil sands 
deposits have been described by Time Magazine as ``Canada's greatest 
buried energy treasure,'' which ``could satisfy the world's demand for 
petroleum for the next century.''
    Deposits are found in three major areas in northeastern Alberta: 
Peace River, Athabasca (Fort McMurray area), and Cold Lake (north of 
Lloydminster), totaling approximately 54,400 square miles--an area 
larger than the State of Florida.

                   SIZE OF ALBERTA OIL SANDS RESERVES

    Alberta is home to the largest oil sands reserves in the world. 
Proven reserves\1\ of 174.5 billion barrels are second only to Saudi 
Arabia.
---------------------------------------------------------------------------
    \1\ Proven reserves: extractable with present technology and 
pricing.

------------------------------------------------------------------------

------------------------------------------------------------------------
Proven Reserves...........................  174.5 billion barrels
Probable Reserves.........................  311 billion barrels
In-Place Reserves.........................  1.4 trillion barrels
------------------------------------------------------------------------

    This data is on the public record and confirmed by the Alberta 
Energy & Utilities Board (AEUB), an arms-length regulatory agency. Over 
56,000 wells and 6,000 cores were the basis of the analysis.
    Since December 2002, these figures were recognized by the Oil & Gas 
Journal, followed by the U.S. Energy Information Administration in 
2003.

                     GROWTH IN OIL SANDS PRODUCTION

    Oil sands production in Alberta hit 1 million barrels a day in 2004 
(about a third of total Canadian production) and by the end of this 
decade, we expect production to rise to 2 million barrels a day. See 
Appendix 1: Oil Sands potential: 3 million bpd by 2020, 5 million bpd 
by 2030.
    Annual oil sands production is growing steadily by about 200-250 
barrels per day (bbl/d) per year, as the industry matures. Output of 
marketable production increased to 858,000 barrels per day (bbl/d) in 
2003, up from 741,000 bbl/d the year before. It is anticipated that in 
2005, Alberta's oil sands production may account for one-half of 
Canada's total crude output and 10 per cent of North American 
production.

                 PRODUCTION METHODS: MINING AND IN-SITU

    There are two methods of oil sands production methods: mining and 
in-situ. Oil sands mining involves open pit operations. Oil sands are 
moved by trucks and shovels to a cleaning facility where the material 
is mixed with warm water to remove the bitumen from the sand. Today, 
all operating oil sands mines are linked with upgraders that convert 
the bitumen to synthetic crude oil.
    For oil sands reservoirs too deep to support economic surface 
mining operations, some form of an in-situ or ``in place'' recovery is 
required to produce bitumen. In-situ oil sands production is similar to 
that of conventional oil production where oil is recovered through 
wells. Present operating costs, not including capital recovery, vary 
between $10-15/per barrel.
    The AEUB estimates that 80% of the total bitumen ultimately 
recoverable will be with in-situ techniques. In general, the heavy, 
viscous nature of the bitumen means that it will not flow under normal 
conditions. Numerous in-situ technologies have been developed that 
apply thermal energy to heat the bitumen and allow it to flow to the 
well bore. These include thermal (steam) injection through vertical or 
horizontal wells such as cyclic steam stimulation (CSS), pressure 
cyclic steam drive (PCSD) and steam assisted gravity drainage (SAGD). 
Other technologies are emerging such as pulse technology, vapor 
recovery extraction (VAPEX) and toe-to-heel air injection (THAI).
    In general, oil sands mines operations are found in central 
Athabasca deposits (around Fort McMurray). In-situ production is used 
in the Cold Lake, south Athabasca and Peace River deposits.

                          GOVERNMENT FRAMEWORK

    The mineral rights in approximately 97% of Alberta's 54,000 square 
miles of oil sands area are owned by the Government of Alberta (i.e., 
state-level) and managed by the Alberta Department of Energy. The 
remaining 3% of the oil sands mineral rights in the province are held 
by the federal Government of Canada (i.e., federal-level) within Native 
Indian reserves, by successors in title to the Hudson's Bay Company, by 
the national railway companies and by the descendants of original 
homesteaders through rights granted by the Government of Canada before 
1887. These rights are referred to as ``freehold rights''.
    The Alberta government departments of Environment and Sustainable 
Resource Development administer complementary environmental policies. 
The Alberta Energy & Utilities Board (AEUB) regulates oil and gas 
activities in the province.
    The Alberta Department of Energy is responsible for administering 
the legislation that governs the ownership, royalty and administration 
of Alberta's oil, gas, oil sands, coal, metallic and other mineral 
resources. The Department's main objective is to manage these non-
renewable resources to ensure their efficient development for the 
greatest possible benefit to the province and its people.

                      OIL SANDS ROYALTY STRUCTURE

    In 1996, Alberta announced a new generic royalty regime for oil 
sands based on recommendations from a joint industry/government 
National Oil Sands Task Force (NOSTF). This regime is defined in the 
Mines and Minerals Act and the Oil Sands Royalty Regulation 1997, as 
amended (OSRR 97). Royalty is calculated using a revenue-less-cost 
calculation.
    In early project years before capital investment and other costs 
are recovered, the royalty rate is lower than the rate that is applied 
after costs are recovered. This helps project cash flows in early 
years. Once costs are recovered, the Province shares in project 
profits. Details are provided below.

   In the pre-payout period (before the project has recovered 
        all of its costs), projects pay royalty tied to 1% of gross 
        revenue;
   In the post-payout period (after the project has recovered 
        all of its costs), projects pay royalty tied to the greater of 
        1% of gross revenue or 25% of net revenue.

    Since 1990, oil sands royalties have totaled over $2.5 billion.

                          ANNOUNCED INVESTMENT

    Since 1996, when the generic royalty regime was introduced, $25 
billion of investment in the oil sands has occurred. Looking forward, 
it is expected that new capital investment could range between $2.5-$4 
billion per year.

                            THE WAY FORWARD

    To date, only about 2% of the established oil sands resource has 
been produced. Alberta's oil sands industry is the result of multi-
billion-dollar investments in infrastructure and technology required to 
develop the non-conventional resource. In the last five years alone, 
industry has allocated $20 billion towards oil sands development, and 
the Government of Alberta invested over $700 million over a 20-year 
period.
    Alberta encourages the responsible development of these extensive 
deposits through planning and liaison among government, industry and 
communities to ensure a competitive royalty regime that is attractive 
to investors, appropriate regulations and environmental protection and 
the management of the Province of Alberta's rights to oil sands while 
taking into account some of the barriers--higher technological risk and 
higher capital costs--faced by oil sands developers.
    In 2003 Alberta's oil sands were the source of just over half of 
the province's total crude oil and equivalent production and over one 
third of all crude oil and equivalent produced in Canada. Over the last 
three fiscal years, through to 2003/2004, oil sands development 
returned $565 million to Albertans in the form of royalties paid to the 
Provincial government.
    Continuing technology improvements will lead to greater energy 
efficiency and a reduction in natural gas as a fuel input source. As 
the future unfolds, the only impediment to oil sands production could 
be shortages of skilled labour to complete the projects. Oil sands 
projects will compete for the same skilled workforce as the MacKenzie 
and Alaska natural gas pipelines.
    Development of Alberta's oil sands resources represents a triumph 
of technological innovation. Over the years, government and industry 
have worked together to find innovative and economic ways to extract 
and process the oil sands and energy research is more important today 
than ever before. Working through the Alberta Energy Research 
Institute, the Alberta government is committed to a collaborative 
approach with counterparts in Canada and the United States to spur new 
technology and innovation programs that will reduce the impact of 
greenhouse gases and other emissions, and reduce the consumption of 
water and gas.

