[Senate Hearing 110-10]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 110-10
                      OIL AND GAS RESERVES ON THE 
                        OUTER CONTINENTAL SHELF



                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION




                            JANUARY 25, 2007

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


34-267                      WASHINGTON : 2007
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                  JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii              PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota        LARRY E. CRAIG, Idaho
RON WYDEN, Oregon                    CRAIG THOMAS, Wyoming
TIM JOHNSON, South Dakota            LISA MURKOWSKI, Alaska
MARY L. LANDRIEU, Louisiana          RICHARD BURR, North Carolina
MARIA CANTWELL, Washington           JIM DeMINT, South Carolina
KEN SALAZAR, Colorado                BOB CORKER, Tennessee
ROBERT MENENDEZ, New Jersey          JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas         GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
JON TESTER, Montana                  MEL MARTINEZ, Florida

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
              Frank Macchiarola, Republican Staff Director
             Judith K. Pensabene, Republican Chief Counsel
                      Patty Beneke, Senior Counsel

                            C O N T E N T S

                                                                TAB NO.

Allred, Hon. C. Stephen, Assistant Secretary for Land and 
  Management, Department of the Interior.........................     4
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Craig, Hon. Larry E., U.S. Senator From Idaho....................    43
Domenici, Hon. Pete V., U.S. Senator From New Mexico.............     2
Jackson, Lisa P., Commissioner, New Jersey Department of 
  Environmental Protection.......................................    18
Landrieu, Hon. Mary L., U.S. Senator From Louisiana..............    42
Manuel, Athan, Director, Lands Protection Program, Sierra Club...    25
Martinez, Hon. Mel, U.S. Senator From Florida....................     2
McKeithen, Marjorie A., Assistant Secretary, Office of Mineral 
  Resources, Louisiana Department of Natural Resources...........    10
Murkowski, Hon. Lisa, U.S. Senator From Alaska...................    47
Nichols, J. Larry, Chairman and Chief Executive Officer, Devon 
  Corporation....................................................    21
Siegele, Paul K., Vice President, Deepwater Exploration and 
  Chevron North America Exploration and Production Company, 
  Chevron U.S.A., Inc............................................    34
Wyden, Hon. Ron, U.S. Senator From Oregon........................    40


Responses to additional questions................................    57



                       THURSDAY, JANUARY 25, 2007

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:45 a.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Jeff 
Bingaman, chairman, presiding.

                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. All right. We'll go ahead with the hearing. I 
thank you all for being here. Today we will receive testimony 
on the oil and gas resources in the Outer Continental Shelf and 
the areas available for leasing in the Gulf of Mexico.
    I'm very glad to have this hearing, at the request of 
Senator Domenici, today. During the last Congress, of course, 
Senator Domenici sponsored and I co-sponsored legislation, S. 
2253. It would have required a previously un-leased portion of 
the Gulf of Mexico to be made available for leasing.
    That legislation was modified during consideration in the 
Congress. Unfortunately I was not able to support the final 
version, but I am glad that there are new areas of the Gulf of 
Mexico that are now available.
    The Outer Continental Shelf and the Gulf of Mexico hold 
abundant oil and gas resources. The latest assessment 
undertaken by the Minerals Management Service indicates a total 
hydrocarbon endowment in the Gulf of Mexico of almost 72 
billion barrels of oil and 443 trillion cubic feet of natural 
gas. Estimates of oil in deep water have increased, as have the 
estimates of deep gas reserves in shallow water.
    So we look forward to hearing about these resources and 
those in the new Gulf of Mexico areas to be opened and to 
finding out when these resources can come on line and what role 
they can play in meeting our national energy needs.
    With respect to the remainder of the OCS, of course, 
production offshore--some areas of Alaska and also from 
longstanding leases off Southern California, but the OCS 
Leasing Program has generated substantial controversy here in 
the Congress. As most everybody knows, there are congressional 
moratoria and there are Presidential withdrawals of the 
remaining portions of the OCS. With only minor exceptions for 
many years, there has not been the political will to reverse 
these leasing bans. I would doubt seriously that that political 
will exists today. Our time and efforts are, in my view, better 
spent focusing on areas that are available in the Gulf of 
Mexico and also, of course, on alternatives to OCS production. 
Many of those we are already scheduling meetings and hearings 
on, such as renewables, energy efficiency, biofuels, new 
technologies and opportunities to enhance oil and gas recovery.
    So again, I thank the witnesses for being here and I thank 
Senator Domenici for suggesting the hearing and I'll turn it 
over to him for any statement he has.
    [The prepared statement of Senator Martinez follows:]
   Prepared Statement of Hon. Mel Martinez, U.S. Senator From Florida
    Chairman Bingaman: Thank you for holding this hearing today. I 
wanted to share some of my thoughts as I reflect on the passage of S. 
3711, the Gulf of Mexico Energy Security Act and the importance of its 
environmental protections to Florida and the energy resources it will 
provide for our economy.
    I want to thank members of this Committee and especially Senators 
Domenici and Landrieu and others who were so helpful in shepherding the 
passage of S. 3711.
    I thank them for their willingness to allow me the opportunity to 
help craft its environmental protections. Chairman Bingaman, I know you 
and I have different opinions on this legislation but I've always 
appreciated your efforts to find common ground between both parties on 
the energy issues that come before this committee. But I think what is 
clear today is that the desire and need to explore for energy resources 
in the Outer Continental Shelf, especially in the Gulf of Mexico; this 
has not changed with the elections of last November.
    High oil and natural gas prices are not Republican or Democrat 
problems; they are our nation's problems. As long as prices remain 
high, coastal states with offshore resources will continue to face 
pressure to explore. Recently, the Administration lifted the executive 
moratoria in Bristol Bay, off the coast of Alaska, and the area known 
as Lease 181 in the Gulf of Mexico. For those who were critical as to 
the need for action on S. 3711, these two examples underscore why I 
found it imperative to act. Without the protections of federal law, the 
President has the power to remove coastal buffer zones.
    That is why I pushed for the passage of S. 3711, and refused to 
roll the dice in the hopes that a new Congress would be better able to 
protect the Gulf coast of Florida.
    For those that think we have protected too much territory, I am 
encouraged that we have witnesses testifying today on the amazing deep-
water discoveries they have made 270 miles off the coast of New Orleans 
that potentially contain billions of barrels of oil.
    We are making incredible technological breakthroughs to discover 
new reserves of oil and gas, and I would encourage the industry to 
utilize these new techniques in the deep-water areas that are now 
available, so that we don't have to continually pressure extraction on 
near-shore resources that predictably draw opposition from states like 
    This week, in his State of the Union address, the President laid 
out ambitious and positive goals for alternative fuel development, 
greater independence from foreign oil, and a reduction in fuel 
consumption over the next decade.
    We are only scratching the surface of our future potential and we 
should not limit the capacity or ingenuity of America's scientists to 
tackle this energy problem. However, we need a bridge to get to that 
future. The promise of deep-water exploration like the enormously 
energy-rich Jack Well off the coast of Louisiana and the passage of S. 
3711 are good ways to keep our industries and utilities running while 
we find new ways to power our cars and cities, and create new and 
smarter sources of energy.

                        FROM NEW MEXICO

    Senator Domenici. Thank you very much, Mr. Chairman. 
Clearly, there are a lot of people here, so we ought to get on 
with the hearing, not delay them unduly. But I thank you for 
calling this important hearing.
    I've said on many occasions that a strong energy policy 
means utilizing a diverse supply that encompasses a spectrum of 
energy sources and technologies and it also means meeting our 
responsibility to deploy these resources in a smart, efficient 
and environmentally sound way. It is unacceptable to me to 
speak of energy independence on the one hand while supporting a 
moratorium that locks up 85 percent of the OCS acreage on the 
    While vast resources in the Atlantic and Pacific coasts 
provide us with hope, this promise is an uncertain one. Based 
on old inventory data, we are told that the Atlantic and 
Pacific Oceans together contain nearly 17 billion barrels of 
oil and nearly 170 trillion cubic feet of natural gas.
    Despite this promise, for 25 years the Interior 
Appropriations Moratorium has quietly barred us from producing 
in vast areas of the OCS. This moratorium locks up our Nation's 
resources and it weakens our foreign policy, our national 
security and economic strength. This is about American oil and 
gas and it is a debate that we should have, in the light of 
day, with the American people watching.
    Last year, on a bipartisan basis, my colleague joined me in 
such a debate, and as a result, we opened a substantial area in 
the eastern Gulf of Mexico to oil and gas leasing. I said then 
and I say now, we will not strengthen our energy security by 
locking up our Nation's energy resources.
    In discussing energy independence, many people point to the 
role that ethanol has played in turning Brazil into a net 
exporter of oil in 2006. While this is true, they often fail to 
mention that Brazil's oil production has risen significantly in 
recent years and the untold story is that most of Brazil's 
crude oil is offshore in the deep water. Similarly, most of 
Mexico's crude oil production occurs off the southeastern coast 
of the country in the Gulf of Mexico.
    Finally, within 50 miles of American land, Cuba leases to 
China's national oil companies to explore in deep water. As we 
wring our hands, other nations act. And as a result, our 
increased dependence weakens our economic and diplomatic 
strength in the world.
    The task of energy security calls for us to be bold. We 
must rethink longstanding policies, like the OCS moratorium, 
stagnant CAFE standards and we must do more than that. It will 
require us to do things that some in this body don't like and 
it will require us to do things that Republicans don't like--
Democrats sometimes, Republicans other times. And it will 
require us to do things that Republicans don't like. It 
requires us to think differently.
    I thank the chairman for the opportunity to have this 
discussion and I look forward to hearing from the witnesses. 
Thank you very much, Mr. Chairman.
    The Chairman. Thank you very much. Let me just introduce 
our witnesses here and then we will hear a short statement from 
each of them. If they can make their main points, we will 
include all of your written statements in the record of the 
    We are going to have a vote, we're informed, at 10:30, so 
we probably will have to interrupt the hearing for about 15 
minutes at that time and come back to ask a lot of our 
    Starting on the left-hand side, our left here, we have 
Assistant Secretary Stephen Allred, who is with the Department 
of the Interior. He is a regular visitor at this committee, as 
all of us know, and we appreciate him being here.
    Next is Marjorie McKeithen, who is the Assistant Secretary 
for Mineral Resources for the State of Louisiana. Thank you 
very much for being here.
    Next is a witness--and Senator Menendez may want to say a 
word here--it's Lisa Jackson, who is the commissioner of the 
New Jersey Department of Environment Protection. Did you want 
to make any statement about this witness, since she is here at 
your urging?
    Senator Menendez. Well, thank you, Mr. Chairman.
    I want to take a moment just to both thank and introduce 
Commissioner Jackson. She is--since she has been sworn in as 
the commissioner of the Department of Environmental Protection 
in New Jersey, she has been a tireless champion of the 
environment and has earned a tremendous amount of respect from 
all corners of the State.
    Being the environmental commissioner in a State like New 
Jersey is an incredibly challenging job and she has met those 
challenges exceptionally well, making sure we're good stewards 
of the land for future generations of Americans and New 
Jerseyians, most particularly, but at the same time, 
reconciling that with some of the economic concerns we have. 
And we certainly want to thank her for being here to share, 
particularly in our concerns about the Outer Continental Shelf, 
which is of incredible concern to us because of what it means 
to New Jersey's economy and tourism and, of course, its natural 
resources. And we look forward to her testimony. We thank her 
for coming and thank you for the opportunity to recognize her.
    The Chairman. Thank you very much. Also as witnesses, we 
have Mr. Larry Nichols, who is the chairman and CEO of Devon 
Energy Corporation. We welcome him.
    Mr. Athan Manuel, who is the director of lands protection 
for the Sierra Club. Thank you very much for being here.
    And finally, Mr. Paul Siegele, who is the vice president 
for deep water for Chevron Corporation. Thank you for being 
    Why don't we start to the right and just go across and have 
all the witnesses make their statements and then we will take 


    Mr. Allred. Thank you, Mr. Chairman, Senator Domenici, and 
members of the committee. I appreciate the opportunity to 
appear before you here today. I'll quickly summarize the 
written material that we've provided to you and then certainly 
be prepared to answer questions.
    The Federal portion of the OCS covers some 1.76 billion 
acres and is a major source of crude oil and natural gas for 
the domestic market. Since 1982, the Department has overseen 
the production of over 9.6 billion barrels of oil and more than 
109 trillion cubic feet of natural gas from the OCS.
    I'm sure you're going to get tired of me showing you the 
first slide, because you've seen it before, but I think it is 
important to continue to emphasis that there is no silver 
bullet to our energy needs and going forward, we will need, in 
addition to conservation and alternative and renewable energy 
supplies, to continue----
    The Chairman. Would you move that podium out there so we 
can see it a little better? Thanks.
    Mr. Allred [continuing]. To continue to develop and supply 
oil and gas from the resources we have in the United States, a 
significant amount of which are found in the OCS. As you can 
see from that graph, our demand is expected to grow more than 
25 percent. These slides, incidentally, are also in the written 
information that we have provided to you.
    Even with renewable energy and conservation, we expect that 
oil and natural gas will continue to account for the majority 
of energy use through the year 2030.
    This next slide that I have again is from the Energy 
Information Administration and it shows the 2007 forecast for 
total domestic oil and gas production and illustrates the 
significance of the OCS in that production. As you can see, it 
is a large amount of the production that we expect to occur.
    Now to talk about the OCS role. Much of the growth in the 
Nation's energy demand will have to be met by OCS production in 
the Outer Continental Shelf, especially for new areas in the 
Gulf and Alaska. In the Energy Information Agency's 2007 Annual 
Energy Outlook, the data shows a trend of increasing oil 
production from the Outer Continental Shelf to about 750 
million barrels per year by the year 2010. National gas 
production should begin increasing again in 2007 and reach 
about 4 trillion cubic feet by the year 2011 and we should be 
able to sustain those levels through at least 2022.
    The Gulf continues to represent a major domestic energy 
source for the United States. There is intense interest in our 
oil and gas potential in the deep- and ultra-deep-water areas. 
In 2006, there were 12 new deep water discoveries announced. 
These new discoveries represent a significant increase in the 
oil and gas reserves for decades to come.
    In looking at our 2006 resource assessment, which we 
completed on the potential oil and gas resources on the OCS--
and I have, again, a map here that shows in summary, what those 
are. These again, are in the information that you have. 
According to that assessment, the OCS is thought to contain 
over 86 billion barrels of oil and 420 trillion cubic feet of 
natural gas that is undiscovered and technically recoverable. 
The OCS oil and gas resources represent about 65 and 40 
percent, respectively, of the Nation's remaining undiscovered 
oil and natural gas resources.
    However, about 20 percent--as you can see from the map that 
you have--of these undiscovered OCS resources have been 
unavailable for leasing due to either congressional or 
presidential moratorium or withdrawal.
    There is great uncertainty regarding the potential 
resources in these withdrawn areas. The last geophysical 
surveys and drilling exploration occurred more than 25 years 
ago. We simply do not have specific reliable estimates without 
the information or new geophysical and exploration methods and 
the information that they would provide.
    Today, even using outdated information, however, we have, 
for the areas under moratoria, undiscovered technically-
recoverable resources of over 18 billion barrels of oil and 76 
trillion cubic feet of gas.
    Now, typically these numbers will change substantially as 
we get additional information. Just for an example, the 
resource estimates for undiscovered economically recoverable 
oil and gas resources for the Gulf of Mexico, in 1975, were 6 
billion barrels of oil and 50 trillion cubic feet of natural 
gas. Thirty years later, with the new information gained 
through exploration and production activities, those numbers 
are 38 billion barrels of oil and 185 trillion cubic feet of 
natural gas. That's over a 470 percent increase just because we 
have better information.
    With regard to access, of the 1.76 billion acres of 
offshore land on the OCS, about 600 million are off limits to 
oil and gas leasing. The Department has finalized our new 5-
year oil and gas--or is close to finalizing--a leasing program 
for 2007 to 2012. The proposed plan was published in August 
2006 and identified 21 lease areas that would be offered over 
that 5-year period.
    The analysis completed anticipates production of an 
additional 10 billion barrels of oil and 45 trillion cubic feet 
of gas worth $170 billion in net benefits for the Nation over a 
40-year period of time. With the enactment of the Gulf of 
Mexico Energy Security Act, these numbers will probably change 
    In addition to moving forward with the planning of two 
lease sales required under the Gulf of Mexico Energy Security 
Act, the recent modification of the presidential withdrawal was 
in response to this legislation and to requests from Alaska 
State leaders.
    MMS is incorporating the sales called for by the Gulf of 
Mexico Energy Security Act into the new 5-year plan. While we 
are experiencing budget constraints under the continuing 
resolution, MMS has begun planning with the conducting of 
required environmental studies, in compliance with the National 
Environmental Policy Act, in preparation for the sales in 181 
and in what we now call 181 South.
    I'd like to just quickly mention that in addition to 
traditional resources, the OCS is poised to provide us with 
renewable and alternative sources of energy, with wind, wave 
and ocean currents. Through the new authorities that you 
provided us in the Energy Policy Act of 2005, the Department is 
moving forward to establish programs, including royalty 
evaluation, regulatory and leasing framework plans, to 
facilitate the development of these potent energy resources on 
the OCS.
    Our target is to have a programmatic EIS and draft rule 
available for public comment in late spring and finalize these 
documents toward the end of the year. The Department remains 
committed to the production of traditional energy that is 
environmentally acceptable as well as increasing energy 
conservation and alternative and renewable sources as critical 
components of a balanced and comprehensive energy policy.
    Thank you very much, Mr. Chairman. I'll be prepared to 
answer your questions.
    [The prepared statement of Mr. Allred follows:]

 Prepared Statement of C. Stephen Allred, Assistant Secretary for Land 
          and Minerals Management, Department of the Interior

    Mr. Chairman, thank you for the opportunity to appear here today to 
discuss the Federal Outer Continental Shelf (OCS) and the role these 
Federal lands play in providing a secure source of domestic production 
of oil and gas.
    The Department and its agencies, including the Minerals Management 
Service (MMS), serve the public through stewardship of our Nation's 
natural resources. The Department also plays an important role in 
facilitating domestic energy development. One third of all energy 
resources produced in the United States are managed by the Department 
of the Interior.
    The MMS has two significant missions: managing access to offshore 
Federal energy and mineral resources and managing revenues generated by 
Federal and Indian mineral leases, on and offshore.
    Managing access has resulted in OCS production of almost 11 billion 
barrels of oil and more than 116 trillion cubic feet of natural gas 
since 1982. Since 1982 OCS leasing has increased by 185 percent, and 
since 1994 OCS oil production has increased by 34 percent.

                        NATION'S ENERGY OUTLOOK

    The United States continues to face an energy challenge with high 
prices and increasing dependence on foreign supplies. Our security, 
economy, and our quality of life are dependent on energy. As this 
Committee knows well, there is no single solution. Achieving energy 
security will require diligence on both the supply and demand sides of 
the energy equation.
    Oil will continue to be vital to the American economy. According to 
the Energy Information Administration (EIA), over the next 20 years 
Americans' demand for energy is expected to grow 25 percent. [see 
figure A: EIA projection of U.S. energy consumption*] Even with more 
renewable energy production expected, oil and natural gas are projected 
to account for a majority of energy use through 2030. This projection 
incorporates continued gains in energy efficiency and movement away 
from energy-intensive manufacturing to less energy intensive service 
industries. Offshore oil and gas production will continue to be a vital 
part of our Nation's domestic energy resource portfolio. [see Figure B: 
EIA projection of U.S. energy resource production]
    * All figures have been retained in committee files.
    Continued and growing reliance on oil and natural gas coupled with 
the need to reduce our dependence on foreign energy supplies causes us 
to look increasingly at the potential oil, natural gas and other energy 
resources from Federal waters on the Outer Continental Shelf (OCS) to 
enhance environmentally safe domestic energy production.
    Today, MMS administers more than 8,400 leases and oversees over 
4,000 facilities on the OCS. According to MMS's calculations, within 
the next 5 years, offshore production will likely account for more than 
40 percent of domestic oil and 25 percent of U.S. natural gas 
production, owing primarily to deep water discoveries in the Gulf of 


    Much of the future United States oil and gas demand will have to be 
met by OCS production, especially from new areas in the Gulf of Mexico 
and Alaska.
    The Gulf of Mexico continues to represent a major domestic energy 
source for the United States. There is intense interest in oil and gas 
potential in the deep and ultra-deep water areas. Exploratory drilling 
in the deep water increased in 2005 despite the disruptions caused by 
hurricanes; and 12 new deep water discoveries were announced in 2006. 
Recent discoveries in the ultra-deep waters of the Gulf of Mexico 
represent a significant increase in oil and gas reserves for decades to 
come. The large volume of active deep water leases, the steady drilling 
program, and the deep water infrastructure indicate that the deep water 
Gulf of Mexico will continue to be an integral part of the Nation's 
energy supply.
    The EIA provided MMS with Federal OCS data pulled from its soon to 
be published 2007 Annual Energy Outlook.\1\ The Federal OCS data shows 
a trend of increasing oil production from the OCS to about 750 million 
barrels per year by 2010. Natural gas production should begin 
increasing in 2007, again reaching 4 trillion cubic feet by 2011 and 
sustaining that level through at least 2022. Significant additional oil 
and natural gas production is expected when new projects, like 
Atlantis, Thunder Horse, and Independence Hub, come on line in 2007 and 
2008. However, new deep water natural gas production may not keep pace 
with the expected declines in production from the shallow waters of the 
Gulf of Mexico.
    \1\ Energy Information Administration, Annual Energy Outlook 2007 
Data (Special National Energy Modeling System run AEO2007.D112106A for 
    To encourage energy development from Federal offshore lands, MMS 
provides an orderly and predictable schedule of oil and gas lease 
offerings through competitive bid. Production from leases issued as a 
result of these sales will contribute substantially to future domestic 
oil and gas production and will provide bonuses, rentals and royalties 
to the U.S. Treasury and adjacent coastal states. To encourage 
increased drilling and production from the OCS, sales in the Gulf of 
Mexico have included royalty incentives authorized by Congress for the 
drilling of deep depth wells in shallow waters and for producing from 
deep water leases. Incentives have also been provided for newly issued 
leases offshore Alaska to encourage industry interest in that area.

                        2006 RESOURCE ASSESSMENT

    Last year, as part of the OCS inventory requirements of the Energy 
Policy Act of 2005, MMS completed an assessment of the potential 
quantities of undiscovered technically recoverable oil and gas 
resources that may be present on the OCS.\2\ According to this 
assessment, the OCS is thought to contain (at the mean level) 86 
billion barrels of oil and 420 trillion cubic feet of natural gas. For 
comparison, the most recent resource assessment estimates from the 
United States Geological Survey National Oil and Gas Assessment 
indicate that the total mean, undiscovered technically recoverable 
resources for onshore and State owned waters offshore are approximately 
46 billion barrels of oil and 627 trillion cubic feet of natural gas. 
Thus, the OCS represents about 65 percent of oil and 40 percent of 
natural gas of the Nation's remaining undiscovered technically 
recoverable oil and natural gas resources. [see Figure C: Resource 
Assessment Map]
    \2\ Report to Congress: Comprehensive Inventory of U.S. OCS Oil and 
Natural Gas Resources. http://www.mms.gov/revaldiv/PDFs/
    Approximately 20 percent of those undiscovered technically 
recoverable OCS resources have been unavailable for leasing due to 
longstanding congressional moratoria and/or Presidential withdrawal. 
When the 2006 resource assessment was completed, areas under 
congressional moratoria or Presidential withdrawal included the North 
Aleutian Basin off Alaska, the Pacific, the Eastern Gulf of Mexico, and 
the Atlantic. As discussed further in my statement, modifications to 
the status of some of these areas have recently been made.
    There is great uncertainty regarding the resource potential in 
areas where leasing has been prohibited and where the last geophysical 
surveys and drilling exploration occurred more than 25 years ago. Using 
the information available to us, we estimate that nearly 17.8 billion 
barrels of oil and 76.5 trillion cubic feet of technically recoverable 
gas remain unavailable for leasing consideration.

                          ACCESS TO RESOURCES

    Of the 1.76 billion acres of Federal offshore lands on the OCS, 
about 600 million acres are not available for oil and gas leasing. The 
potential resource in the areas under remaining moratoria and 
withdrawal are estimated to be approximately 18 billion barrels and 76 
trillion cubic feet of gas.
    There has been a 20-year congressional moratorium on new leasing 
along the Atlantic and Pacific coasts and in the Eastern Gulf of 
Mexico. In 1990, Congress placed Alaska's North Aleutian Basin under a 
leasing moratorium. In 1998, these areas were placed under a 
Presidential Withdrawal which continues through 2012.
    In 2004, at the request of the Alaska delegation, Congress dropped 
the North Aleutian Basin from the annual moratoria language. The Gulf 
of Mexico Energy Security Act (GOMESA)\3\ was signed into law in 
December 2006, establishing a new moratorium on leasing activities 
until June 30, 2022 in the new Eastern Gulf Planning Area outside of 
Sale 181, and a portion of the Central Gulf Planning Area that, in 
general, is within 100 miles of the coastline of Florida. There are two 
small areas in the new Eastern Gulf Planning Area west of the Military 
Mission Line and one small area in the new Central Gulf Planning Area 
north of the Sale 181 Area that remain subject to the Presidential 
Withdrawal through 2012, but are not subject to the new 2022 moratorium 
under GOMESA. In addition, GOMESA repealed the congressional moratorium 
for the area in the Central Gulf Planning Area, known as ``181 Area 
South.'' [See Figure D: Map of Sale 181]
    \3\ GOMESA was Title I of Division C of Public Law 109-432, an act 
to amend the Internal Revenue Code of 1986 to extend expiring 
provisions, and for other purposes.
           5-YEAR OCS OIL AND GAS LEASING PROGRAM (2007-2012)

    The MMS is nearing completion of a new 5-Year OCS Oil and Gas 
Leasing Program for sales beginning in July 2007 through June 2012. MMS 
is preparing the Proposed Final Program and Final Environmental Impact 
Statement (EIS) for issuance in April of this year. Pursuant to the OCS 
Lands Act, the Program will be sent to Congress and the President for 
at least 60 days before the Secretary approves the final program.
    The Draft Proposed Program, issued in February 2006, contained 21 
sales in seven planning areas--Western and Central Gulf of Mexico, 
Beaufort and Chukchi Seas, Cook Inlet and North Aleutian Basin off 
Alaska, and the Atlantic offshore Virginia.
    Following scoping and public comment, the Proposed Program and 
Draft EIS were issued in August 2006. The sales in Alaska are proposed 
in response the State of Alaska and industry interest, especially the 
Chukchi Sea. The North Aleutian Basin, as well as the 181 South Area in 
the Gulf of Mexico and the Atlantic offshore Virginia were included as 
areas for further consideration of leasing should Congress and the 
President modify the pertinent congressional moratoria and Presidential 
Withdrawal language.
    On January 9, 2007, the President modified the 1998 withdrawal to 
allow leasing in the North Aleutian Basin planning area offshore Alaska 
and the 181 South Area of the Gulf of Mexico. These actions were in 
response to the requests from Alaska state officers and local 
communities and enactment of the GOMESA respectively.
    The analysis completed for the proposed 5-year plan indicated that 
implementing the new program would result in the anticipated production 
of an additional 10 billion barrels of oil and 45 trillion cubic feet 
of gas, with $170 billion in net benefits for the Nation over a 40-year 
time span. With the enactment of the GOMESA, these numbers will 
probably change. Those changes will be reflected in the Final Plan.
    In response to passage of the GOMESA, which directs lease offerings 
in two areas of the Gulf, MMS plans to move forward with this 
Congressional directive in connection with the new 5-year program. 
Adding these two important areas to the leasing schedule under the 
final 2007-2012 leasing program provides access to a potential 637 
million barrels of oil and 2.8 trillion cubic feet of natural gas.
    The first area consists of approximately 546,000 acres that lie 
within the Sale 181 area and in the Eastern Gulf Planning Area. MMS has 
begun preparation of a supplemental EIS to a previous National 
Environmental Policy Act (NEPA) document prepared in 2001 for Sale 181.
    The second area consists of approximately 5.8 million acres in the 
deep waters of the Central Gulf and was included in the Proposed 
Program as an area for further consideration for leasing. In response 
to the GOMESA and modification of the Presidential withdrawal, MMS 
intends to prepare a supplemental EIS and include this area in the 
Central Gulf sale scheduled for March of 2009.
    On the Atlantic coast, Virginia expressed an interest in looking 
into the gas resources off its coastline. While this area has been 
included in the Proposed Program and discussions continue, no leasing 
will occur in this area unless Congress lifts its moratorium and the 
President modifies the withdrawal to allow leasing activities to occur.
    Sales proposed will be completed in compliance with the National 
Environmental Policy Act to analyze potential environmental impacts. 
Other laws, such as the Marine Mammal Protection Act and the Endangered 
Species Act, will be complied with.


    The United States faces a future of increasing energy demand 
causing a search for new sources of domestic energy supply. Our ocean 
frontiers may play a significant national role in this quest, 
particularly in the areas of new renewable and other alternative energy 
sources. MMS, drawing on its vast offshore engineering and 
environmental expertise, will work to help secure America's energy 
future while protecting the environment.
    In addition to supplying the Nation with ``traditional'' energy 
resources, the OCS is poised to provide us with ``alternative'', 
renewable sources of energy such as wind, wave, tidal, and ocean 
current. Through new authorities established by the Energy Policy Act 
of 2005, the Department, specifically MMS, is establishing a regulatory 
framework to harness these potent energy sources. Our goal is to create 
a program that provides for meaningful dialogue with states and 
stakeholders; relies on sound environmental, engineering and scientific 
analyses; and culminates in a balanced approach that promotes safe and 
environmentally responsible renewable energy production.
    Along with the program, MMS is preparing a programmatic EIS that 
will focus on general impacts from each industry sector based on global 
knowledge and identify key issues that future project or site-specific 
environmental analyses should consider. Our target is to make the 
programmatic EIS and draft rule available for public comment in the 
spring of this year, and finalize these documents in the near future.
    The Energy Policy Act also gave the Secretary responsibility for 
two existing offshore alternative energy proposals, the Cape Wind 
Energy and the Long Island Offshore Wind Park projects. The MMS is 
reviewing each proposal and supporting information, and is preparing 
project-specific environmental analyses.
    Cape Wind Associates (CWA) has proposed to construct an offshore 
wind park located on Horseshoe Shoal in Nantucket Sound, 4.7 miles 
offshore Massachusetts. The purpose of the project is to provide a 
utility-scale renewable energy facility project providing electricity 
to the New England Power grid. The proposed wind park will consist of 
130 offshore wind turbine generators arranged to maximize the park's 
maximum potential electric capacity of approximately 454 megawatts. The 
draft EIS is anticipated to be available for public comment in late 
    The Long Island Power Authority (LIPA) and Florida Power & Light 
(FPL) have proposed an offshore wind park located between 3 and 4 miles 
off the South Shore of Long Island, New York. The proposed wind park 
would entail installation of 40 turbines with a capacity of 140 
megawatts of electricity for use in Long Island communities. The draft 
EIS is anticipated to be available for comment in late summer.


    The Department of the Interior remains committed to doing its part 
to provide access to both traditional energy resources and alternative 
and renewable sources on Federal lands as a critical component of a 
balanced, comprehensive energy policy. For this reason, the Department 
has ensured that the OCS remains a solid contributor to the Nation's 
energy needs. The relative contribution from Federal offshore areas 
will increase in the coming years due to increased access and increased 
activity in the deep waters of the Gulf of Mexico.
    Mr. Chairman, this concludes my statement. I appreciate the 
continued support and interest of this Committee in MMS's programs. It 
would be my pleasure to answer any questions you or other members of 
the Committee may have at this time.

    The Chairman. Thank you very, very much.
    Ms. McKeithen, why don't you go right ahead. Thank you. 
Tell us the perspective from the State of Louisiana.


    Ms. McKeithen. Good morning and thank you, Mr. Chairman and 
Mr. Ranking Member, distinguished members of the committee, in 
particular Senator Landrieu and her staff for having a 
representative from Louisiana here today. It is an honor.
    My name is Marjorie McKeithen. I am assistant secretary for 
the Department of Natural Resources for Louisiana, in charge of 
the Office of Mineral Resources, and I am secretary of the 
Louisiana State Mineral Board.
    Louisiana has a long and distinguished oil and gas history 
for our country both onshore and offshore. We look at ourselves 
as the heartbeat of America's energy coast, sort of the working 
capital. While many companies may be headquartered elsewhere 
these days, we're where the activity takes place.
    Thirty-four percent of the Nation's natural gas supply and 
30 percent of the Nation's crude oil supply is either produced 
in Louisiana, produced offshore Louisiana or moved through 
Louisiana's coastal wetlands.
    Just a brief look at our rank among the 50 States will just 
give you a snapshot of Louisiana's importance and our role in 
supplying energy to our great Nation. We are first, when you 
include offshore OCS production, in total crude oil production; 
first in OCS crude oil production; first in OCS natural gas 
production; first in OCS revenue generated for the Federal 
Government; first in mineral revenues from any source to the 
Federal Government; first in Federal oil import volume; first 
in LNG terminal capacity; and first in natural gas plant 
processing capacity. The list goes on and on, but we're 
starting to become second right there so I'm going to stop.
    The bottom line is that Louisiana has provided a tremendous 
contribution to the energy needs of our Nation and we look 
forward to moving to forward. Of the offshore territory, off 
Louisiana's coast, it is the most extensively developed 
offshore territory in the entire world. Of the 15.9 billion 
barrels of crude oil and 162 trillion cubic feet of natural gas 
ever produced, from all OCS Federal territories combined, 85.4 
percent of the crude oil and 81.1 percent of the natural gas 
has come from Louisiana's coast. And we're proud of that. We 
want to continue. We want to move forward. We thank you so 
much, from the bottoms of our hearts, for sharing with us in 
this historic legislation and we're ready to move forward as 
partners now, for the first time ever, getting a share of the 
money and not just the impact of all that activity. Thank you.
    Now, with this expansion is going to--with this expanded 
area is going to come some expanded needs and we need to be 
honest about it, take a look at it and know that it is going to 
have an impact on Louisiana's infrastructure. Although this 
expanded area is off the coast of Alabama and Florida, the 
nearest oil and gas infrastructure and the nearest oil and gas 
ports are in Louisiana.
    And I wanted to just take a brief minute to look at those 
and talk briefly about what we can expect. Morgan City is close 
to the area in question. It is very important and advantageous 
to the oil and gas industry because it's at the intersection of 
several waterways and important for shipbuilding and repair.
    The Port of Iberia is on the Commercial Canal and it is 
important for platform fabrication, repair and maintenance. And 
Port Fourchon is the largest Gulf supplier base for all 
offshore oil and gas services right now, and that is also 
expected to expand with the expanded activity.
    The bottom line is that developing these new areas will 
undoubtedly require a bolstering of our ports and 
infrastructure in Louisiana. We are thrilled to do it. We are 
thrilled for the economic activity that will be coming to 
Louisiana. We're thrilled about the jobs but we've got to be 
honest about the impact that it is going to have and move 
forward in an environmentally responsible way, and we're 
prepared to do that.
    Louisiana is a working wetland and Louisiana is not an 
``either-or State''. Louisiana firmly believes that--hey, 
Senator, good morning--that production and protection can co-
exist. We have proved that time and time again. Louisiana's 
wetlands is a place where crops are grown, energy is produced, 
petrochemicals are manufactured, and our ports are buzzing all 
at the same time where fish is being harvested. Louisiana's 
commercial fisheries account for 30 percent of the total catch, 
by weight, of commercial fisheries for the lower 48 states.
    We pride ourselves on being the ``Sportsman's Paradise''. 
We have a ton of--what's the word I'm looking for? Your brother 
is in charge of it--tourism. Focused on leisure and sports 
activities in Louisiana. Our recreational fishing industry--
well, I guess, our pastime--is a $1 billion a year industry. 
Our hunting generates $446 million a year, all on Louisiana's 
coast--or a lot of it in Louisiana's coastal areas.
    Louisiana knows that production and protection can co-exist 
because we've been doing that. But we know that we can't 
continue to do it without learning some of the hard lessons 
from the past. Those lessons cannot go unlearned.
    The massive energy infrastructure that I described in more 
detail in my testimony, sits atop an extraordinarily fragile 
environment. Louisiana continues to lose about 25 square miles 
a year, roughly an acre every 33 minutes. Through coastal 
loss--yes, sir?
    The Chairman. Can you go ahead and summarize the rest of 
your statement for us? We're going to have to get on.
    Ms. McKeithen. I will. Did I run out of time already?
    The Chairman. Yes, you have.
    Ms. McKeithen. All right. Just one more minute and I'll be 
    The Chairman. That would be fine. One more minute, please.
    Ms. McKeithen. Thank you very much. The good news is that 
scientists know now how to restore wetlands. They know how to 
bolster our Barrier Islands. What has been lacking in the past 
was not the will or the way but the resources to make a 
difference, and now you are providing us with those resources 
and we thank you.
    Now that it matters for us, now that we are getting a 
portion--I'd just like to make a brief comment on the way we 
conduct our business in Louisiana, because it now matters to us 
more how the minerals off our coast are managed. We look at our 
model in Louisiana as Louisiana's business, and it is a 
business. While industry are our customers, the people of 
Louisiana are our shareholders and we want to keep our 
customers happy and keep them coming back, but we want to 
maximize the profits for our shareholders as well.
    Three things dominate our process in Louisiana: 
transparency, checks and balances, and market--let the market 
drive the price. We have transparency in that our bidding 
process is done in a public forum, field bids, opened in 
public. We have checks and balances, because only the State 
Mineral Board, not me, not the Governor, not the Secretary of 
our Department, can grant a mineral lease in Louisiana, only a 
board appointed by the Governor and confirmed by the Senate can 
do that. And finally, we have bidding in Louisiana and let the 
market set the price, as to bonus, as to royalty, as to rentals 
and as to the actual acreage that is being put up.
    We have tract nomination, and then if a particular tract is 
on another company's back burner and someone else nominates 
that tract, they have to advertise for 60 days and then they 
may realize they may need to put it on their front burner. 
While our royalty percentage is set at a 12.5 percent minimum, 
the industry has significantly raised that through competition. 
Our average royalty is 22.5 percent in Louisiana.
    The Chairman. Why don't we get into some more of the detail 
here in the question and answer.
    Ms. McKeithen. All right. Thank you very much for the 
opportunity to speak to you here today and I'm sorry, I've 
tried to talk fast.
    [The prepared statement of Ms. McKeithen follows:]

   Prepared Statement of Marjorie A. McKeithen, Assistant Secretary, 
Office of Mineral Resources, Louisiana Department of Natural Resources, 
                           State of Louisiana


    Mr. Chairman, Mr. Ranking Member, and distinguished members of the 
Senate Committee on Energy and Natural Resources, I thank you for 
extending to me the honor of testifying before you here today.
    My name is Marjorie McKeithen, and I serve the State of Louisiana 
as Assistant Secretary for the Department of Natural Resources, Office 
of Mineral Resources.


    Louisiana has a long and distinguished history of oil and gas 
production, both onshore and offshore. While many oil and gas companies 
may have their corporate headquarters elsewhere these days, Louisiana 
is the nation's energy backbone--the working capital of our nation for 
crude oil and natural gas exploration, production, refining, and 
distribution, as well as for imports of foreign crude oil and liquefied 
natural gas. I make this statement with a tremendous sense of pride on 
behalf of the citizens of our great state. And I want you to know that 
Louisiana not only understands, but embraces, her role as the working 
energy capital for America.
    Currently, approximately 34% of the nation's natural gas supply and 
almost 30% of the nation's crude oil supply is either produced in 
Louisiana, produced offshore Louisiana, or moves through the state and 
its coastal wetlands. Together with the infrastructure in the rest of 
the state, this production is connected to nearly 50% of the total 
refining capacity in the United States. Moreover, over 40,000 miles of 
large transmission pipelines traverse the state to transport oil and 
gas from production centers to consumption markets throughout the 
    Louisiana has 17 petroleum refineries, most of them large, world-
scale facilities, with a combined crude oil distillation capacity of 
approximately 2.77 million barrels per calendar day, which is 16.2% of 
total U.S. refinery capacity of 17.1 million barrels per day, the 
second highest in the nation after our sister America's Energy Coast, 
Texas. Louisiana produces approximately 42.1 million gallons of 
gasoline per day and 29.9 million gallons of distillate fuel (that is, 
jet fuel and diesel fuel) per day. Two of the four Strategic Petroleum 
Resource storage facilities for our country are also in Louisiana. 
Louisiana is also home of LOOP (Louisiana Offshore Oil Port), the only 
deep-water offshore oil import terminal in the world.
    Finally, while almost every state in the nation is trying to 
prevent the siting of any new liquefied natural gas (LNG) facilities, 
Louisiana is the site of the largest permitted LNG import terminal in 
the nation (Cheniere Energy's 2.6 billion cubic feet per day facility 
in Cameron Parish) and the home of the largest throughput facility of 
the existing LNG import terminals in the country (Southern Union in 
Lake Charles, which is undergoing more than a doubling of capacity from 
1 billion cubic feet per day to 2.5 billion cubic feet per day).
    The magnitude of Louisiana's contribution to the nation's energy 
supply is punctuated by taking a brief look at Louisiana's rank among 
the 50 states on the following (numbers include Louisiana's Outer 
Continental Shelf production):

          1st in total crude oil production
          1st in OCS crude oil production
          1st in OCS natural gas production
          1st in OCS revenue generated for the federal government
          1st in mineral revenues from any source to the federal 
          1st in LNG terminal capacity
          1st in foreign oil import volume
          1st in natural gas plant processing capacity
          2nd in total natural gas production
          2nd in total energy production from all sources
          2nd in petroleum refining capacity
          2nd in primary petrochemical production
          2nd in dry natural gas proved reserves
          2nd in crude oil proved reserves

    When it comes to developing the nation's offshore petroleum 
resources, there simply would not be much if it were not for 
Louisiana's leadership and participation. The offshore territory of 
Louisiana's coast is the most extensively developed offshore territory 
in the entire world. As most of you know, the offshore area beyond 
three miles from Louisiana's coast is federal territory called the 
Outer Continental Shelf, or OCS. OCS production off Louisiana's coast 
constitutes approximately 91% of oil and 75% of natural gas production 
from all of our nation's OCS areas combined. Additionally, Louisiana 
OCS territory has produced 85.4% of the 15.9 billion barrels of crude 
oil and condensate and 81.1% of the 162 trillion cubic feet of natural 
gas ever extracted from all federal OCS territories.
    Simply put, based on its energy producing value to the nation, 
Louisiana is, acre for acre, the most valuable real estate in the 
    The landmark passage of the Domenici-Landrieu Gulf of Mexico Energy 
Security Act recognizes the critical role that Louisiana and other Gulf 
Coast producing states play in our national energy supply. By sharing a 
portion of the revenue from OCS oil and gas activity with these states, 
the nation is re-investing in one of its critical assets and ensuring 
that a sustainable landscape exists to support these activities for 
generations to come.


    For the first time in more than 20 years, the Domenici-Landrieu 
Gulf of Mexico Energy Security Act opened up a significant portion of 
new Outer Continental Shelf (OCS) acreage to oil and natural gas 
development. The addition of this 8.3 million acre area increases the 
available acreage in the Gulf of Mexico OCS by nearly 20 percent.
    The area, Eastern Gulf Lease Sale 181, lies approximately 125 miles 
due south of Pensacola and Mobil; however, the nearest port is in south 
Louisiana, which is roughly 90 miles from the Lease 181 area and 
roughly 130 miles from the Lease 181 south area.
    Preliminary estimates show that this area contains at least 1.3 
billion barrels of oil and 5.8 trillion cubic feet of natural gas. 
However, virtually no modem seismic surveys have been conducted in the 
area, and its potential resource base could be significantly larger.
    As a result, most experts predict significant interest in the 
region from oil and gas companies. After all, the Gulf of Mexico has 
been one of the most productive oil and gas provinces in the world for 
more than fifty years. And while politics may respect state boundaries, 
geology does not. The oil and gas resources that have been found in 
such bountiful quantities just to the west of this new region are also 
likely to be found there.
    An effective logistical support system is an important prerequisite 
for deepwater oil and gas exploration and development. Ports are 
critical activity centers connecting the onshore processing plants, 
pipelines and markets with the offshore oil and gas reservoirs.
    In addition to cargo handling, ports also serve as industrial sites 
for large shipyards, equipment fabrication and repair, and value-added 
processing activities for both inputs and outputs of the industry. In 
south Louisiana, the Ports of Iberia, Morgan City and Fourchon are the 
largest service providers to the Gulf of Mexico offshore oil and gas 
    Morgan City is an important onshore supply base currently serving 
several deepwater oil and gas installations. Shipbuilding and repair 
activities at Morgan City play a larger role, and the port's location 
at the intersection of several major waterways is advantageous.
    The Port of Iberia is located along the Commercial Canal 
approximately 7 miles north of the Gulf Intracoastal Waterway. The port 
specializes in platform fabrication, repair, and maintenance.
    Port Fourchon has developed into the largest Gulf supply base for 
offshore oil and gas services, due to its central location with easy 
access to the OCS and the availability of port infrastructure. Distinct 
advantages to the port are its proximity to offshore installations in 
the Central and Eastern Gulf and its 300-foot wide navigational channel 
with a 24 ft depth. In 2002, approximately 44 percent of the 
exploration plans filed by oil and gas companies in the Gulf indicated 
that Port Fourchon would serve as their supply base, and the market 
share of the port is expected to expand as the industry develops the 
areas opened by the Gulf of Mexico Energy Security Act. Port Fourchon 
is roughly 90 miles away from the newly-available acreage opened by the 
bill, and thus it is the closest and most likely port to be used by 
operators developing this region.
    Each of these ports plays a critical role in the development of the 
nation's offshore energy resources, and each of the communities around 
these ports is strongly influenced by the growth trend of the offshore 
    Developing these newly-available oil and gas resources will 
undoubtedly require a bolstering of the region's land based 
infrastructure and industrial activity. This activity generates jobs 
and energy and economic growth in the region and across the nation, but 
it also generates wear and tear on roads, congestion, and significant 
coastal development in one of the world's largest and most fragile 
estuarine environments. Port Fourchon is connected to the State's main 
highway network through a two-mile segment of LA Hwy 3090 that runs 
from the port to LA Hwy 1, and a 40-mile segment on LA Hwy 1 to US Hwy 
90. Excessive roadway flooding, an older two-lane mechanical lift-span 
bridge at Leeville, and the two-lane undivided roadway are identified 
as the major constraints resulting in congestion, delay, incidents and 
excessive travel times on this segment of the highway. Among the major 
improvements planned are to construct a two or four-lane elevated 
highway structure from Port Fourchon to Golden Meadow, construct a 
four-lane fixed span bridge over the Gulf Intracoastal Waterway and 
Bayou Lafourche at Larose, and widen and upgrade LA Hwy 1 from Grand 
Isle to Port Fourchon.
    Accordingly to MMS data, it is estimated that for every OCS well 
drilled there is a corresponding increase in truck trips on LA Highway 
1 by 744 trips per year. For every additional mile of pipeline 
extension, the truck traffic will increase by 217 trips per year. 
Accordingly to model estimates, for each additional OCS well drilled, 
port tonnage will increase by 114,500 tons; for each exploratory well, 
port tonnage will increase by 148,500 tons. For every additional 
extension of the pipeline network by one mile, port tonnage will 
increase by 45,000 tons.
    Between 1993 and 2000, Louisiana port tenants serving the offshore 
industry have increased their share of port-owned land by 23 percent. 
Since 2000, deepwater exploration has only increased, and with the 
opening of new areas, this trend will continue. The State of Louisiana 
will monitor this growth and work to ensure that it proceeds in ways 
that protect local communities and are environmentally sound.


    Louisiana is not an ``either-or'' state. Louisiana's coastal 
wetland is a working wetland where crops are grown, energy is produced, 
fish are harvested, petrochemicals are manufactured and ports are 
buzzing with activity. Thirty percent of the total catch of commercial 
fisheries by weight in the lower 48 states comes from coastal 
Louisiana, and our coastal wetlands provide a habitat for over five 
million migratory waterfowl. Louisiana knows that her oil and gas can 
be produced from offshore regions in a manner compatible with the 
nation's highest environmental standards and has taken steps to ensure 
just that.
    Louisiana has certainly suffered some negative impacts in the past 
from offshore production. And, yes, we still have to deal with some of 
those legacies of the past, but that is largely because Louisiana 
pioneered offshore production in the days before modem technology, 
before the awakening of America's environmental consciousness, and 
before the advent of environmental regulatory agencies and regulations.
    Louisiana's first oil well was drilled in 1901. The first oil well 
over water in the world was in Louisiana in 1910 in Caddo Lake. The 
first well drilled off the coast of Louisiana was in 1938 near Creole, 
Louisiana. Louisiana was the site of the first well drilled out of 
sight of land in 1947. Those eras spawned some practices that harmed 
the ecology of the state--indeed some of the effects are still 
reverberating through the region today.
    However, we have learned some hard lessons, and things are 
different today. They have to be: since the 1930s some 1,900 square 
miles of coastal wetlands--an area nearly the size of Delaware--have 
been eroded away into the Gulf of Mexico. For the industry to maintain 
its access to these natural resources and protect its infrastructure, 
it has needed to adapt its environmental practices.
    Maintaining any ongoing operation requires reinvestment to 
maintain, repair, and replace worn out or outdated equipment and 
facilities. As any farmer can tell you, you cannot just take from the 
land forever without putting something back into the operation. Out of 
the harvest of crops, the farmer has to set aside a portion as seed to 
plant for the next harvest. He has to fertilize the land to replace 
depleted nutrients, plow and till the soil, rotate crops, control 
runoff and erosion, irrigate, apply pesticides and herbicides, buy and 
repair machinery. Likewise, to maintain, much less increase, production 
from off our coasts, we must reinvest in the infrastructure that makes 
all of the activity possible, whether it be port facilities, roads to 
transport equipment and supplies, erosion control, or barrier island 
and wetlands storm protection.
    As is abundantly clear today, the massive energy infrastructure 
that I have described rests atop an extraordinarily fragile 
environment. Louisiana continues to lose about 25 square miles (65 
square kilometers) of land each year, roughly one acre every 33 
minutes. Due to hurricanes Katrina and Rita alone, coastal land lost 
totals the equivalent of 217 square miles. Imagine that--an area the 
size of Washington, DC lost in a matter of hours over two days. When 
the Louisiana coastline is eroded at that rate, previously buried 
pipelines that carry the nation's oil and natural gas are left 
perilously exposed to the elements. Refineries that produce gasoline 
for Americans across the country are compromised, as are the power 
plants that convert natural gas into electricity that heats home in 
dozens of surrounding states.
    But these fragile wetlands are precisely what protect communities 
and infrastructure from destructive storms. One study has indicated 
that for every mile of wetland, the storm surge in adjacent inland 
areas is reduced by one foot.\1\ The nation's energy infrastructure--
all of the waterways, energy conduits, ports, pipelines, refineries and 
process plants--is dependent upon the wetlands to protect and sustain 
them from the elements.
    \1\ ``Regaining Ground: In the aftermath of Katrina and Rita, 
scientists make case for coastal recovery balancing ecology with 
economy'' University of Texas at Austin._http://www.utexas.edu/
    Barrier islands also act as a buffer to reduce the effects of ocean 
waves and currents on associated estuaries and wetlands. A recent study 
indicates that the bays adjacent to the Isles Dernieres (about 75 miles 
southwest of New Orleans) could experience an increase in wave height 
of 700 percent if the Isles Dernieres barrier chain is reduced to 
shoals. The interior marshlands of the fringing bay marsh can expect 
increases in wave and storm surge height of greater than 2 meters.\2\
    \2\ Source: Prof. Gregory Stone, Coastal Studies Institute, 
Louisiana State University.
    Today, scientists know how to restore the wetlands and they have 
been very successful in reinforcing barrier islands so that they will 
dramatically lower storm surges and waves. What has been lacking 
heretofore is neither the will, nor the know-how, but the resources to 
attack the problem. Until now, states have been rewarded with the 
impacts of OCS development and not the benefits.
    For the State of Louisiana and its neighboring energy producing 
states on the Gulf Coast, the most important aspect of the Gulf of 
Mexico Energy Security Act are its revenue sharing provisions. This 
landmark legislation will share 37.5 percent of new revenues with Gulf 
energy-producing states: Louisiana, Texas, Mississippi and Alabama. The 
revenues will be used for wetlands restoration, hurricane protection 
and flood control projects. An additional 12.5 percent share will be 
used for the state side of the Land and Water Conservation Fund, which 
funds building parks and preserving green spaces in all 50 states.
    The revenue shared with Louisiana under this new law will not be 
wasted. The citizens of Louisiana recently created a constitutional 
``lock box'' by overwhelmingly passing a constitutional amendment that 
specifically directs that the funds be used for restoring Louisiana's 
working wetlands and for hurricane protection. Under the Gulf of Mexico 
Energy Security Act, Louisiana is projected to receive at least $13 
billion over the next 30 years. The dedicated funds will be used to 
finance a comprehensive coastal protection and restoration plan that 
will be finalized this spring.
    As noted, Louisiana has supported a great deal of oil and gas 
activity, which can cause significant coastal wetland losses. Through 
hard work, Louisiana has been successful in achieving its goal of no 
net loss of coastal wetland habitat values, caused by activities over 
which the State has control. Through innovative approaches such as the 
State-led interagency review of proposed drilling projects and our 
SONRIS computerized data base, Louisiana has been successful in 
reducing the amount of coastal wetland impacts caused by State-
regulated oil and gas development.
    Despite our efforts, the indirect and cumulative effect of OCS 
energy development is still causing significant adverse impacts to our 
coastal resources and communities. The cumulative effects of human and 
natural activities in the coastal area, including OCS activities, have 
severely degraded essential natural processes and shifted the condition 
of the coastal area from one of net land building to one of net land 
    In order for OCS energy development activities to be consistent 
with State and national policies specifying no net loss of wetlands, it 
is necessary for the Minerals Management Service to provide for 
compensatory mitigation for all losses of wetland values that result 
from OCS-related activities and that might not be obtained through the 
State and Federal regulatory processes. This need, as well as the need 
for more-accurate assessment of the impacts of OCS development on 
Louisiana's coastal communities and infrastructure in the aftermath of 
the recent devastating hurricanes, formed the primary basis for the 
State's litigation last year involving OCS Lease Sale 200. Those 
concerns were also paramount in the State's recent comments on MMS's 
Draft Environmental Impact Statement for Gulf of Mexico OCS Oil and Gas 
Lease Sales for 2007 through 2012. We are eagerly awaiting MMS's 
actions in response to those comments.


    Given the profound purposes for which Louisiana's portion of the 
shared revenue will be used, Louisiana has a heightened interest in how 
the minerals off its coast are managed. In this regard, Louisiana 
offers a brief outline of how her own minerals are currently managed.
    The duties for managing Louisiana's mineral assets lie with the 
Office of Mineral Resources within the Department of Natural Resources. 
Currently, this includes approximately 5.4 million acres of state-owned 
water bottoms, and approximately 1.9 million acres of state lands.
    The Office of Mineral Resources is essentially the intersection for 
private industry and the public's resources. And we certainly try to 
conduct our business like just that--the state's business. While 
industry is our customer, and we pride ourselves on good customer 
service, the people of Louisiana are our shareholders, and we owe them 
a fiduciary duty of good asset management, from both a fiscal and an 
environmental standpoint. Toward these ends, Louisiana's policies are 
geared toward conducting our business at a fair, market-driven price to 
maximize the return to the people of Louisiana, while at the same time 
providing good, fair customer service to keep our customers coming 
    The actual awarding of state mineral leases and the oversight of 
the Office of Mineral Resources is performed by the Louisiana State 
Mineral Board, a seven-member body appointed by the Governor of 
Louisiana and confirmed by the State Senate. Neither the Governor, the 
Secretary of the Department of Natural Resources, nor I have authority 
to award a mineral lease. This is exclusively the function of 
Louisiana's Mineral Board.
    Louisiana's leasing procedure is carried out primarily by the 
Petroleum Lands Division of the Office of Mineral Resources and can be 
summarized as follows: Industry nominates acreage for leasing every 
month. By law, nominated tracts cannot exceed 5,000 acres, but by 
Mineral Board policy, the size limit of a nominated tract is further 
limited to only 2,500 acres. The nominated tracts are then advertised 
in official state and parish journals. Competitive, sealed bidding then 
takes place on bonus, royalty and rental to be received by the state. 
The sealed bids are opened and read into the record at a public meeting 
of the Louisiana Mineral Board at the time and place advertised. The 
Mineral Board then awards the leases to the highest bidder, if it 
determines that the bids are sufficient, after evaluating data provided 
from the staff geologists from the Geology and Engineering Division of 
the Office of Mineral Resources. The term of the lease is limited to 
three years for inland tracts and five years for offshore tracts.
    By law, the royalty received must be at least 12.5%; however, in 
reality, market competition has raised the average royalty received 
considerably higher. The average royalty that Louisiana has received 
for the last six fiscal years is 22.5%. The inland tract average is 
22.85%, while the offshore tract average is 21.85%. Louisiana currently 
has four existing recent units involving common reservoirs with the 
federal governmental on state leases granted from 1993 to 2002. Two of 
the state leases have a 21% royalty provision, one has a 22% royalty 
provision and one has a 23% royalty provision.
    Louisiana currently has 2,368 active state leases covering over 
1,022,000 acres, most of which are submerged, and Louisiana's leasing 
program generated approximately $430 million in mineral income last 
fiscal year.
    Each lease is reviewed at least once a year by the staff of the 
Geology and Petroleum Engineering Division of Mineral Resources, with 
further reviews dependent on lease development activity, the 
nonproductive acreage attributed to each lease and the royalty income 
per acre.
    The Mineral Income Division of the office of Mineral Resources is 
then responsible for auditing at least 22% of the royalties received by 
the state each fiscal year. The Mineral Income Division is directed by 
a Certified Public Accountant and consists of a team of 25 auditors, 
some of whom are officed in Louisiana's Houston and Dallas offices, 
where most of Louisiana's payors are headquartered. Louisiana's Mineral 
Income Division has recouped approximately $146.5 million in royalty 
underpayment, interest and penalty over the past six years.


    Louisiana is indeed proud of its long and distinguished history 
fueling America. We believe that our efforts can be summed up as 
``nation building.'' When it comes to America's energy security there 
is no more important piece of real estate than this, the great 18th 
state of our union. We must do everything as a nation to ensure its 
    The environmental lessons of the past must not be forgotten. We 
must be prepared to mitigate the impacts of energy development of our 
coast. We must remember that the production of this energy can only be 
made possible through the cooperation of a host state. The state is 
doing its part to mitigate the impacts of these activities and create a 
safe and sustainable landscape for the continued support of OCS 
activities in the Gulf of Mexico, but we still rely on our federal 
partners and the commitment to safely and responsibly deliver these 
critical resources to the nation.

    The Chairman. Not a problem.
    Let me now call on the Honorable Lisa Jackson, the 
commissioner for the New Jersey Department of Environmental 
Protection. Thank you for being here.


    Ms. Jackson. Thank you. Thank you, Mr. Chairman, ranking 
member and members of the committee. Good morning. I am pleased 
to be here today to represent Governor Jon Corzine and the 
citizens of New Jersey and the staff at the Department of 
Environmental Protection on this very important issue.
    I'd first like to recognize our Senator, Senator Menendez, 
for the leadership he has shown in protecting New Jersey's 
coastal environment. We are a State that has consistently, 
consciously, objected to exploration and exploitation of the 
resources off of the Outer Continental Shelf and I come here 
today to say that our position has certainly not changed.
    We strongly support your legislation, Senator, to prohibit 
offshore drilling in the vicinity of New Jersey's coastline, 
which coincidentally, was previously introduced by then-Senator 
Jon Corzine.
    I want to reaffirm our opposition to oil and gas lease 
sales off the coast of New Jersey as well as the opening of the 
Mid-Atlantic to offshore oil and gas development. Such actions 
leave us vulnerable to future damage, and quite frankly, in our 
opinion in New Jersey--and I carry with me the opinion not just 
of State leadership, but many of our mayors along the coast, 
who wrote specifically to ask me to convey their concerns that 
our coastal economy is frankly too important--our tourism 
economy is too important for us to move in the direction of 
exploiting our resources, natural gas or oil resources, off of 
our coast.
    I know that I can only speak for New Jersey, but I think 
it's on the record that other Northeast States, certainly 
including Delaware and Connecticut, have been vocal in their 
opposition as well.
    It's important for you to understand that in New Jersey, 
the coast drives our economy. In fact, it brings in about $36 
billion a year. One in six jobs are related to our coastal 
zone, making coastal revenues our State's largest economic 
sector. We have $4.5 billion that come from commercial, 
recreational fishing and aquaculture alone.
    As such, we are simply not interested right now, as we have 
not been interested, in risking that in any way in order to 
explore resources off the Outer Continental Shelf. We frankly 
feel that the risks of such exploration do not meet the 
potential for reward, and we think there are alternatives that 
are better and smarter at this juncture.
    There are environmental impacts as well. I don't need to 
repeat what is in my written testimony, which I know will be in 
the record, Mr. Chairman, about those potential environmental 
impacts. And quite frankly, I would prefer us to avoid them 
rather than to learn to mitigate or restore, if we are 
unfortunate enough to have to deal with damages to our marine 
mammals, our coastal habitats, our recreation, our tourism, our 
commercial fishing, and our cruise ship economies.
    We strongly support the moratoria. And although Virginia 
seems to be a ways away, I do want to point out that the 
Virginia proposed program area is only 75 miles from the New 
Jersey coast. So we are very interested in what happens with 
that area as well.
    Physical processes do not honor administrative boundaries 
and we believe that that is why Federal leadership, in honestly 
evaluating the risks versus potential rewards, lead us and we 
hope you, to understand that the area of the North Atlantic and 
Mid-Atlantic areas should not be open for development.
    Instead, Governor Corzine and I ask this new Congress and 
you to be more comprehensive and forward-looking when you 
evaluate the North Atlantic and Mid-Atlantic regions and energy 
needs for our country. America certainly needs to strongly 
promote energy efficiency and conservation. We also need to be 
serious about producing alternative means of energy, and New 
Jersey would certainly like to partner with the Federal 
Government and join with other States that have led and 
embarked on initiatives that make our buildings more green, 
increase the use of hybrids and enhanced-mileage vehicles, and 
reduced our energy consumption.
    In our State, we have a strong push to look at alternative 
energy production. In fact, New Jersey is a national leader in 
solar energy. We have strong standards to implement, in New 
Jersey, the California low-emissions vehicles law. We have a 
renewable portfolio standard of 22\1/2\ percent portfolio 
standard and we have a projected--we are set and will meet a 
goal of reducing energy demand 20 percent by 2020 as a key goal 
of the Governor's Energy Master Plan.
    I think, in conclusion, it is time for us to lead by 
example and that the specific decisions made when you weigh 
exploration and development in the Outer Continental Shelf and 
our region do not in any way justify going there at this time. 
I thank you for the opportunity to appear and I am happy to 
answer questions for you.
    [The prepared statement of Ms. Jackson follows:]

    Prepared Statement of Lisa P. Jackson, Commissioner, New Jersey 
                 Department of Environmental Protection

    Good morning Mr. Chairman and members of the committee. My name is 
Lisa Jackson; I am Commissioner for the New Jersey Department of 
Environmental Protection.
    I appreciate the opportunity to testify before you today on natural 
resources on the Outer Continental Shelf.
    I would first like to recognize Senator Menendez for the leadership 
he has exhibited in protecting New Jersey's coastal environment. We 
strongly support your legislation to prohibit offshore drilling in the 
vicinity of New Jersey's coastline, which coincidentally was previously 
introduced by then-Senator Jon Corzine.
    I would like to reaffirm the State of New Jersey's opposition to 
oil and gas lease sales for areas off the coast of New Jersey, as well 
as the opening of the mid-Atlantic to offshore oil and gas development. 
Such an action would leave New Jersey vulnerable to damage caused by 
drilling-related incidents in nearby waters. While I can only speak for 
New Jersey, other northeast states, including Delaware and Connecticut, 
have been just as vocal in their opposition to drilling in the Outer 
Continental Shelf.
    Our coast helps drive our tourism economy, which brings in more 
than $36 billion a year. In fact, one out of every six jobs in New 
Jersey is related to the ``Coastal Zone,'' making coastal revenues our 
state's largest economic sector. $4.5 billion comes from commercial and 
recreational fishing and aquaculture alone.
    As such, development for oil and gas off our coast has the 
potential to threaten the economy of our entire state and the region as 
well. Adverse impacts on commercial and recreational fishing could deal 
a catastrophic blow to the economic welfare of the State and the 
    Furthermore, the potential adverse impacts of development for oil 
and gas would not just be felt economically, but environmentally as 
well. New Jersey and other Northeast and Mid-Atlantic states have 
worked hard to enhance and protect our water quality and marine habitat 
and resources. New Jersey's 127-mile coastline is a treasure of great 
ecological value; its integrity is essential to the environmental 
health of this state.
    The potential impacts of drilling are too risky to the health of 
our residents, coastal heritage, economy and environment. The potential 
impacts of a large oil spill include:

   effects to marine mammals and sea turtle populations,
   adverse impacts on coastal habitats,
   effects on the recreation, tourism, commercial fishing and 
        cruise ship economies,
   negative effects on the real estate markets and losses of 
        job and income.

    We strongly support the existing moratoria on OCS activities. The 
proposed special interest sale in the Mid-Atlantic planning area 
offshore Virginia is in conflict with this policy and presents serious 
environmental concerns to the New Jersey Coastal Region. I would like 
to point out that, while it may seem like different worlds, the 
Virginia Proposed Program Area is only 75 miles from the New Jersey 
    The physical processes in the ocean do not honor administrative 
boundaries. Activities anywhere in the Mid-Atlantic region could affect 
the uses and resources of the coastal zone and the marine environment 
off the New Jersey coast.
    In addition, there has been no evidence to date that exploring for 
oil and gas off our coast would be productive or economically feasible. 
Balanced against the downsides I have already discussed, the risks are 
way too high.
    New Jersey therefore has a direct interest in any proposed resource 
evaluation in the Mid-Atlantic region. Our State is opposed to any 
activity on the Outer Continental Shelf that could adversely impact our 
economy, maritime ecology, fishing and coastal-dependent tourism, 
particularly in a case such as off Virginia, where the Outer 
Continental Shelf development would be likely to make only a limited 
contribution to our energy needs
    Instead, Governor Corzine and I are asking this new Congress to be 
much more comprehensive and forward-looking in its search for ways to 
meet our country's energy needs. America needs to strongly promote--as 
well as mandate--energy efficiency and conservation. We also need to be 
serious about developing alternate means to produce energy. Besides 
reducing our dependence on traditional fossil fuels, the use of these 
types of power has the additional benefits of reducing air pollution 
and greenhouse gases.
    New Jersey and many other states have already embarked on 
initiatives that would make our buildings more green, that would 
increase the use of hybrid or other enhanced mileage vehicles in our 
fleets or have taken other measures to reduce our energy consumption. 
At the state level, there has been a strong push to evaluate and 
implement alternative energy production strategies such as solar, 
geothermal, wave and wind power. In fact, New Jersey is a national 
leader in the solar market.
    Examples of Governor Corzine's initiatives in this regard include:

   Implementing greenhouse gas tailpipe standards for 
        automobiles, through New Jersey adoption of the California Low 
        Emissions Vehicles (LEV) Program;
   Moving forward on a commitment that 22.5% of electricity 
        consumed in the State will be met with renewable energy 
        resources via the New Jersey Renewable Portfolio Standard 
   Setting an achievable goal to reduce total projected 
        electricity demand by 20% by 2020 as key goal of the Energy 
        Master Plan;

    It is time for the federal government to follow the lead set by New 
Jersey and other states. Administration officials are only now 
acknowledging that climate change may in fact be a real phenomenon and 
that we need to take steps to reduce emissions of greenhouse gases. 
However, it is not too late for federal action and we urge Congress to 
    As this committee explores the range of issues to be considered for 
offshore oil and gas exploration and production, I advise you to 
undertake a comprehensive review of not only potential energy 
alternatives and energy efficiencies but also the potential 
consequences of going down the wrong path. The risk to our economy and 
this natural treasure are too great to do anything less.
    Again, I thank you for the opportunity to appear before you today. 
I am available to answer any questions you may have.

    The Chairman. Thank you very much.
    Next is Mr. Larry Nichols, the chairman and CEO of Devon 
Energy Corporation. Thank you very much for being here. You 
should push the button there to be sure that microphone works.


    Mr. Nichols. Thank you. Thank you, Mr. Chairman. As I was 
saying, I am Larry Nichols, chairman and CEO of Devon Energy 
Corporation. My father and I started Devon in 1971 as a very 
tiny company and owning an interest in five wells. Today, we 
are one of the largest U.S. producers of natural gas and oil in 
America. We are an independent producer, which means we focus 
purely on exploration and production, not on refining and other 
downstream operations.
    We are very excited about the potential of the Outer 
Continental Shelf. It has tremendous potential. The scientists 
of our industry, American scientists, are continually pushing 
things to a new frontier.
    I have with me a sand sample. This is a core that actually 
came from 27,000 feet in the ground, 7,000 feet below the ocean 
or the water. This core sample cost us about $100 million to 
get. It's from a new discovery that we got recently with 
Chevron, our partner in the Lower Tertiary. I will pass this 
around so that the Senators can see it. It is a piece of rock. 
Not many people have held a piece of rock that old, that deep, 
but there it is. And I'll use the Lower Tertiary as an example 
of the potential that exists in the Outer Continental Shelf.
    Mr. Chairman, if you had held this hearing 5 years ago or 7 
years ago, those people who are opposed to developing our 
resources, our American resources, would have told you that 
there was no scientific evidence that there was any oil and gas 
in this depth of water. And they would have been correct. There 
was none. They would have cited governmental studies that did 
not include this as a technical resource that our country could 
develop. And they would have been correct. Seven years ago, 
there were no drilling rigs that could sit out there in 5,000 
and 10,000 feet of water and drill an oil and gas well. Our 
industry did not have seismic that could see that deep, could 
see the structures that were there that would allow us to do 
that. So they would have been correct in opposing that and 
saying that there were no resources there, as, indeed, we've 
just heard from the preceding witness.
    If you look at it today, we do have drilling rigs that can 
drill in 10,000 feet of water. Today we do have seismic that 
can see to that depth and discover oil and gas reserves that 
are there. And we indeed do have discoveries. We've had 12 of 
them already, as the Assistant Secretary of the Interior said. 
The press has characterized those discoveries as the largest in 
the United States since Prudhoe Bay. No rational person can say 
with credibility that that kind of a discovery is not 
significant. The Department of the Interior projects that in 
the next 5 years, 40 percent of our oil and 20 percent of our 
natural gas will come from the Gulf of Mexico. No one can say 
with credibility that that is not significant. And that only 
comes from the 15 percent of the Outer Continental Shelf in the 
United States, excluding Alaska, that is available for leasing 
now. The original estimate back in the 1970's for natural gas 
in the Gulf of Mexico was 50 trillion cubic feet. We have 
already produced 150 trillion cubic feet. And the current 
estimate is that we can produce 232 trillion cubic feet in 
addition to that.
    So these resources, the technology of our industry has 
demonstrated time and time again that whenever someone says 
it's not there, it's not technologically feasible, we have 
proven that to be wrong, time and time again. Not only 
offshore, but onshore. The same thing happens onshore. The 
second largest gas field in the United States is the Barnett 
Field in east Texas, which is a field that, in 2000, no one 
believed existed. And there it is, on the outskirts of Fort 
Worth, the largest gas field in Texas, the second largest gas 
field in the United States.
    Back in the Gulf of Mexico, the Independence Hub is about 
to come on string. It was a part of a lease that was originally 
authorized--that single gas hub is going to produce the gas 
equivalent--enough gas to be the gas equivalent, the energy 
equivalent of windmills covering 300 square miles. We need to 
develop our alternative energy sources, we need conservation, 
but until we advance new technology to discover alternate 
energy, this country desperately needs the Outer Continental 
Shelf, not as a total solution, there is no total solution, but 
as a part of our country's overall response to meeting the 
legitimate energy needs of our communities.
    It is a false choice to say you can either have a clean 
environment on one hand or you can have energy security on the 
other. We have both. The experience with the recent 
hurricanes--the worst hurricanes in history that blew through 
the Gulf of Mexico--the beaches are clean and the fishing 
industry of Louisiana is in great shape, as the previous 
witness said. It is a false choice to say that we can do 
either/or. We can have both. We can have a clean environment 
and we can have energy security in the United States. Thank 
you, Mr. Chairman.
    [The prepared statement of Mr. Nichols follows:]

 Prepared Statement of J. Larry Nichols, Chairman and Chief Executive 
                   Officer, Devon Energy Corporation

    Mr. Chairman and members of the Committee, I am Larry Nichols, 
Chairman and Chief Executive Officer of Devon Energy Corporation, one 
of the largest independent exploration and production companies in the 
United States.
    I am pleased to be here today. Thank you for the opportunity to 
share some of the excitement of our Devon Energy team--from 
geoscientists to our production personnel--as we work hard to provide 
the secure supplies of natural gas and oil that America needs.
    That excitement is especially keen with respect to offshore energy 
resources that are the focus of today's hearing.
    Who could not be excited about our being able to tap potential 
energy-bearing geologic formations five miles below the seabed, under a 
mile-and-a-half-deep water?
    The sand sample I am going to pass to you to look at is from just 
such a formation. (There is oil trapped within the small pores of the 
sample, providing both the potential energy and some of the extraction 
and cost challenges for the future that must be understood.)
    This sample provides the starting point for my remarks today that 
will focus on our views of available Gulf of Mexico resources, other 
areas that should be made available for exploration, the advanced 
technologies that make our industry the best and most efficient in the 
world, and the need for good, stable energy and investment policies for 
us to best meet the nation's energy requirements.

                             GULF OF MEXICO

    The members of this Committee know very well the crucial role that 
the Gulf of Mexico and the Gulf Coast states have today in providing 
oil and gas for America. The Department of the Interior projects that 
within the next five years fully 40 percent of U.S. oil production and 
20 percent of U.S. natural gas production will come from the Gulf of 
    Some of that natural gas production will undoubtedly come from the 
areas in the Central Gulf that will be leased as a direct result of the 
Gulf of Mexico Energy Security Act passed first by the Senate and then 
approved by the House and signed into law late last year. That new 
access is shown in the beige shading on the map.*
    * All visuals have been retained in committee files.
    Opening this new area and putting in place the revenue sharing 
principle included in the new law are very significant steps toward 
what the country must do in providing increased access to better 
prospects for natural gas and oil exploration and production. I commend 
you and your colleagues for this progress.
    Devon Energy is already carefully evaluating where, and at what 
levels, we will be prepared to bid in the original Sale 181 area that 
is to be leased to the north later this year. We are also interested in 
acquiring seismic and other data to better assess the potential of the 
area to the south.
    We and others, including the large independents that are leading 
the way in developing the Independence Hub in the part of the Sale 181 
area leased several years ago, are well positioned to be major 
participants in these new areas.
    In terms of resource expectations in these areas, we'll defer to 
the MMS for official numbers. But these areas are very significant. 
They may even hold potential to have more gas than are in current 
official estimates.
    We must always keep in mind that resource estimates are based on 
available information. As more information is gained, resource 
estimates can grow substantially. That has certainly been the case in 
the Central and Western Gulf of Mexico where exploration and production 
has been allowed for decades. In those parts of the Gulf we have 
produced three times more natural gas than the first comprehensive 
resource estimates identified--and we now believe the Gulf still 
contains nearly five times those original estimates. The more we 
explore, the more we know.
    If you detect excitement about the natural gas potential in the 
Gulf, the same should be true with respect to oil potential. However, 
in the most promising areas in the deeper waters and deeper geologic 
formations, our enthusiasm must be tempered with a realization that we 
face very high technology hurdles and costs. We also face very long 
lead times--perhaps a decade--before there is any production, much less 
cost recovery or profit, from even the best prospects.
    You have seen and heard about recent deep water discoveries in what 
is known as the Lower Tertiary trend located hundreds of miles off the 
central and western Gulf of Mexico coasts. Devon has been associated 
with four of those discoveries, including Chevron's Jack prospect (from 
which the sand sample was provided). The graphic shows industry results 
to date.
    Devon Energy has additional prospects and leases in the trend area.
    The trend's resource potential may indeed eventually be in the 
billions-of-barrels ranges reported by media. But my previous point 
bears repeating: We are at the leading edge of technology and we have 
very high costs that may or may not lead to any particular project's 
being determined to be economic.
Technology and Costs
    Today we are able to use our geoscience technology such as 3- and 
4-dimensional seismic imaging to ``see'' geologic formations better 
than ever before.
    For example, in the year 2000 we could not see through deep salt 
formations that cover parts of the Lower Tertiary trend. But with new 
seismic acquisition and improved processing capability we are able to 
study and target interesting formations we knew little about only a few 
years ago. At the same time, drilling and well completion technology 
that allows exploration and production in today's water depths and deep 
formations did not exist.
    Today our advanced technology allows us to both find new supplies 
and then make the most efficient and cost-effective development and 
production facility decisions.
    The new technologies are expensive. Drill ships that use satellite 
and thruster positioning because of ultra deep water conditions cost 
one half million dollars a day--more than twice as much as just a few 
years ago. We're also contracting for new high-technology moored semi-
submersible rigs that can operate in 10,000 feet of water.
    This means that we have single well investments of $100-million or 
more, field development costs that may exceed $1.5 billion, and project 
costs in excess of $2.5-billion. Again, most of these costs may be 
incurred years or even a decade before any revenue is obtained, even if 
a project is assumed to be commercial.
    With such costs and timelines we must have a stable investment 
    Devon Energy and other companies in the large independent sector 
have a record of investing more than we earn, and 100 percent or more 
of our total cash flow to find and produce more energy. But we cannot 
risk making multibillion dollar decisions only to have royalty, tax or 
regulatory policies change--pulling project economics out from under 
    The same is true for regulatory or other delays, such as in leasing 
processes. Given the many people involved at every phase of activity 
from leasing to the construction by service companies of drill rigs to 
actual drilling and development, slowdowns at any stage cause 
disruption and higher costs.
    On the other hand, if we assume a good, stable investment regime 
and smooth government and other processes, we are excited about the 
country's offshore oil and gas potential in the Gulf of Mexico and 
    This brings me to my comments on other offshore areas.
Other Areas
    The remarkable technology improvements that we continue to 
experience have made our industry one that is sought after to explore 
offshore around the world.
    We explore, develop and produce oil and gas safely, cleanly and 
efficiently from the Gulf of Mexico to Angola and Azerbaijan, to Norway 
and the UK. But we don't do it off the U.S. Atlantic and Pacific 
coasts. We hope this will change. We will continue to work in that 
    Which brings me back to the focus of this hearing--offshore 
    Offshore resources in current moratoria areas may be very large. 
When opponents of more access argue to the contrary, they turn logic on 
its head. Without access we do not know what is there--and remember 
that resource estimates are made on the basis of information--
information ultimately available only by exploration.
    Based on exploration done in the Atlantic decades ago, for example, 
we know that there is natural gas 100 miles or more off the mid-
Atlantic coast. But without further exploration we don't yet know how 
much, or whether it is in formations that, with today's technology, 
might be economic.
    With increased reasonable access to new areas in the future, we and 
our employees are excited about the possibility of providing more 
natural gas, with less price volatility, to heat our homes, generate 
our electricity and manufacture fertilizer, plastics, and the many 
consumer products America relies on everyday.
    Thank you once again, Mr. Chairman, for the opportunity to share my 
views today.
    I would be pleased to answer questions.

    The Chairman. Thank you very much for your testimony.
    Mr. Athan Manuel, who is the director of lands protection 
of the Sierra Club. Thank you for being here.

                        THE SIERRA CLUB

    Mr. Manuel. Thank you, Mr. Chairman and Ranking Minority 
Member Domenici and members of the committee, good morning. My 
name is Athan Manuel and I am the director of the lands 
protection program for the Sierra Club. It is great to be here 
this morning representing the 750,000 members of the Sierra 
Club nationwide. Our membership makes us the largest 
environmental grassroots organization in the country.
    I want to thank you for the opportunity to testify this 
morning regarding oil and gas drilling in the eastern Gulf of 
Mexico and the Outer Continental Shelf. It will probably come 
as no surprise to the members of the committee that the Sierra 
Club strongly opposes any new offshore oil and gas drilling in 
areas that are currently off-limits and we oppose opening up 
the areas in the eastern Gulf that were opened up by S. 3711, 
the Gulf of Mexico Energy Security Act.
    Senator Domenici. Do you oppose it? You say that rather 
nonchalantly. I don't know why----
    Mr. Manuel. Well, I'll be happy to enumerate those reasons 
this morning, but I think most folks here know the reputation 
of the Sierra Club--that we work on environmental issues, but 
we also support clean energy programs--and I can give you the 
reasons why.
    We have three primary reasons why we oppose any new 
offshore oil and gas drilling and the primary reason is that it 
is still--despite increases in technology, it is still a dirty 
industry that is prone to accidents that leave problems for the 
    As we saw in the wake of Hurricanes Katrina and Rita, there 
were hundreds of spills that spilled oil and gas throughout the 
central and western Gulf of Mexico. And we just feel that new 
offshore oil and gas drilling represents a real threat to 
America's marine environment.
    We do not believe that our beaches, coasts and marine 
resources and a billion-dollar tourism industry should be 
sacrificed for a relatively small amount of oil and natural 
gas, especially when we have alternative and clean energy 
resources that we can develop here in the United States.
    America's coasts are a complex mosaic of sea grasses, 
wetlands, beaches and sand dunes. Our coastal waters support 
huge populations of fish, which commercial and recreational 
fishermen depend on. There are thousands and hundreds of 
species of birds and marine mammals, including environmentally 
sensitive species like sea turtles, whooping cranes, bald 
eagles, brown pelicans and manatees, that are found 
specifically in the eastern Gulf of Mexico.
    We just think again, offshore drilling is incompatible with 
this kind of environment and these kinds of environmental 
resources. Some of America's most popular and famous beaches, 
from Pensacola Beach in Florida to Myrtle Beach in South 
Carolina to the Outer Banks in North Carolina, to Cape May in 
New Jersey and Cape Cod and the beaches of Maine, all those 
would be threatened by new offshore oil and gas drilling.
    Obviously, our chief concern is the potential for spills, 
both routine spills from operations, but also the threat of a 
catastrophic spill. Current cleanup methods are incapable of 
removing all the oil and usually only a small portion of the 
oil is recovered from spills.
    Offshore drilling platforms and pipelines spilled 1.8 
million gallons of oil into U.S. waters from 1990 to 1999 in 
224 reported accidents. That breaks down to about an average of 
500 gallons spilled a day.
    The eastern Gulf of Mexico and America's East Coast are the 
two areas most coveted by the oil and gas industry and are no 
strangers to hurricanes. We saw what happened in 2005 when 
Hurricanes Rita and Katrina caused spills off our coasts and 
damaged production and refining capacity and caused a spike in 
the price of gas. The storms caused 124 oil spills in the 
waters of the Gulf of Mexico, and during Katrina alone, 223,000 
gallons of oil were spilled and there was 508,000 gallons 
spilled during Hurricane Rita.
    The Minerals Management Service reported that Hurricanes 
Rita and Katrina destroyed 115 production platforms in the Gulf 
of Mexico and damaged 457 pipelines connecting facilities in 
the Gulf to the shore.
    We simply think that putting more oil and gas rigs into 
hurricane-prone waters is precarious at best and simply is not 
a smart energy policy.
    Drilling rigs also produce a significant amount of air and 
water pollution. Rigs produce about 214,000 pounds of air 
pollutants every year. An average exploration well, either for 
oil or natural gas, generates tons of nitrous oxide, carbon 
monoxide, sulfur dioxide and other volatile organic 
hydrocarbons. These pollutants are the precursors to smog and 
acid rain and contribute to global warming as well.
    Water pollution is an issue. According to the National 
Academy of Sciences, a single well produces between 1,500 and 
2,000 tons of waste material. Debris includes drill cuttings 
and toxic drilling mud that contain toxic metals, such as lead, 
cadmium and mercury.
    It's not just pollution. The onshore network of roads, 
docks and buildings also hurt wetlands on our coasts. As the 
commissioner said, years of wear and tear by the oil and gas 
industry have damaged coastal wetlands in Louisiana. Twenty-
five square miles of coastal wetlands each year are lost, 
wetlands that serve as important natural storm barriers for 
    These are some of the environmental reasons we oppose 
offshore drilling and opening any new areas. The second reason 
we oppose it is that natural gas and oil estimated to be 
recoverable will simply not solve America's oil problems or 
meet our energy challenges.
    As the commissioner mentioned, 80 percent of the areas that 
contain oil and natural gas off of our coasts are already 
opened up. We're talking about the last 20 percent and we think 
that the oil and natural gas in those areas, again, could be 
replaced by increasing fuel economy standards for our cars and 
being more energy efficient and using renewable energy.
    And also, the area opened up by S. 3711 will produce a 
small amount of natural gas and oil, about 25 days worth of oil 
at current rates of consumption, and about 35 days of natural 
gas, again at current rates of consumption. That seems to be 
one of the main tradeoffs for us, is that again we see this 
one-of-a-kind environmental resource that contributes to a 
billion dollar tourism economy around our country, then we see 
a small amount of oil and gas that would come on-line. Again, 
even the oil companies acknowledge that there is only about 3 
percent--that the U.S. contains only about 3 to 4 percent of 
the world's proven oil reserves.
    So, in conclusion, the Sierra Club feels there are smarter 
and cleaner ways to meet our energy needs. Last November, 
Americans cast their ballots and called for a new direction on 
a number of fronts, including energy policy. We now have an 
opportunity to make a fresh start and to shelve bad ideas like 
new offshore oil and gas drilling.
    The Sierra Club believes that the best and boldest way to 
address our energy concerns is to promote energy efficiency and 
renewable energy programs. We do not believe that our beaches, 
coasts, and marine resources and again, a billion dollar 
tourism industry should be sacrificed for a small amount of oil 
and natural gas, especially when efficiency and renewable 
energy programs are available to us right now.
    For instance, it typically takes----
    The Chairman. Could you summarize the remainder of your----
    Mr. Manuel. Yes. Second to last paragraph.
    The Chairman. Great.
    Mr. Manuel. For instance, it typically takes 7 to 10 years 
to bring an oil field on-line, but it only takes 1 year to 
build a 15-megawatt wind farm that produces clean, renewable 
and domestically-produced energy. We strongly feel that it is 
time to begin to wean America off of fossil fuels, and instead, 
promote energy efficiency programs, such as increased fuel 
economy for our cars, trucks and SUVs and to promote renewable 
energy such as wind, solar and other clean energy sources.
    Again, thank you for the opportunity to testify and I look 
forward to questions later. Thank you.
    [The prepared statement of Mr. Manuel follows:]

Prepared Statement of Athan Manuel, Director, Lands Protection Program, 
                            The Sierra Club

    Mr. Chairman, ranking minority member, and members of the 
Committee, good morning. My name is Athan Manuel, and I am the Director 
of the Lands Protection Program for the Sierra Club.
    I am here representing over 750,000 Sierra Club members who belong 
to more than 65 chapters and 450 groups nationwide. We are the largest 
environmental grassroots organization in the country.
    I am very appreciative of the opportunity to testify this morning 
regarding oil and gas drilling on the Outer Continental Shelf and areas 
available for leasing in the eastern Gulf of Mexico. Most of my 
comments will focus on the environmental problems caused by off shore 
oil and gas drilling.


    It will come as no surprise that the Sierra Club strongly opposes 
drilling in the eastern Gulf of Mexico, the area opened by the Gulf of 
Mexico Energy Security Act of 2006 (S. 3711), or in any off shore areas 
in the outer continental shelf currently off limits, for a number of 
important reasons:
          1. New off shore oil and gas drilling represents a measurable 
        hazard to the marine environment of the eastern Gulf of Mexico 
        and all our coastal waters. We do not believe that the beaches, 
        coastal environment, marine resources, and billion-dollar 
        tourism industry of the eastern Gulf of Mexico should be 
        sacrificed for a small amount of oil and natural gas.
          2. The natural gas and oil estimated to be recoverable in the 
        eastern Gulf of Mexico will not solve our energy problems. 
        According to the Minerals Management Service, offshore areas 
        opened by S. 3711 will supply only 25 days of oil and 35 days 
        of natural gas over the next 60 years at 2004 consumption 
        rates. The new area, loosely called 182, is in very deep water 
        and contains relatively small amounts of oil and natural gas, 
        about 525 million barrels of oil and 2.2 trillion cubic feet of 
        gas, according to MMS.
          3. Most off shore oil and gas reserves are already available. 
        According to the MMS, 80 percent of recoverable oil and natural 
        gas reserves are in areas already available for leasing and 
        drilling. The Sierra Club feels that there is no justifiable 
        reason to turn to our special places for drilling.
          4. Finally, there are smarter ways that we can and should 
        address our energy needs rather than allowing our coastlines to 
        be threatened with oil and gas drilling.

     1. new off shore oil and gas drilling is bad for our coastal 
 environment, our beaches, for marine life and their habitat, and for 
                        the broader environment

    While there have been many advances in oil and gas recovery 
technologies in recent decades, many serious consequences still result 
from exploration and drilling for either oil or gas.
Harm to wildlife
    America's coasts are a complex mosaic of sea grasses, wetlands, 
estuaries, beaches, and dunes. Off shore drilling is simply not 
compatible with this fragile ecosystem.
    The Gulf of Mexico is home to more than twenty species of marine 
mammals, four species of shark, seven species of tuna and five species 
of sea turtle. All five turtle species found in the Gulf are either 
endangered or threatened, making any adverse effects very significant 
to the overall populations.
    This area is the heart of one of the most important migration 
corridors in the world, traveled by hundreds of species of birds.\1\ 
Offshore oil rigs interfere with migratory routes, spawning, and 
feeding areas for target species, generate pollution that destroys 
crucial nursery habitat for larval and juvenile stages, and cause large 
and small oil spills that reduce catches.\2\ In addition to migratory 
birds, the eastern Gulf of Mexico supports large populations of brown 
pelicans and bald eagles.
    \1\ Deepwater Gulf of Mexico Environmental and Socioeconomic Data 
Search and Literature Synthesis. Volume I: Narrative Report. 2000. 
Minerals Management Service.
    \2\ Interactions Between Migrating Birds and Offshore Oil and Gas 
Platforms in the Northern Gulf of Mexico. Final Report. 2005. Minerals 
Management Service.
    The eastern Gulf coastal waters are also home to a number of 
important environmentally sensitive areas like the Big Bend Seagrass 
Area and Tortugas Ecological Reserve. These reserves and coastal 
shoreline host a number of environmentally sensitive species such as:
    Important beach areas include the: Florida Panhandle, the Big Bend 
area, southwest Florida, and Ten Thousand Islands. All these could be 
affected by a large oil spill in the eastern Gulf with the beaches of 
the Florida Panhandle most at risk.
Onshore damage
    The onshore infrastructure associated with offshore oil or gas 
causes significant harm to the coastal zone. The shoreline processing 
infrastructure for offshore drilling often requires industrialization 
within the coastal zone of affected states, using installations similar 
to onshore storage and processing facilities including miles of 
pipeline and roads and other industrial apparatus like ports, helipads, 
and dorms.
    For example, OCS pipelines crossing coastal wetlands in the Gulf of 
Mexico are estimated to have destroyed more coastal salt marsh than can 
be found in the stretch of coastal land running from New Jersey through 
Maine.\3\ Years of wear and tear by the oil and gas industry had torn 
apart the coastal wetlands of the Louisiana Bayou. Thanks in part to 
drilling operations, Louisiana is losing 25 square miles of coastal 
wetlands each year, eating away at natural storm barriers.
    \3\ Boesch and Rabalais, eds., ``The Long-term Effects of Offshore 
Oil and Gas Development: An Assessment and a Research Strategy.'' A 
Report to NOAA, National Marine Pollution Program Office at 13-11.
Water pollution
    Drilling muds are used to lubricate drill bits, maintain downhole 
pressure, and serve other functions. Drill cuttings are pieces of rock 
ground by the bit and brought up from the well along with used mud. 
Massive amounts of waste muds and cuttings are generated by off shore 
oil and gas drilling operations--an average of 180,000 gallons per 
well.\4\ Most of this waste is dumped untreated into surrounding 
waters. Drilling muds contain toxic metals, including mercury, lead and 
cadmium. Significant concentrations of these metals have been observed 
around drilling sites.\5\
    \4\ MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181, Draft 
Environmental Impact Statement (DEIS), p. IV-50.
    \5\ Id.
    A second major polluting discharge is ``produced water,'' the water 
brought up from a well along with oil and gas. Offshore operations 
generate large amounts of produced water. The Minerals Management 
Service estimates that each platform discharges hundreds of thousands 
of gallons of produced water every day.\6\ Produced water typically 
contains a variety of toxic pollutants, including benzene, arsenic, 
lead, naphthalene, zinc and toluene, and can contain varying amounts of 
radioactive pollutants. All major field research programs investigating 
the fate and effects of produced water discharges have detected 
petroleum hydrocarbons, toxic metals and radium in the water column 
down current from the discharge.\7\
    \6\ Id., p. IV-32.
    \7\ Id., p. IV-32-33.
Air pollution
    Drilling an average exploration well for oil or gas generates some 
50 tons of nitrogen oxides (NOX), 13 tons of carbon 
monoxide, 6 tons of sulfur dioxide, and 5 tons of volatile organic 
hydrocarbons. Each OCS platform generates more than 50 tons per year of 
NOX, 11 tons of carbon monoxide, 8 tons of sulfur dioxide 
and 38 tons of volatile organic hydrocarbons every year.\8\
    \8\ Id., p. IV-40.
Global warming pollution
    Methane hydrates are ice-like structures formed from frozen water 
and methane. These structures are found in Arctic permafrost and 
beneath the seafloor of the Outer Continental Shelf where water depths 
are greater than 500 feet. The Congressional Research Service reports 
``safety problems related to gas hydrates may be anticipated. Oil and 
gas operators have recorded numerous drilling and production problems 
attributed to the presence of gas hydrates, including uncontrolled gas 
releases during drilling, collapse of well casings, and gas leakage to 
the surface.'' The report continues that methane hydrates easily become 
unstable, potentially triggering seafloor subsidence and catastrophic 
landslides. In addition, a single unit of methane hydrate can release 
160 times its own volume in gas.\9\ As methane is a greenhouse gas more 
than twenty times more potent than carbon dioxide in contributing to 
global warming, this volume of gas release would be extremely 
    \9\ Congressional Research Service, Report RS20050, ``Methane 
Hydrates: Energy Prospect or Natural Hazard?'' James E. Mielke. 
February 14, 2000
Oil spills
    If offshore areas are leased for gas exploration there is always 
the possibility that oil also will be found. There is no known example 
of a case where a lease prohibits an oil company from developing oil if 
oil is found in a ``gas prone'' region. There is no documented instance 
of any company ever agreeing to such a condition in the history of the 
OCS leasing program. Without such a restriction included in a lease 
there would be no assurances that oil would not in fact be developed, 
raising the possibility of an oil spill. According to statistics 
compiled by the Department of the Interior, there were some 3 million 
gallons of oil spilled from OCS oil and gas operations in 73 incidents 
between 1980 and 1999.\10\ Oil is extremely toxic to a wide variety of 
marine species, and as noted by a recent National Academy of Sciences 
study, current cleanup methods are incapable of removing more than a 
small fraction of the oil spilled in marine waters.
    \10\ MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181, 
Draft Environmental Impact Statement (DEIS), pp. IV-50.
    It would only take 24 hours after a petroleum spill in the eastern 
Gulf of Mexico's Lease Sale 181 area for oil to ``sully Florida's 
Panhandle beaches if the spill was swept up by the gulfs powerful Loop 
Current. This spill could travel around the Florida Keys and 
contaminate estuaries and beaches from the Everglades to Cape 
Canaveral,'' according to Congressional testimony by oceanographers 
from the University of South Florida.
    It is important to note that, with the exception of oil spills, the 
environmental damages described above result from drilling or exploring 
for either oil or natural gas. Any suggestion that restricting leases 
to natural gas drilling only will not adequately reduce risk of 
environmental impacts
Hurricane risks
    The Gulf Coast and East Coast--the two offshore areas most coveted 
by the oil and gas industry--are no strangers to destructive hurricanes 
that could wreak havoc on offshore drilling operations. The 2005 
hurricane season highlighted the danger of depending on this vulnerable 
offshore oil and gas infrastructure. It was the first year in recorded 
history with three category 5 storms--Katrina, Rita, and Wilma.
    In 2005, Hurricanes Rita and Katrina caused massive spills of oil 
and other pollutants and seriously affected the production, refinery 
capacity, and price of oil in the United States. The storms caused 124 
oil spills into the waters of the Gulf of Mexico. During Hurricane 
Katrina alone 233,000 gallons of oil were spilled. There were 508,000 
gallons spilled during Hurricane Rita.\11\ The U.S. Minerals Management 
Service reports that Hurricanes Katrina and Rita destroyed 115 
petroleum production platforms in the Gulf of Mexico. The storms also 
damaged 457 pipelines connecting production facilities in the Gulf and 
bringing oil and natural gas to shore.\12\
    \11\ U.S. Minerals Management Service. Estimated Petroleum Spillage 
from Facilities Associated with Federal Outer Continental Shelf (OCS) 
Oil and Gas Activities Resulting from Damages Caused by Hurricanes Rita 
and Katrina in 2005. 8 August 2006.
    \12\ U.S. Minerals Management Service. News Release. MMS Updates 
Hurricanes Katrina and Rita Damage. 1 May 2006.
    A full year after Katrina, BP admitted that a damaged oil well 
valve in the Gulf of Mexico was still leaking oil. The knee-jerk 
reaction to throw up more rigs offshore--especially in hurricane-prone 
waters like Florida's Gulf Coast and the Eastern Seaboard--is 
precarious at best and not smart energy policy. For more on the 
pollution and hurricane risks of offshore drilling:
Drilling and Testing
            Seismic Surveys
    The first step to drilling for oil and gas involves doing an 
inventory of estimated resources. One technology used for this type of 
inventory is a ``seismic survey.'' This technology involves ships 
towing multiple ``airgun'' arrays with tens of thousands of high-
decibel explosive impulses to gather geologic profiles of seabed rock 
structures. These airgun arrays fire regular bursts of sound at 
frequencies in the range of 20 to 150 Hz, which is within the auditory 
range of many marine species, including whales.
    Marked changes in behavior in marine species in response to loud 
underwater noises in the ocean have been well documented. Seismic 
survey devices and military sonars (which operate at a similar decibel 
level) have been implicated in numerous whale beaching and stranding 
incidents, including a December 2001 mass stranding of 16 whales in the 
Bahamas, an incident of Cuviers beaked whales being beached and 
stranded in the Galapagos Islands and a more recent stranding in the 
Canary Islands.\13\
    \13\ NMFS, NOAA Fisheries Status Report: Preliminary Findings on 
the Stranding of Beaked Whales in the Bahamas (June 14, 2000); NMFS, 
NOAA Fisheries Status Report; NMFS, NOAA Fisheries Status Report on the 
One Year Anniversary of the Stranding of Beaked Whales in the Bahamas 
(Mar. 26, 2001).
    The auditory organs of fish are particularly vulnerable to loud 
sounds such as those produced by survey airguns. As fish rely on their 
ability to hear to find mates, locate prey, avoid predators, and 
communicate, damage to their ears can seriously compromise their 
ability to survive.\14\ In addition, mortality is possible in species 
like salmon that have swim bladders (the flotation organ that fish use 
to orient themselves vertically in the water), which have been shown to 
rupture on exposure to intense sounds.\15\
    \14\ McCauley.R.D., J. Fewtrell and A.N. Popper, 2003. ``High 
intensity anthropogenic sound damages fish ears.'' J.Acoust.Coc.Am. 
113, January 2003.
    \15\ Id.
            ``Dart Core'' Seabed sample extractions
    ``Dart core'' sampling, another survey technique, consists of 
dropping large hollow metal tubes from ships to vertically puncture the 
seafloor. The samples are retrieved and analyzed for information about 
subsea rock structures. This technique is extremely destructive to 
seafloor benthic organisms and fish habitat, discharging silt plumes 
that are transported on ocean currents and smothering nearby life on 
the seabed.
            Seafloor ``Grab samples"
    ``Grab samples'' are retrieved from the seafloor sediments with 
large hinged ``buckets'' dropped from the shipboard into the seafloor 
to analyze silt, rocks, and seabed sediments and seafloor organisms. 
These buckets damage benthic organisms at the seafloor and cause silt 
            Directional Drilling
    Directional drilling has been used to access oil and gas reserves 
under our National Parks, the Great Lakes, and the Gulf of Mexico. In 
the case of drilling off shore, the wellhead is on shore while the 
bottom of the well may be thousands of feet offshore. In 1997, Governor 
Engler of Michigan directed the Michigan Environmental Science Board to 
study the impacts of directional drilling on environmental and human 
activities. This study concluded impacts from directional drilling 
could result in the contamination of groundwater aquifers and loss of 
habitat while also increasing noise levels, odor, and congestion, 
impacting recreation and tourism.\16\
    \16\ Long, D.T., W.E. Cooper, W.B. Harrison III, R.H. Olsen, B.J. 
Premo and K.G. Harrison. 1997. Evaluation of Directional Drilling under 
the Great Lakes, October 1997. Michigan Environmental Science Board, 
Lansing, Michigan.
Impact on coastal economies
    Our coasts and marine waters provide the economic lifeblood for 
thousands of tourism and fishing communities, providing billions of 
dollars of economic activity and millions of jobs. They are 
destinations for thousands of vacationing families each year, sanctuary 
for fish and wildlife and a critical part of America's ``sea to shining 
sea'' natural heritage. Offshore drilling is simply not compatible to 
the quality of economy and life this fragile ecosystem supports.
    There are five main economic benefits attributed to beaches and 

          1. Increased sales, income and employment opportunities 
        resulting from spending.
          2. Enhanced property value,
          3. Expansion of the federal, state and local tax base.
          4. Protection of developed shorefront property from storm 
          5. Provide recreational opportunities for people

    Tourism in America is a $1.2 trillion industry with coastal 
communities representing over $700 billion annually.\17\ Travel and 
tourism is one of the largest employers in America, employing 
approximately 16.9 million people.\18\ It is estimated that in 1992 
beaches contributed approximately $170 billion annually to the national 
economy.\19\ In South Carolina alone, beaches generate $1.54 billion in 
wages and earnings.\20\
    \17\ Houston, James R. (2002). The Economics Value of Beaches. U.S. 
Army Engineer Research and Development Center.
    \18\ World Travel and Tourism Council. (2001). Year 2001, World, 
United States, TSA Research Summary and Highlights. www.wttc.org/ecres/
    \19\ U.S. Travel and Tourism (1993). World Tourism at the 
Millennium. U.S. Department of Commerce.
    \20\ Marlowe, Howard. Assessing the Economic Benefits of America's 
Coastal Regions. Trends and Future Challenges for U.S. National Ocean 
and Coastal Policy.
    Florida is one of the world's top travel destinations with 825 
miles of beaches.\21\ With nearly 80 million tourists in 2005, the 
hospitality industry generated approximately $57 billion for Florida's 
economy and helped create nearly one million jobs. Florida's tourism 
industry is responsible for 20 percent of Florida's economy. Miami 
Beach alone reports approximately 21 million tourist visits annually. 
In 1992, about 40 million tourists visited Florida, spending nearly $14 
billion and creating about 630,00 jobs with a payroll of $8.9 
    \21\ Murley, James, Lenore Alpert, William Stronge. (2005). Tourism 
in Paradise: The Economic Impact of Florida Beaches. 14th annual 
Biennial Coastal Zone Conference.
    \22\ Strong, W.B. (1994) Beaches, tourism and economic development. 
Journal of the American Shore and Beach Preservation Association. 
    In addition to potentially catastrophic effects on the tourism 
industry, drilling for gas and oil off our coasts could have 
significant negative impacts on commercial fishing. Florida generates 
more then 800 million dollars worth of commercial fish caught annually. 
Florida also has more then $5.6 billion in annual recreational fishing 
    In a Norwegian study conducted in the central Barents Sea, seismic 
shooting severely affected fish distribution, local abundance, and 
catch rates over a large geographic area. In this study, catch of cod 
and haddock fell precipitously within a 38-nautical-mile by 38-
nautical-mile area, and remained depressed for at least five days 
following the conclusion of seismic survey activities.\23\
    \23\ Engas, Arill, Svein Lokkeborg, Egil Ona, and A.V. Soldal. 
Institute of Marine Research, 1996. Effects of Seismic Shooting on 
Local Abundance and Catch Rates of Cod (Gadus morhua) and Haddock 
(Melanogrammus aeglefinus). Can. J. Fish. Aquat. Sci. 53: 2238-2249.
    In addition, the Canadian T. Buck Suzuki Environmental Foundation 
and the United Fishermen and Allied Workers Union--CAW recently weighed 
in on the Canadian Statement of Practice on the Mitigation of Seismic 
noise, citing their concern for the B.C. marine-based industries, which 
employ over 20,000 and contribute over $2 billion in revenues and 
$600,000 in total GDP. These groups point to mortalities in fish eggs, 
fish and shellfish larvae, and adult fish with swim bladders; trawl 
catch declines from 50 to 70 percent and long line catch declines by 44 
percent for 5 days after cessation of seismic shooting; and the 
particular concern about seismic activity during salmon migration or 
herring spawning. Salmon are of particular concern because of the 
endangered status of some populations off the Atlantic and Pacific 
coasts, and because of their apparent inability to detect and avoid 
low-frequency sound until damaging levels are reached.

    2. more offshore oil and gas drilling will not solve our energy 

    The natural gas and oil estimated to be recoverable in the eastern 
Gulf of Mexico will not solve our energy problems. According to the 
Minerals Management Service, offshore areas opened by S. 3711 will 
supply only 25 days of oil and 35 days of natural gas over the next 60 
years at 2004 consumption rates. The new area, also referred to as 
lease sale 182, is in very deep water and contains relatively small 
amounts of oil and natural gas, about 525 million barrels of oil and 
2.2 trillion cubic feet of gas, according to MMS.
    The same is true for oil and gas in areas in the eastern Gulf of 
Mexico outside of Lease Sale 182. There is an estimated 930 million 
barrels of oil in the entire eastern Gulf of Mexico, which breaks down 
to approximately 47 days worth of oil when you consider that Americans 
use about 21 million barrels of oil a day. Obviously, that is not 
enough oil to impact the price of a gallon of gas or solve our energy 
    Drilling anywhere on the Outer Continental Shelf will not solve the 
problem of high natural gas prices either. It simply takes too long to 
develop a natural gas field to impact prices in the short term (1-3 
years). Natural gas from areas currently off limits to drilling will 
not reduce prices in the long term either, since there is not enough 
gas there compared to either annual U.S. production or consumption.
    A Department of Energy, Energy Information Administration study 
done in 2001, U.S. Natural Gas Markets: Mid-Term Prospects for Natural 
Gas Supply, SR/OIAF/2001-06, compared the price of natural gas with the 
OCS moratoria areas kept out of production and the price of natural gas 
with all of the moratoria areas opened for drilling in the 2007-2012 
MMS 5 Year Plan.
    With all of its supply and demand information, DOE's National 
Energy Model Modeling System (NEMS) predicted that the price of natural 
gas would be $3.26 per thousand cubic feet in 2020 without the gas 
under moratorium and $3.22 per thousand, or four (4) cents less with 
access to the additional gas in moratoria areas. This is a predicted 
price drop of a 1.2 percent from the addition of 10 times more gas 
reserves than would be freed up under this bill.
    This is hardly major or even significant price relief. The effect 
is of such a magnitude that it would probably be drowned out by the 
marketplace or normal fluctuations, or by catastrophic events we have 
no control over like the impact of a Hurricane Katrina. Catastrophic 
events that effect production or distribution assets clearly have the 
ability to move prices much more than a mere addition of 5 TCF of 
technically recoverable resources.

      3. most off shore oil and gas reserves are already available

    The vast majority--80 percent--of the nation's undiscovered 
technically recoverable OCS gas is located in areas that are already 
open to drilling, according to the Department of the Interior's 2006 
Report to Congress: Comprehensive Inventory of U.S. OCS Oil and Natural 
Gas Resources. There are estimated to be 86 TCF of Undiscovered 
Technically Recoverable Resources (UTRR Mean Estimate) in all OCS areas 
withdrawn from leasing compared to 479 TCF of Reserves, Reserve 
Appreciation and UTRR in the total OCS of the U.S. Therefore, all the 
potential gas placed off limits to drilling at present constitutes less 
than 20 percent of the gas thought to exist in the OCS.
    Furthermore, according to the 2003 Energy Policy and Conservation 
Act (EPCA) report issued by the Department of the Interior, 85 percent 
of federal onshore oil resources and 88 percent of federal onshore 
natural gas resources (122.6 trillion cubic feet, or tcf) occurring on 
federal lands in Montana, Colorado, New Mexico, Utah and Wyoming are 
already available for leasing and development. Only 12 percent of 
federal onshore natural gas resources are off-limits to leasing.\24\
    \24\ BLM, ``EPCA Inventory Fact Sheet,'' 1/15/03, p. 3
    Thus, permanent protection for the coastal moratorium areas will 
leave the vast majority of the nation's OCS gas available to the 
    In addition to availability for leasing, Bureau of Land Management 
(BLM) data indicates that the vast majority of federal lands currently 
under lease are not being developed. Of the more than 35,000,000 acres 
of public lands under lease, development is occurring or has occurred 
on approximately 12,000,000 acres.\25\ Drilling permit approvals on 
Western public lands by the BLM increased by 62 percent in 2004, to a 
record number of 6,052, while the number of new wells that were drilled 
declined by nearly 10 percent, to 2,702.\26\
    \25\ BLM, ``Total Number of Acres Leased'' (unpublished table, 
January 31, 2005) and BLM, ``Number of Producible Acres on Federal 
Lands'' (unpublished table, January 31, 2005)
    \26\ BLM, ``Number of APDs approved by Year on Federal Lands'' 
(unpublished table, January 31, 2005) and BLM, ``Number of Well Spud 
During the Year on Federal Lands'' (unpublished table, January 31, 
    Based on this data, it is clear that the vast majority of federal 
oil and gas resources occurring on federal lands and waters are 
available for development. The oil and gas industry clearly has plenty 
of access to our public lands already; there is no reason to grant 
access to additional areas currently under moratorium for additional 

4. there are smarter, cheaper, and faster solutions for rising gasoline 
                         and natural gas prices

    America's coasts and marine waters provide the economic lifeblood 
for tourism and fishing communities, a destination for thousands of 
vacationing families each year, and sanctuary for fish and wildlife. 
Offshore drilling would industrialize our coasts and put our coastal 
communities and economies at risk.
    Sacrificing America's shoreline is not what will bring down--and 
keep down--energy prices. The United States has about 5 percent of the 
world's population but consumes about 25 percent of the world's energy. 
Instead of drilling off out coasts, which will only add to the billions 
in profits already being made by Big Oil, Congress should raise the 
fuel economy of our cars, encouraging the use of renewable energy like 
wind and solar power, and adopting other, existing energy-saving 
technologies that cut pollution, curb global warming and create good 
    For example, if our cars, trucks and SUVs together averaged 40 
miles per gallon--something that is achievable with existing 
technology--we would save as much oil as the United States currently 
imports from the Persian Gulf, with another million barrels to spare. 
And the average driver would save nearly $600 a year at the pump.\27\ A 
single modem turbine can produce enough power to meet the annual 
electricity needs of 500 average homes.\28\
    \27\ Freidman, David, et al. ``Drilling in Detroit: Tapping 
Automaker Ingenuity to Build Safe and Efficient Cars.'' Union of 
Concerned Scientists. June 2001. p. 41.
    \28\ American Wind Energy Association--http://www.awea.org/pubs/
    There are other examples of clean energy solutions and alternatives 
to off shore oil and gas drilling. Many states have adopted renewable 
energy standards. By 2017, the renewable energy standards already 
enacted by states such as New Mexico, California and Texas will produce 
as much renewable energy as would be produced by gas fired power plants 
using 0.6 TCF of gas per year. That is twice as much gas annually than 
the amount of oil and gas thought to be in the area covered by the 
original Lease Sale 181.
    By simply making our homes, offices, cars and trucks more efficient 
we will save energy and money today and far into the future. Instead of 
relying on volatile and expensive sources of oil and gas, we can use 
better technology to reduce our energy demand while producing more 
energy from renewable sources of energy like wind and solar power. 
These cheaper, cleaner and faster policies reduce short-term demand and 
costs while also providing long-term solutions to our energy needs. And 
it does not require you to put your favorite vacation spot on the 
chopping block.


    The Sierra Club strongly opposes efforts to open areas currently 
off limits to off shore oil and gas drilling. Off shore oil and gas 
drilling is a dirty business, one incompatible with America's coastal 
ecosystems and economies.
    We feel that the oil and natural gas thought to be in these areas 
will make, at best, a very marginal difference in the supply or price 
of gas in the future. Any oil and gas found would not be available any 
time soon and therefore would not address immediate concerns regarding 
prices or supply.
    We suggest that a better way to address these concerns is to 
promote energy efficiency and renewable energy programs. For instance, 
it typically takes seven to ten years to bring an oil or gas field on 
line. But it only takes one year to build a 50-megawatt wind farm that 
can produce 50 megawatts of clean, renewable electricity.
    Finally, we do not believe that the beaches, coastal environment, 
marine resources, and billion-dollar tourism industry of the eastern 
Gulf of Mexico should be sacrificed for a small amount of oil and 
natural gas, especially when efficiency and renewable energy solutions 
to our energy problems are available right now.
    We strongly feel that it is time to begin to wean America off of 
fossil fuels, and in their stead promote energy efficiency programs 
such as increased fuel economy for our cars, trucks and SUVS, and to 
promote renewable energy such as wind, solar and other clean energy 
    Once again, thank you for the opportunity to testify before this 

    The Chairman. Thank you very much.
    Our final witness here is Paul Siegele, who is the vice 
president of deep water exploration and projects for Chevron's 
North American Exploration and Production Company.


    Mr. Siegele. Thank you, Mr. Chairman, members of the 
committee. I appreciate the opportunity to be able to appear 
here today. As Chevron's vice president of deep water 
exploration and projects, my responsibilities involve exploring 
for, developing, and bringing on-line new sources of oil and 
gas in the deep water Gulf of Mexico.
    Energy diversification is a good way to provide energy 
security. The Gulf's deep water is a critical part of a 
diversified energy portfolio because it has a tremendous 
potential for significant new finds of oil and gas. However, it 
is also a high-cost, high-risk area to explore and produce and 
it requires new technology to develop these resources.
    For instance, we have drilled six to eight exploratory 
wells per year over the past several years. These wells cost 
$50 million to $100 million each and often result in dry holes.
    We are also participating in three new offshore 
developments that are anticipated to yield 300,000 barrels of 
oil per day within the next few years. We operate two of these, 
the Tahiti and Blind Faith projects, which will represent over 
$4.5 billion in capital investment.
    Chevron is also a partner in the Perdido Regional 
Development Project, another multi-billion-dollar effort. All 
these are located in exceptionally deep waters, requiring 
development of new technologies.
    As Mr. Nichols has mentioned, an example of how we are 
meeting deep-water challenges is the record-setting Jack #2 
production test conducted in June 2006. This well was completed 
and tested in 7,000 feet of water and more than 20,000 beneath 
the sea floor. More than half a dozen world records for test 
equipment pressure, depth and duration were set during the 
test. The test was significant because, for the first time, we 
showed that oil could be commercially produced from the newly 
discovered Lower Tertiary area, given the right economic 
conditions. Due to the exceptionally high costs, the ultimate 
potential for this area is particularly sensitive to oil prices 
and fiscal terms.
    To ensure that we can implement our long-term deep water 
plans, in 2006 we committed $2.5 billion to extend two deep 
water rig contracts and entered into two long-term lease 
agreements to build two new, state-of-the-art drill ships. 
These new ships will be capable of drilling in 12,000 feet of 
water and to a total depth of 40,000 feet.
    Deep-water exploration and production is commercially risky 
and success is in no way guaranteed. As mentioned earlier, 
exploratory wells can cost up to $100 million each and many 
result in dry holes or are uncommercial. Companies invest 
billions of dollars in early phases of exploration and 
development and income from production can be a decade away or 
    Government incentives designed to stimulate activity and 
grow energy production from high-risk, high-cost areas, such as 
the deep water Gulf of Mexico, encourage companies to invest by 
reducing costs or increasing revenues, ultimately resulting in 
reducing the need for foreign sources of oil.
    The Deep Water Royalty Relief Act is a successful program. 
Production from the Gulf's deep water has grown dramatically 
over the past decade and will continue to grow as projects 
currently under construction are completed and energy 
production starts.
    Before closing, I would also like to address the issue of 
price thresholds for deep-water leases issued in 1998 and 1999. 
We remain committed to finding a mutually acceptable resolution 
to this issue. With this in mind, we have had a series of 
discussions with MMS officials where we have proposed a range 
of options and we have submitted a written proposal for 
resolution of the issue. We continue to honor the proposal and 
look forward to further discussions with the MMS. There are 
many details to work out and we remain hopeful that we will 
reach an agreement.
    In summary, Chevron has a long history of working to 
maximize the production of energy from the Gulf of Mexico, and 
our efforts will continue. We are committed to being a leader 
in deep-water exploration and development, a partner of choice 
and a leader in innovation and technology development. We take 
our job of providing energy for our great Nation very seriously 
and look forward to working with all stakeholders to ensure we 
maximize energy production to meet our Nation's energy needs.
    Thank you again for giving me the opportunity to be here 
today. I will be happy to answer any questions you may have.
    [The prepared statement of Mr. Siegele follows:]

   Prepared Statement of Paul K. Siegele, Vice President, Deepwater 
    Exploration and Projects, Chevron North America Exploration and 
                Production Company, Chevron U.S.A. Inc.

    Mr. Chairman and Members of the Committee, on behalf of Chevron 
North America Exploration and Production Company (hereinafter 
``Chevron'') I wish to express our appreciation at having the 
opportunity to appear here today to discuss oil and gas resources on 
the Outer Continental Shelf and areas available for leasing in the Gulf 
of Mexico.
    As Vice President, Deepwater Exploration and Projects, my job 
responsibilities include looking for new sources of oil and gas in the 
deepwater Gulf of Mexico. My previous position was General Manager for 
Deepwater Exploration and Production.


    In a world of increasing strategic competition for resources and 
heightened geopolitical risks, safeguarding America's energy security 
requires an integrated, strategic approach. This approach must focus on 
reducing and managing America's energy vulnerabilities while providing 
Americans with affordable, reliable energy--the foundation of our 
competitiveness and way of life. Energy portfolio diversification is 
the best way to provide energy security. Long-term energy security will 
require increasing our energy assets here at home (efficiency measures, 
alternative energy sources, and traditional hydrocarbons), while 
engaging strategically with foreign partners who share these same goals 
of increasing energy supplies, reducing energy demand and promoting 
global energy diversification.
    Oil and gas production from the deepwater Gulf of Mexico is a 
critical part of a diversified energy portfolio. The Gulf's deepwater 
is an important frontier area for oil and gas exploration in the U.S. 
My testimony focuses on Chevron's deepwater exploration prospects 
because the deepwater is the area of the Gulf of Mexico with the most 
potential for significant new finds of domestic oil and gas at this 
time and because it is my job to steer Chevron's deepwater Gulf of 
Mexico exploration activities. My testimony addresses our current 
activity in the deepwater Gulf of Mexico, our future plans for growth, 
and our vision to remain an industry leader in producing tomorrow's 
energy resources from this basin. My testimony also provides examples 
of our design and application of industry-changing technology.


    Chevron is a leader in drilling exploratory wells in the deepwater 
and is a leading leaseholder in the region. (An exploratory well is a 
``wildcat'' well, a well drilled in an area where it is unknown whether 
crude oil or natural gas is present.) We drilled an average of 6-8 
exploratory wells per year over the past few years in the Gulf of 
Mexico and plan to maintain a robust drilling program for the long 
term. Exploratory wells cost $50 to $100 million dollars to drill and 
often result in dry holes, wells not capable of producing in commercial 
quantities, rather than discoveries.
    Chevron is participating in three new offshore developments 
involving investments of more than a billion dollars each that are 
anticipated to yield approximately 300,000 barrels of oil production 
per day within the next four years. Chevron operates two of these--the 
Tahiti and Blind Faith projects--which represent over $4.5 billion in 
capital investment and are designed to produce 165,000 barrels of oil 
per day. In these projects, we are drilling development wells (wells 
drilled in a known reservoir in a proved oil-or gas-producing area) and 
constructing associated facilities, with first oil production targeted 
for 2008. Chevron is also a partner in the ultra-deep Perdido Regional 
Development Project, which will include a regional production host 
facility to allow future expansion beyond the initial core fields. This 
facility is expected to be on production near the turn of the decade 
and is capable of handling 130,000 barrels of oil per day of 
production. These projects are located in very deep waters (4000 feet 
to 9500 feet), which requires the development of new technologies for 
successful completion.
    In addition to these new offshore developments, Chevron is involved 
in six projects where the company and its partners are actively 
appraising significant discoveries. Chevron is the operator of three of 
these projects, those involving the Jack, Saint Malo, and Big Foot 
discoveries. These projects are anticipated to provide significant 
volumes of production for the U.S. for the long term. Each of these 
projects faces challenges, however, as each requires significant 
commitment to capital investment, subsurface evaluation, development 
and testing of new technology, and design of complex subsea production 
    An example of how we are meeting deepwater development challenges 
is the record setting Jack well production test in June 2006. The Jack 
well was completed and tested in an area 270 miles southwest of New 
Orleans in 7,000 feet of water and more than 20,000 feet under the sea 
floor. The Jack well test broke Chevron's own 2004 Tahiti well test 
record as the deepest successful well test ever completed in the Gulf 
of Mexico. During the test, the well sustained a flow rate of more than 
6,000 barrels of crude oil per day, with the test representing 
approximately 40 percent of the total net pay measured in the Jack #2 
well. More than a half a dozen world records for test equipment 
pressure, depth, and duration in deepwater were set during the Jack 
well test. For example, the perforating guns were fired at world record 
depths and pressures. Additionally, the test tree and other drill stem 
test tools set world records, helping Chevron and its partners to 
conduct the deepest extended drill stem test in deepwater Gulf of 
Mexico history. The test was also significant in that it proved the 
application of technology required to achieve substantial production 
rates from a reservoir type and a reservoir depth not previously proven 
to be economically productive in the Gulf of Mexico deepwater. As a 
result of the Jack well test and other company activities, Chevron has 
become the recognized leader in exploring, evaluating, and developing 
the promising area of the deepwater Gulf of Mexico known as the ``Lower 
Tertiary Trend.''
    Chevron is applying its experience in deepwater appraisal and 
project design methods to all of its deepwater Gulf of Mexico projects 
in order to improve productivity, reliability, and safety, and to 
expedite production in both current and future projects. Further, to 
assure that Chevron will have the capability to implement its long-term 
deepwater exploration and development plan, in 2006 we committed $2.5 
billion to extend two long-term deepwater drilling rig contracts and to 
enter into long term lease arrangements to build two new state-of-the-
art drill ships. The ships will be capable of drilling in 12,000 feet 
of water and to total depth of 40,000 feet, further extending our 
ability to explore for and produce new deepwater Gulf of Mexico 

                           ROLE OF INCENTIVES

    From a fiscal perspective, deepwater exploration and production is 
a risky business proposition. As discussed above, exploratory wells can 
cost $100 million each, and many result in dry holes. The process of 
bringing new energy supplies to the marketplace, from leasing through 
exploration, development, and construction, can take a decade or more. 
Companies invest billions of dollars years before there is any income 
from production, and assume all this risk. Government incentives, 
designed to grow energy production from high-risk, high-cost areas such 
as the deepwater Gulf of Mexico, encourage companies to invest by 
reducing costs, and thereby reducing reliance on foreign sources of 
oil. The Deepwater Royalty Relief Act is a successful program--
production from the Gulf of Mexico has grown dramatically over the past 
decade, and will continue to grow as projects currently under 
construction are completed and energy production starts.


    Chevron has a long history of commitment to the development of 
resources in the Gulf of Mexico, and this commitment will continue. We 
are the largest operator on the Gulf of Mexico shelf and a leader in 
all aspects of deepwater exploration, appraisal, and new project design 
and execution. We are a partner of choice and a leader in innovation 
and technology development. We look forward to continuing to explore 
for and produce oil and gas from the Gulf of Mexico for years to come.

    The Chairman. Thank you very much for your testimony. I 
thank all the witnesses for your testimony. Why don't we take 
5-minute rounds. I'll start and then Senator Domenici, and 
we'll just take people in the order that they arrived.
    First, Secretary Allred, let me ask you: There are about 33 
million acres of Federal Outer Continental Shelf, as I 
understand it, that are currently under lease but are not 
producing; could you explain why there is such a large amount 
that is not in production? Do we have rules to encourage 
diligent development of leases once a lease is issued and are 
those adequate to get the production underway?
    Mr. Allred. Thank you, Mr. Chairman. Yes, in the offshore 
leases, when we offer them for sale, depending upon the depth 
of water, they are offered for a term of either 5 years or 10 
years and essentially, it's about--that breaking point is 400 
    They are required, in that lease term, to start producing 
or to do certain diligence or the lease expires and then it 
comes back on the market and is resold.
    The Chairman. Expires in what period of time? Are these 5-
year leases?
    Mr. Allred. Either a 5-year or 10-year, depending upon the 
depth of the water where the lease occurs.
    The decisions that the oil companies make--and it's 
probably a better question to ask them, but the decisions that 
the oil companies are faced with on those leases has to do with 
the information that they gain after they are awarded the lease 
and decisions that they have to make as to where the most 
productive information--or the information indicates where the 
productive resource is, as they develop it under their lease, 
after the lease is acquired. So they're making decisions, after 
they acquire the leases, as to whether they should go.
    Now, we will see--remember, there are payments with regard 
to rental rates on these leases going forward, before they 
produce. They will make decisions, sometimes, to turn those 
leases back, before the 5- or 10-year period is up. And again, 
they will go back onto the market in our next sale in that 
area. So there are due diligence requirements. They have to 
proceed or they cannot retain the lease. But there are many 
decisions that they have to make, based upon data that they 
acquire after they are awarded that lease.
    The Chairman. Let me ask, also, as I heard Ms. McKeithen's 
testimony, and in her written testimony as well, she points out 
that in Louisiana, the royalty received has to be, by law, at 
least 12\1/2\ percent--in fact, it's on average 22.85 percent 
for inland tracks and 21.85 percent for offshore--and I believe 
she said that the leases that the State of Louisiana issues for 
the land it owns or has leasing rights in, those leases are 
bid, not just the original bid price, but also the rate; why do 
we not pursue that at the Federal level, if that's what the 
market will bear?
    Mr. Allred. Mr. Chairman, we try to analyze what market 
conditions are when we make decisions as to what to set the 
royalty rates on a particular sale. One of the differences 
between the lease rates or the royalty rates with regard to 
market conditions in the inland waters and the waters on the 
Outer Continental Shelf, of course, is the depth and the cost 
of developing those. In the 3-mile areas, you're talking about 
technology that is well developed and costs, which when 
compared to the OCS, are fairly moderate. So we try to make 
decisions as to what is attractive or what will be attractive 
in the lease sales that we offer in order to maximize the 
greatest money to the United States.
    Now remember, they are bidding-in the U.S. sales, they are 
bidding two items and both of those are driven by the market. 
The first is the bonus bid that they give us, which is a fairly 
immediate income to the United States, and then second, they 
are required to pay the royalty rate that we specify in the 
sale. If you raise the royalty rate--the companies are going to 
be able to pay a certain amount in their minds for that lease. 
If you raise the royalty rate, then you're probably going to 
get less on the bonus bid. And that was the kind of analysis we 
looked at when the President decided to raise the royalty rate 
to 16\2/3\ percent. And our analyses indicate that when we did 
that, we probably--in the short term, we're going to decrease 
the bonus bids.
    So we try to balance those two in the process that we have, 
and which is in legislation, to make sure we get the best money 
for the United States.
    The Chairman. My time is up.
    Senator Domenici.
    Senator Domenici. Thank you, Mr. Chairman.
    I am really very impressed that I see the Honorable 
Marjorie--how do you say your last name?
    Ms. McKeithen. ``Mc-KITH-in.'' I think we mispronounce our 
own names, Senator.
    Senator Domenici. ``Mc-KITH-in,'' and the Honorable Lisa 
Jackson, sitting side by side, and one is so happy about 
offshore leasing and the other is so dour and so scared. I do 
not quite understand that we are living in the same world. But 
nonetheless, it is nice that we can sit together and talk and 
be decent about things.
    Let me move from that to a couple of questions. Mr. 
Secretary, when we did 181 and 181 North and opened that up, we 
tried to put in language expediting you as much as possible, so 
we do not have that very valuable leasehold sitting around, 
that we would get it done, that we would get on with it. Is 
that happening? Are we working on what must be done to get that 
lease up and get it going?
    Mr. Allred. Senator Domenici, yes, we are working on both 
lease sales to try to make sure we have the information and 
have met the requirements of NEPA with regard to that sale. I 
think we have told you before that we have some concerns that 
we are going to be able to complete this sale by the end of the 
year because of the NEPA documentation and the studies that 
have to be done. But we are doing what we can to do that.
    We are further complicated, as I think we have said before, 
by the continuing resolution. But we are proceeding 
expeditiously. If we cannot do it by the end of the year, it 
will be soon after. So we understand what you want and we are 
working as hard as we can to do it.
    Senator Domenici. The same person. Would you comment, sir, 
on Mr. Manuel's contention that there were hundreds of oil 
spills during Hurricane Katrina on the OCS? Is this true?
    Mr. Allred. Mr. Chairman--Senator Domenici, our records 
with regard to--this is the Federal OCS.
    Senator Domenici. Yes.
    Mr. Allred. I do not have information on the other areas 
down there. But our records indicate that there were a little 
over 17,600 barrels of oil spilled during Katrina and Rita. 
That was 124 spills--89 of them were classified by the Coast 
Guard as minor, 52 of the spills were from platforms and rigs, 
and 72 of those 124 were from pipelines. The pipelines 
represented a little over 7,000 barrels of oil. The spills from 
the rigs represented about 10,000 barrels of oil.
    But as we looked at the results, I think it is rather 
amazing, all of the shut-off or shut-in valves performed as 
they were intended. There were no reports of spills from OCS 
facilities reaching shore. There were no reports of oiled birds 
or mammals from the OCS spills and there were no observations 
of large slicks that required collection or clean-up.
    Now, there were spills that reached the ocean from onshore 
facilities, but as best we can tell the OCS facilities 
performed as we had expected.
    Senator Domenici. Thank you very much.
    Mr. Nichols, could I ask you, you went out there and 
drilled extremely deep and kind of struck it rich in terms of 
finding a new yield that may not have been expected, that 
indicates there might be more oil in the offshore than we had 
expected; is that true?
    Mr. Nichols. We potentially have major discoveries out 
there. We have drilled discoveries, in our case, in four 
different wells, four different fields. Each of these wells are 
costing about $100 million each. To fully determine 
commerciality of these projects, it is going to cost $2 billion 
to $3 billion of additional money.
    We are right on the edge of technology. As my colleague 
from Chevron testified, we are breaking world records every 
time we do something out there. So there is, potentially, major 
discoveries out there and we have 35 prospects that we have 
already identified seismically that look very attractive. We 
are eager to move forward with those as aggressively as we can.
    We, as an independent producer, get measured by how we book 
reserves and how we build production. So there is tremendous 
pressure on us to move as fast as we possibly can. Our 
shareholders demand that.
    The delays are caused by equipment. Because we are on the 
edge of technology, there is not an abundance of drilling rigs 
out there or equipment to allow us to do that.
    Senator Domenici. Sir, when we look at the offshore are 
you--these that you have found, discovered, that you continue 
to go after, are they on open leaseholds or do we have to let 
    Mr. Nichols. No, they are on prospects that we have already 
leased from the Department of the Interior.
    Senator Domenici. All right. So that business of whether 
you can do it or not has already been accomplished as far as 
the Government of the United States is concerned?
    Mr. Nichols. Yes. And those are in the western part of the 
Gulf that is now available for leasing.
    Senator Domenici. I think I am finished. Thank you very 
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    We have 13 minutes on this roll call vote. As we know, the 
Majority Leader is trying to get these votes done on time. 
Senator Wyden has asked to go ahead with his 5 minutes of 
questioning, and why do we not do that, and then if he would 
just recess the committee at that point and we will come back 
in about 10 or 15 minutes and startup again.

                          FROM OREGON

    Senator Wyden [presiding]. Thank you very much, Mr. 
    Mr. Siegele, to me, it just defies common sense to argue 
for opening new environmentally-sensitive areas to oil and gas 
drilling when so much land already leased for oil and gas 
drilling in environmentally-sensitive areas just sits out there 
idle. So I want to ask you about a concrete case, to begin 
    The State of Alaska recently terminated the Point Thomson 
unit on the North Slope in Alaska. Chevron and its partners--
Exxon, BP, and Conoco--held the leases for more than 20 years 
without developing the field. Chevron owns about 14 percent. 
Now, the Thomson Sand Reservoir is known--known--to contain 200 
million barrels of oil and the shallower reservoirs are known 
to contain hundreds of millions of barrels of oil more. And yet 
Chevron has never developed this field.
    Now, after years of listening to excuses, the State of 
Alaska basically said there is no legitimate reason to let 
Chevron sit on these leases. Now, this is a huge deal for us in 
the Pacific Northwest. Alaskan crude is our major source of 
crude in our part of the country.
    Why should the Congress let Chevron or Exxon or BP drill 
off the coast of Oregon for oil when we have these kind of 
concrete examples of you all not developing the resources you 
    Mr. Siegele. Let me answer that question by starting with--
my responsibilities are for the deepwater Gulf of Mexico, not 
for Alaska. So with that caveat, maybe I could attempt to 
answer it by--what little I know, and it has been years since I 
have worked Alaska, but I think the answer to your question 
lies in the commercial uncertainty. And it is the very same 
problem that we face in the deepwater Gulf of Mexico, 
particularly with this new trend that we were talking about, 
the Lower Tertiary. The costs are enormous. In the case of 
Point Thomson, I believe part of the issue is pipeline and 
getting into the Trans-Alaska Pipeline. There are a lot of 
commercial issues. So it is not due to an unwillingness of 
companies to go forward, it is due to a lack of commercial 
    Senator Wyden. I recognize you may not know much about 
this, but there are scores of these kinds of examples, example 
after example. And nobody can divorce politics from this 
debate. I will tell you, you just cannot reconcile arguing for 
going into new areas when so much has been passed up, to date.
    I am going to see if I can get one more in and it deals 
with the royalty issue that, as you know, our committee feels 
strongly about. Mr. Nichols, your company, Devon, unfortunately 
has been one of those to sue the government in recent years in 
order to avoid paying billions of dollars in royalties to the 
taxpayers. Devon was a plaintiff in the Santa Fe Snyder case, 
and in 2004 convinced a U.S. Circuit Court of Appeals to apply 
price thresholds to individual leases in the Gulf, not to 
overall fields, thereby guaranteeing companies a more generous 
level of royalty relief than the Interior Department ever 
    Now the decision in your case is being cited by another 
company, Kerr-McGee, in its lawsuit to erase any price 
thresholds on any Gulf lease issued from 1996 to 2000, 
potentially costing the taxpayers $60 billion. Devon says it 
agrees. You informed your shareholders in your 10Q statement, 
filed with the Securities and Exchange Commission, that it does 
not recognize the Interior Department's right to impose any 
price thresholds on the Gulf leases issued from 1996 to 2000. 
And I gather that you have said how great it is to save this 
$100 million in royalties and that more will be forthcoming.
    Tell me, if you would, so we have it on the record, why you 
think your company should not pay the Federal Government 
royalties on the oil you produce from these Federal leases?
    Mr. Nichols. Several corrections, Senator. First, that 
lawsuit filed by Santa Fe Snyder was a separate company that 
was filed and litigated long before we bought them, so I really 
have no knowledge about that particular lawsuit.
    Senator Wyden. Do you agree with the Kerr-McGee position, 
    Mr. Nichols. We did not join Kerr-McGee in that lawsuit.
    Senator Wyden. Do you agree with the position?
    Mr. Nichols. I have not studied that. We did not file that 
    How we got those leases I think, though, is instructive. 
Devon bought several companies. We did not buy those leases 
through the open auction bid that came from the Department of 
the Interior. Instead, we bought two companies that had those 
leases. Part of our due diligence, Senator, was we go in and 
look at the terms of all the leases that we buy, both onshore 
and offshore, and in the process of that, run it through our 
computers to evaluate those leases.
    We looked at the terms of those leases. They were offered 
by the Department of the Interior during the Clinton 
administration. We evaluated them. The leases had been in 
existence for 5 or 6 years. We evaluated based on the terms.
    So there was no reason for us to assume, in evaluating 
those, that the Government would not honor the terms of those 
    Senator Wyden. Mr. Nichols, do you deny that you informed 
your shareholders, in the 10Q, that you do not recognize the 
Interior Department's right to impose any price thresholds on 
those leases?
    Mr. Nichols. The terms of those leases do not have price 
thresholds in them. We have disclosed in our 10K obviously the 
amount of money that would be owed to the Government if those 
leases were retroactively amended to include price thresholds. 
That is clearly laid out in the 10K for all of our shareholders 
to see.
    Senator Wyden. My time has expired. Perhaps my colleague 
wants to get into this before the vote. But I think this is a 
textbook case of what has gotten us into this predicament on 
these oil leases. I think everybody knows that there is plenty 
of blame to go around. It goes back to the past administration.
    But companies like yours have got to be constructive rather 
than look for ways--and it is stated in your 10Q statement that 
you all basically think it is a great thing that there should 
not be any price thresholds. That is not in the public 
    I want to recognize my colleague.

                         FROM LOUISIANA

    Senator Landrieu. We only have 7 minutes. And I will be 
back, but I wanted to follow this line of questioning, because 
I am looking forward to working with my colleague Senator Wyden 
to work through these many difficult challenges. But for the 
record, I want to say that it would be no sense for an oil 
company to drill any well, whether it was 10 feet or 10,000 
feet, or a gas well, 10 feet or 10,000 feet, if there was no 
way to get the oil or gas to market.
    Now, I know that there are some people that represent 
States that do not know a lot about oil and gas drilling, so I 
am going to be patient with my colleagues as they learn. But 
you have to have a pipeline or a railroad or a road or some 
infrastructure to distribute the oil and gas to other places. 
It would be foolishness for any company to drill anywhere where 
there was not the infrastructure.
    I am not familiar, Mr. Siegele, with Alaska and the details 
of that, but for the record, I just want to be clear that you 
would be a fool to drill if you did not have the 
infrastructure. So one of the reasons that oil companies and 
gas companies drill in some places more than others is because 
some places have more infrastructure.
    I am going to leave that fact there and then, Mr. Manuel, I 
am going to come back and talk to you about the spillage that 
occurs naturally in the ocean versus the spillage that occurs 
from the oil and gas platforms. Also, you might want to get 
your windmill information out, because I am going to ask you 
how many windmills it is going to take to keep the lights on in 
California. So you can start your calculating, and I will be 
    The Chairman. The next set of questions is from Senator 
Craig. Why don't you go right ahead.

                           FROM IDAHO

    Senator Craig. Mr. Chairman, thank you very much.
    For the hearing today, I think it is tremendously 
enlightening for all of us to understand what is and is not 
possible, and that our limitations today are more political 
than they are either scientific or engineeringly so, and the 
choices that we as a Nation have to make in relation to the 
politics of the issues versus the technology of the issues.
    I am not going to embarrass anybody this morning by asking 
any of you your age, especially you ladies. That would be 
inappropriate. But I did a little math and I find that the 
Sierra Club is still suffering under a ghost effect of Santa 
Barbara. But many in the audience would not know what I was 
talking about if I mentioned Santa Barbara. I am talking about 
something that happened in January 1969, 38 years ago.
    I find it also interesting that the world we live in today 
is so dramatically advanced from 1969, even though some of us 
are still stuck in that mind set. I think that is what Larry 
Nichols and Paul--how do you pronounce your last name, Paul?
    Mr. Siegele. ``SIGG-lee.''
    Senator Craig. ``SIGG-lee.'' In part are telling us, that 
their world has changed dramatically. It has even changed in 
the last few years, based on technology or reprogrammings or 
some ability to change an old instrument into a newer 
instrument, and to do so in a very safe and environmentally-
sound way. That causes us to arrive at--having to look, from a 
public policy point of view, at what we do for our country for 
energy security.
    Of course, I have been a bit direct and open about it. I 
was the first to go to the floor to talk about the hypocrisy of 
Florida and our allowing--by disallowing ourselves--China to 
drill just literally miles off our coast in the Northern Cuban 
Basin. And, of course, I was extremely pleased this past year 
when 181 finally made it across the finish line to be now 
implemented by the Department of the Interior.
    There are three levels of protection for the Gulf: there is 
Presidential moratoria; there is the Interior Department's 5-
year MMS plan, also at the Presidential discretion; and then 
there is the Interior Appropriations moratoria. Now that I am 
ranking on Interior, I really think we ought to change that 
attitude there to an opt-out, so that if New Jersey wants to 
opt out they can. But other States might not want to any more, 
based on what we now know as capable and potentially possible.
    I do not know if I have got that chart here. I love showing 
it, because it is a direct contradiction to what Steve Allred 
is telling us. Not that it is not there, but because--now I 
know that Democrats will accuse me of being Kent Conrad. I 
always accuse Senator Conrad of being unable to speak without a 
chart and now I am doing the same thing.
    This is Santa Barbara, 1969, Mr. Chairman. This is not the 
America we live in today. And therefore I am pleased you are 
revisiting this issue. Whether it is adjustments in royalties, 
whether it is the bringing on of new technology, this is all 
about energy security today in an environmentally sound way. It 
has nothing to do with conservation. It has nothing to do with 
new technologies. We are going to do all of those, and over the 
decades to come we will do more of those as we deal with this. 
But I think the core sample that was sent around today is 
literally an example of a very real change in our capability.
    I am sorry, I can't live in the past and I won't live in 
the past, and if I have anything to do about it, public policy 
will adjust a little bit to be reflective of that.
    Let me come back to you, Steve, Secretary Allred. In the 
implementation of the legislation that has been passed 
relating--well, the Gulf of Mexico Energy Security Act that we 
passed in 2006, you talked about where we are on timelines; can 
you be more specific? When will leases be let, to your 
knowledge, based on the work you have yet to get done?
    Mr. Allred. Senator, we expect that the first sale--first 
of all, the plan will be done midyear. It will be adopted by 
midyear. The first sale will probably be in August, and then 
the second sale probably a month after that. That is our 
current--what we anticipate. The only question is the one new 
area, whether or not we can get the environmental studies done 
to include that in a sale this year.
    Just from a business standpoint, from the standpoint of 
getting the most return to the Federal treasury, it may also be 
better to wait until early spring of 2008. But those are the 
things that we will evaluate. We will be ready to go as quickly 
as we can and it makes sense.
    Senator Craig. We understood during the debate over 181 
that this was not an unknown area, that it was relatively well 
known and known prior to it being taken out of lease or lease 
opportunity some years ago. Is that, based on your knowledge, a 
fact and will that expedite it at least as it relates to 
industry's interests?
    Mr. Allred. Senator, I think it will. There is a lot of 
information known there, although as you go out further, 
obviously, you will gain additional information. What we have 
not been able to do, when an area is under a moratorium, we 
cannot begin the environmental studies that are necessary, so 
while on all of the other areas in the plan we were well along 
on the collection of environmental data and the analysis that 
was required under NEPA, on those that were added in last 
December's legislation we had not been able to start that. So 
that is why it is a little bit later.
    But we are accelerating that and I think there will be, 
from what we understand, a tremendous amount of interest.
    Senator Craig. I see I am out of time. Thank you, Mr. 
    The Chairman. Thank you.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    I appreciate all the witnesses being here. Let me start 
with Secretary Allred. We have only touched on the question of 
whether there is enough oil and gas in the Atlantic Ocean to 
make this all worthwhile in the first place. So my question, 
Mr. Secretary, is are you familiar with the most recent MMS 
resource assessment on the Outer Continental Shelf?
    Mr. Allred. Senator, in general terms, yes.
    Senator Menendez. So is it correct that the entire Atlantic 
OCS is estimated to hold less than 6 percent of the total gas 
on the OCS and about 3 percent of the total oil?
    Mr. Allred. Senator, I can give those to you in cubic feet, 
but I do not remember what the percentage rates are.
    Senator Menendez. Well, let me just tell you, the actual 
numbers, from what I have gleaned from the Department's 
statements, are 5.8 percent of the gas and 3.3 percent of the 
oil, according to your 2006 assessment. So that is about 37 
trillion cubic feet out of a total of 633 trillion. But that is 
over the entire Atlantic seaboard, is that correct?
    Mr. Allred. That is correct.
    Senator Menendez. Now, in that respect, that is about 259 
million acres that covers that stretch of territory; is that 
    Mr. Allred. That is correct.
    Senator Menendez. So meanwhile the western and central Gulf 
of Mexico planning areas have over 400 trillion cubic feet of 
gas; is that correct?
    Mr. Allred. That is correct.
    Senator Menendez. And those two planning areas cover only 
about 84 million acres, about \1/3\ the size of the Atlantic 
planning area; is that correct?
    Mr. Allred. Correct.
    Senator Menendez. So let me get this straight. In the Gulf 
of Mexico, you have over ten times the natural gas concentrated 
in an area \1/3\ the size, that is far easier to find. You have 
the infrastructure. You have legal authority to drill. So why 
in the world are we looking at the Atlantic seaboard when you 
look at the benefits versus the potential costs and the amount 
that your own Department determines may be available?
    Mr. Allred. Senator, as you are aware, we cannot do 
anything on the areas that are under moratoria until such time 
as you change that. The reason that the sliver off Virginia was 
included in the plan was at the request of the State. And even 
with that request, we could not proceed until such time as this 
committee and the President were to decide that the moratoria 
or the withdrawal should be released. So as far as being in the 
5-year plan, they cannot be unless you took action to change 
    I will say, though, that again I want you to realize that 
the numbers on which we developed the resource estimates are 
over 25 years old and are not comprehensive. Our experience 
elsewhere is that if the data were there you might find 
substantially more than what is in our assessment. We do not 
have the resources or did not have the resources to gather new 
data for that assessment.
    Senator Menendez. Well, I am working with what we have now 
and listening to the other witnesses' costs of expenses of 
drilling and all of that, I am not quite sure. I learned--I 
listened to one of my colleagues suggesting that we are living 
in the past, but sometimes the past is prologue in terms of 
    Commissioner Jackson, first of all, thank you for your 
powerful statement laid out in terms of New Jersey's vision in 
all of this, and particularly the economic consequences to New 
Jersey if, in fact, we had a challenge. We heard a little while 
ago, in answer to one of the questions, that there was a spill 
in New Orleans during the context of the hurricane, so this is 
not without some risk.
    In a different context, we have seen some environmental 
damages in New Jersey in the past during the 1980's, did we 
    Ms. Jackson. Thank you, Senator. We certainly did, and I do 
remember the past and certainly I remember the 1980's, without 
telling my age.
    Senator Craig. How about the 1960's?
    Ms. Jackson. Yes, I do, unfortunately.
    I think it is important for you to realize that we----
    Senator Menendez. In her infancy, I would add.
    Ms. Jackson. Thank you, Senator.
    We face a variety of issues besides this. Certainly in the 
1980's our issue then on the shore was wash-ups on our beaches. 
We had medical waste, we had sewage spills from some of our 
neighbors and from plants in our own State. We had nonpoint 
pollution. And in that year, 1988, we had over 800, 803 beach 
closings. We normally average--our lowest ever has been 30 and 
last year we had about 79. Those are--by the way, that 79 was 
almost entirely because of one area on our coast.
    Senator Menendez. And what happened, Commissioner, to our 
    Ms. Jackson. Our economy suffered tremendously at that 
point, Senator. We saw about a third--we went from 8.6 million 
people traveling to our shores to under 7 million, about 6.7 
million. Our numbers dropped 22 percent. There was a decrease 
of $800 million in revenue just from that one incident. And it 
took several years--and it is important for people to realize 
that--for a shore-based economy, several years for people to 
feel comfortable coming back to the clean beaches of the Jersey 
shore again.
    Senator Menendez. And I will finish on this. I see my time 
is up, Mr. Chairman.
    But $800 million in the 1980's is a lot more today.
    Ms. Jackson. It certainly is, Senator.
    Senator Menendez. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Murkowski.

                          FROM ALASKA

    Senator Murkowski. Thank you, Mr. Chairman.
    I appreciate all those of you who have joined us here this 
morning and for the hearing. Again, it is a very important 
    To you, Secretary Allred, we understand that MMS has been 
holding meetings with the six current OCS-producing States, and 
this is to implement the coastal impact assistance program that 
we approved in 2005. And that law calls for the States to split 
$250 million of the nearly $8 billion a year that the Treasury 
is collecting from OCS. Now, I understand that, in implementing 
this act, MMS feels that it needs to spend money to essentially 
set up a funding formula for allocation and to monitor the 
State's use of the funds.
    I think we can understand that, but it has recently come to 
our attention that MMS feels that it doesn't have the funding 
needed to implement the program unless the budget for fiscal 
year 2007, the likely-permanent continuing CR, adds several 
million dollars to it. I understand that MMS wants $2.5 million 
extra to administer this, which seems like a large amount of 
overhead. But my question to you is whether or not it is true 
that MMS does not plan to make any disbursements to the States 
unless the CR accommodates such additional money.
    Mr. Allred. Senator, we have gone ahead and developed the 
procedures and the rules and regulations in draft form and the 
actual process that had to be developed so we could go ahead. 
The problem we have is that in order to undertake the 
activities that are contemplated and to actually look at the 
proposals that we have, do the engineering, the environmental 
work, and all of the things that have to be done, the only way 
we could do that without additional funding is at the expense 
of other programs.
    So the issue with the continuing resolution is a real issue 
for us just from a staffing standpoint.
    Senator Murkowski. Well, we understand that. I guess I 
would just ask that you look specifically to that language that 
directs the Secretary to disburse the impact aid without 
further appropriation. Now, for my State this is not--the 
dollars coming are not that significant, but I think certainly 
for those Gulf States that were affected by Katrina and Rita it 
is significant, and we would like to see that certainly be 
    Next question for you, Mr. Allred, is about the 5-year OCS 
sale schedule, which I understand will be released--or the 
final schedule will be released in mid-April. When this comes 
out, what can we expect in terms of the public's opportunity to 
have the ability to express their views as to size, specific 
location, conditions, any kind of environmental stipulations 
that might be imposed? What is that process, if you can just 
lay that out quickly for me?
    Mr. Allred. Senator, as you are aware, the proposed plan 
was released and has been subject to public comment. There was 
an environmental impact statement that was done for the plan. 
That has been released and has been subject to public comment, 
and we have gotten significant comments. Those closed I 
believe--it closed just recently, I don't remember the date. 
But there was a significant amount of information that we 
    As we go forth with those sales, we have to look at those 
sales from a standpoint of what we will offer for sale. And 
again, the Secretary has not made a decision on the plan.
    Senator Murkowski. And let me ask you further on that, as 
it relates to Alaska and the North Aleutian Shelf specifically, 
it has not been announced whether or not that will absolutely 
be added to the 5-year schedule, but again the question is what 
type of environmental stipulations might be included to provide 
for the protection that we would like to see for our fisheries 
and the other resources there; can you speak more specifically 
to that?
    Mr. Allred. Yes. I was just double-checking to make sure I 
get it right.
    Each sale requires an EIS. Also, at the time we offer the 
sale there will be a preliminary notice of sale that will have 
all of the restrictions that would be applied to any resulting 
lease from that sale. So there will be a number of times that 
people can look at what is going on and there will be the 
opportunity to influence it.
    With regard to--I think there were two comment periods 
specifically with regard to the plan and the overall EIS. But 
there will be individual EIS's with regard to these sales as 
    Senator Murkowski. We also have a related issue--I know my 
time is up, but up north in the Beaufort and the Chukchi Sea, 
where we have whalers that are very concerned about providing 
for those environmental stipulations and protections, so we 
want to again ensure that those are taken into account and 
    Mr. Allred. Senator, we understand that very well. In fact, 
I have a real interest in, particularly, the marine mammals up 
there, and to make sure that if we make decisions, we know what 
the impacts are. We have been closely working with the boroughs 
and with the people up there to make sure that what we do does 
not adversely impact their subsistence.
    Senator Murkowski. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Domenici has to leave for another meeting. Let me 
just defer to him to ask another round of questions, and then I 
will have some questions.
    Senator Domenici. Thank you very much, Senator Bingaman.
    I want to make, just as a general statement for the record, 
because we have been talking about both estimates of what we 
have got by way of resources and we have been talking a lot 
about what kind of environmental damage we might be causing by 
this activity. And I want to make sure that the record is clear 
that most of what we have been talking about is old 
information. And when you are talking with offshore and talking 
about estimating reserves and talking about estimating what 
kind of damages are going to ensue, if you are dealing with any 
back information, late information, old information, you really 
are not dealing with what is relative to the offshore today. 
Things having changed so dramatically in terms of the equipment 
that is used to do the work, to drill the holes, in terms of 
cleanliness and getting down without making any mess, that it 
is not fair to compare 15 years ago with today, because that is 
really worse than apples and oranges, they just are not 
    The best we can do is to get busy providing you with 
sufficient money, Secretary Allred, so you can do the kind of 
broad and lengthy evaluation that we have asked be done with 
reference to the geological--putting the geological estimators 
and experts out there to tell us what is in certain areas that 
we know we want to take on after--the next, and next and next, 
so that we can tell the American public what they own. We also 
can be honest with them as to what kind of damage will be 
caused and what kind won't.
    And those will oppose it and talk in terms of 10 and 15 
years ago, I hope you are wise enough to tell the American 
people that they have got to get up out of their slumber and 
their sleep and come alive and do their looking and estimating 
today, not what they expected 15 or 20 years ago, because it 
just ain't true. Right?
    Mr. Allred. Yes, Senator.
    Senator Murkowski. If I can just interrupt the Senator for 
one moment. We had asked for an inventory of all that we have, 
but I understand that, even though the Department has conducted 
the inventory, they rely on--they have not done new seismic 
testing. So it is basically an inventory based on old 
information that is 25 years old.
    Senator Domenici. That is true, and I guess their excuse is 
they do not have enough money.
    Is that true, Mr. Secretary? What is the answer to that? I 
was going to get to that.
    Mr. Allred. Senators, as the oil companies have testified 
here, some of those holes can cost $100 million, and the 
seismic work, while less expensive, is still very expensive. So 
it is very difficult to gather new information on these deep 
areas with any of the resources that MMS has available.
    I think it is important, though, while it is not directly 
related to the oil and gas inventory, it is certainly related 
to the inventory--environmental inventory of the oceans. And 
one of the things that is not well recognized anyplace is that 
MMS is one of the primary research organizations for ocean 
environmental situations. We have spent over $780 million in 
environmental studies on the Outer Continental Shelf and 
environs over the last 30 years. That is a lot of money.
    It is done for a number of reasons. Part of it, one of the 
most important, is that we have to have that information in 
order to make intelligent decisions on when we go forward with 
leases or the other regulations that we have.
    I certainly would like to go out and get more information. 
However, I think that would also require a change in your 
moratoria. But we know that there are--we are pretty sure that 
there are resources out there. Given our experience elsewhere, 
the numbers that we have, since they are based on old data, 
probably would increase substantially if there were new data 
    Again, it is under moratoria and it is not going to be 
offered for lease unless you were to change your position with 
regard to that moratoria. But there are resources there, they 
are valuable, and I think that we would find over time that 
they would probably increase.
    Senator Landrieu. Mr. Chairman, can I interject on that for 
1 minute? Because both the chairman and the ranking member came 
to agreement and pursued a more up-to-date, modern inventory of 
the assets that the American people own. Regardless of whether 
you are for or against drilling, I do not know anybody in 
America that would not like to know what assets they own.
    I think it has a great deal of bearing not only on our 
energy industry, but in our security, particularly in our 
current challenging situation. I would urge the chairman and 
the ranking member to pursue vigorously this more modern 
    And I wanted to ask for the record if there was a better 
way to get the data using the private sector, which may have 
more information than we might, and if we could pursue or you 
could submit for the record on this point, some suggestions to 
us about how to. I do not know, Mr. Nichols, if you wanted to 
say a word about or a suggestion real briefly. Is that OK, 
Senator Domenici, or should I wait for my questions?
    The Chairman. Why do we not just see if Senator Domenici 
had one final statement. He is going to have to leave here.
    Senator Domenici. Well, I have to go see Senator Byrd with 
an appointment that I made. I do want to know what you think 
about this, Mr. Nichols, and I will read about it afterwards 
because I will not be here. I consider the question to be very 
important to me. I would second it and ask that you answer it.
    And, Mr. Secretary, I wanted to say, from my standpoint, 
whatever you are doing is not enough unless you are able to 
answer that you are proceeding either with--vigorously with--
the drilling and the kind of work that is necessary to prove up 
the next and the next and the next, however you do that. 
Because it seems to some of us that we have a huge inventory 
that we have not touched, and that we should be deciding, based 
upon its proximity to the United States--the fact that we can 
prove that it will do no damage to the abutting property, and 
it is seriously something that moves us toward independence or 
at least moves us to using less of somebody else's oil.
    I do not see how we can, as a committee, not insist that 
the information be forthcoming as to what these assets are 
worth. And if we have to go to the private sector to get it, we 
are going to have to get it. You can't just be getting $100 
million or $200 million in royalties or $500 million and not 
paying for the best information on the future that is out 
    I do not know what the Senators here think about it, but I 
think we could win that in this committee, and I think Senator 
Bingaman would have to help us do it. But they have to get it 
done. I do not know what they are charged with yet, but I think 
we ought to charge them with it pretty darn soon, because we 
cannot sit around here 6 months from now and say nobody has 
told the Interior Department, subject to whatever limitations 
they insisted that they needed, go ahead and find out.
    Do you agree with me?
    Senator Landrieu. Yes.
    Senator Domenici. It is a big-time asset and we have got to 
find out. It is pretty darn close to or shoreline. We do not 
have to run off to Alaska. I am sorry, we should and we are, 
but it is pretty close.
    Thank you. Thank you very much, Senator.
    The Chairman. Thank you very much.
    Senator Landrieu had not had her chance for 5 minutes of 
questions. Why don't you go ahead.
    Senator Landrieu. Thank you.
    I will start with Mr. Nichols. If you could respond to the 
question that I just asked for the record: Are there any ideas 
that you might have about how we could work more in partnership 
with MMS to get a better idea--without divulging proprietary 
information, because I understand this industry is quite 
competitive. We hope to make it even more competitive. But do 
you have any suggestions to MMS about how we could get an 
accurate inventory of the Outer Continental Shelf?
    Mr. Nichols. Thank you, Senator.
    Of course, the entire Pacific coast, the entire Atlantic 
coast, and the eastern half of the Gulf of Mexico have been off 
limits for seismic work, for exploration for decades, if not 
generations. There is very little information out there as to 
whether there is anything there or how big it would be. Anyone 
who argues that there is nothing there cannot do that with 
certainty, anymore than we can argue with certainty that there 
is a lot there. It is just a great void on the map that has not 
been explored.
    We are the only country in the world that has that kind of 
acreage offshore that is off limits, including very 
environmentally conscious countries like England and like 
Norway, that certainly do not look--are not inferior to the 
United States in their environmental sensitivity. Because that 
it is all off limits and it has been off limits for so long, my 
company, and I would speculate very few--and most other 
companies, have done no work out there, certainly not to apply 
modern technology. You use your shareholders' money where you 
have some prospects, and if you discover something you can go 
work on it.
    Senator Landrieu. To follow up, the seismic that is 
available to us now, which is so much more superior than it was 
even 10 years ago and most certainly in the early part of the 
century, are there serious or moderate or minimal environmental 
impacts to just tests to see what is there? Could you talk 
about it, because the argument is we cannot even run the test 
because it will damage the environment. And we would like an 
answer from you about your knowledge about that.
    Mr. Nichols. There is no serious environmental damage to do 
that. There are people who do not want that knowledge because 
they are afraid that we might discover that there is actually 
something there and then we would want to develop it, to 
provide for this country's energy resources. To do a simple 
seismic survey out in the middle of the ocean is as 
environmentally friendly as you can be, certainly when you 
compare it to other alternatives.
    Senator Landrieu. Thank you.
    If I could ask about this seepage or spill issue, because I 
most certainly think that we need to enter this argument, not 
with fear and ignorance, but with fact and reason. And I am 
going to try to do everything I can to make sure that 
organizations--and I have great respect for members of the 
Sierra Club, but sometimes I think the leadership of 
organizations like that leads with fear and ignorance as 
opposed to fact and reason.
    So I want to, just for this record of this committee, to 
have it either challenged or I want to put it on the record 
unchallenged that there are 43 million gallons of oil released 
by natural seepage in the Gulf each year. Does anybody disagree 
with that at this table? 43 million gallons of oil, of seepage, 
every year in the Gulf?
    Mr. Manuel. We will get back to you on that. I do not have 
that in front of me, but I am happy to.
    Senator Landrieu. Would you check that? And if you have any 
question about the validity of that I would like to hear 
directly from the Sierra Club and why you will not acknowledge 
that. Because the percentage of oil that is spilled from 
pipelines and the rigs is less, according to my data, than one-
tenth of 1 percent--no, one one-thousandth of 1 percent. I want 
to say that again. Naturally, by nature, if no human ever 
touched or swam in the ocean or fished one fish out of it, 43 
million gallons of oil will seep naturally into the Gulf. Yet, 
with all the human activity, to create the lights that turn 
this room on, the energy that keeps this great country moving, 
we spill less than one-tenth--one one-thousandth of the amount 
of the oil.
    So Mr. Chairman, I have to insist that the Sierra Club get 
the facts straight, not just for your members, but for the 
whole country.
    Now, No. 2, I would like to ask, Ms. McKeithen, if you 
would describe--and I only have a minute or two--why you think 
that our process of competition for revenues in Louisiana, why 
our system is superior to the Federal system? And you may not 
know all the details of the Federal system, and if you do not 
that is fine. But again, for the record, say how you think the 
Louisiana system encourages competition, makes sure that the 
taxpayers get a good return for the resources that they own, 
and that the companies are also encouraged to continue the 
    Ms. McKeithen. Thank you, Senator.
    Well, it is market-driven. We let the market do the work. 
We have tract nominations, limited to 2,500-acre tracts, and 
they are nominated so everybody is on notice for 60 days. We 
have public advertising about what tracts are being nominated 
by industry for public bid. That way, as I said earlier, if 
another company has an interest in that particular tract, they 
are on notice that somebody else does, too. That promotes 
    Then I think it increases because we have bidding, 
competitive bidding, on our royalty, on our bonus and our 
rentals. It increases--the market increases our price. And I do 
think that that is superior, as evidenced by the common 
reservoirs. Just a sampling that I gave in my written 
testimony, we have four common reservoirs, recent ones, where 
we actually--there is no difference in depth appreciable.
    So I understand the concerns as you go deeper. There may be 
some reasons for some adjustments as you go deeper, but at the 
3-mile mark: common pools. The Federal Government we know is 
getting no more than 16.7 percent. We are getting in those 
pools--if they are older leases, it would be less than that, 
but we are getting 21 percent on two of them, 22 percent on one 
of them, and 23 percent on the fourth one. That is just a 
    We are averaging 21.8, I think--I can't tell you the exact 
number, but it is in my testimony--on our offshore leases.
    Senator Landrieu. Mr. Chairman, considering that we have an 
extraordinary deficit and rising--although the Federal deficit 
has been coming down, the debt relative to the gross national 
product and the debt we are carrying in this country is tough, 
and we have got a challenge by the President to balance our 
budget and we would like to help do that. One way is to make 
sure that this system is not only transparent and accountable, 
but that the market is driving it and that the companies are 
being treated fairly in the sense that they have a return on 
their investment, but the taxpayers can feel like they are 
getting a good bargain, too.
    I would like to suggest that this committee pursue more 
vigorously this, not only reform of MMS, but look to what 
Texas, Louisiana, and Alaska, to get best practices for maybe 
how we shape MMS, because these moneys can come for good uses 
to the Federal treasury. Obviously, we are directing most of 
ours to save our wetlands.
    But I want to remind this committee that children are sent 
to college with these revenues, roads are built with these 
revenues, and jobs are created with these revenues. So leaving 
something on the table or underneath the water just because we 
do not want to spend the time to figure out how to do it better 
is not what this Senator would suggest.
    My time is up, but I have additional questions and I will 
submit them for the record. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Let me just ask a few other questions and then we will 
finish the hearing. Let me ask, Mr. Manuel, about the Sierra 
Club position on the development of alternative energy on the 
Outer Continental Shelf. I think Secretary Allred pointed out 
that is a new authority they have in their Department. Is it 
your view that we should go forward with that or not? What is 
the position of the Sierra Club?
    Mr. Manuel. I think our general position on alternative 
energy off our coasts is that as long as they follow NEPA, we 
do not have any opposition to the siting of alternative sources 
of energy off of our coasts.
    The Chairman. So additional wind farms off the coast, if 
they are put there in conformity with NEPA requirements, are 
acceptable, from your perspective?
    Mr. Manuel. Yes, from our perspective, they are not as 
hazardous as certainly offshore drilling for oil and gas. So 
again, as long as they abide by NEPA, we do not oppose those 
projects generally.
    The Chairman. Let me ask Secretary Allred a couple more 
questions here. In the 2005 energy bill we put a directive in 
there to provide deepwater royalty relief. I think we did that 
over the objection of the administration, that is my 
recollection. Given the level of industry interest in the area, 
does the administration have a position as to whether deepwater 
relief is still warranted as an incentive to drilling in that 
    Mr. Allred. Mr. Chairman, as you are aware, we try to look 
at it on a lease--or a sale-by-sale basis. And that is one of 
the questions we will look at for the next sale--whether or not 
we think that market conditions and the difficulty involved 
should or would dictate that we give some royalty relief. But 
at this point in time, the Secretary has not made any decision.
    The Chairman. I assume that is still--that is also your 
position--we also had a provision in there regarding royalty 
relief in deep gas, for deep gas wells in shallow water; is 
that your position with regard to that as well?
    Mr. Allred. Mr. Chairman, we would have the same position 
there, that we need to look at it on, not a well-by-well basis, 
but a lease-by-lease, given the market conditions that are 
projected to exist during that lease.
    The Chairman. Let me just ask Mr. Nichols and Mr. Siegele 
if they have any more information for us. I think, Mr. Siegele, 
you indicated that you are still in negotiations with the 
Department of the Interior with regard to the leases that you 
have that were issued in 1998 and 1999 and trying to settle up 
on royalty issues there; is that a correct understanding on my 
    Mr. Siegele. That is correct.
    The Chairman. Do either of you know whether the other 
leaseholders that have those leases are still pursuing a 
settlement of that, or do we have a group that are just 
adamantly opposed to any change in the agreement? Do either of 
you know? Mr. Nichols, do you have any information?
    Mr. Nichols. Well, we too are in conversations with the 
Department of the Interior, as recently as yesterday in fact. 
As to what other companies are doing, I do not know.
    Mr. Siegele. I do not know either.
    The Chairman. Well, we had a hearing on this issue last 
week, or at least partially on this issue, with Secretary 
Allred, and obviously it is a major issue of concern here in 
the Congress. As I am sure you have noticed, the activity on 
the House side has been focused on this as well. So we are 
going to have to make some decisions on it here in the fairly 
near future.
    That is all the questions that I had at this point. Senator 
Landrieu, did you have another question?
    Senator Landrieu. Just one.
    Ms. Jackson, thank you very much for coming to testify. 
Your Senators, both Senator Lautenberg and Senator Menendez, 
have been very vocal on this subject, and of course the New 
Jersey position is not to drill. So I am going to address this 
request to you and to Governor Corzine, and I will copy them as 
well so they will know. But if New Jersey is not interested in 
drilling off the coast, since you are a large State, not in 
land mass but population-wise, and you consume a tremendous 
amount of energy per capita, not just your residential 
consumption, but you are also a very strong industrial State 
like we are, so we can appreciate that, what is the plan that 
New Jersey has to be more energy sufficient?
    Are you supporting nuclear? Are you supporting wind farms 
in your State? What exactly is New Jersey prepared to do to 
contribute to the electricity grid and the power grid of the 
    Ms. Jackson. Thank you, Senator. New Jersey is in the 
process and by October will have developed its first energy 
master plan in well over a decade. And Governor Corzine has 
stressed from the beginning of his term and before he was 
Governor that it was vitally important for New Jersey, both 
from an economic growth perspective as well as an environmental 
perspective, for a myriad of reasons, to address the issue of 
energy generation and use in our State.
    A couple of options are clear. Governor Corzine personally 
supports nuclear power. He has been very vocal about that. Just 
recently--actually, it has been almost 6 months now, but we 
concluded a blue ribbon task force on offshore wind. Wind 
resources in New Jersey are, unfortunately for us, almost 
entirely located offshore. So that means higher costs, but it 
is also certainly not something that we are willing to walk 
away from. And I am very hopeful that we will be able to put 
some resources into doing the environmental studies to 
determine where it is best, in terms of other offshore coast, 
for wind. And we look forward to MMS's work to allow us to move 
forward with permitting and licensing there.
    I think, for a variety of reasons, we have done a lot of 
work in New Jersey to move our portfolio standards, not just 
toward renewable, but toward generation for our coal plants 
that--until greenhouse gases, which is our latest challenge--
are well controlled. And we have quite a bit of generation from 
nuclear as well.
    So while I do not have the answer yet--and I am happy to 
give you, through the chair, more information, Senator--I think 
we do recognize that we have to plan and make policy decisions 
based on a realistic plan for New Jersey.
    Senator Landrieu. I appreciate that, and I really do 
appreciate your forthrightness, because I plan to write a 
letter to every Governor of every State in the Union, 
particularly the coastal States, to ask them, if they are not 
for drilling oil and gas, what are they for?
    Because I want to show a chart, for the record. This is 
what the gas grid looks now. The gas that comes to the 
Northeast, as you can see, comes basically from the Gulf of 
Mexico, which is why we are proud of the drilling that we do 
for the country, proud to lay these pipelines, because we think 
that America does well when it has reasonable prices for energy 
so that we can compete, protect our troops in Iraq, and lead 
the world in almost every area.
    But as you can see where this gas goes, primarily to the 
Northeast--and the only other place it comes from is Alaska. So 
I am going to ask the Governors--because we are happy to shut 
these pipelines down about right there, and we may decide that 
that is what we want to do until the Northeast figures out what 
they can contribute to this grid. And if you want to put 
windmills in every place offshore, that is fine; build more 
nuclear power plants, that is great; make sure that no cars can 
run on the streets unless they are electric cars or whatever, 
but every part of this country has to do something, and we are 
going to do better conserving. And we recognize that we are not 
doing what we need to do in Louisiana and the Gulf Coast to 
conserve. We do not have very efficient plants. We want to 
tighten that up.
    We have wind also on the Gulf that we can contribute. We 
believe we have options for more solar power. We have a lot of 
sunlight in the South and a lot of heat, and if we can figure 
out how to get that going to the grid--but, Mr. Chairman, I 
think it is about time that every Governor in every region 
answer the call to energy independence, because the goal will 
not be met until every Governor and every legislature figure 
out their plan. Maybe Louisiana's plan, Mr. Chairman, is 
different than others, but everybody should have a plan, and I 
would like to get that discussion started in the country.
    Thank you.
    The Chairman. Thank you very much.
    Let me just advise any staff for members that if they have 
additional statements or questions they want to put in the 
record, please do that by the close of business tomorrow.
    Again, thank you all for being here. Thank you very much 
for your testimony.
    [Whereupon, at 11:39 a.m., the hearing was adjourned.]


                   Responses to Additional Questions


      Response of J. Larry Nichols to Question From Senator Wyden

    Question 1. You stated at the hearing that your company was not 
involved in Santa Fe Snyder v. Norton, the 5th U.S. Circuit Court of 
Appeals decision against the Interior Department on the subject of 
price thresholds by lease as compared to field. However, Devon Energy 
announced in May 2000 that it was acquiring Santa Fe Snyder Corp. Santa 
Fe Snyder sued the Interior Department later that year. Subsequent 
court records listed Devon Energy and Santa Fe Snyder as plaintiffs 
when the district court ruled in 2003 and the circuit court ruled in 
2004. Please explain how Devon Energy was not involved in the lawsuit.
    Answer. The Santa Fe Snyder v. Norton case was filed by Santa Fe 
Snyder prior to the merger of that company into Devon Energy 
Corporation. It is true that Devon became a named party in that case as 
a result of the merger.
    The Santa Fe Snyder case did involve an issue concerning the 
interpretation of the Deepwater Royalty Relief Act, but the issue in 
that case was whether the Department of the Interior could put a 
restriction on a qualifying lease that royalty relief would only be 
available if the production from that lease was from a field designated 
after the date of the lease issue. It did not address the issue of 
price thresholds.
    Although Devon by merger was a party to the Santa Fe Snyder case, 
Devon is not a party in the Kerr McGee v. Burton case that is currently 
pending in the Western District Court of Louisiana. That case is 
addressing the issue of price thresholds.

    Responses of J. Larry Nichols to Questions From Senator Bingaman

    Question 1. Jack Field--When do you expect the resources in the 
Jack Field to be produced? Is additional infrastructure needed?
    Answer. First production from the Jack Field could be seen between 
2011 and 2013 depending on current development evaluation work and 
potential future schedules being met. Significant new infrastructure 
will be required.
    With discovery in 2004, we and our partners are currently 
evaluating development scenarios. As is explained more fully under 
Question 5 and its attachment, significant time between now and 
potential full development will be required for geoscience, 
engineering, development and complex infrastructure construction 
operations for both Jack and other discoveries (such as St. Malo) in 
the area. While no specific development plan decision has yet been 
made, a stand-alone project could result in total costs including 
infrastructure exceeding several billion dollars.
    Question 2. Deep Water Royalties--Both of your companies hold 1998 
and 1999 OCS leases that do not contain price thresholds for royalty 
relief. Do you anticipate entering into a settlement with the Interior 
Department to make these price thresholds applicable to production 
under these leases? Why or why not?
    Answer. The price threshold issue can and should be resolved. We 
have been actively pursuing an acceptable agreement with the Interior 
Department's Minerals Management Service since mid-2006.
    The January 25 hearing provided a valuable opportunity for senators 
to perhaps better understand the contract sanctity and complexity 
elements of this matter. As I pointed out, Devon Energy acquired its 
1998-9 leases as a result of corporate mergers, with no reason to 
believe at the time that these leases would be questioned or that we 
would be asked to ``renegotiate'' them. So, the challenge has been to 
find a way of putting the threshold matter behind us in a way that does 
not totally violate contracts or disrupt the very successful US 
offshore leasing program.
    We will continue to work toward an agreement.
    Question 3. Infrastructure--What additional infrastructure is 
needed to use the Gulf of Mexico resources that will be made available 
under the Gulf of Mexico Energy Security Act? What is the time frame 
for constructing it?
    Answer. Of course we and other companies must first obtain leases 
and then explore for the resources we believe may be available in areas 
designated under the Gulf of Mexico Energy Security Act. The results of 
that work over several years will allow us to better answer this 
question, including whether any early discoveries will be close enough 
to, and there is ability to put initial production through, the 
existing Independence Hub that will collect natural gas from leases in 
the original Sale 181 area.
    If we assume significant exploration success, we may be able to use 
the Independence Hub (a collecting point for 10 fields of some 15 wells 
each over an area with a radius of 30 miles and a 130-mile pipeline 
connection to shore) as a model. We might also assume similar discovery 
rates, with another 2-to-3 such hubs.
    The design, approval, permitting and construction for each hub 
could take 3 years once enough discoveries were made to justify 
development. The amount of time from leasing to hydrocarbon production 
could be 5-7 years, depending availability of rigs capable of drilling 
in water depths greater than 8,000 feet. Some of the discoveries 
currently dedicated to the Independence Hub were made on leases 
acquired in 2001--6 years before initial production that is expected 
later this year. Since the economics of these discoveries did not 
justify ``stand alone'' development, pooling of them was necessary to 
create a commercial venture.
    Question 4. Resources--How long will it take for the new resources 
made available under the Gulf of Mexico Energy Security Act to come 
    Answer. The answer to this question depends in large measure on the 
leasing schedule and the exploration success that follows.
    First production could be seen somewhere in the 2011-2018 time 
period, perhaps earlier if leasing occurs quickly and significant 
discoveries are made close to, and are able to have production put 
through, the Independence Hub.
    Depending on the specific location and size of the new resource, 
first production may be brought on line between three and ten years 
from the time leases are awarded. On the low end of the range would be 
new, smaller-size, resources discovered in close proximity to existing 
infrastructure (subsea tie-backs). Larger resource discoveries not 
close to existing infrastructure could be producing in five to ten 
years from the time leases are awarded.
    Question 5. Diligent Development--Can you help us understand why 
there are 33 million acres of the Federal OCS that are under lease but 
that are not producing?
    Answer. Successful oil and gas exploration, development and 
production must include significant inventories of leased-but-not- (or 
not yet) producing acreage at any given time. (This is both normal and 
necessary as the attached paper more fully details.)
    In summary, when companies purchase leases at an OCS lease sale, 
those leases are in various stages of technical maturity. In some cases 
enough technical work has been done to define a ``drillable'' prospect. 
If such a lease is awarded, it may be drilled within a year of 
acquisition if a drilling rig is available.
    Most leases, however, need additional technical work (seismic, 
geologic interpretation, engineering, etc.) to refine drillable 
prospects. Many times a lease is ``condemned'' by additional work.
    Very deep drilling targets combined with sub-salt objectives create 
very high capital exposures. Shelf wells now exceed $50-million and 
deepwater wells commonly exceed $100-million. Seismic image refinement 
to lower the risk of drilling these expensive wells can cost millions 
of dollars and take up to two years to complete. Since this technology 
investment is made once the lease is acquired, it adds considerable 
time to the process of creating a drill-ready prospect. In addition, 
the process also requires that several blocks be leased to refine a 
prospect; six-to-ten blocks may be secured to refine a drilling 
location on a single lease. Non-prospective leases would be turned back 
to the Minerals Management Service or allowed to expire and put up for 
lease in a future lease sale. Historically we see about 25 percent of 
leases bought in lease sales drilled in their primary term.
    Some acreage is acquired ``on trend'' with other discoveries. This 
purchase of trend acreage is highly speculative and considerable 
uncertainty exists on perhaps \1/2\-to-\2/3\ of the blocks leased. If 
this uncertainty cannot be overcome with new seismic, geologic or 
engineering data, the block may not be drilled. Industry therefore is 
risking considerable money competing for leases that may not be 
drillable when all the data is in and interpreted. Lease terms allow 
companies to generate a portfolio of opportunities out of which the 
best prospects are chosen for drilling. In addition, the other factors 
described in previous question responses and the attachment (including 
permitting time, rig availability, facility design and engineering, 
etc.) add to the years, or perhaps a decade or more, that leases may 
not have production from them.
    Question 6. Royalty Rates--What royalty rates do you pay under 
state oil and gas leases? What rates do you pay for oil and gas 
produced on private lands?
    Answer. There is significant variation among royalty rates paid on 
oil and gas production from state and private lands due to many 
factors. The average for state royalty rates is the standard \1/8\ 
(12.5%) royalty with a few instances of higher rates. Similarly, the 
average rate for fee owners is 12.5%. However, due to varying terms of 
specific leases, there are some rates that are slightly higher for 
owners of private lands. We also do have cases of specific leases with 
lower rates.
      Responses of Paul Siegele to Questions From Senator Bingaman

    Question 1. Jack Field--When do you expect the resources in the 
Jack Field to be produced? Is additional infrastructure needed?
    Answer. We cannot at this time state when the resources in the Jack 
Field will be produced. Additional infrastructure is needed before 
production can occur. Most significantly, a new 90-mile deepwater 
pipeline will likely need to be constructed.
    Question 2. Deep Water Royalties--Both of your companies hold 1998 
and 1999 OCS leases that do not contain price thresholds for royalty 
relief. Do you anticipate entering into a settlement with the Interior 
Department to make these price thresholds applicable to production 
under these leases? Why or why not?
    Answer. We remain committed to negotiated settlement of the price 
threshold issue and are looking for a mutually satisfactory solution 
for all parties. We have had a series of discussions with Department of 
the Interior (``DOI'') officials covering a range of options, and we 
have submitted a proposal for resolution of the issue. There are many 
details to work out, but we remain hopefully that we will reach 
agreement with our lessor the DOI.
    Question 3. Infrastructure--What additional infrastructure is 
needed to use the Gulf of Mexico resources that will be made available 
under the Gulf of Mexico Energy Security Act? What is the time frame 
for constructing it?
    Answer. New pipelines and production systems will likely be needed 
to produce the resources that may be found in the new areas made 
available for leasing by the GOM Energy Security Act. Based on our 
experience from other GOM locations, exploratory drilling could begin 
within a year or two after the next lease sale occurs. If oil or gas is 
discovered in commercial quantities, construction of the infrastructure 
necessary for production would take six or seven or more years beyond 
    Question 4. Resources--How long will it take for the new resources 
made available under the Gulf of Mexico Energy Security Act to come 
    Answer. Based on our experience from other GOM locations, it can 
take a decade or more to bring new resources online in previously 
unexplored areas of the Gulf of Mexico.
    Question 5. Diligent Development--Can you help us understand why 
there are 33 million acres of the Federal OCS that are under lease but 
that are not producing?
    Answer. A successful exploration program in a geologically risky 
area like the deepwater Gulf of Mexico requires a large inventory of 
prospects from which to high-grade the best drilling opportunities. The 
leases are small, and it typically takes several leases to secure a 
prospect. If a company is unsuccessful in securing an entire prospect 
in the lease-bid process, the company must enter into a partnership 
with the other companies that acquired leases in the prospect before 
drilling can occur. Prospects are often secured with immature seismic 
imaging, and it can take years to technically mature the prospect 
through additional seismic work. Negative drilling results can decrease 
the attractiveness of a prospect over time, and many leases are 
returned to the DOI undrilled if the prospects are too commercially 
risky to justify the costs of proceeding.
    Question 6. Royalty Rates--What royalty rates do you pay under 
state oil and gas leases? What rates do you pay for oil and gas 
produced on private lands?
    Answer. For the major portion of its state and private oil and gas 
leases, Chevron's royalty rates are \1/8\, \3/16\, or \1/6\. In some 
anomalous cases, Chevron's royalty rates are lower than \1/8\ or higher 
than \1/6\. Generally, the variances occur because of circumstances 
particular to each lease, such as the era in which a lease was issued, 
the location of the lands leased, or other factors affecting the 
valuation of the oil and gas rights provided by the lease.

    [Responses to the following questions were not received at 
the time the hearing went to press.]

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                  Washington, DC, February 1, 2007.
Hon. C. Stephen Allred,
Assistant Secretary for Land and Minerals Management, Department of the 
        Interior, Washington, DC.
    Dear Secretary Allred: I would like to take this opportunity to 
thank you for appearing before the Senate Committee on Energy and 
Natural Resources on Thursday, January 25, 2007 to give testimony on 
issues relating to oil and gas resources on the Outer Continental Shelf 
and areas available for leasing in the Gulf or Mexico.
    I am enclosing a list of questions which have been submitted for 
the record. If possible, please respond to these questions by Thursday, 
February 15, 2007.
                                             Jeff Bingaman,

                    Questions From Senator Bingaman

    Question 1. Royalty Rate--Earlier this month, the Administration 
announced that the royalty rate for certain offshore oil and gas leases 
would be increased to 16\2/3\ percent.

   Exactly which leases does this apply to?
   If 16\2/3\ percent is the appropriate level of royalty, 
        shouldn't it be the operative royalty rate for existing leases 
        as well?

     Is there any opportunity to make this applicable to 
            existing leases?
     Does the Secretary have discretion to increase the rate 
            for existing leases? Are they subject to renewal and 
            revision of lease terms?

   I understand that the State of Louisiana gets a royalty rate 
        of over 21 percent for oil and gas produced in State waters. As 
        a matter of policy, do you think 16\2/3\ percent is the correct 
        royalty rate to charge in adjacent federal waters?

    Question 2. Bidding Systems--The Outer Continental Shelf Lands Act 
authorizes the Secretary to use several different bidding systems 
including a variable royalty bidding system for OCS lease sales. Please 
describe how such a variable royalty system would work. Has the 
Secretary considered using such a system? Has the Department done any 
analysis of the revenue impacts of the use of such a system? If so, 
please provide.
    Question 3. Diligent Development--Do you think we need to change 
federal law or policy to require more diligent development of the 33 
million acres of the Federal OCS that are under lease but not being 
    Question 4. Deep Water Negotiations--The Department has entered 
into six settlement agreements with respect to these 1998 and 1999 
leases, that I understand cover approximately 20 percent of the 
expected production under the 1998 and 1999 leases. How many additional 
settlement agreements do you think you will be able to negotiate'? How 
much production will be covered?
    Question 5. Deep Water Royalty Relief--An additional directive to 
provide deep water royalty relief was included In the Energy Policy Act 
of 2005. Given the anticipated increase in production from deep water, 
do you have estimates of impacts royalty collections resulting from 
these provisions?

   Given the level of industry interest in this area, is deep 
        water relief still warranted as an incentive to drill?
   Am I correct in my recollection that the Administration did 
        not support inclusion of this provision in EPAct?

    Question 6. Deep Gas Royalty Relief--The Energy Policy Act also 
included royalty relief for deep gas in shallow water. What are the 
estimated revenue impacts from this provisions? Do you think royalty 
relief is warranted as an incentive to drill this resource? Am I 
correct in my recollection that the Administration also did not support 
this provision's inclusion in EPAct?

                      Questions From Senator Wyden

    Bobby Maxwell, a former audit manager at the Minerals Management 
Service, on Jan. 23 won his False Claims Act lawsuit against the Ken-
McGee Oil and Gas Corp. before a federal district court jury in Denver. 
The jury concluded, as had Maxwell, that Kerr-McGee underpaid the 
government more than $7.5 million in royalties. Maxwell's superiors at 
MMS told him not to pursue the case on the job; and when he pursued it 
privately through his suit, his job was eliminated. During today's 
hearing, MMS issued a press release regarding this jury decision (the 
release is now posted on the MMS Web site) in which it continued to 
side with Ken-McGee against its former auditor. ``The Minerals 
Management Service maintains its original position that Kerr-McGee paid 
the royalties it owed to the U.S. government,'' the release stated.
    Question 1. Why did the Interior Department choose not to join 
Maxwell's suit?
    Question 2. Specifically who at the Interior Department decided not 
to join the suit, and when was that decision made?
    Question 3. Did the Justice Department make a recommendation 
regarding the suit, and if so, specifically who at Justice and Interior 
communicated on the subject?
    Question 4. At any time did the Interior Department advise the 
Justice Department against joining the suit, and if so, specifically 
who at Interior made that recommendation and to whom at Justice was it