[Senate Hearing 110-10]
[From the U.S. Government Printing Office]
S. Hrg. 110-10
OIL AND GAS RESERVES ON THE
OUTER CONTINENTAL SHELF
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
RECEIVE TESTIMONY ON OIL AND GAS RESOURCES ON THE OUTER CONTINENTAL
SHELF AND AREAS AVAILABLE FOR LEASING IN THE GULF OF MEXICO
JANUARY 25, 2007
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Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
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
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
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
OIL AND GAS RESERVES ON THE OUTER CONTINENTAL SHELF
THURSDAY, JANUARY 25, 2007
Committee on Energy and Natural Resources,
The committee met, pursuant to notice, at 9:45 a.m., in
room SD-366, Dirksen Senate Office Building, Hon. Jeff
Bingaman, chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN,
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.
STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR
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
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
STATEMENT OF C. STEPHEN ALLRED, ASSISTANT
SECRETARY FOR LAND AND MINERALS MANAGEMENT, DEPARTMENT OF THE
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
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
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
OCS ROLE IN NATION'S ENERGY PORTFOLIO
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
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
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
\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
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.
RENEWABLES: ALTERNATIVE ENERGY ON THE OUTER CONTINENTAL SHELF
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.
STATEMENT OF MARJORIE A. MCKEITHEN, ASSISTANT SECRETARY, OFFICE
OF MINERAL RESOURCES, DEPARTMENT OF NATURAL RESOURCES, STATE OF
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
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: HEART OF AMERICA'S ENERGY COAST
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.
LOUISIANA'S INFRASTRUCTURE: PLANNING FOR THE IMPACT
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.
AMERICA'S WETLAND: PRODUCTION AND PROTECTION CAN CO-EXIST
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
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.
LOUISIANA: MANAGING HER MINERAL ASSETS
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
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
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.
STATEMENT OF LISA P. JACKSON, COMMISSIONER, NEW JERSEY
DEPARTMENT OF ENVIRONMENTAL PROTECTION
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
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
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
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
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
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.
STATEMENT OF J. LARRY NICHOLS, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, DEVON ENERGY CORPORATION
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
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
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
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
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
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.
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
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.
STATEMENT OF ATHAN MANUEL, DIRECTOR, LANDS PROTECTION PROGRAM,
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
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.
NEW OFFSHORE 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
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
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.
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,
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.
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.
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.
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
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
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
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
\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.
``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
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 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,
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
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.
STATEMENT OF PAUL K. SIEGELE, VICE PRESIDENT, DEEPWATER
EXPLORATION AND PROJECTS, CHEVRON NORTH AMERICA EXPLORATION AND
PRODUCTION COMPANY, CHEVRON U.S.A. INC.
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
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
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.
INTRODUCTION: ENERGY SECURITY AND GULF OF MEXICO DEEPWATER EXPLORATION
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'S PARTICIPATION IN GULF OF MEXICO DEEPWATER EXPLORATION
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
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
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-
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. 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.
STATEMENT OF HON. RON WYDEN, U.S. SENATOR
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
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
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.
STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR
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.
STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR
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
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
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. 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
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.
STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR
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
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
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
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
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
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.
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
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
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.]
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.
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
Is there any opportunity to make this applicable to
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,
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
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
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