[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
OFFSHORE DRILLING:
INDUSTRY PERSPECTIVES
=======================================================================
OVERSIGHT HEARING
before the
COMMITTEE ON NATURAL RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
Wednesday, February 25, 2009
__________
Serial No. 111-4
__________
Printed for the use of the Committee on Natural Resources
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index.html
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COMMITTEE ON NATURAL RESOURCES
NICK J. RAHALL, II, West Virginia, Chairman
DOC HASTINGS, Washington, Ranking Republican Member
Dale E. Kildee, Michigan Don Young, Alaska
Eni F.H. Faleomavaega, American Elton Gallegly, California
Samoa John J. Duncan, Jr., Tennessee
Neil Abercrombie, Hawaii Jeff Flake, Arizona
Frank Pallone, Jr., New Jersey Henry E. Brown, Jr., South
Grace F. Napolitano, California Carolina
Rush D. Holt, New Jersey Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona Louie Gohmert, Texas
Madeleine Z. Bordallo, Guam Rob Bishop, Utah
Jim Costa, California Bill Shuster, Pennsylvania
Dan Boren, Oklahoma Doug Lamborn, Colorado
Gregorio Sablan, Northern Marianas Adrian Smith, Nebraska
Martin T. Heinrich, New Mexico Robert J. Wittman, Virginia
George Miller, California Paul C. Broun, Georgia
Edward J. Markey, Massachusetts John Fleming, Louisiana
Peter A. DeFazio, Oregon Mike Coffman, Colorado
Maurice D. Hinchey, New York Jason Chaffetz, Utah
Donna M. Christensen, Virgin Cynthia M. Lummis, Wyoming
Islands Tom McClintock, California
Diana DeGette, Colorado Bill Cassidy, Louisiana
Ron Kind, Wisconsin
Lois Capps, California
Jay Inslee, Washington
Joe Baca, California
Stephanie Herseth Sandlin, South
Dakota
John P. Sarbanes, Maryland
Carol Shea-Porter, New Hampshire
Niki Tsongas, Massachusetts
Frank Kratovil, Jr., Maryland
Pedro R. Pierluisi, Puerto Rico
James H. Zoia, Chief of Staff
Rick Healy, Chief Counsel
Todd Young, Republican Chief of Staff
Lisa Pittman, Republican Chief Counsel
------
CONTENTS
----------
Page
Hearing held on Wednesday, February 25, 2009..................... 1
Statement of Members:
Capps, Hon. Lois, a Representative in Congress from the State
of California, Prepared statement of....................... 83
Hastings, Hon. Doc, a Representative in Congress from the
State of Washington........................................ 3
Prepared statement of.................................... 4
Rahall, Hon. Nick J., II, a Representative in Congress from
the State of West Virginia................................. 1
Prepared statement of.................................... 2
Statement of Witnesses:
Cejka, Tim, President, ExxonMobil Exploration Company........ 31
Prepared statement of.................................... 32
Harbert, Karen A., President & CEO, Institute for 21st
Century Energy, U.S. Chamber of Commerce................... 40
Prepared statement of.................................... 42
Luquette, Gary P., President, Chevron North America
Exploration and Production Company......................... 33
Prepared statement of.................................... 34
McKay, Lamar, Chairman and President, BP America, Inc........ 13
Prepared statement of.................................... 15
Nichols, J. Larry, Chairman and Chief Executive Officer,
Devon Energy Corporation, on behalf of the American
Petroleum Institute........................................ 22
Prepared statement of.................................... 23
Odum, Marvin E., President, Shell Oil Company................ 6
Prepared statement of.................................... 7
Additional materials supplied:
Engler, Hon. John, President and CEO, National Association of
Manufacturers, Letter submitted for the record............. 84
OVERSIGHT HEARING ON ``OFFSHORE DRILLING: INDUSTRY PERSPECTIVES''
----------
Wednesday, February 25, 2009
U.S. House of Representatives
Committee on Natural Resources
Washington, D.C.
----------
The Committee met, pursuant to call, at 10:03 a.m. in Room
1324, Longworth House Office Building, Hon. Nick J. Rahall, II,
[Chairman of the Committee] presiding.
Present: Representatives Rahall, Hastings, Napolitano,
Holt, Costa, Boren, Heinrich, DeFazio, Hinchey, DeGette, Capps,
Inslee, Sarbanes, Shea-Porter, Tsongas, Kratovil, Duncan,
Brown, McMorris Rodgers, Gohmert, Bishop, Lamborn, Smith,
Fleming, Coffman, Chaffetz and Lummis.
STATEMENT OF THE HONORABLE NICK J. RAHALL, II, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF WEST VIRGINIA
The Chairman. The Committee on Natural Resources will come
to order, please. The Committee is meeting today as part of a
series of oversight hearings aimed at examining the nation's
current offshore drilling policy, with the intention of
determining where we need to go next. Two weeks ago, Ted
Danson, Philippe Cousteau and others provided testimony to the
Committee, predominantly in opposition to expanded drilling on
the Outer Continental Shelf.
Yesterday, representatives of coastal states reminded us
that there are more than simply pro-and-con sides to this
issue. Today, rounding out the debate, we will hear from some
of the titans of America's oil and gas industry. As I have
stated repeatedly, I am not opposed to new drilling. The
transition to greater reliance on alternative sources of energy
will not happen overnight, and fossil fuels--oil and gas, and
coal--will continue to be major assets in America's energy
portfolio for the foreseeable future.
But, as was made so very clear yesterday, offshore energy
development is a complex, multisided issue. The American people
deserve to understand the risks and benefits that expanded
drilling on the OCS will bring. There are clear benefits to
offshore drilling, including jobs, tax and royalty income, and
money that we keep right here at home instead of sending it
overseas.
But the amount of additional oil that we could drill
offshore is a drop in the bucket of what we would need to
sustain our economy and meet our energy needs. Even the
American Petroleum Institute's most optimistic projections, a
best-case scenario extrapolation requiring that the entire OCS
be made available, would in 2030--in 2030--provide no more than
five percent of our total daily energy needs, and displace only
eight percent of our oil imports.
These are large volumes of oil, to be sure, but they
comprise less than half the impact of the increase in fuel
efficiency standards that Congress passed just over a year ago.
Last year's heated election-year rhetoric on this topic was not
the most productive way to move forward. I believe these
hearings are a vast improvement, and I am confident that we all
can work together toward a responsible energy policy that meets
America's needs, reduces our dependence on imports, and
protects America's important ocean resources.
I look forward to working with Members on both sides of the
aisle to ensure a clean and productive future for America's
oceans, and I want to thank Members on both sides of the aisle
who have been very attentive to these hearings, and have been
very productive in their questions and comments. I thank in
particular the witnesses we have before us today. Some have
come a long way and taken a tremendous amount of time out of
their busy schedules, and our Committee deeply appreciates your
presence.
With that, I will now recognize our Ranking Member, Mr.
Hastings.
[The prepared statement of Mr. Rahall follows:]
Statement of The Honorable Nick J. Rahall, II, Chairman,
Committee on Natural Resources
We are meeting today as part of a series of Committee oversight
hearings aimed at examining the Nation's current offshore drilling
policy with the intention of determining where we need to go next.
Two weeks ago, Ted Danson, Philippe Cousteau and others provided
testimony to the Committee predominantly in opposition to expanded
drilling on the Outer Continental Shelf. Yesterday, representatives of
coastal States reminded us that there are more than simply pro and con
sides to this issue. Today, rounding out the debate, we will hear from
some of the titans of America's oil and gas industry.
As I have stated repeatedly, I am not opposed to new drilling. The
transition to greater reliance on alternative sources of energy will
not happen overnight. And fossil fuels--oil and gas, and coal--will
continue to be major assets in America's energy portfolio for the
foreseeable future. But, as was made so very clear yesterday, offshore
energy development is a complex, multi-sided issue. The American people
deserve to understand the risks and benefits that expanded drilling on
the OCS will bring.
There are clear benefits to offshore drilling--including jobs, tax
and royalty income, and money that we keep here at home instead of
sending it overseas.
But the amount of additional oil that we could drill offshore is a
drop in the bucket of what we need to sustain our economy and meet our
energy needs. Even the American Petroleum Institute's most optimistic
projections--a best-case scenario extrapolation, requiring that the
entire OCS be made available--would, in 2030, provide no more than 5%
of our total daily energy needs, and displace only 8% of our oil
imports. These are large volumes of oil, to be sure, but they comprise
less than half the impact of the increase in fuel efficiency standards
that Congress passed just over a year ago.
Last year's heated election-year rhetoric on this topic was not the
most productive way to move forward. I believe these hearings are a
vast improvement, and I am confident that we all can work together
toward a responsible energy policy that meets America's needs, reduces
our dependence on imports and protects important ocean resources.
I look forward to working with Members on both sides of the aisle
to ensure a clean and productive future for America's oceans. I thank
the witnesses for coming today, and I now recognize our Ranking Member,
Mr. Hastings, for his opening remarks.
______
STATEMENT OF THE HONORABLE DOC HASTINGS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WASHINGTON
Mr. Hastings. Thank you, Mr. Chairman. I want to thank you
today for calling today's hearing. As you mentioned, this is
the third hearing focusing on how to address solutions for
developing our OCS resources. Today, we will finally hear from
individuals who are actively developing oil and gas resources.
Unfortunately, due to restrictions kept in place by this
Congress for nearly a generation, most of the development in
the U.S. has been restricted to just a few areas. I hope that
today we can hear from the representatives before us about what
they believe are the resources available in the OCS, how much
investment and job creation they foresee from expanded OCS
development, and how best Congress could best put in place
rules to make OCS development occur.
One of the largest questions facing Congress is what
resources are really available in the OCS? While a 2007 MMS
inventory report shows that there are billions of barrels of
oil available in the OCS, the real question is how to
responsibly develop those resources. Estimates in the Atlantic
Ocean, last surveyed in the 1970s, currently show 3.8 billion
barrels of oil and 37 trillion cubic feet of natural gas.
I have been told that if the estimates were to expand in
the same fashion in the Atlantic that the Gulf of Mexico
resources have expanded since the 1970s, then we could have
more than 18 billion barrels of oil and 89 trillion cubic feet
of gas in the Atlantic Ocean alone. These resources are a
significant source of American energy development, and a
tremendous opportunity to help free us from foreign and
imported oil and natural gas.
I hope that the witnesses today will give us some sense of
what they know of the resources in the areas formerly under the
Congressional moratorium. I am particularly interested in what
areas they believe are the most productive for the development,
and thus, their willingness to commit billions of their company
dollars into exploration and research in finding the resources
in the OCS.
At a time when Congress is spending hundreds of billions to
stimulate the economy, we have before us companies that are
prepared to spend billions of their own dollars to bring much-
needed job creation and infrastructure to our shores. The only
hurdle to those billions in investment has been access, which
until recently has been blocked by the Federal Government.
Although Congress acted last year to lift the moratorium on
OCS development, it will require action by the Department of
the Interior to produce a plan for that development before any
of our resources can be produced. Sadly, the Secretary of the
Interior decided to delay the plan for new leasing and
exploration on the OCS. The true effect of Secretary Salazar's
six-month delay is, in fact, a reinstatement of a ban on
drilling.
Make no mistake, this action has precisely the same result
as a moratorium, so let us call it what it truly is--a
moratorium, not a delay. Last August, the Minerals Management
Service published a draft proposal plan based on lifting the
Presidential moratorium. That was last August. That draft plan
was the first step in a long process of getting to OCS
development, a process which includes resource assessments,
impact reviews, environmental impact statements and multiple
options for public comments.
All this must be in place before we can allow companies
access to developing our resources, which will create jobs and
make the U.S. less dependent on foreign-controlled oil. The
need to move forward with the planning process is more
important than ever because the development of these resources
simply won't occur overnight.
The process of leasing, finding and producing in the OCS,
particularly deepwater OCS, is one of the most challenging
technological achievements in the world. The exploration and
development process, and permitting, has meant that it often
can take up to 10 years to develop a lease in the OCS. Now that
we have new areas open, I would like to know what areas could
be produced sooner than 10 years.
In addition, I hope for suggestions on how we could shorten
the time it takes to bring needed energy resources on line for
the American consumer. Last year, the House repeatedly
considered legislation based on the premise that companies were
taking too long in the nonproducing or expiration period of
their leases, and should instead be punished for not producing
faster.
I hope that we can examine what we could do to help speed
the process along so that, when we begin to act on OCS
development, we can see the end of the tunnel in the production
of these resources. In addition, I hope that my colleagues who
have not been as familiar with the lengthy process will hear
firsthand of the difficult procedures that must be followed
before production can occur.
Finally, Mr. Chairman, I know that I have said it before,
but OCS development isn't just about energy. It is also about
creating new American manufacturing jobs and building the
infrastructure to harness this energy. Offshore drilling has
the potential to create millions of high paying jobs throughout
each development phase, from exploration and platform
investments to production and refining.
Studies have shown that it would have the spillover effect
of creating thousands of jobs across the country in other
industries associated with offshore oil and gas production.
America is too dependent on foreign nations for energy
supplies.
We can, and should, determine the most responsible way to
develop our OCS resources, and I hope that the witnesses today
will help us determine the best course of action to accomplish
that goal. So, Mr. Chairman, I look forward to hearing from our
witnesses today.
[The prepared statement of Mr. Hastings follows:]
Statement of The Honorable Doc Hastings, Ranking Member,
Committee on Natural Resources
Mr. Chairman, I want to thank you for calling today's hearing. This
is the third hearing focusing on how to address solutions for
developing our OCS resources. Today we will finally hear from
individuals who are actively developing oil and gas resources.
Unfortunately, due to restrictions kept in place by this Congress for
nearly a generation most of the development in the U.S. has been
restricted to just a few small areas.
I hope that today we can here from the representatives before us
about what they believe are the resources available in the OCS, how
much investment and job creation they foresee from expanded OCS
development and how best Congress could put in place rules to make OCS
development occur.
RESOURCES
One of the largest questions facing Congress is what resources are
really available in the OCS. While a 2007 MMS inventory report showed
that there are billions of barrels of oil available in the OCS, the
real question is how to responsibly develop those resources.
Estimates in the Atlantic Ocean, last surveyed in the 1970's,
currently show 3.8 billion barrels of oil and 37 Trillion Cubic feet of
natural gas. I have been told that if the estimates were to expand in
the same fashion that Gulf of Mexico resources have expanded since the
1970's, then we would have more than 18 billion barrels of oil and 89
Tcf of gas in the Atlantic Ocean alone. These resources are a
significant source of American energy development and a tremendous
opportunity to free us from foreign oil and imported natural gas.
I hope that the witnesses today can give us some sense of what they
know of the resources in the areas formerly under Congressional
Moratoria. I am particularly interested in what areas they believe are
the most productive for development and their willingness to commit
billions of their companies' dollars into exploration and research in
finding the resources in the OCS.
INVESTMENT
At a time when Congress is spending hundreds of billions to
stimulate the economy, we have before us companies that are prepared to
spend billions of their own dollars to bring much needed job creation
and infrastructure to our shores. The only hurdle to those billions in
investments has been access, which until recently has been blocked by
the federal government.
Although Congress acted last year to lift the moratoria on OCS
development, it will require action by the Department of Interior to
produce a plan for that development before any of our resources can be
produced. Sadly, the Secretary of the Interior decided to delay the
plan for new leasing and exploration on the Outer Continental Shelf.
The true effect of Secretary Salazar's six month delay is a
reinstatement of a ban on drilling. Make no mistake; this action has
precisely the same result as a moratorium. So let us call it what it
truly is, a moratorium, not a delay.
Last August, the Minerals Management service published a Draft
Proposal Plan based on the lifting of the Presidential moratoria. That
DRAFT plan was the first step in a long process of getting to OCS
development, a process which includes resource assessments, impact
reviews, environmental impact statements and multiple options for
public comments.
All this must be in place before we can allow companies access to
developing our resources, which will stimulate the economy, create jobs
and make the U.S. less dependent on foreign controlled oil.
TIMELY PRODUCTION
The need to more forward with the planning process is more
important than ever because the development of these resources won't
simply occur overnight. The process of leasing, finding, and producing
in the OCS, particularly deep water OCS, is one of the most challenging
technological achievements in the world.
The exploration and development--process and permitting--has meant
that it often can take 10 years to develop a lease in the OCS. Now that
we have new areas opened, I want to know what areas could be produced
sooner than 10 years. In addition, I hope for suggestions on how we
could shorten the time it takes to bring needed energy resources online
for the American consumer.
Last year, the House repeatedly considered legislation based on the
premise that companies were spending too long in the non-producing, or
exploration, period of their leases and should instead be punished for
not producing faster. I hope that we can examine what we could do to
help speed the process along so that when we begin to act on OCS
development, we can see the end of the tunnel in the production of
those resources.
In addition, I hope that my colleagues who may not be as familiar
with the lengthy process will hear firsthand of the difficult
procedures that must be followed before production can occur.
JOBS--CLOSING
Finally, Mr. Chairman I know I have said it before but OCS
development isn't just about energy, it is also about creating new
American manufacturing jobs and building the infrastructure to harness
this energy. Offshore drilling has the potential to create millions of
high-paying jobs throughout each development phase--from exploration
and platform investments, to production and refining. Studies have
shown it would also have spill-over effects, creating thousands of jobs
across the country in other industries associated with offshore oil and
gas production.
America is too dependent on foreign nations for our energy
supplies. We can and should determine the most responsible way to
develop our OCS resources and I hope that the witnesses today will help
us determine the best course of action to accomplish that goal.
I look forward to hearing from our witnesses.
______
The Chairman. Thank you, Mr. Hastings. Let us move on with
our panel composed of the following individuals: Mr. Marvin E.
Odum, the President of Shell Oil Company; Mr. Lamar McKay, the
Chairman and President of BP America; Mr. J. Larry Nichols, the
Chairman and CEO at Devon Energy Corporation, testifying on
behalf of the American Petroleum Institute; Mr. Tim Cejka, the
President of ExxonMobil Exploration Company; Mr. Gary P.
Luquette, the President of Chevron North America Exploration
and Production Company; and Karen A. Harbert, the President and
CEO, Institute for 21st Century Energy, U.S. Chamber of
Commerce.
Lady and gentlemen, we welcome you to the Committee, and
again, appreciate your taking the time to be with us today, and
look forward to hearing your expertise and your testimony. We
do have your prepared testimony. It will be made part of the
record as if actually read. You may proceed as you wish, and in
the order that I announced, under the five-minute rule.
STATEMENT OF MARVIN E. ODUM, PRESIDENT,
SHELL OIL COMPANY
Mr. Odum. Thank you. Chairman Rahall, Ranking Member
Hastings and Committee Members, thank you for the opportunity
to be here today to talk about the critical role of the OCS in
America's energy future. I would like to just briefly summarize
my written testimony which has been submitted for the record. I
commend the Committee. With all Americans concerned about jobs
and the economy, I think this hearing is very timely.
A comprehensive energy policy is critical to our economic
recovery. As President Obama said last night, we must invest in
energy to reduce our dependence on foreign oil. I am hopeful
that Congress and the Administration will develop an energy and
environment plan that addresses today's realities. Let me
highlight just a few of those, as I see them.
First, I am concerned that our country has been lulled once
again into complacency by the drop in the price of oil. Oil is
now trading in the $30s, down from the $140 range that we saw
just last summer, but the energy challenge that dominated the
headlines and gripped households has not vanished. It is simply
hidden by the current economic slowdown.
When the economy recovers, the energy challenge will
return, and I believe it will return with a vengeance. I urge
Congress needs to anticipate this and act now. Second, I am
concerned that the debate will default to the same all-or-
nothing choices--either alternative energy and conservation, or
fossil fuels. Such a deadlock will not lead to forward
progress.
The facts are clear. Growing global demand dictates that
all sources of energy and efficiency will be needed to fuel
economic growth. Yes, policies are needed that will lead to the
commercialization of green energy sources, but we must be
realistic. The transition to this future will take time, even
under the most optimistic circumstances.
This is not about a tradeoff. It is about a transition, and
the reality is that fossil fuels will be a major source of
energy for the coming decades. The economic benefits of new oil
and gas production simply cannot be overlooked, especially in
the difficult circumstances that we face today. Producing more
of our own energy will create jobs and fuel economic recovery.
It will keep investment dollars here rather than exporting
trillions of dollars to pay for imported oil. It will increase
energy security, and it will generate significant new revenues
for Federal, state and local governments.
Offshore development is a critical part of a comprehensive
U.S. energy policy. Our nation should not return to a blanket
moratorium. A moratorium, in my mind, is neither a strategy,
nor a solution. Mr. Chairman, I do not support carte blanche
offshore drilling. I agree with the need to address import
issues, such as marine sanctuaries, ``no go'' areas, ecosystems
and the management around those, states' rights and revenue
sharing.
I welcome the opportunity to work with you and Secretary
Salazar on how these concepts can work, and how we best
implement them. Access in the OCS is about more than just
holding a lease sale. A case in point is Shell's experience in
Alaska, where we are experiencing what I would call a de facto
moratorium. I think this is important because it could be an
indicator of what we may see as we open other areas for
exploration and production.
The Alaska OCS is open for leasing. The resource potential
is enormous. Shell paid the Federal Treasury over $2 billion
for leases and has made additional investments, of course, to
prepare for the exploration for oil and gas. Despite several
years of effort, we have yet to be able to drill a single
exploratory well.
We have learned firsthand several aspects of our regulatory
and legal system need to be addressed as we look at opening new
areas. The new Administration, I know, is working for better
government. In that spirit, what I am asking for is an
efficient, well-resourced and coordinated regulatory process
that functions in a timely manner.
Mr. Chairman, keeping 85 percent of our OCS off-limits
while trillions of dollars to import our energy needs go
offshore is not sound policy. We have the technology, we have
the expertise, and the OCS can be explored and developed safely
and responsibly to the great long-term benefit of this nation.
Thank you, and I look forward to addressing your questions.
[The prepared statement of Mr. Odum follows:]
Statement of Marvin E. Odum, President, Shell Oil Company
Mr. Chairman and members of the Committee,
Thank you for the opportunity to testify before the Committee. I
would like to thank Chairman Rahall for having this series of hearings
to examine the OCS and the role it can play in helping America meet the
energy challenge, and for inviting me to participate in this hearing
regarding the energy industry's perspective on the future of the U.S.
Outer Continental Shelf.
These hearings are timely as a new Congress and a new
Administration work to address the global economic recession, and our
energy and climate challenges. I believe that all of these challenges--
the economy, energy and climate change--should be addressed
holistically.
Shell's testimony today about our perspectives on the U.S. OCS will
focus on the following points:
In order to meet the energy challenge, the U.S. needs
access to more domestic oil and gas and the U.S. OCS offers a
tremendous resource, much of which is untapped. The OCS is a critical
part of the solution.
Our experience in the Gulf of Mexico and elsewhere shows
that we can produce oil and gas safely and efficiently, and our
technology is helping us produce more with a smaller environmental
footprint.
Access to more OCS energy will help fuel the economy and
provide additional stimulus to the economic recovery. It will mean jobs
and benefits to the local community and revenues to the federal
treasury. We will need more OCS oil and gas to transition to the
renewable fuels of the future.
In order to effectively access new areas, such as the
Alaska OCS, we need to fix the regulatory system to make government
work better. Federal agencies need to work together and be adequately
funded. With this and a productive partnership between government,
industries and other stakeholders, we can address concerns about
adequate safeguards for communities and ecosystems.
About Shell
Before we address these points, I would like to provide a little
background about Shell. We are an integrated oil and gas company,
dedicated to meeting ever-growing energy demands efficiently and
responsibly. Shell puts safety, sustainability, the global search for
viable new energy sources and innovative technologies at the heart of
how we do business.
We have a robust portfolio in North America that consists of
offshore and onshore exploration and production, unconventional
resource development, oil products manufacturing and distribution,
chemicals, LNG, hydrogen and renewables, including wind and biofuels.
In 2009, we expect to invest between $31 and $32 billion worldwide
to develop a broad portfolio of energies.
Three Hard Truths
At Shell, our commitment to exploring for and developing new energy
resources stems from our recognition of Three Hard Truths:
First, global demand for energy has been accelerating
and, when global economies recover, will continue to accelerate as
emerging nations grow and their citizens acquire more buying power.
Second, given this growth, existing and developing energy
sources will struggle to keep up with demand and oil and gas resources
will be needed for decades to come.
Third, increased energy use will mean increased stress on
the environment--a factor which must be addressed.
There has always been tension in the global energy system, but
those strains are becoming more acute as the world grapples with these
realities. Although the recent economic slowdown has tempered energy
demand, this is only a temporary situation. When global economies
revive and grow--especially those in China, India and other parts of
the developing world--we will once again see accelerating energy
demand. World energy demand is projected to increase by roughly 50
percent over the next 20 years and could double by 2050. To address
this demand, we will need hydrocarbons, alternatives/renewables and
significant progress in efficiency.
The United States imports more petroleum than it should and the
cost is enormous. According to the EIA:
More than 12 million barrels per day are imported, nearly
60 percent of our consumption.
Imports cost the U.S. more than $600 billion last year.
The U.S. could produce more of our own resources, rather
than having others produce theirs for us.
The choice is clear. We can continue to import increasing volumes
of oil and gas, or we can develop more of our own domestic resources.
Producing more oil and gas in our own country is a ``no lose''
proposition. It provides real economic and security benefits. With
increased domestic production, less money is exported from the US, more
money is invested in the U.S. and federal revenues increase through
royalties and taxes. This can be done in a way that provides
appropriate environmental protections based on solid science and an
understanding of ecosystems and the impact of oil and gas activities on
them.
As we move to meet the nation's energy needs, we recognize that
environmental challenges, both changes in terms of climate change and
local pollution, are increasing. We need to embrace policies that
address not only the global energy challenge but also these
environmental challenges. We can sum it up in five words: More Energy--
Carbon Dioxide Solutions. Shell supports a cap and trade program to
address CO2.
The United States needs a national climate change policy that is
built within the context of energy demand--realistically recognizing
the amount of energy that will be required to grow the economy. Human
ingenuity combined with business acumen and political will has helped
us clean up rivers, improve air quality, and make acid rain in the U.S.
history. It is the same human ingenuity that will solve the climate
piece of the challenges we face.
Fundamentally, it comes down to government taking its role in
defining a framework. We need to create a viable, efficient and
workable market; and free enterprise will innovate and solve this
problem. The energy industry has a key role to play, including working
on carbon capture and storage technology solutions. Currently, this
technology is too expensive and our country lacks a regulatory
framework to enable this technology.
Renewables and energy efficiency will play a greater role as well.
Shell is investing heavily in sustainable next generation biofuels,
including woodchips, biomass waste, and algae. We are testing new solar
technologies and have a wind business in North America. Shell foresees
strong future growth for alternative energy forms paced by:
the speed of technological development,
public and private investment capacity,
government policies, and
the affordability of energy supply.
Developing effective policies to address our energy and climate
challenges can only be possible through joint, concerted efforts
between governments, industry, consumers and other important
stakeholders.
Economic Benefits
Shell believes that addressing the Energy Challenge head-on will
result in jobs and economic benefits to the nation that can help us
recover from the current financial crisis.
The oil and gas industry is one of America's largest
employers, with employees in all 50 states.
The industry has some of the highest paying jobs in the
US, about two times the national average.
Domestic OCS oil and gas activities support other
industries as well as local economies across the nation.
The oil and gas industry makes a significant contribution
to the Federal treasury and more access will mean more revenue.
The more energy we produce in the US, the less we will
need to import from other countries.
According to the U.S. Minerals Management Service (MMS) revenues
from the OCS leasing program are the second largest federal revenue
source behind the U.S. Treasury Department. MMS collected and
distributed a record $23.4 billion to state, American Indian and
federal accounts from onshore and offshore energy production in 2008.
Employment in the energy sector can and will have a positive impact
in pushing economic recovery. A recent study commissioned by the
American Petroleum Institute showed that a substantial number of new
jobs would result from making new areas available for oil and gas
leasing. Oil and gas activities are an excellent source of employment.
The industry directly employs about two million people at an average
salary of $93,000 per year and there are an additional four million
jobs indirectly related to oil and gas activities.
Future OCS activities would produce more federal revenues.
According to a study recently released by ICF International,
development of America's oil and natural gas resources that have been
kept off-limits (both offshore and onshore) could generate more than
$1.7 trillion in government revenue, create thousands of new jobs and
enhance our nation's energy security.
A growing oil and gas sector has a positive impact on many other
sectors of the economy. A few of the many industries that would benefit
directly and indirectly from a growing oil and gas sector include iron
and steel, aviation, electronics, agriculture, construction, chemicals,
plastics, marine vessels, telecommunications, manufacturing, trucking
and transportation. Most of these industries have expressed their
support for expanded access to the OCS.
Our industry does not need funds from the stimulus package in order
to create jobs and economic growth--we need access to new oil and gas
resources.
OCS Experience: Gulf of Mexico
While Shell is committed to addressing the many facets of the
energy challenge, the focus of this testimony will address the topic of
the hearing ``Industry Perspectives on the Outer Continental Shelf.''
Our experience in the Gulf of Mexico has shown us that:
We can drill safely and efficiently with an ever-
decreasing environmental footprint.
Technology enables us to find and produce oil and gas
further from shore and at greater depths.
It can take years to develop the technology and
innovations that can result in a commercial project.
The 10-Year Lease Term is key to enabling us to explore
deeper and more challenging areas.
We have been exploring the Gulf of Mexico safely and efficiently
for decades. During that time we have developed a host of new
technologies that have enabled us to find and produce oil and gas in
ever-deeper waters, more than 8,000 feet, and at greater depths below
the sea floor. At the same time, advances in subsea equipment and
technology allow us to produce more oil and gas, from fields and wells
scattered over a wider area, through sea floor pipeline tiebacks to a
single platform. In practice, the number of producing wells one
platform can handle is limited only by onboard processing capacity. All
of this significantly minimizes the environmental footprint.
For example, our Mars tension leg platform produces about 140,000
barrels of oil and 165 million cubic feet of natural gas every day. It
produces from 34 wells: 24 direct to the platform and another 10 remote
wells producing through subsea equipment then feeding through single
dedicated pipes up into Mars' processing and export systems. By itself,
the Mars platform accounts for about 3 percent of all U.S. crude
production and 1 percent of the nation's total daily consumption.
The Gulf of Mexico remains a significant petroleum province and we
expect to achieve further success through continued sound geological
work, combined with leading-edge technology. Shell is one of the
leading deepwater producers in the Gulf. Shell-operated total gross
production in the Gulf averages more than 500,000 barrels of oil
equivalent every day.
We believe that the Gulf of Mexico, and indeed the U.S. OCS, has a
bright future. But in order for this domestic resource base to continue
to make its contribution to the U.S. economy, we will need more running
room through access to new areas in the Gulf, Alaska and elsewhere.
Environmental Record
Shell's record of preventing and minimizing oil spills in offshore
drilling and production operations is excellent. Shell has had no
significant offshore well blowouts in more than 30 years and no
significant platform spills in more than 25 years--worldwide.
That record is reflected widely across industry due to advances in
technology, such as subsea wellheads, control valves and robotics and
diligent operations. According to the National Academy of Sciences less
than 1% of hydrocarbon pollution in all U.S. waters now comes from
drilling and extraction, while natural oil seeps contribute 63%. As a
description of how diligently this is tracked and reported, Shell
routinely tracks and reports oil spills of less than a tablespoon.
There has been much discussion about oil spills associated with
strong hurricane activity in the Gulf of Mexico in recent years. As a
result of Katrina in 2005, one of the strongest hurricanes recorded in
history, Shell lost no oil from any Gulf of Mexico wells. We did spill
325 barrels of crude oil from a damaged oil storage tank on one
platform. Wind and wave action dispersed it at sea. This was the only
spill from our offshore assets that is directly attributable to this
storm. Our Mars platform was severely damaged, but held fast in 200+
mph winds and 120-foot waves.
As a result of Hurricane Ike in 2008, it is estimated that Shell
spilled 59.5 barrels of oil from a heavily damaged Pipeline Crossover
Platform. This estimate was made after underwater inspection and again,
the oil was dispersed by the elements during the hurricane. In all of
2008 Shell had about two-thirds of a barrel (about 28 gallons) spilled
from all of our offshore drilling and production assets combined.
In 2007 there were 38 spills from our drilling and producing assets
totaling only 27.24 gallons (less than 1/3 barrel). In 2006 the total
spill volume was less than one-and-a half barrels (<63 gallons). These
totals include all reportable spills down to drops of oil capable of
producing mere sheen on the water.
There has never been an oil spill caused by a well blowout from
offshore exploration and production in state or federal waters off
Alaska or Canada--over 110 wells have been drilled.
Diligent Development of Leases
There has been much talk in recent months about oil companies not
developing the leases they already have. There are some who are making
a case that this is a justification for not offering new areas for oil
and gas development. While the ``use it or lose it'' concept makes a
catchy ``bumper-sticker'' slogan, the arguments that are being made to
support it are not grounded in reality. In fact, we evaluate all of our
leases. Prior to drilling there are a number of activities that are
taken on our leases as part of our overall exploration program. These
activities include, but are not limited to, geological model building,
seismic acquisition and processing and reservoir analysis. The fact is,
most are obtained in the exploration phase and the vast majority will
not result in the finding of commercial quantities of oil and gas. This
is one of the key commercial risks inherent in this business.
Lease expirations and delay rental payments are a key component of
the offshore leasing program. The 5- and 10-year primary terms, during
which lessees must make additional ``delay rental payments'' in the
event that they do not conduct operations on a lease, provide the
lessees with the necessary time to internally ``develop'' a lease
before actual operations take place on the lease. At the end of a
primary term, a lessee can no longer maintain the lease by making delay
rental payments. At that point, it must have conducted operations in
order to maintain the lease beyond the primary term. Thus, the MMS
already has a ``use it or lose it'' system in place. Shell is a strong
proponent of this system.
When we find commercial quantities, we develop them. If we
determine that a lease is not prospective, we return it to the
government. In fact, last December we relinquished 19 lease blocks in
the Beaufort Sea to the Federal government when we determined that they
were not prospective.
Shell holds 400 federal offshore leases in the Gulf and about a
quarter of them (96) are producing. More than 80% are in deep and
ultra-deep water. Shell will continue to be an industry leader in the
Deepwater Gulf of Mexico, a frontier we pioneered more than a decade
ago. In the past five years, we have produced nearly one billion
barrels of oil in the Gulf.
Shell has been a leader in finding oil and gas in greater depths in
the Gulf of Mexico. The 10-year lease term has been essential to
allowing the development of deepwater oil and gas leases where new
technology is needed in order to economically find and produce
commercial quantities of hydrocarbons. A case in point is the Perdido
Development Project, a world-class project Shell and other participants
are undertaking in 7800 feet of water and about 200 miles south of
Galveston, Texas.
The project includes four discoveries on 10 leases in a 30-mile
area. The first leases were acquired in 1996. At the time Shell
acquired these leases, the deepest projects in the Gulf of Mexico were
in about 3,000 feet of water. We did not have the technology to develop
oil and gas resources in 7,800 feet of water depth, but we did have
faith in our ability to develop new technology that would enable
commercial development under the lease terms we were granted by the
federal government.
Around the turn of the decade Perdido is expected to yield 100,000
barrels of oil per day and 200 million cubic feet of natural gas per
day. It will be the deepest offshore oil development in the world, as
well as the deepest drilling and production facility and the deepest
subsea well (at Tobago in 9627 feet of water). I have attached a recent
Popular Science magazine article entitled ``The World's Deepest Oil
Well'' that does a good job of explaining the technical feats involved
in bringing Perdido on line.
Shell is involved in a number of near-field exploration projects
where we are able to bring leases to the production phase relatively
quickly because they are near existing development projects.
The Deimos field, in 3,000 feet of water, 130 miles south of New
Orleans, produces oil and gas from three wells tied back to Shell's
Mars platform four miles away. Deimos is a prime example of existing
infrastructure--a big platform, processing equipment and export
pipelines--expediting the delivery of energy to market. The project
moved from the go-ahead at final investment decision to first oil
production in just 15 months. Stand-alone development would have taken
at least seven years.
The Gulf of Mexico oil and gas leasing program has been extremely
successful for more than 50 years, aruably one of the most successful
leasing programs in the world. This success is based on the maintenance
of a system that provides balance, certainty and continuity to both the
companies that purchase leases and the government and taxpayers who
benefit from it. The current system provides stable lease terms for the
government and oil and gas companies.
OCS Experience in Alaska: A de facto Moratorium
In 2005, Shell was awarded leases in the Alaska OCS and we have
acquired additional OCS acreage in subsequent federal lease sales. Our
experience in Alaska has shown that:
The area potentially has tremendous offshore energy
resources that could provide a substantial benefit to the country.
Despite being issued these leases, Shell has been unable
to drill exploration wells due to legal challenges.
The current regulatory system can be inefficient and
hinder development of resources in new areas.
According to MMS, Alaska's OCS has enormous oil and gas potential
with an estimated 25 billion barrels of oil and 122 trillion cubic feet
of natural gas. Development of these resources will benefit the nation
and the state of Alaska, both economically and as a bridge to future
fuels. Shell has made a significant investment to explore and develop
these resources in a responsible way but has not yet been allowed to
take the first step. Litigation against the government has resulted in
a de facto moratorium for the Alaska OCS.
Exploring for oil and gas offshore Alaska is not new. In the 1980s,
Shell acquired federal leases and drilled seven exploratory wells in
the Beaufort Sea. Although we found oil and gas, production from these
wells was not economically viable at that time. To date there have been
a total of 30 wells drilled in the Beaufort Sea and five wells drilled
in the Chukchi. There have been over 110 wells drilled in the Canadian
and U.S. Arctic waters.
Shell returned to Alaska in 2005 and has participated in several
Federal lease sales. We have paid the Federal Treasury nearly over $2
billion for the right to lease the acreage. We currently have 434
leases in the Beaufort Sea and the Chukchi Sea. We have invested
heavily in equipment, support vessels, baseline studies, and workforce
training in order to take the first step to explore for oil and natural
gas. We have assembled what is arguably the most environmentally
sensitive and thoroughly responsible exploration plan in history.
However, as mentioned earlier, we have yet to drill a single
exploration well. There are many lawsuits challenging Federal
government actions in the Alaska OCS. Only one court in one lawsuit has
issued a ruling that stops the work. In 2007, the U.S. 9th Circuit
Court of Appeals issued an injunction against the permit MMS issued
approving Shell's plan of exploration. This injunction effectively
blocked our exploratory work in both the 2007 season and the 2008
season. After nearly 16 months, in December 2008, the court ruled and
ordered the MMS to vacate its approval of our Beaufort Sea Plan of
Exploration pending further environmental studies.
Let me stress that I fully support the permitting work and the
regulatory requirements that Congress has put in place to protect the
environment. And I am not suggesting that this process become a rubber
stamp--quite the opposite. My objective is to have a valid process that
leads to a timely decision. Endless delays and inefficiencies should
not be tolerated because it is a waste of effort and money for all
concerned, Shell and the government and the taxpayer. Congress should
consider legislative solutions that would, for example, require legal
challenges to federal permits to be resolved in a reasonable timeframe.
It should ensure that federal agencies are adequately funded so that
environmental studies and other requirements can be performed on time.
Finally, Congress should consider establishing an a pilot office in
Alaska to coordinate the regulatory activities of all the federal
agencies that address energy activities in Alaska can share resources
and work together on studies, permits and other activities regarding
these projects.
All of this uncertainty in Alaska is keeping an important resource
from the American people and is keeping benefits from the citizens of
Alaska. Let remember that a successful OCS program in Alaska will:
Create thousands of jobs in Alaskan and outside Alaska.
Generate billions of dollars of direct revenues to the
Federal treasury as well as to the state and local communities.
Extend the life of the Trans Alaska Pipeline System--a
valuable resource to Alaska and the nation.
Improve the economic justification for the Alaska Gas
Pipeline project.
We understand that we need to protect the environment and Arctic
ecosystem. Shell is ready to move forward with an exploration program
that does just that. We also need to remember that the potential energy
security benefits of the Alaska OCS are great. I urge Congress to
examine the issues raised here--the regulatory process and litigation--
that currently hinder exploration in the Alaska OCS. The same issues
will arise if and when other OCS areas are opened. It is imperative
that we address them now and address President Obama's goal of making
government work.
Key Policies Going Forward
Shell believes that there remains enormous energy potential on the
OCS. Developing those resources can have a substantial impact on the
U.S. economy and jobs, energy security, federal revenues and coastal
states and communities. Properly expanding our oil and gas development
on the OCS requires policy that:
Recognizes the resource potential and impact on the U.S.
economic recovery.
Provides access to new areas on the OCS.
Provides adequate environmental and community safeguards.
Extends OCS revenue sharing beyond the four Gulf of
Mexico coastal states.
According to the U.S. Minerals Management Service, there are 466
trillion cubic feet of natural gas and more than 96 billion barrels of
oil yet to be discovered on the Outer Continental Shelf, including
Alaska. To put that in perspective, that is enough natural gas to heat
100 million homes for 60 years and enough oil to fuel 85 million cars
for 35 years. If we are going to utilize this resource and make it work
for the American people, we need for government to take action.
Until last year, most offshore areas in the U.S. were restricted by
Congressional withdrawal. Given the sustained high energy demand in the
U.S. and globally, access to these resources under the long-respected
government lease planning program is imperative. While I believe that
much can be accomplished through that process, other issues like the
need to address the regulatory system and its vulnerability to
litigation requires more scrutiny.
Shell would like to work with Congress and regulatory agencies to
enable proper exploration and development in the OCS in areas
including:
Marine Sanctuaries and No-Go Areas
Ecosystem Based Management
OCS Revenue Sharing
State's Rights Issues
I would like to emphasize that states and communities adjacent to
offshore development will have infrastructure needs such as roads,
housing and schools for workers and their families, enhanced sea port
and air terminal facilities, greater demands for basic public services
and other expenses common to economic growth. For that reason we
encourage Congress to extend the revenue sharing made available to four
Gulf of Mexico states through the Gulf of Mexico Energy Security Act to
other states and coastal communities that have oil and gas leasing off
their coasts. Providing revenue sharing to states and local communities
with future oil and gas production off their coasts would not take
money out of the federal treasury. It would bring new money into the
federal treasury and provide an incentive for states and local
communities to support such activities.
We encourage a healthy discussion of these issues through the 5-
Year Planning process and through informative hearings like those that
are being held in this Committee. Ultimately, the government needs to
decide what areas need to be made available for leasing and under what
conditions. Those decisions need to be based on science and we need to
act quickly and decisively so that we can begin developing these new
energy sources that will enable us to meet the energy challenge and
create new jobs and revenues for the American people.
For too many years the energy and environmental debate has been
framed as an ``either-or'' and ``us-against-them'' proposition. It is
wrong to frame the OCS issue in this way. It is not a trade-off between
energy and economic value versus the environment. It is counter-
productive to pose it as these false choices. We need to come together
around the facts, reject the myths and move forward on solutions that
will fuel the economic growth.
[NOTE: The Popular Science magazine article entitled ``The World's
Deepest Oil Well'' has been retained in the Committee's official
files.]
______
The Chairman. Thank you, Mr. Odum. Mr. McKay?
STATEMENT OF LAMAR McKAY, CHAIRMAN AND PRESIDENT, BP AMERICA
Mr. McKay. Chairman Rahall, Ranking Member Hastings,
Members of the Committee, good morning. My name is Lamar McKay,
and I represent more than 33,000 people working for BP in the
United States. BP is the country's leading producer of oil and
natural gas, and the largest investor in U.S. energy
development. Our more than 13,000 service stations, most of
them locally owned and operated, are a familiar part of the
American landscape.
We are here today to support an important part of America's
energy plan: opening the Outer Continental Shelf, opening that
shelf for evaluation and exploration. This strategic policy
decision will allow the industry to invest tens of billions of
dollars to create jobs for the American people, to diversify
and expand the nation's energy supply, to generate new revenues
for Federal and state governments, and do it while preserving
the natural environment that we all enjoy.
We also understand the desire for greater efforts toward
efficiency and energy conservation, for higher mileage
automobiles, and the need to develop low-carbon fuel for
transportation. BP supports these efforts. We were the first
energy company to recognize the need to tackle climate change,
and we are active in the effort to meet the world's growing
demand for sustainable, environmentally responsible energy.
In alternatives, we are investing $8 billion over 10 years
in solar, wind and biofuels development. At the same time, we
must face certain realities. When the current economic downturn
ends, the nation's energy demands will increase once more. Even
with major investments in efficiency and new energy sources,
the Energy Department projects the U.S. will rely on fossil
fuels for its primary energy needs for decades to come.
Where will those fuels come from? As domestic U.S. energy
production has lagged in recent years, oil imports have risen.
We now depend on imported oil for about 65 percent of America's
needs. Almost alone among the producing nations of the world,
the U.S. has heretofore decided not to fully develop its
domestic hydrocarbon endowment. A commitment by Congress to
such development is one of the surest ways of diversifying,
securing and enhancing the nation's energy supply.
Some of the most potentially promising areas for
exploration lie off our shores in the OCS. Estimates of the
amount of oil and natural gas recoverable from closed areas
vary. The Interior Department estimates that there may be as
many as 30 billion barrels of oil-equivalent recoverable
reserves utilizing today's technology. There might be more.
There might be less. We can't know unless we evaluate and
explore.
Conducting low-density seismic surveys and evaluations of
the entire OCS is an indispensable first step to identifying
areas that might be suitable for eventual production. This will
allow more focused, higher-density seismic surveys to be
carried out in the most promising areas. We also support
revenue sharing with coastal states. Such arrangements have
been put in place recently in Louisiana, Texas, Mississippi and
Alabama.
Opening up new areas would also benefit the Nation as a
whole. Royalties from onshore and offshore energy production to
Federal and state governments, as well as American Indian
tribes, totaled $23.4 billion in 2008. Given similar oil
prices, those numbers would likely increase significantly if
the OCS were opened for further development. It would also
create a substantial number of good-paying American jobs.
We know that 21,000 jobs in Louisiana, with a payroll of
$1.2 billion, depend directly on OCS oil and gas production
offshore that state's Gulf Coast. Many more jobs, of course,
are indirectly tied to such activity. BP supports an all-of-
the-above energy strategy with investments across the board in
fossil fuels, as well as low-carbon alternatives, but limiting
or taxing one form of energy production while subsidizing
another is unlikely to result in a net gain for the nation's
energy supply.
BP is serious about bringing new sources of oil and gas to
the U.S. market. We are also serious about building a
sustainable, profitable, renewable energy business, one capable
of delivering the clean, affordable energy consumers want. My
company is ready to work to address the energy and
environmental needs of this nation through a bipartisan and
comprehensive energy policy. Thank you.
[The prepared statement of Mr. McKay follows:]
Statement of Lamar McKay, Chairman & President,
BP America
My name is Lamar McKay and I am the Chairman and President of BP
America.
BP appreciates the opportunity to appear before this panel and
present our views on exploring for potential new sources of oil and
natural gas in areas of the federal Outer Continental Shelf (OCS). The
needs of our country require that we explore for new domestic sources
of energy that are secure and reliable in good times and in tough
times.
I represent the 33,000 employees at BP working in the United
States. We are not only the largest oil and gas producer in the United
States, but also the company that invests in the most diverse energy
portfolio in the industry. Since 2004, we have invested more than $34
billion in the U.S. to increase existing energy sources, extend energy
supplies and develop new low-carbon technologies.
BP's investments stretch from the Gulf of Mexico to the North Slope
of Alaska and from the East Coast to the Midwest and the West Coast.
Our over 13,000 service stations--most of them locally owned and
operated--are a familiar part of the American landscape.
The company's major spending programs also touch every major
segment of the energy industry, from exploration and production of oil
and natural gas through refining and distribution of fuel products, as
well as renewables.
By heavily investing in a diverse range of energy sources--from
traditional oil and natural gas production to renewable energy
including biofuels, solar, wind and hydrogen power--BP is helping meet
America's energy needs today while moving towards a more secure energy
future.
In 2008, BP's U.S. production of liquid hydrocarbons was 538,000
bpd, about 10 percent of U.S. domestic production and the largest of
any single producer. Our gas production was over 2 Bcfd.
BP's solar business has been in operation for over 30 years and
last year had sales of 162 MW globally. This represents an increase of
29% over 2007 and expectations are there will be significant growth
through 2009.
We are major investors in wind generation and have amassed a land
portfolio capable of potentially supporting up to 20,000 megawatts (MW)
of wind generation, one of the largest positions in the country. As of
year-end 2008, BP and its partners had 1,000 MW of wind generation on-
line and expect to have an installed capacity of approximately 2,000 MW
of wind power by the end of 2010.
We are one of the largest blenders and marketers of biofuels in the
nation. Last year, BP blended over 1 billion gallons of ethanol with
gasoline. We are underwriting cutting-edge research--investing more
than $500 million over the next 10 years--in the search for a new
generation of biofuels. We believe these will contain more energy, have
less impact on the environment, and will not reduce the supply or
increase the cost of food.
Overall, we support an energy policy that promotes the development
of both traditional and non-traditional sources of energy, as well as
conservation and efficiency. At the same time, our approach has been
shaped by some stark realities about America's energy outlook.
Stark Realities
The relatively low oil and gasoline prices American consumers are
now enjoying masks the fact that our country faces tremendous energy
challenges. Years of contradictory public policies, poor market
dynamics and company decisions have combined to limit access to
resources, discourage development and constrain new investment. No
company or industry on its own is large enough or powerful enough to
change the conditions that brought us here. But energy companies,
policymakers and consumers together have roles to play in creating a
new energy future for our country.
This relationship must be shaped by the recognition that the U.S.
economy needs both to better conserve energy and to produce more energy
of every type to meet future growth. We need to invest in conventional
oil and gas. We also need to invest in renewables to begin the
transition to a lower-carbon future. However, we must all understand
that this future is many years away and that these new energy sources
will not make a large contribution to total U.S. energy supply for many
years.
This view is reflected in a 2007 study issued by The National
Petroleum Council--Facing the Hard Truths About Energy. I have
integrated its observations and conclusions below and added emphasis as
necessary:
There is no single, easy solution to the global challenges
ahead. Given the massive scale of the global energy system and
the long lead-times necessary to make material changes, actions
must be initiated now and sustained over the long term. Over
the next 25 years, the U.S. and the world face hard truths
about the global energy future:
Coal, oil, and natural gas will remain indispensable to
meeting total projected energy demand growth.
The world is not running out of energy resources, but
there are accumulating risks to continuing expansion of oil and natural
gas production from the conventional sources relied upon historically.
These risks create significant challenges to meeting projected total
energy demand.
To mitigate these risks, expansion of all economic energy
sources will be required, including coal, nuclear, biomass, other
renewables, and unconventional oil and natural gas. Each of these
sources faces significant challenges including safety, environmental,
political, or economic hurdles, and imposes infrastructure requirements
for development and delivery.
The benign energy environment we are now experiencing may not last.
Growth in the demand for energy will resume when our economy starts
growing again. The U.S. Energy Information Administration (EIA)
projects that energy demand will increase 11 percent by 2030. If
anticipated U.S. needs are combined with those of the rest of the
world, at growth rates of three percent, EIA projects that a 35 percent
expansion in global oil production will be needed. That equates to an
additional 30 million barrels of oil every day.
Finding that oil will be neither simple nor cheap. The era of
``easy oil'' may be over. New supplies are harder to find, more
difficult and more expensive to extract, and are often located in
politically unstable parts of the world. Wherever they come from,
bringing new supplies to fuel our homes, businesses and transportation
needs will require the investment of hundreds of billions of dollars.
Let me take the opportunity to put to rest a major energy myth,
namely that there is no more energy to be found here in the US.
In fact, the United States is a sleeping giant when it comes to
energy.
We have a 100-year supply of coal. There is little doubt
that, with ``clean coal'' and carbon capture technology, we could be
using a lot more coal in the coming decades to heat our homes and
recharge our electric cars.
We have huge deposits of oil shale in many of our Western
states.
We have the potential to generate much more safe, clean,
reliable electricity via nuclear energy than we are doing today.
But until technologies such as clean coal, carbon capture and
renewable sources can come on line in a major way, far and away the
greatest potential source of new domestic energy supply is the oil and
natural gas that lies off our shores.
Here in the US, we have deliberately constrained our own supply by
limiting access to promising areas for leasing, exploration and
development. American domestic oil production has fallen by around 4
million barrels per day since 1985. At the same time, demand has risen
by roughly similar amounts, so the gap must be filled by imports.
And when world demand rises--as it did recently, particularly in
China and India--it makes those imports more expensive. That accounts
in part for the dramatic rise in oil prices we experienced last summer.
A more secure and reliable source of energy closer to home is also
essential to our country's long-term economic and energy well-being. As
we have seen repeatedly since the first oil shock in 1973, wildly
spiking and plunging oil prices kill jobs. Energy drives economic
growth but few businesses--as we are seeing now--are willing to make
investments in an atmosphere of great uncertainty.
The slowing of investment--the number of operating U.S. oil rigs
has fallen to 1399, the lowest number since July 2005--presents a real
risk to our economy. Prices could rise once again when the recovery
occurs because investment may not be sufficient to offset the natural
decline in the resource base. The challenge for all of us is to not
allow this cyclical decline to create a structural loss in capacity. We
must continue to invest in new technology and infrastructure
development at the bottom of the cycle to provide continued access to
supplies.
Areas of the OCS that have historically been off-limits to
exploration can and should play a substantial role in closing this
supply gap as well as securing our economic future. It is not the
entire answer to the energy challenge we face, by any means, but the
U.S. can't fashion an answer to its energy challenge without it.
A Department of the Interior study estimates the amount of oil to
be found in areas that have been off-limits to exploration at 17.8
billion barrels. That's equal to 30 years of U.S. imports from Saudi
Arabia. The same study put natural gas reserves at 76 trillion cubic
feet, or enough to meet America's requirements for over 10 years.
These are DOI estimates. There could be more. There could also be
less. We can't know unless we are given the opportunity to lease and
explore.
The journey from access to production is a long one. A tremendous
amount of preparation as well as infrastructure, both onshore and
offshore, is required for successful development.
That's why we support a thoughtful and deliberate approach to this
issue. As a first step, we propose the acquisition of new regional 2D
seismic data in the OCS in order to identify the most prospective
regions. From there, closely spaced 2D or 3D seismic data can be
acquired to identify the best prospects in each area. Such surveys are
costly and complex to plan and implement, but vastly increase the
information content. This ``virtual drilling'' protects the environment
by providing greater accuracy in mapping deposits and reduces the need
for drilling exploratory wells.BP In the Gulf of Mexico
The track record of BP and the industry generally in the Western
and Central Gulf of Mexico (GOM) demonstrates that when areas are
opened, they can be leased, explored and developed to the highest
environmental and operational standards in the world.
Our investments in the Gulf of Mexico are a remarkable American
success story. Since 1985, oil production from the deepwater Gulf has
increased 15-fold, from 58,000 to 870,000 barrels per day, or more than
one in six barrels of oil produced in the US. It's also more than all
the oil the U.S. imported on an average day from Angola, Indonesia,
Kuwait, Libya, and Russia combined in 2007. 1
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\1\ EIA, ``US Imports By Country of Origin,'' Annual Thousand
Barrels per Day.
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We operate in water depths that exceed 1 1/2 miles--more than six
Empire State Buildings stacked one on top of another--and well depths
as great as 30,000 ft--the normal cruising altitude of a commercial
passenger jet.
Further, we have had to cope with operating temperatures and
pressures greater than any we have ever experienced. For example, a
typical military fighter jet is capable of operating in an 8 G
environment, while oil and gas drilling tools regularly experience
forces in excess of 200 Gs. Despite these challenges, industry
responded to government encouragement to invest, explore and develop
the deepwater resource base.
The dramatic rise in deep-water production in the GOM also
demonstrates an elemental truth about our business: the more we know,
the more we can produce. As knowledge and technology advances, deposits
once thought to be beyond reach or uneconomical to extract eventually
become viable.
Diligent Development of Leases
I'd like to address an issue that has received a great deal of
attention by some in Washington. The notion that the industry does not
diligently develop the oil and gas leases it currently holds. For BP,
this misperception is troubling as the leases we hold represent the
future potential for oil and gas production--that is our business.
Companies spend millions to acquire leases with very little
knowledge of their resource potential. I wish it were not so, but every
lease does not contain oil and natural gas in commercial quantities.
But, in order to determine that, we undertake extensive geologic
evaluations that extend over many years. It is through this process
that we develop the understanding, confidence and technology to drill
and develop a resource. The chart on page 18 graphically displays this
lease maturation process overlaid by a typical development timeline.
The dollars we invest in this process are similar to venture
capital for our company. We have an obligation to not only our
shareholders but also to the U.S. to spend them wisely.
I am sure you would agree that all agricultural lands are not
created equal--that is the expectation you can get the same yield of
corn in the Arizona desert as you can in the heartland of the Midwest.
So it goes with oil and gas leases. As the U.S. Department of Interior
points out, a lease does not guarantee the discovery of oil and gas.
Well success rates for onshore leases are about 10% for new areas.
While success rates on deepwater offshore leases are about 20%.
The industry has had great success in the 15% of the OCS that is
currently available for development. Since 1995, more than 750 new
exploration wells have been drilled, yielding over 100 announced
discoveries, much of which used technologies only dreamed of as little
as two decades ago. As a result of these efforts, 7 of the top 20 U.S.
oil fields are in the deep water of the Federal OCS. Since 1995,
natural gas and oil produced from the deepwater have expanded by 620
and 535 percent, respectively.
By evaluating the potential of the remaining 85% and undertaking
responsible development, we believe this success can be replicated.
The Role of Technology
The energy industry isn't usually classified as a high-tech
business, but it truly is. This technology has been instrumental in
protecting the environment. Today's offshore oil drilling technology
bears about as much resemblance to what was available in the 1960s as a
rotary dial telephone does to an iPhone.
I have already mentioned improved seismic imaging, which allows us
to locate and map deep oil and gas deposits with vastly greater
accuracy and less environmental disturbance per barrel of oil produced.
But there is much more.
For example:
With directional and extended reach drilling, we can
connect multiple wells to a single platform located miles offshore,
thus reducing or even eliminating the visual ``footprint'' of permanent
energy operations;
All offshore wells have downhole flow control valves that
shut down the well automatically if damage to the surface valves is
detected;
Blowout preventer (BOP) technology has improved
tremendously since early offshore drilling in the 1960's, and includes
redundant systems and controls.
New and improved well control techniques maintain
constant control of the fluids in the well. Sensors continually monitor
the subsurface and sea bed conditions for sudden changes in well
pressure.
We run emergency drills regularly, and all of our
platforms have contingency plans that identify procedures, response
equipment and key personnel needed for coping with oil outside
containment. Also, since Congress passed the Oil Pollution Act of 1990,
vastly greater resources are now in place to cope with ``worst case''
discharges.
The amount of oil introduced into the marine environment by oil and
gas operations has fallen dramatically since the early 1970s. In fact,
between 1991 and 1999, 35 times more oil was introduced into North
American waters by recreational boaters than by offshore oil
operations. 2
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\2\ Oil in the Sea III, Committee on Oil in the Sea: Inputs, Fates,
and Effects, National Research Council; Table 2-2 Average, Annual
Releases (1990-1999) of Petroleum by Source (in thousands of tonne).
---------------------------------------------------------------------------
A study by the National Academy of Sciences found that, worldwide,
the amount of oil introduced into the marine environment had fallen by
80 percent. Offshore oil production accounted for just four percent of
that total, even as such production increased 204 percent in the same
period.
Looking specifically at the OCS, around 1.4 million barrels of oil
per day are pumped from the OCS. According to MMS data, since 1980,
less than .001 percent, or one one-thousandth of one percent, has
escaped containment.
Loss of oil from tankers has also become far less likely than in
earlier decades, thanks to the advent of double-hulls and other safety
measures. Nevertheless, between 1971 and 2000, more oil was released
into U.S. waters as a result of tanker operations (45 percent) than
from OCS drilling (two percent). In the absence of increased domestic
production, the U.S. will have little choice but to increase the amount
of oil it receives from other sources via tankers.
For those who continue to question the safety of offshore energy
operations, I can only point to our record in the GOM. Hurricanes
Katrina, Rita, Ike and Gustav caused serious damage to oil rigs and
pipelines throughout the area and shut many of them down for a time.
But our personnel and safety systems were up to the challenge. There
were no instances of significant oil leakage or spills.
Our technology will only improve as we go forward. At the same
time, it makes strategic sense to diversify our offshore production
activities away from areas subject to regular severe weather events
such as the GOM. When domestic supply comes from a variety of areas,
geographically speaking, those vulnerabilities can be minimized or
reduced significantly.
The Role of Policy
As we look to the future, the U.S. investment climate remains
challenging. Government policy can both be a vital enabler of new
development or an unfortunate impediment to much needed investment.
Over the last several years, numerous efforts have unnecessarily
burdened viable and critical infrastructure projects; promising
development areas remain out of reach; existing manufacturing
operations have been challenged in their efforts to upgrade and expand;
and new taxes have been proposed that will discourage future energy
resource development. Furthermore, these stumbling blocks exist across
the energy profile, and are not just confined to oil and gas
activities.
Support for Renewables
Emblematic of these gaps are policy discussions concerning how to
support and fund the development of new energy resources like wind,
solar and biofuels. Not surprisingly, policymakers and consumers
generally support efforts that promote the development of renewable
energy. As reflected in our investment portfolio, BP concurs with this
sentiment. However, there is significant divergence of opinion
regarding the question of how to fund the necessary financial
incentives.
BP supports transitional incentives for wind, solar, and biofuels.
They are an important part of why the U.S. has been so successful in
developing its renewable energy sector, but we cannot support taxes
that discourage efforts to bring on other much needed energy sources
(oil and gas production). This is not a recipe for increasing America's
total energy production.
Biofuels
Similar policy concerns exist in the area of biofuels. EISA of 2007
created significant opportunities to develop and grow the contribution
of biofuels to the transportation fuels market. BP believes that
biofuels may be able to attain penetration rates of 20% or more by 2030
thus playing a significant role in meeting future transportation needs.
However, the legislation has created challenges that could in the end
create market distortions, supply disruptions and higher consumer
prices if not adequately addressed.
The implementation timetable of the RFS program is very aggressive,
creating a risk to delivery of fuel in sufficient quantities to the
markets where it is needed. Congress, while mandating biofuels
blending, did not adequately assess whether the market was prepared to
accommodate the huge storage, transportation and delivery
infrastructure requirements necessary to get the product to the
consumer. In addition, given the recent economic downturn and reduction
in gasoline demand, mandated blending levels are expected to outstrip
the ability of the market to absorb the volumes as early as 2010,
potentially threatening the integrity of the program.
BP supports accelerating research to test, evaluate and approve the
use of higher biofuel blends. Further, we support efforts to transition
incentives away from first generation biofuels to support the research,
development and deployment of advanced non-food feedstocks, conversion
technologies and fuel molecules. Similarly, policymakers should explore
how trade policy can be improved to stimulate greater worldwide
biofuels production and supply options for the US.
Climate policy
Our nation faces difficult choices as we take steps to foster
economic growth, ensure our nation's energy security and protect the
environment. Chief among these environmental concerns is that of global
climate change.
BP has long advocated for the creation of a single, mandatory U.S.
greenhouse gas emissions registry and a market-based price for carbon.
Market-based programs deliver the greatest and fastest reductions at
the least cost. Just as important, they create a level playing field,
meaning that everyone must be part of the solution and first movers
aren't placed at competitive disadvantage.
The fact that Congress has not yet addressed national climate
policy has not deterred some from trying to impose requirements as if a
national policy existed.
During the last Congress, legislation was adopted to discourage
development of Canadian oil sands--the single largest oil resource base
outside of Saudi Arabia. Additionally, a bill was introduced to prevent
the U.S. from utilizing its world leading resource position in coal for
power generation. Similarly, efforts continue to either allow or
encourage state or local jurisdictions to try and impose CO2
reduction targets on individual projects in order to make them
uncompetitive and further discourage resource development.
Why do I mention these examples? They clearly represent efforts to
limit energy development opportunities that would enhance U.S. energy
security, economic development and environmental protection. And, in
the absence of a national climate policy, these approaches will
proliferate and likely result in a piecemeal regulatory approach that
will stifle investment of all kinds.
We believe Congress needs to adopt a national climate policy that
establishes a price for carbon. This policy mechanism will allow
companies to make better investment decisions and consumers more
informed behavioral choices. To do otherwise stifles the very
technology breakthroughs and developments Congress supports.
Energy Security
Over the years, U.S. policy has, in effect, encouraged oil and gas
providers to look beyond the U.S. border to meet growing U.S. energy
demands, yet policymakers often question our reliance on foreign oil
imports. Policymakers have also implored OPEC to produce and develop
its own oil resources in order to reduce crude oil prices in the US.
The U.S. should strive to more fully develop its own resource
base--to make a greater contribution to world oil supply--otherwise we
will increasingly rely on imported energy to meet the needs of our
growing economy.
The U.S. experience in the deepwater Gulf of Mexico is instructive
in evaluating the role of policy. The development of the deepwater GOM
was no accident or coincidence. Positive federal policies, including
the Deepwater Royalty Relief Act of 1995, were instrumental in bringing
the deepwater GOM online. Since its passage, GOM deepwater production
has increased 15-fold to nearly 900,000 barrels/day.
Federal and State Governments Will Benefit
Increasing access to the OCS represents a potential highlight on
the energy horizon--enabling job creation, generating much needed
revenues for local, state and federal governments, improving the
nation's energy security, reducing the transfer of wealth and expanding
the manufacturing sector.
Our industry directly employs 1.8 million Americans, with at least
another four million indirect jobs supporting the industry. And these
are good-paying jobs. Oil and natural gas exploration and production
wages in 2006 were more than double the national average. 3
These employees are covered by comprehensive health care for which the
industry pays billions. America lost nearly 600,000 jobs last month
alone. We can and need to keep America's energy industry working to
deliver energy security for all of us.
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\3\ Numbers drawn from Energizing America: Facts for Addressing
Energy Policy, p. 30; API, 1/18/09.
---------------------------------------------------------------------------
Royalties paid to the federal government by our industry are among
its largest single sources of revenue. In FY 2008, the Interior
Department disbursed to the federal government, state treasuries and
American Indian tribes a record $23.4 billion from both onshore and
offshore energy production, including over $10 billion in bonus bids
alone to acquire leases. These revenues, of course, benefit all
Americans.
On the state level, BP believes that a revenue sharing program,
similar to that which is now in place under the Gulf of Mexico Energy
Security Act of 2006 for Louisiana and other Gulf Coast energy
producing states, is fundamental to the success of a long term OCS
leasing and development program.
Last November, the MMS announced it was disbursing $2.59 billion to
35 states as their share of federal revenues collected from energy
production within their borders, including oil and gas drilling off
their shores. Alabama received $15.8 million; Texas $21.6 million;
Louisiana $49.5 million, and California $103.4 million.
Virginia, by contrast, received just $227,154.44; Florida and South
Carolina did far less well than that, receiving just $6,298 and $277.50
respectively. North Carolina received nothing. At a time when states
are facing record budget shortfalls, these are revenues that could be
augmented significantly under an expanded OCS access program.
4
---------------------------------------------------------------------------
\4\ ``Interior's Minerals Management Service Disburses Record $23.4
Billion in FY 2008,'' press release, DOI, 11/20/08.
---------------------------------------------------------------------------
We believe that coastal economies at the local, state and regional
level will see significant, positive benefits from increased OCS
access. While it is impossible to know with precision, we can examine
the experience of other states. In Louisiana, for instance, 21,000 jobs
with an estimated payroll of $1.2 billion depend directly on oil and
gas production on the OCS. 5
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\5\ Louisiana Mid-Continent Oil and Gas Association website.
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An appropriately structured revenue sharing program designed to
benefit coastal communities should provide funds to help mitigate any
real or perceived impacts from development. With proper planning, these
communities, working with industry and government, can learn and
benefit from past experiences and best practices from other
jurisdictions.
According to an ICF International study, developing America's
domestic oil and natural gas resources in areas where leasing has been
prohibited could generate a total of more than $1.7 trillion in
government revenue, create over 160,000 new jobs and significantly
boost domestic petroleum production.
The ICF study also suggests that opening offshore and onshore areas
would lift U.S. crude oil production by as much as two million barrels
per day in 2030, offsetting nearly a fifth of the nation's imports.
Natural gas production could increase by 5.34 billion cubic feet per
day, or the equivalent of 61 percent of the expected natural gas
imports in 2030.
Time Frames and the Need for Informed Choices
It has been said that allowing increased oil and gas exploration
off America's shores isn't worth it, since it will take years before
any newly discovered energy starts reaching American consumers. The
same can be said for new wind projects as well, however. The reality is
that energy projects of scale require significant lead-time to plan,
permit, litigate, procure and construct.
One of the things you learn quickly in the energy business is that
nothing happens quickly. Ours is an industry that has no choice but to
take the long view. Oil used to heat Americans' homes and power their
automobiles today is available as the result of decisions taken by
policymakers and business leaders years or even decades ago. The sooner
we start, the sooner the American people will start seeing the
benefits.
The United States has one of the world's most restrictive policies
when it comes to accessing resources on its Outer Continental Shelf. In
an increasingly globalized world economy, this serves only to increase
dependence of the US--and increasingly places our energy future in the
hands of others. In recent years, we have witnessed American officials
requesting oil producing nations to boost output for our benefit.
There are no silver bullets or magic formulas when it comes to
energy. Our nation requires a comprehensive ``all-of-the-above''
approach to energy.
We must be realistic. Exploration alone will not solve our energy
dilemma. Likewise, conservation and efficiency efforts without
increased production are a recipe for ongoing scarcity and economic
decline.
Until we can bring new, renewable energy sources online in a big
way in the decades to come, safe, environmentally-conscious oil and gas
production off our shores holds the best prospect for providing our
nation's economy with the growing and secure energy supply it needs.
BP stands ready to work with Congress to develop the policy
measures necessary to make this happen.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Mr. Nichols?
STATEMENT OF J. LARRY NICHOLS, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, DEVON ENERGY CORPORATION, TESTIFYING ON BEHALF OF THE
AMERICAN PETROLEUM INSTITUTE
Mr. Nichols. Thank you, Mr. Chairman. I am Larry Nichols,
Chairman and CEO of Devon Energy Corporation, and also Chairman
of the American Petroleum Institute. Devon is the largest U.S.
independent natural gas and oil producer in the United States.
That means our sole focus is on exploration and production, and
not downstream activities.
The API is, of course, the largest trade association
representing our industry--with over 400 companies in all
aspects of the U.S. natural gas and oil industry, including
exploration and production, but also refining, marketing,
transportation, as well as the service companies that support
our industry.
This core sample that I am holding here today is an example
of why I am excited about the offshore, and the potential that
the offshore has for the economic foundation for our industry,
even as we move forward on alternate energy sources, and as we
move forward on improved energy efficiency. This core, this
rock, is from a discovery well that was drilled some three-and-
a-half miles deep, about 18,000 feet, offshore New Jersey in
1979, 30 years ago.
That well was drilled before the embargoes were put in
place, the moratorium were put in place. It is a dramatic
reminder of the time that we have already lost in exploring for
energy resources that were put under the moratorium. It is also
a reminder that drilling, even in those days, was done safely.
Developing the untapped natural resources off our coast can
help put our nation on the road to economic recovery, provide
jobs, higher income, economic growth, greater governmental
revenues and global competitiveness. As my predecessors have
said here, when our nation recovers from this crisis, which it
will, we need to be prepared to meet its increased demand for
energy. That is where the offshore continental shelf can play a
big role.
The Energy Information Administration estimates that
natural gas and oil will continue to meet more than half of our
energy our country needs in 2030. Such a demand will be there
even with a new climate policy, and in the case of clean-
burning natural gas, our cleanest burning fuel, that demand can
even be higher. Much of that energy demand can be found
offshore. The size of those offshore resources may, in fact, be
much larger than even the most robust estimates that we may
have today.
That is because the more we explore, the more we know. One
thing is clear. It is a fallacy to claim that most of our
offshore resources have already been discovered and already
been leased. Obviously, the best data we have is in areas that
we have already explored and drilled. What we do not know is
what is really out there in the previous moratoria area, and we
cannot know that until we have an active and ongoing
exploration program, but we can make estimates.
The United States Department of the Interior has estimated
that the Atlantic and Pacific offshore continental coasts
contain 55 trillion cubic feet of gas and 14.3 billion barrels
of oil. The eastern Gulf of Mexico, they estimate, contains
21.5 trillion cubic feet of gas and 3.7 billion barrels of oil.
That is a lot of resources for this country.
In fact, our experience in the western half of the Gulf of
Mexico, the one area offshore where we have been allowed to
drill, illustrates how these estimates can be extremely low. If
you look at the original estimates that were made for the Gulf
of Mexico in the western half, we have already produced three-
times those estimates, and the wells we have that are now
producing have another five-times, so we are now sitting today
at eight times the original estimate for the western part of
the Gulf of Mexico.
In fact, in the eastern part of the Gulf of Mexico where
the moratoria is in place, there are trillions of cubic feet of
gas that have already been discovered. Those wells were not
allowed to be completed, despite the fact that there is a
pipeline that goes right by some of those fields--pipelines
that could carry that gas to Florida very, very quickly, and
gas that would probably expand in capacity as additional fields
along that pipeline were developed.
But let me come back to this core sample. Advanced
technology has revolutionized the exploration process for
natural gas and oil in this country. Today we have tools that
we did not have 10, and 20 and 30 years ago. One only needs to
look at the Barnett Shale, which today is the largest gas field
in the United States. Ten years ago, we did not have the
technology to do it.
We hope the moratorium will remain lifted. We hope we will
allow an expeditious process for the Minerals Management
Service. The ICF, a recent engineering study--and this was a
report done by the API--has shown that our natural gas
resources will produce 160,000 new jobs and $1.7 trillion in
governmental revenue. That is a lot of jobs and a lot of
revenue that this nation desperately needs.
We look forward to working with this Committee to try and
produce a rational policy that will allow the development of
those resources. Thank you.
[The prepared statement of Mr. Nichols follows:]
Statement of J. Larry Nichols, API Chairman,
on behalf of the American Petroleum Institute
I am J. Larry Nichols, Chairman and Chief Executive Officer of
Devon Energy Corporation and Chairman of the American Petroleum
Institute.
Devon Energy is the largest U.S. ``independent'' or natural gas and
oil exploration-and-production company. That means that our sole focus
is on finding and producing these energy sources--not refining and
marketing. Most recently, our search for hydrocarbons has extended to
the deepest offshore waters.
API represents nearly 400 companies involved in all aspects of the
U.S. natural gas and oil industry, including exploration and
production, refining, marketing and transportation, as well as the
service companies that support the industry. We welcome this
opportunity to present the industry's views on the role of offshore
natural gas and oil development in meeting the nation's economic and
energy needs.
In addition to API, this statement is supported by the American
Exploration & Production Council, Independent Petroleum Association of
America, International Association of Drilling Contractors, National
Ocean Industries Association, Petroleum Equipment Suppliers
Association, and the U.S. Oil & Gas Association.
I. Introduction
Developing the untapped resources of natural gas and oil off our
coasts can help put our nation on the road to economic recovery,
providing jobs, higher incomes, economic growth, greater government
revenues and global competitiveness. The economic downturn has
significantly reduced energy demand in recent months, and some
companies have reduced drilling accordingly. However, when our nation
recovers from this crisis, we need to be prepared to meet its increased
demand for energy.
The Outer Continental Shelf (OCS) has a central role to play in
meeting our economic and energy needs. The OCS contains vast, untapped
resources of natural gas and oil that can keep our economy strong and
provide jobs, higher incomes, economic growth, and global
competitiveness. The U.S. natural gas and oil industry's advanced
technology has enabled it to find and develop natural gas and oil in
remote, previously inaccessible offshore areas in an efficient and
environmentally safe way.
Our approach to offshore natural gas and oil development--and to
all domestic energy development--must be based on the economic and
energy realities facing our nation. Every respected energy study on
future demand comes to the same conclusion about the next several
decades: we need all the energy we can produce in an environmentally
responsible manner. U.S. energy policy needs to encourage development
of all domestic energy sources: natural gas, oil, and alternatives like
solar, wind and geothermal. We cannot afford to focus on just one
energy source, to the exclusions of others. Nor can we depend upon
sources that are neither fully developed nor ready to compete in the
energy marketplace.
The Energy Information Administration (EIA) estimates that total
U.S. energy consumption will grow by 11 percent between 2007 and 2030.
Although the share of non-fossil fuels is growing rapidly, natural gas
and oil will continue to play leading roles through 2030. EIA estimates
that natural gas and oil will continue to meet over half of U.S. energy
consumption in 2030. Such demand will be there even with any new
climate policy--and in the case of clean-burning natural gas, demand
may even be much greater than projected. Natural gas is a major
component in efforts to address climate change. Demand for natural gas
in recent years has been driven by its clean-burning nature, making it
an ideal means of reducing greenhouse gas emissions. It is one of the
few lower-emission power generation sources available.
EIA also estimates that just 6 percent of the nation's energy needs
were supplied by renewables--including ethanol, hydropower, and
biomass--in 2007, with their share expected to grow rapidly. Despite
their rapid growth and because they are starting from such a small
base, EIA estimates that renewables will supply only about 10 percent
of the nation's energy needs by 2030.
Much of the domestic energy we need can be found offshore. All
areas of the Outer Continental Shelf (OCS) should be available for
leasing and development of natural gas and oil resources. We are
delighted that moratoria have been lifted from most of our coasts and
hope there will be similar action in the Eastern Gulf of Mexico.
In those areas now technically open, we urge expeditious--not
further delayed--consideration of the Minerals Management Service's
(MMS) Five-Year Leasing Program so that opportunities can be
anticipated by companies like ours. That will encourage private
investment in the geosciences that companies and the MMS needs in order
to better estimate the extent of our offshore resources in previous
moratoria areas.
Our nation is at a historic turning point for our country and its
energy needs. We have a rare opportunity to significantly change our
direction on energy and adopt policies that will help put America on
the road to economic recovery. Record high gasoline prices in 2008
focused public attention on energy in a way not seen since the 1970s.
Energy was a major issue during the presidential campaign. Public
attitudes have changed dramatically. Polls have repeatedly shown strong
support for increased domestic energy development.
For example, in a poll this month, 61 percent of Americans said
they supported greater access to offshore oil and natural gas
resources; only 26 percent of those polled were against greater access.
Exit polls in last November's election showed that two-thirds of voters
supported offshore drilling in areas where it was banned.
II. General Offshore Issues
Offshore Potential
Offshore natural gas and oil resources are potentially vast. The
size of offshore resources may, in fact, be much larger than even the
most robust estimates we have today. That's because the more we
explore, the more we know.
One thing is clear: It is a fallacy to claim that most of our
offshore resources are in areas already leased. While the only good
data we have on discovered and estimated resources is, obviously, in
areas in which robust exploration has been allowed, we do not know what
is in the previous moratoria areas until we have active and ongoing
exploration programs there so that we and the Minerals Management
Service (MMS) can learn from the results.
However, according to the MMS, the previous moratoria areas in the
Atlantic and Pacific OCS contain an estimated undiscovered technically
recoverable 55.3 trillion cubic feet of natural gas and 14.3 billion
barrels of oil. In addition, most of the Eastern Gulf of Mexico remains
off-limits, preventing development of an estimated undiscovered
technically recoverable 21.5 trillion cubic feet of natural gas and 3.7
billion barrels of oil. According to MMS, there are multiple known
fields with discovered natural gas and oil resources in the Eastern
Gulf. For example, the Destin Dome, a discovery located 25 miles from
shore off Pensacola, Florida, could produce anywhere from 110 billion
to 165 billion cubic feet of natural gas a year for the next 20 years,
according to exploration plans filed with the agency.
Our experience in the one area on the lower 48 offshore where we
have been allowed to drill consistently illustrates how these estimates
could be extremely low. In the Gulf of Mexico, we have now produced
three times the early resource estimates--and the estimates now are
that we have five times more. (See attached graph, The More We Explore,
The More We Know.)
In another example, we don't have to rely on estimates to show how
much natural gas we are foregoing because of policy rather than
geology. In the Eastern Gulf of Mexico, there are trillions of cubic
feet of discovered gas now locked away by drilling bans still in
effect. This gas is along a pipeline that could be carrying more supply
for Florida consumers immediately if production had been allowed. Even
more important is the fact that additional drilling could see even more
supply within a very few years. (See attached map, Jurassic Norphlet
Trend Eastern Gulf of Mexico.)
Federal lands, including offshore areas, hold enough undiscovered
recoverable natural gas to heat 60 million households for 160 years.
They also hold enough undiscovered recoverable oil to produce gasoline
for 65 million cars for 60 years.
Moreover, a recent ICF International study commissioned by API
shows that developing the offshore areas that had been subject to
Congressional moratoria, as well as the resources in Alaska's Arctic
National Wildlife Refuge and a small portion of currently unavailable
federal lands in the Rockies, could increase U.S. crude oil production
by as much as 2 million barrels per day in 2030, offsetting nearly a
fifth of the nation's oil imports. Natural gas production could
increase by 5.34 billion cubic feet per day, or the equivalent of 61
percent of the expected natural gas imports in 2030.
Congress should not re-impose the moratoria or place other
obstacles to the development of offshore resources. It should also open
the off-limits areas of the Eastern Gulf.
Economic Benefits of Offshore Development
The ICF International study underscores how offshore natural gas
and oil development benefits the economy. The study found that
development of natural gas and oil resources that have been kept off-
limits by Congress for decades, both offshore and onshore, could create
more than 160,000 new jobs in 2030. Those new jobs would be in addition
to the approximately 6 million jobs the U.S. natural gas and oil
industry already supports--1.8 million people directly employed by the
industry and more than 4 million jobs indirectly tied to the industry.
Many of these jobs are the ``green jobs'' our society desires.
Moreover, the average salary of exploration and production jobs is more
than twice the national average.
Increased natural gas and oil development not only creates more
jobs and provides more energy, it also generates significant government
revenues. In fact, in November 2008, the Department of the Interior
reported that it accrued a record $23.4 billion from 2008 energy
production--double the previous year's revenue.
The ICF study found that development of offshore and onshore areas
that had been kept off-limits to development for decades could generate
more than $1.7 trillion in government revenues that would help support
vital programs and reduce pressure on American taxpayers. Moreover,
these revenues could help fund government energy research and
development of alternative energy sources. In addition, these revenues
are particularly needed by states and communities facing budget
shortfalls. These governments are being forced to lay off teachers,
reduce police protection, limit repair of roads and bridges, and cut
back on other important programs.
The ICF study also estimated that development of all U.S. natural
gas and oil resources on federal lands could produce more than $4
trillion in revenues over the life of the resources.
Industry Technology
Advanced technology has revolutionized the exploration and
development process for natural gas and oil, increasing the safety and
efficiency of offshore operations and helping shape the offshore
industry's outstanding offshore environmental record. There is a very
good chance we will advance our knowledge of offshore areas and make
new discoveries if we are allowed to employ highly sophisticated and
leading-edge advances such as 3D and 4D seismic technology and subsea
production systems. Today's tools did not exist 30 years ago when the
industry was drilling wells in the Atlantic and Pacific.
3D seismic survey technology improves the industry's ability to
locate potential natural gas and oil resources with greater accuracy.
Seismic surveys send high-energy sound waves into the ground and
reflect information on underground rock layers back to the surface.
Since sound travels at different speeds as it passes through various
types of rocks, computers can use the seismic data to create a 3-D map
of what lies below the surface. This is especially helpful as engineers
plan the most efficient way to produce resources from a reservoir. More
precision in locating these resources facilitates field development and
the location of drilling sites and production facilities. These steps
can help to reduce a project's environmental footprint.
Geophysicists and engineers also use 4-D seismic technology, which
adds the dimension of time to the survey process. By combining several
3-D seismic surveys taken as the field is producing over time and
arranging them in a sequence, they can create images that show where
gas or oil deposits may remain. By using 4-D models, engineers and
geologists can gauge how many wells a reservoir might need and where to
place them. The ``virtual drilling'' can help protect the environment
by reducing the number of wells for exploration and production while
maximizing the ultimate recovery of natural gas and oil from the field.
The search for resources deep below the ocean has spurred
additional technological innovation, including the ability to produce
and transport these resources using equipment installed on the ocean
floor and, thus, not visible from shore. Subsea production systems
include a series of gathering lines that connect the production from
multiple wells into a single processing hub, allowing the production
from the wells to be transported to a platform, where the natural gas,
oil and produced water are separated for transport to shore through
pipelines.
The equipment on the seafloor is maintained using robots, known as
Remote Operating Vehicles (ROVs), which are tethered to a vessel. ROVs
serve as eyes underwater for these operations, and are designed to
connect to the subsea equipment. These systems are being deployed at
depths of nearly 10,000 feet of water in the Gulf of Mexico, where
deepwater development plays a significant role in current and future
energy production.
Just as we had no clue only a decade or so ago that the Barnett
Shale in Texas would become the most prolific onshore natural gas play
in the nation, we don't know what we don't know about much of the
offshore that has been under moratoria until we begin applying our new
technology.
What we can say with certainty is that we can ``see'' better
beneath the seabed, design better wells, and more efficiently and
safely produce oil and natural gas than ever before if given the
chance.
Offshore Environmental Record
The U.S. natural gas and oil industry has an outstanding offshore
environmental record. According to the Minerals Management Service,
offshore leases produce about 1.4 million barrels of oil per day. MMS
calculates that since 1980 less than 0.001 percent of the oil produced
in federal waters offshore has been spilled.
The environmental and safety performance of offshore production
facilities was severely tested when Hurricanes Katrina and Rita roared
through the heart of the Gulf of Mexico in 2005. Some 3,000 offshore
platforms were in the direct path of the hurricanes. Some experienced
five to six hours of sustained winds of 170 miles per hour with gusts
of 200 miles per hour. Production was shut-in and some platforms
destroyed. However, platforms were evacuated and production restarted
without any loss of life. No significant spills were reported from
production activities, according to the Minerals Management Service and
Coast Guard, and not even a small spill reached shore.
Advanced technology allows our companies to explore safely while
protecting our oceans. Specialized equipment, such as blowout
preventers and subsurface safety valves, safeguard ocean waters.
Moreover, industry standards are designed to ensure that both the
design of the platform and the equipment protect the ocean waters.
These design standards were strengthened again following Hurricanes
Katrina and Rita.
The industry's offshore operations are among the most heavily
regulated endeavors in the United States. Companies operating in
federal offshore waters must obtain 17 major permits and must follow 90
sets of federal regulations. Federal agencies, including MMS and the
Coast Guard, perform numerous drills and inspections throughout the
year to test company responses to appropriate situations. Between 2000
and 2007, the number of spill drills and exercises has increased from
669 to 1,584.
Other Countries Are Developing Their Domestic Resources
Other countries are working pro-actively to develop their domestic
natural gas and oil resources. Instead of placing areas off-limits to
natural gas and oil development, these countries are moving ahead with
development and some are offering incentives to encourage projects.
Recent examples include:
Argentina: Oil companies plan to spend $300 million in
oil and natural gas exploration in 2009 under the terms of two
incentives programs which offer tax discounts and higher prices on
sales of new output of natural gas and oil.
Indonesia: The state oil firm Pertamina plans to invest
19 trillion rupiah ($1.74 billion) in 2009, against 17 trillion rupiah
in 2008. Indonesia has been offering new exploration rights and
financial incentives for oil fields in a bid to step a steady decline
in production.
Ireland: The government has sought to develop Ireland's
energy sector by attracting oil exploration companies with financial
incentives and a recent series of offshore licensing rounds.
Pakistan: The Pakistan Economic Coordination Council
approved a 2009 petroleum policy envisaging incentives for natural gas
and oil exploration. The bidding process for new gas fields has been
revised; the entire bidding process would now be completed in two to
three months.
United Kingdom: The government proposed tax changes and
incentives to help boost the recovery of the UK's remaining natural gas
and oil reserves and slow the decline in output. The proposals include
a value allowance to encourage marginal field development and changes
to reduce or eliminate taxes on the change of use of North Sea
infrastructure.
III. API Views on Specific Offshore Issues
Five-Year Plan
We were very disappointed by Secretary of the Interior Salazar's
decision to delay the OCS Five-Year plan process, which was designed to
address the critical energy concerns facing our nation. The draft plan
already received more than 152,000 comments--a record number--from
states, environmental groups, industry, labor groups and members of the
public--with 87,000 or 57 percent of those comments supporting expanded
and expeditious development. The Secretary's decision overlooks the
fact that more than two-thirds of the American people in polls have
supported tapping our vast domestic resources for the benefit of the
nation.
Secretary Salazar's announcement means that development of U.S.
offshore resources could be stalled, depriving the nation of tens of
thousands of new jobs, billions of dollars in revenues to federal,
state and local governments, and greater energy security. We share
Secretary Salazar's view that the nation needs a comprehensive energy
policy that includes developing alternative energy sources. However, we
should also be moving as quickly as possible to develop more of our
offshore natural gas and oil resources to benefit all Americans.
Orderly development of offshore natural gas and oil resources under
a predictable Five-Year Leasing Program, as mandated by Congress in the
Outer Continental Shelf Lands Act, provides an effective, efficient
mechanism for balancing the national interest objectives of identifying
and developing OCS oil and natural gas resources in a timely manner,
while protecting valuable coastal and marine natural resources.
Reliable, predictable and orderly continuation of an area-wide
leasing and development schedule for the OCS, which equitably shares
benefits of development and minimal environmental risks among the
various OCS regions, is necessary to ensure the continued investment
needed to meet the nation's natural gas and oil needs. It is also
important to avoid such misguided actions as underfunding the offices
that prepare environmental studies, management plans and drilling
plans.
State Involvement
API believes that all federal OCS acreage should be available for
leasing. States currently participate through the OCS Lands Act, the
Five-Year Plan process, the Coastal Zone Management Act, and the
National Environmental Policy Act (NEPA) process in decisions involving
leasing and natural gas and oil development. These laws provide states
with a real hand in decision-making, particularly through the Coastal
Zone Management Act, which allows a state to block offshore activities
that are inconsistent with its coastal zone management plan. That block
can be removed only by the federal government through an arduous
appeals process, which can be followed by litigation if the state
disagrees with the federal government's decision.
Revenue-sharing
API recognizes the legitimate stake that states have, both onshore
and offshore, in receiving direct compensation from the federal
minerals program. We support federal revenue-sharing with states that
support leasing, exploration and development activities off their
coasts and within their borders provided that current royalties, bonus
bids and rentals are not affected; current regulatory schemes don't
change; additional regulatory burdens are not placed on industry; and
opportunities for development are not affected. We support efforts to
improve the federal OCS revenue-sharing program provided it is
established only for coastal states that allow development off their
coast and encourages states to open offshore lands for development.
Buffer Zones
All areas of the OCS should be available without buffer zones,
since these areas can be developed in an environmentally safe manner
with a minimal impact on coastal communities. Placing arbitrary limits
on offshore leasing close to the coastline would significantly limit
offshore energy development. In the Gulf of Mexico, where offshore
production is the most developed in the U.S., important finds have been
made both near-shore and far-shore. In the Pacific, most undiscovered
technically recoverable resources are thought to be close to shore.
About 92 percent of the natural gas resources and 91 percent of the oil
resources are within 50 miles. In the Atlantic, we don't know for sure.
We've done some exploration, but a lot more needs to be done for us to
determine where the richest pockets of natural gas and oil are located.
Advances in drilling and production technology have allowed the
industry to develop fields close to existing infrastructure without the
installation of additional platforms. Off the coast of California, this
has allowed the industry to use a single platform to access supplies
from four miles away, resulting in additional production of 10,000
barrels a day.
``Idle Leases''
While natural gas and oil companies are seeking to find and produce
natural gas and oil in new offshore areas, they are also making the
maximum effort to develop the leases they already have. If a lease is
not producing, critics who don't understand the exploration and
production process say it is ``idle'' when, much more often than not,
it is being actively explored and developed.
The purchase of a lease is always a gamble. Exploration is an
essential part of the energy business. There is nothing ``idle'' about
it. When a natural gas and oil company purchases a lease, it believes
the lease may yield enough natural gas and oil to benefit consumers and
become economically viable to develop. But until a company actually
completes the exploration process, it does not know whether or not the
millions of dollars spent on the lease were actually worth it.
Typically, exploration of a lease involves extensive analyses of
geological and geophysical data, environmental studies that can be
equally detailed, and a variety of government permits before drilling
can occur. If drilling leads to the discovery of natural gas or oil in
sufficient quantities to justify development, additional geological
study often is required for planning field development. Additional
engineering and design work, environmental studies and detailed permits
likewise will be needed before complex production facilities can be
installed and operations begun.
If the company finds there is no natural gas or oil underneath a
lease, the company hands the lease back to the government, incurs the
loss of invested money and moves on to more promising leases. Those who
call for so-called ``use-it-or-lose-it'' requirements fail to recognize
that such requirements are already in effect, with leases that are no
longer being explored returned to the government.
Use of Litigation and Bureaucratic Action to Block Offshore Development
Legal challenges and bureaucratic delays are common with both
offshore and onshore federal projects, and the consequences are often
multi-year delays in the production and delivery of significant natural
gas and oil resources to U.S. consumers. Even where a project has not
been delayed or canceled, companies must carefully consider whether to
risk further investment if litigation has been initiated, but not yet
decided, in opposition to their project. Leases within projects that
have been obstructed or canceled due to litigation or bureaucratic
delays are often wrongly characterized as ``nonproducing'' by opponents
of offshore development.
Examples of litigation that has delayed offshore development
include the following:
The Ninth Circuit Court of Appeals recently ordered a
second halt to Shell's exploration of the Beaufort Sea off the northern
coast of Alaska, due to environmental groups' claims that the Minerals
Management Service did not properly account for environmental impacts
on the lease sales under the National Environmental Policy Act (NEPA).
Even if Shell ultimately finds reserves capable of production, the
litigation will have delayed that oil coming to market by two years.
Shell's expenses to date are understood to be well over $100 million--
with no return on investment and no increased supply to consumers. This
is despite the fact that the government prepared a detailed 1,500 page
environmental impact statement on leases in the area.
The Ninth Circuit Court of Appeals also used the Coastal
Zone Management Act to stop development of oil leases when it allowed
California's Coastal Commission to review and veto lease renewals for
35 offshore leases. Offshore development under those leases has been
halted since 2001.
The Destin Dome, located off Pensacola, Florida, was
believed to be one of the largest natural gas fields in the U.S., with
2.6 trillion cubic feet of natural gas, according to the Department of
Energy. After drilling exploratory wells, Chevron submitted a
development plan to the state and the Interior Department for review in
1996. Two years later, Florida objected to the application and Chevron
appealed to the Department of Commerce, which delayed making a decision
through the terms of two Presidents and multiple Secretaries of
Commerce. After waiting years for a Commerce decision, Chevron sued the
federal government in 2000, 14 years after Chevron and its partners
paid for the rights to explore the Destin blocks. They were
subsequently reimbursed the money they paid for the bonus bids and
lease rentals. Meanwhile, U.S. consumers have been denied that natural
gas to heat and cool their homes.
Royalties
Natural gas and oil produced on government lands generates
substantial revenues to the government in the form of royalties.
Revenues from such development go to both the federal government and to
states to help pay for vital programs. These royalties are one of the
largest sources of income to the federal government; since 1953, the
federal government has collected more than $200 billion in bonus bids,
royalties and rentals. In Fiscal Year 2008, the government collected
and distributed $23.4 billion from onshore and offshore energy
production. This includes the more than $10 billion paid by companies
in bonus bids to lease tracts for offshore energy production on the
Outer Continental Shelf in the Gulf of Mexico and Alaska as well as
onshore leases.
Recently, the Fifth Circuit Court of Appeals issued a decision
finding for Anadarko Petroleum in a case regarding royalty collection.
The Fifth Circuit panel unanimously affirmed that Congress, when it
passed the Deepwater Royalty Relief Act, provided royalty relief, based
only on a volume limitation, not price. That Act was passed at a time
of historically low crude oil prices as a means to increase production
and sustain jobs in a struggling industry. It was enormously
successful, helping to boost deepwater Gulf of Mexico production by 50
percent in less than a decade.
IV. Conclusion
What the nation needs is a policy that increases, not decreases,
domestic energy production. Offshore development is a vital component
of U.S. energy development. Barriers to offshore oil and natural gas
production contribute to volatile energy prices, slower economic
growth, lost American jobs and a weakened U.S. position in global
markets. We need to find and develop our offshore oil and natural gas
resources in an orderly, efficient, and environmentally sound way. By
so doing, we can put America on the road to economic recovery and help
ensure our nation's energy security for decades to come.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you, Mr. Nichols. Mr. Cejka?
I am sorry if I mispronounced your name in the first go-
round.
Mr. Cejka. It is Cejka, but I hear almost anything, sir.
The Chairman. Cejka. I am sorry again.
STATEMENT OF TIM CEJKA, PRESIDENT,
EXXONMOBIL EXPLORATION COMPANY
Mr. Cejka. Mr. Chairman, Ranking Member Hastings and
Members of the Committee, I wanted to thank you for the
opportunity to discuss, I think, this very important topic. My
name is Tim Cejka, and I am President of ExxonMobil Exploration
Company, which has the responsibility for global exploration.
The U.S. represents a major element of our global portfolio.
This morning I would like to discuss how increasing access
to U.S. energy supplies will strengthen the U.S. energy
security, create jobs for Americans, stimulate the U.S.
economy, and increase revenues to the Federal and state
governments. I would like to describe how the energy industry
can help achieve each of these objectives in an environmentally
responsible way.
The need for more oil and natural gas available to
Americans is clear. The United States' continued economic
growth and prosperity depends on access to clean, reliable and
affordable supplies of energy. There is no single answer to our
energy needs. We must pursue an integrated set of solutions
that will help us accelerate gains in energy efficiency, curb
greenhouse gas emissions, and develop new supplies of energy
from all sources, including oil and natural gas found in our
own backyard.
Thankfully, the United States is endowed with significant
energy resources. Unleashing their value for the benefit of all
Americans represents an important opportunity for growth, not
only for these challenging times, but also on the long-term
health of our economy. It is important to note that the current
estimates for oil and gas potential in the OCS areas that have
been off-limits were made using data from now outdated
technology.
We have resource underestimations that have resulted in the
past. Where industry has been able to collect data utilizing
advanced technology, resource estimates have grown. In 1987,
for example, the U.S. Government estimated there were nine
billion barrels in the Gulf of Mexico. By 2006, advanced
technologies caused the resource estimate for that area alone
to grow to 45 billion barrels. But meeting America's basic
energy needs is only one of many reasons the United States
should develop our domestic oil and natural gas resources.
Doing so will also strengthen our energy security. By
diversifying our nation's energy portfolio with more energy
from more domestic locations, Americans will be less vulnerable
to supply interruptions from any one region or country in the
world. Developing more of our domestic energy resources will
help stimulate our economy.
According to one recent study, the decision to lift the
bans in the offshore oil and gas production alone would lead to
investments that generate more than 76,000 new jobs in our
industry, which now accounts for six million employed
Americans. Increased domestic energy production will help ease
pressure on Federal and state budgets, too. Annual receipts
from mineral leases are already a major source of Federal and
state revenues.
Opening additional domestic offshore areas to production
opens the door to more than $1.3 trillion in additional
royalties, bonus bids, rental fees and other tax revenues for
the Federal and state governments. Federal oil and natural gas
leasing has generated in excess of $200 billion since 1953
through bonus bids, royalty and lease rental payments. That
does not include the tax revenues.
In developing our domestic resources, the energy industry
is also committed to doing it in an environmentally responsible
manner. It has been more than 30 years since the first offshore
moratorium was imposed. In those intervening decades, our
industry has made tremendous leaps forward in technology, in
operational excellence and in environmental performance.
For example, extended-reach directional drilling now
enables us to develop areas up to six miles from a single
location, minimizing the environmental footprint. Advances in
subsea production ensure facilities remain safe and largely
hidden from view. Technology currently in place in the Gulf of
Mexico has already proven able to prevent spills, even during
the worst hurricanes we have seen in a long time.
We can apply these technologies, and more, to new areas
open to the development and preserve the safety, the
biodiversity and the beauty of the American coastlines. We look
forward to working with Congress, the Department of the
Interior and state governments to find a safe, secure,
environmentally responsible way to use America's resources to
produce energy for American needs right here at home, and in
doing so create jobs, strengthen our security and grow our
economy. Thank you.
[The prepared statement of Mr. Cejka follows:]
Statement of Tim Cejka, President, ExxonMobil Exploration Company
Mr. Chairman...Ranking Member Hastings...Members of the Committee.
This morning, I would like to discuss how increased access to U.S.
energy supplies will strengthen U.S. energy security--create jobs for
more Americans--stimulate the U.S. economy--and increase revenues to
federal and state governments.
And I would like to describe how the energy industry can help
achieve each of these objectives in an environmentally responsible way.
The need for making more oil and natural gas available to Americans
is clear. The United States' continued economic growth and prosperity
depend on access to reliable and affordable supplies of energy.
There is no single answer to our energy needs. We must pursue an
integrated set of solutions that will help us accelerate gains in
energy efficiency...curb greenhouse-gas emissions...and develop new
supplies of energy from all sources, including oil and natural gas
found in our nation's own backyard.
Thankfully, the United States is endowed with significant energy
resources. Unleashing their value for the benefit of all Americans
represents an important opportunity for growth, not only for these
challenging times, but also to underpin the longer term health of our
economy.
It is important to note that the current estimates for the oil and
gas potential in the OCS areas that have been off limits were made
using data from now-outdated technology, and we have seen historic
resource underestimates result from this. Where industry has been able
to collect data utilizing advanced technology, the resource estimates
have grown. In 1987, for example, the U.S. Government estimated that
there were 9 billion barrels of oil in the Gulf of Mexico. By 2006,
advanced technologies caused the resource estimate for that area to
grow to 45 billion barrels.
But meeting Americans' basic energy needs is only one of many
reasons the United States should develop our domestic oil and natural
gas resources.
Doing so will also strengthen U.S. energy security. By diversifying
our nation's energy portfolio with more energy from more domestic
locations, Americans will be less vulnerable to supply interruptions
from any one region or country of the world.
Developing more of our domestic energy resources will help
stimulate our economy. According to one recent study, the decision to
lift bans on offshore oil and gas production alone could lead to
investments that generate more than 76,000 new jobs in our industry,
which now accounts for nearly 6 million employed Americans.
Increased domestic energy production will help ease pressure on
federal and state budgets, too. Annual receipts from mineral leases are
already a major source of federal and state revenues. Opening
additional domestic offshore areas to production opens the door to more
than $1.3 trillion in additional royalties, bonus bids, rental fees,
and other tax revenues for our federal and state governments. Federal
oil and natural gas leasing has generated in excess of $200 billion
since 1953 through bonus bids, royalties and lease rental payments
alone, not including any tax revenues.
In developing our domestic resources, the energy industry is also
committed to doing so in an environmentally responsible manner.
It has been more than 30 years since the first offshore moratorium
was imposed. In those intervening decades, our industry has made
tremendous leaps forward in technology--operational excellence--and
environmental performance.
For example, extended-reach directional drilling now enables us to
develop areas up to six miles from a single location, minimizing the
environmental footprint. Advances in subsea production ensure
facilities remain safe and largely hidden from view. And technology
currently in place in the Gulf of Mexico has already proven able to
prevent spills even during hurricanes.
We can apply these technologies and more to new areas opened to
development and preserve the safety, biodiversity, and beauty of
America's coastlines.
We look forward to working with the Congress, the Department of the
Interior, and state governments to find safe, secure, and
environmentally responsible ways to use America's resources to produce
the energy America needs right here at home--and in so doing, create
jobs, strengthen our security and grow our economy.
Thank you.
______
The Chairman. Thank you. Mr. Luquette?
STATEMENT OF GARY P. LUQUETTE, PRESIDENT, CHEVRON NORTH AMERICA
EXPLORATION AND PRODUCTION COMPANY
Mr. Luquette. Good morning. Mr. Chairman, Ranking Member
Hastings and Members of the Committee, my name is Gary
Luquette, I am the President of Chevron North America
Exploration and Production Company. I have the honor today of
representing over 28,000 Chevron employees who live and work in
the U.S. before your Committee.
Our nation is confronting serious economic challenges. I
appreciate the opportunity today to share with you how the oil
and gas industry, and Chevron, can assist our nation in the
economic recovery process. There are two overarching ways the
industry can help--by enhancing America's energy security, and
by creating more jobs and more revenue for Federal, state and
local governments.
To the urgent goal of addressing both energy and economy, I
will speak briefly about two things--why the development of the
Outer Continental Shelf, including the former moratoria areas,
is essential, and how we can do it in a responsible and
sustainable way.
First, OCS development is essential because America needs
the energy. While energy demand is down today due to the
economic slowdown, we know that energy demand will grow longer-
term.
Today's decision should help us prepare for, not
jeopardize, tomorrow's economic growth. To prepare for
tomorrow's economic growth and meet our nation's increasing
long-term energy demand, we must recognize we are not in an
either/or situation. We need more conservation, we need more
alternatives and renewables, and we need more conventional oil
and natural gas. We need more of all forms of energy.
Every major study of America's energy future agrees that,
even with the most aggressive development of alternatives and
renewables, oil and gas will continue to make up a dominant
share of the energy mix for decades to come. Given the
projected increase in energy demand, we need to access our
secure and reliable U.S. resources, including the OCS. The good
news is, the potential in the OCS is significant.
By 2025, OCS production could add one million barrels of
oil a day to our energy portfolio, and based on our experience
in the Gulf of Mexico with the introduction of new technology,
that amount should drastically increase. Every barrel produced
in the U.S. increases our energy security and reduces our
dependence on less reliable sources. Of course, this also helps
the U.S. economy by keeping U.S. dollars and jobs here at home.
To sum up why developing the OCS is essential, America
needs the energy, America needs the jobs and America needs the
economic boost that development will provide. My second point
is how, how can we develop the OCS in a responsible and
sustainable way? We in the oil and gas industry appreciate this
fact, that our ability to continue to operate depends on doing
exactly this.
I will focus on three of the seven policy recommendations
contained in my written testimony today. First, we should
sustain the 2008 decision to open up the majority of the OCS.
Again, developing these resources will boost our economy,
improve our energy security and reduce our vulnerability to
imports from abroad.
Second, we should guide future leasing by using the
comprehensive and time-tested Minerals Management Service five-
year plan leasing process. As an early part of the process, the
MMS should support and encourage the gathering of new, state-
of-the-art geophysical data so we, as a nation, can understand
the true extent of the OCS resource potential. Then, and only
then, can we make an informed leasing and development decision.
Third, we should incentivize states to support OCS
production by allowing all coastal states where there is new
production to have an increased share in royalties and
revenues. To conclude, I am proud of my 30 years of service to
this industry. I can assure you that Chevron, and all of our
employees, will continue to apply our best efforts to provide
energy that is vital to America.
Reliable and affordable energy is a pillar of Americans'
economic stability and strength. Developing America's own oil
and gas resources can supply even more of the jobs and energy
we need and boost the American economy. But, ladies and
gentlemen, to strengthen America's energy pillar and help
stimulate our economic recovery, it is vital that we act now.
Thank you.
[The prepared statement of Mr. Luquette follows:]
Statement of Gary P. Luquette, President,
Chevron North America Exploration and Production Company
Chairman Rahall, Ranking Member Hastings, Members of the Committee.
My name is Gary Luquette and I am President of Chevron North America
Exploration and Production Company. I am here to represent the more
than 62,000 Chevron employees, of whom 27,000 work here in the United
States, and the more than 1.5 million stockholders who put their trust
in our company each day. Chevron's broad portfolio of energy businesses
include oil and natural gas production, refining and marketing of
petroleum products, geothermal, and energy efficiency services. We are
actively pursuing next-generation biofuels and other alternatives with
a number of important strategic partnerships.
I lead the Chevron North America Exploration and Production
Company, made up of over 5,000 employees working to deliver energy
supplies from both onshore and offshore resources. We produce about 5
percent of United States oil and gas, and extend the limits of
technology everyday, in areas such as the outer continental shelf of
the Gulf of Mexico, to lengthen the life of existing assets and to
deliver future supplies. While our company has a heritage going back
130 years, we are constantly reinventing how we explore for and produce
energy.
Chevron invests in America. Last year we spent $13.3 billion with
our suppliers and other business partners in the United States
purchasing goods and services from more than 11,000 large and small
businesses throughout the country.
Chevron also strives to be a strong corporate citizen in the
communities where we live and work. We invested in about 2,000
charitable organizations across 43 states and the District of Columbia.
In 2008, our United States charitable contributions totaled over $75
million.
I want to thank the Committee for holding this important hearing
today. We believe development of a long term, strategic and
comprehensive energy policy is a critical national priority. This
hearing provides an opportunity to demonstrate the vital importance of
America's oil and gas industry today and for decades to come. It offers
the chance to underscore how our industry works to address America's
greatest energy vulnerability, imports of foreign oil; the commitment
of the U.S. energy industry to develop U.S. oil and gas resources; and
the policies that need to be maintained or implemented to enable us to
develop these vital resources in a prudent and orderly manner. Finally,
today's hearing highlights the critical role that the industry plays in
addressing the current economic challenge faced by this country--
through creating good, high paying jobs; increasing revenues to
federal, state and local treasuries; and reducing our trade deficit and
capital outflows by producing more energy here at home.
Energy is the foundation of America's economic growth and global
competitiveness and energy policy must ensure that American consumers
and businesses have access to the reliable, affordable supplies of
energy that underpin our economy, even as we use that energy more
wisely.
Our country's role as a major consumer of energy is well
understood, but fewer people understand the United States' strength as
a producer of energy: the United States is the world's leading producer
of refined petroleum products, electricity, nuclear power, wind power
and ethanol; the second largest producer of coal, natural gas; and the
third largest producer of oil.
Billions of people around the globe are working every day to
increase their standard of living. This will cause an inevitable
increase in global energy demand, and competition for energy resources
will intensify. Accounting for production declines in existing oil and
gas fields, by 2015 the world will need to replace as much as 45
million barrels it produces each day with new production. 1
By strengthening our own domestic production capability, the United
States can reduce future demand for imports, improve economic and
energy security, and be in a stronger position to lead global efforts
to meet these challenges. Our country's leadership is essential.
Any comprehensive energy policy must also include emphasis on
efficiency and conservation, which are the most immediate and cost-
effective sources of ``new'' energy with no greenhouse gas emissions.
As important as resource development is, the energy challenges we face
cannot be met by addressing only the supply side. It is a focus for our
company and we applaud the efforts of Congress to enact efficiency
measures in recent legislation.
Stabilizing and strengthening our economy is a top priority and
energy will play a central role in that process.
Affordable, reliable energy is the backbone of a strong and
competitive economy. America's domestic oil and natural gas industry
plays an integral role in the nation's economy. In addition to
providing critical energy supplies to fuel our economy, the industry
directly employs 1.8 million workers and an additional 4 million are
employed in energy related jobs. Oil and natural gas operations provide
billions of dollars of tax and royalty revenues to Federal, state and
local governments--$152 billion between 2001 and 2006. 2 In
Fiscal Year 2008 royalties, rents and bonuses alone paid to the
Minerals Management Service (MMS) totaled $23.8 billion. The industry
also contributes hundreds of billions of dollars to the country's Gross
Domestic Product (GDP). For example, in 2006 the upstream domestic oil
and natural gas industry contributed around $160 billion in GDP, more
than the individual contributions of major industries such as
agriculture, auto manufacturing, or computer and electronic product
manufacturing. 3
According to a recent study, development in the former moratoria
areas of the Outer Continental Shelf, and other restricted areas in the
Arctic National Wildlife Refuge and the Rockies would create 160,000
new jobs by 2030 and up to $1.7 trillion in bonus revenues and
royalties over the coming decades. 4 Every incremental
barrel of oil developed at home avoids the purchase of a barrel of
imported oil, creates jobs, and provides incremental revenue to the
government.
Even with the most aggressive development of renewables and
alternatives, every major study of our energy future underscores the
critical importance of oil and gas in meeting America's energy needs
for decades to come.
While much attention has been paid in the public dialogue to
replacing petroleum with alternatives like biofuels, even under the
most aggressive scenarios for the introduction of biofuels and
renewables, these energy sources will meet only a fraction of U.S.
demand. The United States Energy Information Agency projects that even
after the implementation of major efficiency initiatives, United
States' liquids demand will increase approximately 5 percent from 2007
levels through 2030. 5
Chevron has maintained for many years that it will take a new
energy equation to address the United States' energy needs for the next
several decades. We believe that we need conservation on a large scale,
expansion of traditional energy sources such as oil and gas, and rapid
development of alternatives and renewables. We live in an ``And'' world
where we will need all energy sources to satisfy the growing global
energy demand in a sustainable way.
Despite our strength as an energy producer, domestic oil production
has fallen approximately 40 percent since 1985, while domestic oil
consumption has grown more than 30 percent. The result has been a
significant increase in our dependence on foreign oil. Today America
has the ability to reduce its dependence and improve energy security
through the prudent and sustainable development of oil and gas
resources which until now have been off-limits. This can be
accomplished through the time-tested existing Federal leasing and
licensing programs.
Focusing on the subject of this hearing, the National Petroleum
Council has estimated that 1 million barrels per day of oil and 3.8
billion cubic feet per day of gas can be brought on line over time from
offshore areas previously and currently under moratoria. The total
estimate may be increased over time as our understanding of the areas
improves and as new technology enhances our ability to tap these
resources. This is what has happened in the Gulf of Mexico. Between
1975 and 2006 the Department of the Interior published 8 comprehensive
assessments of the undiscovered resource potential of the OCS. For the
Gulf of Mexico, the estimates of undiscovered recoverable oil resources
increased seven-fold during this time period and undiscovered
recoverable natural gas estimates increased by more than four and a
half times. 6
The undeveloped OCS includes promising known prospects. For
example, in the late 1980's, Chevron made a significant discovery of
natural gas in the Eastern Gulf of Mexico called Destin Dome,
approximately 25 miles off the coast of Florida. At the time, it was
estimated that Destin Dome held enough natural gas to supply one
million American households for 30 years.
Chevron and its partners, however, could not get permits to develop
the field because of opposition in Florida and a maze of regulatory and
administrative barriers at the federal level. After a long, expensive
and frustrating effort to move forward, we relinquished the leases as
part of a settlement reached with the government in 2002. This was not
a good outcome for the government, industry, the workers involved in
development and production of this gas, or consumers. We currently
import little natural gas and can maintain domestic production for
years to come, but only if promising resources like Destin Dome are
made available and our comprehensive energy policy ensures that they
can be brought to commercial production.
Developing domestic energy is an urgent challenge, but one that can
be addressed through the joint efforts of this Committee, the Obama
Administration and companies like Chevron.
Bringing these important resources on line will require a long term
focus and stable policies to attract the enormous investments and drive
the constant innovation and evolution of technology needed to
responsibly develop the OCS. We need to start now. Chevron believes
that swift action to initiate evaluation and development of offshore
resources is important, and that the joint efforts of Congress, the
Obama Administration, the states and companies like Chevron can address
this crucial element of our energy strategy in a way that balances the
need for energy with the many other considerations.
Already one of the largest producers in the Gulf of Mexico, Chevron
is focused on developing new offshore energy supplies to help meet
America's needs. These efforts are complex, costly, time consuming and
often require the development of new technology. Our experiences
provide important insights relevant to new offshore areas.
First, one of the most important factors determining the time and
cost it will take to bring new offshore resources into production is
proximity to infrastructure. The timeline for a frontier prospect that
is far from existing support facilities and infrastructure can easily
stretch to a decade or more from lease acquisition to first oil.
Projects closer to infrastructure will generally offer shorter
timelines. Second, technology today has improved our ability to locate
and safely develop offshore resources.
The following are four examples of the effort and time needed to
bring new OCS production to the market. These are Blind Faith, Tahiti,
Buckskin, and Flatrock projects, all in the Gulf of Mexico. While the
challenges are very real, we are grateful that we have the people, the
technology and the financial resources to overcome these challenges and
develop the affordable, reliable energy supplies that are so vital to
America's competitiveness.
We started production at our new Blind Faith facility in 2008,
seven years after the initial successful exploratory well was drilled.
Total development time following lease acquisition was around a decade
and, given the complexities involved in this project, this was a very
aggressive schedule. The Blind Faith facility is located in 6,500 feet
of water, and supports wells that are drilled more than five miles
below the ocean floor. The wells themselves use remote subsea
completion technology, allowing a single facility to produce a much
larger area. The depth, high pressures and temperatures encountered in
Blind Faith's reservoirs presented technical challenges. Developing the
technology to solve these challenges has been a significant
accomplishment and will enable us to bring an estimated 65,000 barrels
per day of oil and 55 million cubic feet of natural gas to market each
day.
Another project, Tahiti, further illustrates the challenges our
industry manages in terms of timing, scale and cost. We acquired the
Tahiti leases in the 1990s. In 2002, following years to complete
evaluation and permitting, we used leading-edge technology to drill in
4,000 feet of water and found an estimated 400 million to 500 million
barrels of recoverable resource. It has taken seven years to build the
infrastructure required to produce the oil and gas from more than 100
miles offshore and five miles deep. When Tahiti comes online this year,
we will have invested $4.7 billion--and dedicated personnel and
resources for over a decade to manage exploration, permitting,
engineering and development--before realizing $1 of return on our
investment. Once in production, Tahiti is expected to add 125,000
barrels of oil and 70 million cubic feet of gas per day to the U.S.
domestic supply, and is expected to produce for decades to come.
Just this month we announced another significant milestone--a new
deepwater oil discovery in the Gulf of Mexico at the Buckskin prospect,
located in 6,000 feet of water depth approximately 180 miles southwest
of New Orleans and 44 miles west of Chevron's 2004 Jack discovery. The
Buckskin discovery is confirmation that our efforts to explore this
geologic formation called the Lower Tertiary trend will help provide
new U.S. oil and natural gas supplies. Buckskin, like Tahiti and Blind
Faith, will take time to develop but we are optimistic that it will
further bolster the nation's domestic energy supplies.
Not all of our activity is focused in the deep water of the Gulf.
We are also working hard to maximize resource recovery from more mature
areas. Last year, working with our partners, we announced
commercialization of a new deep gas discovery known as Flatrock,
located in just 12 feet of water deep below existing shallow
reservoirs. Applying modern 3-D seismic data and state-of the-art
analysis, we identified deep gas reservoirs close to our production
facilities in the Tiger Shoal area offshore Louisiana. While the deeper
resources required drilling wells to depths of 18,000 feet and
application of new technology to safely manage the higher temperatures
and pressures, due to the proximity to existing infrastructure, we were
able to bring three producing wells into service within a year of
discovery and are continuing to work on additional development in the
area.
As we consider our approach to the undeveloped OCS, it is clear
from these examples that proximity to infrastructure should be one of
the factors governing selection of priority areas. The undeveloped OCS
is unlikely to yield prospects with the timeline of a Flatrock, but
those we can identify that are closest to infrastructure represent the
resources we can most quickly develop and that will serve as the
foundation for more extensive exploration and development.
Finally, these four examples represent projects that were simply
not feasible a couple of decades ago. They are possible today thanks to
remarkable innovations in technology, equipment and processes. This
ability to innovate and apply sophisticated new technologies holds
promise for continued success, maximizing the potential of U.S.
resources.
Chevron recognizes the importance of operating in an
environmentally responsible manner and in a way that accommodates other
uses of federal lands and waters.
Just as our ability to identify and develop resources has evolved,
so too have the equipment and procedures we use to safeguard the
environment. The oil and gas industry has proven, especially in the
last 25 years, that it has the technical capability and safety
procedures in place to minimize the risk of adverse impact on the
natural environment. Successfully drilling deep wells in water depths
exceeding 5,000 feet is one example of industry's ability to operate
without adverse environmental impact. Even more impressive is the
record of the offshore industry during hurricanes in 2005 and 2008.
These storms adversely impacted hundreds of surface facilities, yet
industry technology such as subsurface safety valves and safety
procedures to shut in and evacuate production facilities in advance of
the storms protected our workforce and the environment by preventing
major oil spills from the impacted wells.
We also have developed ways to reduce the visible footprint of our
projects and produce offshore assets with fewer permanent surface
facilities. Directional drilling and the ability to install subsea
completion and gathering systems greatly extend our reach from surface
facilities, or eliminate the need for them altogether.
America's efforts to reduce foreign oil dependence must include the
continued prudent and responsible development of federal resources,
including development of resources in areas of the OCS recently under
moratoria, through the MMS mineral development programs that have been
in place for many years.
Expiration of moratoria has created the potential opportunity to
apply advanced exploration and production know-how in unexplored parts
of the OCS, but it is important to note that removal of a moratorium
does not create immediate or uncontrolled access to these offshore
areas. MMS resource development programs, in place for over 25 years,
provide the Secretary of the Interior with the tools, authority and
flexibility to manage a balanced program of energy development. The
leasing process is methodical, balances mineral development with other
considerations, provides robust environmental safeguards and includes
multiple opportunities for stakeholder input.
We believe the question before this Committee and Administration is
how best to implement and sustain a thoughtful development strategy in
former moratoria areas.
The areas involved are vast. Both industry and government resources
must be deployed in a prioritized manner to maximize the effectiveness
of this strategy. The procedures to do this are in place. A carefully
planned and phased approach to developing former moratoria areas is the
critical next step, utilizing the MMS 5 year leasing program process
that has proven a successful approach to offshore development. We offer
several recommendations for consideration:
1. Lift the statutory moratorium on the Eastern Gulf of Mexico
The eastern Gulf of Mexico remains under a moratorium imposed under
the Gulf of Mexico Energy Security Act of 2006. The most important
action Congress can take to enhance our energy security is to lift this
moratorium. The GOMESA restriction impacts areas with the best known
prospects that are relatively close to existing infrastructure,
including Destin Dome.
2. Reject calls for new moratoria and similar restrictions on OCS
development.
Removal of the Presidential and Congressional moratoria in 2008 was
a positive first step toward responsible OCS development, but
additional steps are needed. Without understanding the process, many
consider ``available for leasing'' to be synonymous with ``already
leased''. Nothing could be further from reality. The MMS is charged
with determining which areas within a given Planning Area will be
offered for lease. It does so, balancing resource potential, commercial
interest, environmental and other considerations, including the views
of the states, using a methodical process. There are at least six
public input steps as well as specific reviews with the states and
Congress between the initiation of planning and an actual lease sale.
Once a lease is issued there is additional planning, review and
approval required before an exploratory well can be drilled. It can
easily take five years from OCS program planning inception to that
first well. As we approach the very real need for energy and the
economic benefits that accompany domestic production, we urge Congress
to reject proposals that arbitrarily remove areas from this careful
process by reinstating moratoria in whole or in part.
We also urge rejection of policies proposed as compromise but that
carry the same effect as a moratorium. For example, arbitrary buffer
zones, restricting access within a set distance to shore, risks
functioning as an outright moratorium. A 50 mile buffer zone, which has
been proposed, would remove from consideration the best known prospects
in the undeveloped OCS and, according to MMS data, severely reduce the
potential resource available. It would also tend to push all
development farther from existing infrastructure. MMS can fulfill its
role most effectively when it is free to evaluate and identify those
resources that can be developed most effectively, efficiently and
safely.
3. Pursue development of new OCS resources with a thoughtful,
prioritized approach.
Chevron supports a phased approach to developing former moratoria
areas, moving quickly to include highest priority areas in the MMS 5-
Year Leasing Program currently under development for 2010-2015. There
are 26 Planning Areas in the OCS. Due to practical constraints, it is
unrealistic for either MMS or the industry to immediately focus on all
of the former moratoria areas while simultaneously continuing
development in existing accessible planning areas. A strategic approach
to phasing in evaluation and leasing, starting with the most
prospective areas and those closest to existing infrastructure, makes
the most economic sense and will help bring on new domestic oil and
natural gas as soon as possible. Through the stakeholder input process,
MMS will be able to identify those Planning Areas with the highest
level of interest which in turn may contain the greatest potential for
commercial discovery of new domestic offshore resources.
4. Facilitate the acquisition of more modern resource assessment data
(including seismic) to better inform development choices in
previously unexplored areas.
Decades of oil and gas access restrictions to most of the OCS have
precluded not only drilling, but also any pre-leasing activity
including collection of seismic data. MMS estimates, based on limited
amounts of older data such as wells, cores and seismic surveys,
indicate substantial resource potential exists, but the scarcity of
comprehensive modern information using improved evaluation technology
makes these estimates highly speculative. More extensive and better
data is needed to update estimates of total resource potential, guide
government efforts to implement an effective leasing program, and to
improve our ability to identify and focus on the most promising
prospects first. Congress can facilitate the gathering of this data by
providing adequate MMS budgets to allow them to do this work and to
establish a mechanism where companies can contribute to pre-leasing
data collection.
5. Preserve the existing MMS planning and leasing framework.
MMS OCS mineral development programs in place for over 25 years
provide the Secretary of the Interior with the tools, authority and
flexibility to manage a balanced program of energy development. The
leasing process is methodical, balances mineral development with other
priorities, provides strong environmental safeguards and includes
multiple opportunities for stakeholder input.
6. Avoid arbitrary and unnecessary due diligence provisions.
Simply stated, both the existing regulatory process and basic
economics ensure that leases are developed in a diligent manner. Leases
are acquired at significant expense through a competitive bidding
process and are subject to annual rental fees. If drilling or
production is not commenced within the primary term, the lease is
automatically relinquished to the government along with all of the bid
bonus and rental fees paid. Beyond this due diligence obligation built
in to the lease structure, the regulations and lease terms contain
numerous additional requirements specifying leaseholder obligations.
For example, exploration and development plans specify the number and
timing of wells to be drilled.
There is no guarantee that commercial quantities oil and gas exist
on any given lease, and under the existing program leaseholders bear
all of the commercial risk for exploration and development of these
properties. For leases returned to the government, leaseholders are out
of pocket not only for bonuses and rentals but also for all the
resources invested in planning, evaluation, and exploratory drilling.
If a lease does terminate, it is not uncommon for the MMS to re-offer
the expired acreage at the next Lease Sale and for someone else to
lease it starting the whole process over again.
Chevron currently holds over 2000 Federal leases, around 70% of
which are producing oil or natural gas, and are classified as
``developed'' in reports to the government. More than 85% of Chevron's
federal onshore leases are producing oil and gas. Most of Chevron's
undeveloped federal leases are located offshore in water depths between
4,000 and 10,000 feet where there is no existing infrastructure to
produce hydrocarbons. These represent complex, high cost and long cycle
time developments, and although government regulations require us to
report them as ``undeveloped,'' this does not mean they are inactive.
Our Tahiti project in the Gulf is an excellent example. It is still
listed today as ``undeveloped'' even though billions of dollars have
been spent, facilities have been constructed and the startup date is
very close.
Chevron's consistent practice is to conduct a thorough evaluation,
followed by exploratory drilling, appraisal drilling, and finally
installation of production facilities, where viable, of every lease we
hold. Many leases do not have recoverable resources--we relinquish
leases for those properties once we determine that commercial
quantities of oil and gas are not available.
7. Give states an incentive to support exploration and production by
enhanced revenue sharing.
While offshore oil and gas operations boost local economies, the
host states also bear some of the burden of administering the program.
For example, permitting and regulating shoreside support facilities
often are the jurisdiction of state and local agencies. Provisions for
enhanced revenue sharing already exist for states adjacent to existing
Gulf of Mexico production, and should be extended to all coastal
states.
It will take time and stable, sustained policies to bring new
resources to the marketplace.
Chevron supports a stable and consistent policy and regulatory
environment with respect to access and leasing. Energy investments are
long-term, and expensive. The Tahiti project has spanned 5 congresses
and its producing life could span 15 more. An unstable regulatory
environment greatly increases the risk profile of these projects and
discourages investment in domestic energy. We urge Congress and the
Administration to maintain a path for the responsible development of
new OCS resources and avoid changes to policy and arbitrary
restrictions that will hinder that development.
New domestic oil and natural gas resources, as with all other
energy choices, are not a quick fix to our energy challenges. Nor are
they the only source we should pursue. We need all energy sources as
well as efficiency measures to meet demand in the coming decades.
Thoughtful development of oil and gas resources as a part of a broad
energy policy will enhance energy security, create high quality jobs,
increase government revenues and reduce U.S. capital outflows to
foreign producers.
At Chevron, we want to work with you to realize that potential.
Thank you.
ENDNOTES
1 NPC Study--2008 update, http://www.npc.org/Hard_Truths-
update_2008.pdf
2 MMS, EIA-28 Financial Reporting System
3 U.S. GDP--2006 (U.S. Bureau of Economic Analysis)
4 Strengthening Our Economy: The Untapped U.S. Oil and Gas
Resources. ICF International December, 2008
5 EIA Annual Energy Outlook, Early Release (December 2008).
6 U.S. Minerals Management Service, 2006, ``Report to
Congress: Comprehensive Inventory of U.S. Oil and Natural Gas
Resources--Energy Policy Act of 2005 Section 357,'' February,
2006.
______
The Chairman. Thank you. Ms. Harbert?
STATEMENT OF KAREN A. HARBERT, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, INSTITUTE FOR 21ST CENTURY ENERGY, U.S. CHAMBER OF
COMMERCE
Ms. Harbert. Thank you, Chairman Rahall, and Ranking Member
Hastings and Members of the Committee. I am Karen Harbert,
President and CEO of the Institute for 21st Century Energy, an
affiliate of the U.S. Chamber of Commerce. As many of you know,
the Chamber is the world's largest business federation,
representing more than three million businesses and
organizations of every size, sector and region of our country.
Offshore drilling, like many other issues in the energy
policy arena, too often winds up pitting people against one
another and dividing them into simplistic camps labeled either
``pro-environment'' or ``pro-oil.'' The reality is that our
country and our economy is ill-served by narrow approaches that
only look to benefit a single side of this debate.
Our nation's energy, environmental and economic future are
all intertwined with one another, and we need comprehensive
policies that will address all three. Many of those testifying
at your previous hearing stressed the importance of continued
development of renewable resources, such as solar and wind, and
to this I would say we could not agree more.
There is no question that renewable resources of energy
need to play a greater role in our energy mix, and that is why
the Institute made a number of recommendations designed to
encourage the development and deployment of renewable energy
technologies as part of our comprehensive transition plan we
submitted to you in this Congress and to the Administration.
But those who would say we can attain energy security
without oil or natural gas are as incorrect as those who would
say that we can drill our way out of our current energy
challenges. The only way we can effectively meet our energy
demands is with an approach that includes a myriad of
resources, including oil, gas and renewables. Just as we can't
ignore the promise of renewable energy, we also cannot ignore
the reality of our continued need for oil and natural gas.
Therefore, the Institute has recommended permanently ending
the remaining moratoria on exploration and production of oil
and natural gas on the Outer Continental Shelf and on Federal
lands onshore, and to expeditiously make leases available for
exploration and development. The energy policies that Congress
has passed over the last several years concede that oil is
going to play a critical role for years to come.
The Energy Independence and Security Act of 2007 set a
renewable fuel standard that assumed 20 percent of our
transportation needs could be met by renewable fuels. This
recognized that oil will still make a majority contribution to
our fuel supply in the year 2022.
While the Institute has issued several recommendations to
transform our transportation sector, such as extending tax
credits for plug-in hybrids, including second generation
biofuels, like cellulosic ethanol and the blenders' tax credit,
we also recognize that the U.S. will continue to be dependent
on oil for years to come, and that oil is going to come from
somewhere.
According to the International Energy Agency, between 2007
and 2030, 64 million barrels per day of gross capacity--that is
about six times the capacity of Saudi Arabia today--will be
needed to be brought on line to meet the growth in oil demand
and offset the inevitable decline from production from existing
fields. Unless the U.S. acts to develop its own resources, the
IEA further estimates that this growth in capacity will be
predominantly filled by the OPEC countries in the Middle East.
The IEA also estimates that, globally, over $6 trillion in
new oil and gas investments will be needed by 2030. Our own
economy could use a portion of that jolt that those investments
would provide. A recent ICF study showed that if energy
development were permitted in the previously off-limit areas of
the OCS, Alaska and a portion of the Rockies, we would see
160,000 new jobs and a new royalty revenue stream for the
American economy.
A conservative estimate is that the OCS contains 86 billion
barrels of oil and 420 trillion cubic feet of natural gas. We
have the technology today, and more will be developed in the
future to better map these regions, better access these
supplies, and do it all in an environmentally responsible
manner. Consider that in 1981 when the OCS moratorium was first
implemented, typewriters were on every desk, people were
listening to music on record albums, and the easiest way to get
directions was to buy a map at the gas station.
Today we have computers, the Internet, MP3 players and GPS
devices. Technology has the power to change and improve the way
we live, and the power to change the way we use, consume and
produce energy. The fear mongering that some engage in when it
comes to expanding domestic production is neither factually
accurate, nor productive to a meaningful dialogue.
Beyond permanently ending the OCS moratorium as a means of
providing legal and regulatory certainty on the issue, there
are important steps this Congress and the Administration must
take. First, Congress should make sure that states are
compensated for any new exploration or production off their
shores, and we recommend bringing all coastal states in line
with the Gulf of Mexico states at a higher level of 37-and-a-
half percent as was approved in 2006 by this Congress.
Second, Congress should reject the so-called ``Use It or
Lose It'' that already exists in law today. Finally, the
Administration and Congress should not allow bureaucratic
processes to slow down our path to energy security. We are
closely watching the Department of the Interior's process and
Secretary Salazar's proposal to further delay the five-year
leasing program that has been put out already for extensive
public comment.
Our nation faces extraordinary challenges. We currently
import 60 percent of our oil. If we had made hard decisions in
previous Congresses and previous Administrations, we would not
face that energy reality today. This Congress has a chance to
change our nation's future, and we look forward to helping you
do that to maintain America's competitiveness, drive our
economic recovery, create American jobs, and preserve our
environment. Thank you.
[The prepared statement of Ms. Harbert follows:]
Statement of Karen A. Harbert, President and CEO,
Institute for 21st Century Energy, U.S. Chamber of Commerce
Thank you, Chairman Rahall, Ranking Member Hastings, and members of
the House Committee on Natural Resources. I am Karen Harbert, President
and CEO of the Institute for 21st Century Energy (Institute), an
affiliate of the U.S. Chamber of Commerce. The U.S. Chamber of Commerce
is the world's largest business federation, representing more than
three million businesses and organizations of every size, sector and
region.
Overview
I appreciate the Committee holding a series of hearings on the
issue of offshore drilling, and in particular your effort to seek
perspectives from a broad array of individuals and groups. The mission
of Institute is to unify policymakers, regulators, business leaders,
and the American public behind common sense energy strategy to help
keep America secure, prosperous, and clean. In that regard we hope to
be of service to this Committee, this Congress as a whole, and the
Administration.
Offshore drilling--like many other issues in the energy policy
arena--too often winds up pitting people against one another and
dividing them into simplistic camps labeled either ``pro-environment''
or ``pro-oil''. The reality is that our country is ill-served by narrow
approaches that only look to benefit a single side of this debate. Our
nation's energy, environmental and economic future are all intertwined
with one another, and we need comprehensive policies that will address
all three.
The goal of my testimony today is to provide some balance to this
issue, and to put offshore drilling into its proper context relative to
our nation's needs and its current policies.
The U.S. Needs a Comprehensive Approach to Energy
Earlier this month, the committee heard from representatives of
environmental and commercial groups, and yesterday you heard from
representatives from states. Many of those testifying at both hearings
stressed the importance of continued development of renewable energy
sources such as solar and wind, and to this I would say that we
couldn't agree more. There is no question that renewable sources of
energy need to play a greater role in our energy mix.
But those who would say that we can attain energy security without
oil are as incorrect as those who would say that we can drill our way
out of our current energy challenges. The only way we can effectively
meet our energy demands is with an approach that includes a myriad of
sources--including oil, gas and renewables.
But beyond new sources of energy, America needs a new approach to
energy. We need an energy strategy that takes into account the many
challenges that need to be addressed in both the short- and long-term.
What guides the Institute is our desire to see policymakers embrace a
comprehensive, consensus-driven approach to energy policy.
To that end, last summer the Institute unveiled 13 pillars upon
which any comprehensive energy reform effort should be built. Among
them were, increasing research and development of clean energy
technologies, and expanding domestic oil and gas exploration and
production. These pillars are:
1. Aggressively Promote Energy Efficiency;
2. Reduce the Environmental Impact of Energy Consumption and
Production;
3. Invest in Climate Science to Guide Energy, Economic, and
Environmental Policy;
4. Significantly Increase Research, Development, and
Demonstration of Advanced Clean Energy Technologies;
5. Immediately Expand Domestic Oil and Gas Exploration and
Production;
6. Commit to and Expand Nuclear Energy Use;
7. Commit to the Use of Clean Coal;
8. Increase Renewable Sources of Electricity;
9. Transform our Transportation Sector;
10. Modernize and Protect U.S. Energy Infrastructure;
11. Address Critical Shortages of Qualified Energy Professionals;
12. Reduce Overly Burdensome Regulations and Opportunities for
Frivolous Litigation; and
13. Demonstrate Global Leadership on Energy Security and Climate
Change.
As a follow-up, the Institute unveiled a Blueprint for Securing
America's Energy Future that built on these pillars and provided
specific recommendations for how Congress and the Administration should
craft a comprehensive energy plan. In November, we presented to the
incoming Administration and Congress a detailed implementation plan
that included timelines for each recommendation and identified who in
our government has the responsibility for taking action.
Congress and the new Administration have made research and
development funding of clean energy technologies a priority, as
evidenced in the major commitment made in the stimulus package that was
recently signed into law.
It is our belief that investing in research and development of new
technologies will ultimately pay major dividends. But it is important
to remember that government should not be in the business of picking
technology winners and losers and that research and development--while
critically important--takes time. It is also critical to find the
appropriate roles for government and the private sector. The role of
the private sector in our future energy security is paramount and we
should not seek to crowd out their participation, capital, innovations
or expertise.
Just as we can't ignore the promise of renewable energy sources, we
also can't ignore the reality of our continued need for oil. When it
comes to energy, our nation can't afford an either/or approach--because
the bottom line is that we need all types of conventional,
unconventional and renewable energy--through diversification comes
improved energy security.
Therefore, in addition to our expanding the role for renewable and
clean energy,, investing in clean coal technologies and expanding
nuclear power, we also recommend permanently ending the remaining
moratoria on exploration and production of oil and natural gas in the
Outer Continental Shelf and on federal lands onshore. For 30 years, 85
percent of America's oil and natural gas resources have been placed
off-limits to exploration and production and this clearly has not
benefitted the American economy or the average American consumer. The
restrictions we have placed on the production of our own domestic oil
and natural gas resources are a significant self-inflicted wound to our
security and prosperity.
Oil Will Continue to Play an Important Role in Meeting our Energy
Demands
The Committee is well aware of the challenges we face when it comes
to energy. Between now and 2030, global demand for energy could
increase by more than 50 percent, and by as much as 20 percent here in
the United States. If we fail to develop the supplies needed to meet
this demand, there will be catastrophic consequences for our global
competitiveness, our economy and our quality of life.
The fact is that oil will remain the backbone of our national and
global economy for the foreseeable future. Despite the valuable
progress being made in the development of new energy sources and
technologies, there is still no viable substitute for oil.
The aggressive energy policies that Congress has passed over the
last several years concede that oil is going to play a critical role
for years to come. The Energy Independence and Security Act of 2007
(EISA) amended the Renewable Fuel Standard to require the use of 36
billion gallons of renewable fuel annually by 2022. This was projected
to be roughly 20 percent of U.S. transportation needs. So even under
this innovation-driven policy, we are assuming that 80 percent of our
transportation needs will still be met by oil in the year 2022. While
the Institute has issued several recommendations to transform our
transportation sector, such as extending tax credits for plug in
hybrids and including second generation biofuels like cellulosic
ethanol in the blenders' tax credit, we nevertheless realize that the
United States will continue to be dependent on oil for years to come.
Domestic Sources of Oil and Gas are Critical for our Economy and
National Security
According to the International Energy Agency (IEA), between 2007
and 2030, 64 million barrels per day of gross capacity--which is the
equivalent of six times the current capacity of Saudi Arabia--will need
to be installed in order to meet the growth in oil demand and offset
the inevitable decline in production from existing fields.
Unless the U.S. acts to develop its own resources, the IEA further
projects that this growth in capacity will be predominantly filled by
OPEC countries in the Middle East. We already see that other nations
are moving quickly to secure and stabilize their future oil supplies.
Last week, China entered into an oil-for-loans agreement with Russia.
These types of agreements are a reminder that as long as there is a
demand for oil, capital will continue to flow into the countries that
can supply it.
Between 2007 and 2030, the IEA also that estimates globally, $6.3
trillion in new investments will need to be made in oil and gas. Thus,
if the United States fails to explore and develop its own oil
resources, we are potentially turning away trillions of dollars in
capital investments. This is an opportunity that we could ill afford to
lose during an economic boom, let alone during the trying economic
circumstances we are currently facing.
The United States already imports roughly 60 percent of our oil
from foreign nations, which is nearly double the amount we imported in
the 1970s. And in 2008, the United States sent between $400 and $700
billion overseas for imported oil.
It is in America's best interest from an economic and national
security perspective to have a stable supply of energy, including oil
and gas, and thus we can no longer afford to ignore the billions of
barrels that lie off our shores. It is estimated that America's Outer
Continental Shelf (OCS) contains 86 billion barrels of oil and 420
trillion cubic feet of natural gas. That estimate is conservative since
previous surveys were conducted decades ago. The technologies available
today and in the future will allow us to better map these regions,
better access their supplies of oil and natural gas, and do it all in
an environmentally responsible manner.
Consider that in 1981, when the OCS moratorium was first
implemented, typewriters were on every desk, people were still
listening to music on record albums, and the easiest way to get
directions was to buy a map at the gas station. Today, we rely on
personal computers and the Internet, mp3 players, and GPS devices. Just
as technology has the power to change and improve the way we live, it
also has the power to change and improve the way we get our energy. The
mongering fear that some engage in when it comes to expanding domestic
production is neither factually accurate nor productive to a meaningful
dialogue on our energy future.
Policymakers Must Take Action to Address our Energy Challenges
It is time to embrace the reality that our energy challenges will
require a long term, comprehensive approach that outlasts political
cycles or economic ups and downs.
In addition to permanently ending the OCS moratorium as a means of
providing legal and regulatory certainty on the issue, there are still
other important steps that Congress and the Administration must take--
and other steps they must avoid--to ensure that our nation is able to
realize the full benefits of these important resources.
It is important to remember that the energy business is capital
intensive. A new offshore production platform typically costs in excess
of $500 million to construct and hundreds of millions of dollars per
year to operate. Before companies will make these types of investments,
they need to be certain that they will be allowed to finish what they
start.
I mentioned before that the United States sent a minimum of $400
billion overseas for imported oil in 2008. If even a fraction of that
money could be kept and invested here in the United States, it could
make a huge impact. A recent ICF International study showed that if
energy development were permitted in the previously off-limits areas of
the Outer Continental Shelf (OCS), Arctic National Wildlife Refuge
(ANWR) and a small portion of the Rockies it would lead to the creation
of 160,000 new jobs. In addition there are significant royalty revenues
associated with these opportunities.
Second, Congress should make sure that states are well compensated
for any exploration or production taking place off their shores. Under
current law, the federal government shares 27 percent or less of
revenues from oil and natural gas production within the first three
nautical miles of federal waters off of the state boundary and zero
beyond that. We recommend bringing all coastal states in line with Gulf
of Mexico states, which were granted a higher percentage share of 37.5
percent of the revenue for new leases off its coast under the Gulf of
Mexico Energy Security Act in 2006.
Third, Congress should reject additional so-called ``Use It or Lose
It'' leasing provisions. Such provisions would be duplicative,
unnecessary and ultimately set back the exploration and development of
the OCS. ``Use It or Lose It'' is already the law of the land.
Companies purchasing a lease already have a time period that they must
act within, and having invested billions of dollars on a lease, they
are already heavily incentivized to see it produce sooner rather than
later. Exploring and developing a lease takes time, and adding
additional, punitive ``Use It or Lose It'' provisions would make it
less likely that companies would want to invest in these areas.
Fourth and finally, the Administration and Congress should not
allow bureaucratic processes to slow down our path to energy security.
The Institute is carefully following the Interior Department's recent
action to extend the public comment period by six months and delay
until this fall the review of proposed leasing plans for future oil and
gas exploration and production on the OCS. We naturally agree with
Secretary Salazar's recent statement that America requires a
comprehensive energy plan, but such a plan must include a pathway for
greater supplies of proven energy sources like oil.
Our nation faces some extraordinary energy challenges in the years
ahead, but these challenges are also an opportunity. If we embrace a
comprehensive approach and enact smart policies, we can lay the
groundwork for energy security, environmental protection and economic
prosperity.
Thank you.
______
The Chairman. Thank you very much, all of you, for your
very enlightening testimony, and well-prepared, and most
importantly, staying within the five-minute time limit. You
know, I agree, Mr. Odum, you started out by saying that it is
very important that we not be lulled into a false sense of
energy security now that prices at the pump are down. We know
they will go up, yes, as the economy improves. I think that was
alluded to by several of the testimonies here this morning.
Last year, during the election campaign when we saw the
over $4 per gallon gas prices, we were subjected to a bumper
sticker campaign--drill here, drill now, pay less, blah, blah,
blah. All of that, of course, was an attempt to get the
American people to believe that if the moratoria were lifted,
then high gasoline prices would immediately drop.
Today, the moratoria has been lifted, gasoline prices have
dropped, although I don't believe, and that would be one of my
questions to the panel, that the lift in the moratoria has
caused the current drop in gas prices compared to where they
were last summer. So, that would be one question.
The second question would be the stake--this would go to
the entire panel--that new leasing and drilling in previously
closed areas of the OCS will significantly alter gas prices at
the pump in the near future.
Mr. Odum. If I could start, Mr. Chairman?
The Chairman. Yes.
Mr. Odum. I think to the first point, specifically to your
question do I think gas prices have come down as a result of
lifting the moratorium, I don't think there is that direct
relationship. I think the world, and of course, the country, is
actually watching to see what do we do next to build some
confidence. That actually means we will develop some of these
areas.
The Chairman. Yes, sir? I am sorry. Mr. McKay?
Mr. McKay. I would just say that I believe the drop in gas
prices are due primarily to a drop in demand on gasoline and
the shape of the world economy. As far as new leasing and
drilling, I think a million barrels a day is a significant
number, if that is the potential of the offshore that is
currently off-limits. That would not be immediate. It would
take 10 to 20 years, probably, to develop. However, it would
send a signal to the world that we are opening up our areas for
exploration and development, and overall would be advantageous,
I think.
The Chairman. OK. Mr. Nichols?
Mr. Nichols. I am sure we are all going to say the same
thing on your first question. The drop in prices is because of
the drop in demand, which is because of the recession around
the world, and that is pretty clear.
The Chairman. All right. I assume the remaining three will
say the same thing, so let me move on to my second question.
Which areas of the OCS are your companies most interested in
developing in priority order? In other words, if you could buy
a lease tomorrow in an area that was previously off-limits,
where would it be located?
Mr. Nichols. The area of the offshore that we have the most
knowledge about is the Gulf of Mexico, because we already have
leases and facilities that go right up to that imaginary line
that goes down the middle of the Gulf of Mexico, dividing the
eastern part from the western part. That is the part of the
United States that we have the most knowledge and, indeed, the
infrastructure, as I said in my testimony, with pipelines going
right through that area offshore, so that area would probably
be the most.
I am sure that different companies would have different
views on the Pacific Coast, Atlantic Coast, Alaska, and that
would be because we really don't have enough knowledge or
information at this stage to really make an informed decision.
Mr. Cejka. May I follow up?
The Chairman. Yes.
Mr. Cejka. Following up on Mr. Nichols' comment, on all the
offshore areas it has been over 30 years. I started 33 years
ago, and the first project I worked on was offshore California.
I remember vividly the technology we had. There were no
computers. We used paper seismic records and pencils to make
our interpretations. The advances in seismic are unbelievable
in those 30-plus years. The first thing I would say is let the
industry gather seismic data on the coastlines.
The industry will find places it has interest. Mr.
Chairman, to your question of where, it is a horserace. We see
things differently because we have different technologies and
different people. Sometimes our company is right, and sometimes
Chevron and BP are right; but that is what makes it good to
have competition in the industry because we do eventually find
the right spot. It is hard to predict until we gather this new
seismic data, which will help all of us determine where the
better areas are.
Mr. Odum. Mr. Chairman, if I could just add one piece which
I think is a little bit different to that answer--specifically,
offshore Alaska where there have been wells drilled in the
past--we know there is oil and gas out there. It is an area
open to leasing, but it is currently being inhibited. I think
just for the Committee to think about--what could be done to
that area which is open, what could be done to help move that
forward--would be an important question.
The Chairman. Any further comments on that? Thank you. Mr.
Hastings?
Mr. Hastings. Thank you, Mr. Chairman. I want to ask a
question of all the panelists except Ms. Harbert because she is
not in the business, but I am wondering if you could tell me,
and if you don't know, you know, the broad range here, submit
that for the record, and that is this: Do you know how much
that your company paid to Federal and state governments in
2008? I am talking about taxes, royalty, bonus bids.
Mr. Cejka? I knew some Cejkas in my hometown, so if I call
you Mr. Cejka, is that OK?
Mr. Cejka. Yes. That is absolutely fine.
Mr. Hastings. OK. Fine. If you could do that, and if you
don't have it in front of you, please submit it for the record.
We will start with Mr. Odum.
Mr. Odum. If I could just characterize that in the very
recent past, maybe 18 months to two years----
Mr. Hastings. That is fine.
Mr. Odum.--about $600 million in the Gulf of Mexico and
over $2 billion in Alaska.
Mr. Hastings. Mr. McKay?
Mr. McKay. In 2008, counting bonuses, rental payments,
royalties and income taxes, $5.3 billion.
Mr. Hastings. Mr. Nichols?
Mr. Nichols. I don't have that number, but would be glad to
submit it.
Mr. Hastings. OK. Mr. Cejka?
Mr. Cejka. In 2008 and 2007, we contributed about $16
billion to the U.S. economy in terms of taxes, royalty.
Mr. Hastings. In taxes and royalty. Mr. Luquette?
Mr. Luquette. I don't have those figures handy but can
provide those.
Mr. Hastings. OK. Fine. I appreciate that. Mr. McKay, I
would like to ask you a question. We hear a lot about
technology in the offshore industry, and typewriters when we
last explored some areas. I thought that was good. Could you
elaborate a little bit on the technological advances that have
occurred in the industry that has made your work more
environmentally friendly?
Mr. McKay. Yes. I think building on from where my colleague
from Exxon was, seismic technology has moved massively forward
in the last 30 years. We can image and see things, and
therefore target things that weren't even possible as little as
10 years ago. The footprint that we must impact, in terms of
number of wells drilled, leads that are developed down into
prospects, and some are culled, as they are not potential, that
has increased our ability to drill in the right place
drastically.
The other thing I would say, in drilling technology we can
now do extended-reach drilling. You heard an example of up to
six miles. There are examples, we are trying to go out eight
miles. We can also design the wells based on the seismic
interpretations to be safer, more robust and designed better
for the situations that they are going into. The third area is
around monitoring and control. The systems, the pressure
sensors, temperature sensors, flow sensors are miles better
than they were in the past.
We can see things and understand things in real time now
downhole in the well and at the surface, and control things
much better than we could in the past. The last area, I would
say, which is a big, big benefit, is the usage of subsea
completions where we can drill wells, produce those wells
purely from subsea installations, tie those back to central
processing facilities 15, 20, 30 miles away and therefore the
visual impact is very low.
And so when you combine all those systems, you have a
safer, more environmentally sensitive methodology of
development today than we had 30 years ago, or actually even 10
years ago.
Mr. Hastings. Thank you. And last, well, maybe not last,
for Mr. Cejka. I just can't resist, I guess. You have been in
the business, you said, for 33 years. Are you aware of any
other industrial country that limits the energy resources like
the United States?
Mr. Cejka. There are none. To my knowledge, there are none.
Mr. Hastings. All right. As far as stimulus, because that
issue was talked about a great deal, is your company receiving
any bailout money?
Mr. Cejka. Absolutely not.
Mr. Hastings. All right. Any of the other companies
receiving bailout money?
Mr. Odum. No.
Mr. Hastings. OK. Good. One last question real quickly. Mr.
Nichols, do you believe that the Federal government should
subsidize your member companies by directly contracting for new
seismic surveys of former moratoria areas before additional
leasing can take place?
Mr. Nichols. No, I do not.
Mr. Hastings. OK. Great. Thank you. I will yield back my
time because I know that we have votes going.
The Chairman. Yes. Let me go to Mr. Sarbanes and advise the
panel, with your indulgence, and if you can return, we will
have to take about a 30 minute break after this questioner and
come back after that time for more questions. Is that agreeable
with the panel? OK. Thank you. Mr. Sarbanes?
Mr. Sarbanes. Thank you, Mr. Chairman. I am curious. Before
the last year or two, when you must have fully expected that
the moratorium would have remained in place, I assume that
looking out from a couple years back, that would have been your
operating assumption as you were making plans and strategies
about going forward. Is that fair enough? OK.
So, what were the plans to make what you all characterize
as a transition from where we are now to a new portfolio of
energy resources that is more diversified? If the moratorium
had stayed in place, what was the strategy? Anybody could take
this question.
Mr. Odum. Well, I can tell you that we are talking about an
expanded portfolio, expanded opportunities for the U.S. when we
talk about opening new areas. One of our primary businesses is
oil and gas, but also working in the renewable areas of wind.
We have a significant wind business in North America, and also
very significant investments into second-generation biofuels.
Mr. Sarbanes. See, I think, I mean, my impression is my
belief. I am willing to have my belief system overturned, but
my belief right now is that the transition you are talking
about can be achieved if the moratorium were back in place,
provided that the exceptions to it, the places where you had
the opportunity to pursue leases and so forth, were part of
that reality.
To me, that is the presumption that needs to be rebutted
here because 85 percent is off-limits, right, if you go back to
the moratorium? Fifteen percent, it seems to me, based on what
I know and hear, should be sufficient to accomplish this
transition we are talking about, particularly, as you indicate,
if the estimates of what you would find were low in most
instances when you then get out and do the research.
I am having trouble understanding why, with the moratorium
being back in place, it doesn't give us enough to make this
transition to the new reality that we want to see.
Mr. Nichols. If I might, one of the things you might focus
on is where an oil and gas company allocates those dollars. We
can allocate those dollars to the United States, or to Canada,
or to other parts of the world. The more the United States
restricts where we can drill as companies, the more those
dollars have to find places internationally.
So, when the President of the United States talks about
increasing the United States lessening our dependence on
foreign oil, that says if you open up more areas in the United
States where we can explore for oil, we can do that. Some of
those dollars will get transferred from places offshore out of
the United States to places onshore.
Mr. Sarbanes. But I am hearing something--from Mr. Odum I
heard something a little bit different. Twice you have alluded
indirectly to the idea that the problem is not necessarily that
you don't have access to sites where there could be oil--under
those exceptions where the leases you had while the moratorium
was in place. The problem is that the process for completing
that exploration and getting it into an operation mode is
cumbersome and needs to be streamlined, or reregulated, or
whatever it is.
Mr. Odum. I appreciate the opportunity to clarify because
what I am saying is actually exactly what Mr. Nichols is
saying. It is an option for this country to develop the
additional resources that are out there for the benefit of
security, jobs, all the things that have been mentioned before,
so I won't repeat that.
Regarding my specific comments on how we can make the
system more effective in terms of accessing areas, it was a
particular flag around Alaska where we have had some challenges
getting things done efficiently and effectively. I think it
just speaks to the fact that when we open new areas for
exploration and production. we need to be sure that we
adequately fund and resource the pieces of government that are
involved in getting that done. So, that was my main point.
Mr. Sarbanes. Well, I would like to test the proposition
that if we do the things you are recommending with respect to
the areas that would be available, even with a moratorium in
place, that you could get to the kind of energy production
that, again, would allow us to make this transition.
I am probably running out of time here--`I am at yellow,
but I wanted to pursue something else, which is I think, Mr.
McKay, you talked about the $8 billion over 10 years that BP is
putting into pursuing alterative energy sources, renewable
energy sources, and so forth.
I just want to put that in context for people listening
because $8 billion is a lot of money. However, it is not a lot
of money compared to, for example, the profits that BP made in
a two-year period, which was $57 billion, so I am not impressed
with that as representing an aggressive transition to a new and
more diversified energy portfolio.
One of the things I am concerned about, Mr. Odum, is the
false sense of security that you are worried about because the
price has gone down. I am worried about the false sense of
security that can result if we suddenly think that we have all
of this OCS available to do drilling and we fall back into the
frame of mind that we don't have to have the discipline to
pursue these alternative sources of energy.
I think there is a discipline dimension to this as well,
and I think I have probably used my time up. Thank you, Mr.
Chairman. Thank you all.
The Chairman. OK. The Committee will stand in recess for a
half hour.
[Whereupon, a short recess was taken.]
The Chairman. The Committee on Natural Resources will
resume its sitting. We will recognize the gentleman from
Oregon, Mr. DeFazio, for questions.
Mr. DeFazio. Thank you, Mr. Chairman. I am sorry. I was
detained in Homeland Security with the Secretary so I missed
some of the questions, and if the panel would cut me a little
slack here, I may ask some questions that are repetitive. As
you know, there was consideration of legislation here last year
in the Congress when gas was retailing for over $4 a gallon and
consumers were outraged.
The Republicans said, ``Drill here, drill now,'' like that
would provide immediate relief. There were others of us who
felt that orderly and prompt development of some of the
existing leases perhaps might provide relief sooner, but we
didn't believe it would provide relief immediately either. I
guess my really simple question is, would ``drill here, drill
now'' last summer, if implemented as proposed, have made any
difference in the retail price of gasoline during last summer?
Yes or no? Seems like a pretty easy question. Anyone?
Mr. Nichols. Well, as we discussed earlier in this hearing,
you know, Economics 101 obviously says the more supply you
bring to any commodity, that that has a downward pressure on
price.
Mr. DeFazio. Right, but, of course, just the potential
leases for potential future supply of unknown volume, that
probably wouldn't provide a lot to a current market, would it?
Mr. Nichols. That had no impact.
Mr. DeFazio. Right.
Mr. Nichols. We all said that earlier.
Mr. DeFazio. Right. OK. That is good. So then, if we are
going to supply, I guess, I have a news report from Reuters,
July 3, and it points to about the time gas prices were peaking
over about $4--$4.30 in my district--that we were exporting a
record 1.6 million barrels of refined petroleum products at
that point in time, up 33 percent from the same period in 2007.
I assume your answer is going to be, ``Well, we are in a
global supply chain, and we will send the oil wherever it gets
the highest value for the refined product,'' so I would like
first a little discussion of why we were exporting a record
amount of refined product at a time when Americans were being
squeezed dramatically at the pump.
And then, I guess the follow-on question to that would be I
often hear that the reason for jumps is, ``This refinery had a
fire, this one shut down for cleaning, this one here had a
hurricane,'' and the price jumps up. Do we have enough refinery
capacity? So, two-part question. Why were we exporting a record
amount at a time when Americans were paying record prices, or
were they paying record prices because we were exporting a
record amount?
Mr. Cejka. I will address the first question, if I may,
sir.
Mr. DeFazio. Sure.
Mr. Cejka. The products that were being refined were, when
you go through a refinery run, and I speak as an upstreamer so
I don't speak with total engineering knowledge, but you develop
a lot of products under one run--gasoline is just one of them--
but there are other byproducts that come out of that, from
sophisticated lubricants down to very base sort of what is
called ``coke,'' which is sort of a leftover product.
Mr. DeFazio. Sure, but if I just could, and, you know I
don't always believe the news, but they do say in the first
paragraph, ``Shipping record amounts of gasoline and diesel
fuel to other countries.'' They weren't saying other splits.
They were saying gasoline and diesel in record amounts. But go
ahead.
Mr. Cejka. Well, I don't believe we were shipping record
amounts of gasoline. From what I know, it was on the product
side.
Mr. DeFazio. OK. Well, I guess, can anybody else address
that? I mean, we will have to check it out because perhaps
Reuters was wrong and you guys should have, you know, tried to
get them to correct it at the time.
Ms. Harbert. Congressman, if I might, I think we need to
recognize why there were high oil prices or high gasoline
prices. It was not because we were exporting some of the
refined product. Most of that product was actually going to
Canada, and it was a very small amount of what we were
refining. The reason there were high prices is because demand
was outstripping supply, and the reason it was outstripping
supply is because we haven't brought new supply onstream in
this country in so long.
Mr. DeFazio. But there were no gas lines like in the 1970s;
there were no absolute shortages; there was no rationing. I am
not aware of anywhere in the world that there were gas lines
outside of Iraq, which has its own set of problems, so to say
there wasn't enough supply, I guess, means we were rationing
through high prices because we were not rationing at the pump,
there were no absolute shortages, there were no red flags,
yellow flags, green flags, any of that kind of stuff.
Ms. Harbert. We did see consumer behavior moderate quite
substantially and, in fact, in August of last year we saw
driving behavior change, and people drove five percent less in
August of last year as they did the year before, so the
consumers responded to the high prices. We certainly don't want
to make decisions today that would put us 10 years from now in
an even worse situation. So, 10 years ago if we had brought new
supply on, we wouldn't be importing as much and we wouldn't
have seen those high prices this summer.
And so we really have an opportunity now to make a
difference. You know, the stimulus package stipulated some
long-term investments to get us out of this energy crisis, and
whether or not leases can be brought on line in one year or
three years or more, we should be investing for the long term
because this is a long-term challenge.
Mr. DeFazio. Sure. And if Congress had chosen to impose
higher fuel efficiency standards 17 years ago, we wouldn't have
been in the same pickle either, but those are what if's. Let us
look to the future. I appreciate that. Let me ask a question
about prices today and OPEC. OPEC, which some of you deal with
on a regular basis, regularly meets. They have meetings and
they decide to constrain production.
Now, they do that not for conservation purposes, but for
purposes of driving up the price and profiting themselves, and
the profits seem to flow through the chain to your books, too.
I believe five or six of the members of OPEC are members of the
World Trade Organization, and three are observers and want
admission. The clear rules say the only reason you can
constrain supply is for conservation purposes, not to
manipulate the market and drive up prices.
I have asked, to be fair, President Clinton, who refused to
file a complaint against OPEC, President Bush, who refused to
file a complaint against OPEC, and we will soon be asking
President Obama to file a complaint against OPEC. Would any of
you support, you know, such a complaint as consumers, or you
are providers but you are also consumers of their product,
because they are illegally constraining supply to drive up and
manipulate the market price?
I mean, because you have to have standing to file these
complaints and consumers can't. I can't. No one I represent
can. The government can or industry could. Anybody willing to
take on that question?
Mr. Odum. Congressman, if I could just comment. I think
what it tells me is I could be clear about what I do support--
which relates to what the President said last night--which is,
what can the U.S. do to stimulate its own energy sources and
energy supply to reduce the number of imports?
Mr. DeFazio. Sure. Well, I am all for that, and I have been
for the 20 years I have served here; but what I am saying is
that since we are all here about free trade every day of the
week, every day of the year, and I voted against all these
agreements because I said they aren't to benefit the American
people, mainly to benefit multinational corporations, of which
you are some, this is a clear violation. They can't do that.
If you do it, you will go to jail, right? If you say,
``Well, we are going to hold back stuff here and we are going
to collude with each other and drive up the price''--which, of
course, I know doesn't happen, so you know that there would be
the force of law on you. This is international law. These
governments are signatories. The U.S. is a signatory. Shouldn't
the U.S. defend its consumers by filing a complaint against
OPEC for improper, illegal constraint of supply?
Ms. Harbert. I think there is a couple of comments on that.
First of all, what would be the consequences of doing such a
thing, whether there is the legal ability to do it or not? That
is probably the subject of a much longer conversation?
Mr. DeFazio. It might break up OPEC because some of them
might say, ``Heck, you know, we are out of here.'' Right now,
they are colluding very nicely and cooperating in a record way,
which usually doesn't happen, and it is happening now. They are
all coordinating to drive up the price now. Even though demand
is way down, consumers are going to be paying well over $3 a
gallon by Memorial Day. I can predict it right here, right now.
Ms. Harbert. If the desire is to lower prices by suing the
producers of the actual product, I don't know what type of
effect that would have on prices, but one could assume that
that may have a negative effect on prices.
Mr. DeFazio. Well, you know how the WTO works, which is, it
is an extraterritorial penalty, and we can then discriminate
against any of their products in any way, as can other members
of the WTO extraterritorially, and they really don't have much
recourse at that point.
I mean, we cave in to the WTO all the time, so I am just
kind of wondering why the USA has to cave in to complaints
filed against us, but somehow OPEC, we don't even dare file a
complaint, which is what you are telling me here, ``We don't
dare file a complaint because they have us by whatever.''
The Chairman. The gentleman's time expired over five
minutes ago.
Mr. DeFazio. Thank you, Mr. Chairman.
The Chairman. The gentleman from Colorado is recognized.
Mr. Coffman?
Mr. Coffman. Thank you, Mr. Chairman. First of all, I have
had five overseas military assignments, four of which have been
in the Middle East, have taken me to the Middle East. I fully
understand the dangers of our dependence on foreign oil. It is
not just bad for our trade deficit; it puts some of the money
in the hands of those who wish to kill Americans.
And so I think my question is, what is the capacity for the
offshore drilling that we are discussing today if you had the
capability to do it in a manner that would also address some of
the environmental concerns that were raised today, which
already are probably in the regulatory framework around
offshore drilling? What capacity would it have in displacing
the importation of foreign oil? To any member of the panel.
Mr. Nichols. Well, an exact number for that is going to be
difficult because we don't really know how big that resource
is. As all of us have said in different ways, estimates about
the resources out there are unknown, and will remain unknown,
until we start exploring. Clearly, all of the numbers that you
have heard today are very significant oil and natural gas
numbers that really would replace, in time, foreign imports of
oil and natural gas, too, for that matter.
Mr. Odum. Congressman, could I just add. One of the things
I worry about is this impression that it is not significant
enough. As you have heard the discussion around the vast
resources that could be there, they are likely even bigger than
the estimates that exist. When we talk about importing 60
percent of our oil, what comes to my mind immediately are some
of the larger projects that are out in the Gulf of Mexico now
and a project we have coming on just in the next probably six
months or so.
The project that I have in my mind produces 180,000 barrels
a day per one single development. So, again, as we talk about
moving, you know, vast areas up to a million or more barrels a
day, I think that is a very reasonable estimate, and that is
significant.
Mr. Cejka. To go back to an earlier point several of us
made in terms of it takes all the sources, as we move to
alternatives and unconventional ways of finding energy and
producing energy, we need to be doing that as we add this extra
bit of production. So, you know, if the additional production
offsets five percent of our imports, maybe fuel efficiencies,
solar, wind offset another five. I think we have to clot that
piece by piece because five percent is a huge number.
It doesn't sound like it, but that would be a tremendous
amount of production. If we don't do it, we are going to
continue to be dependent. The U.S. right now is declining in
its production. That will not stop until we find new areas to
bring new production on. And so, we are looking at a further
decline if we don't do something now.
Mr. Coffman. Any other? Great. Thank you. There have been
some concerns that were raised about the issue off Santa
Barbara, Hurricane Katrina. If we were going to look with
today's technology, where would you say the greatest
environmental concern would be in the whole process if you were
to aggregate offshore drilling from the first phase of
production to the last phase of bringing it in? If there was a
sensitive point environmentally, where would that be?
Mr. Luquette. Well, let me have a go at it and we will have
other thoughts, I am sure, but I think natural disasters--and,
in particular, in the OCS we are talking about hurricanes--
represent our biggest threat. Industry has had some pretty
significant storms in 2005 and 2008 that have really devastated
a lot of the facilities.
The good news is that the record, from a spill-performance
standpoint, has been outstanding considering the amount of
devastation. I still think that represents our biggest exposure
when we talk about OCS areas.
Mr. Coffman. It was brought up yesterday that it was a much
greater concern about the spillage with the importation of
foreign oil coming in on tankers than it was in offshore
drilling. I wonder if anybody could comment on that. It would
seem to me that if anybody is interested and concerned about a
ban in offshore drilling, they ought to be concerned about a
ban in the importation of foreign oil, given the dangerous or
precarious situation with the tankers. I am wondering if
anybody could address that.
Mr. Odum. Well, I think just simply to confirm that the
numbers do, I believe, show that tankering, that there would be
more spillage from that than the type of operations we are
talking about offshore. I think, you know, and I will refer to
the written testimony that I know I submitted where we put
quite a bit of detail in there to try to represent what is the
performance of this offshore industry in terms of spillage? It
is stellar performance.
I will just add one small thing. I think when you look at
what opening new areas would look like and what type of
developments you would have, you should look at the Gulf of
Mexico in terms of the latest projects because that represents
the latest technology for some of the deepwater projects and
others--and look at the record of those projects. They are
stellar.
Mr. Coffman. Some concerns also were raised yesterday about
the visual blight of having them within a distance offshore
where they could be seen in some of our areas that, say, base
their economies on tourism, and it was mentioned that there was
a way to have them not be visible. I think one was facades, but
another one that struck a greater interest with me was having
them at or below the surface. What is the capability of doing
that?
Mr. McKay. We have a couple of different things. One, we
have subsea technology. Fields can be developed with subsea
wellheads on them so it would be beneath the surface and tied
back offshore. Due to the curvature of the Earth, about 15
miles out you wouldn't see a normal height platform. So,
roughly tied back offshore to a central processing facility is
one way to do it. I think there are several ways to do it, but
that is one of the simplest ways to do it.
Mr. Coffman. OK.
Mr. Cejka. If I could just add one thing. With this new
long-distance drilling capability, you could put a rig onshore
and drill six miles offshore. There would be nothing on the
water.
Mr. Coffman. Thank you, Mr. Chairman. I yield the balance
of my time.
The Chairman. The gentleman's time has expired. The Chair,
unfortunately, with the indulgence of the panel, is going to
have to ask for another recess after Mr. Costa's questions as
we have a vote on the House Floor, but this should be a very
quick vote. I will go over and vote and come back and resume
the Committee's hearing immediately upon my return. The
gentleman from California, the Chairman of our Energy and
Minerals Subcommittee, Mr. Costa, is recognized.
Mr. Costa. Thank you very much, Mr. Chairman. Thank you for
the thoughtful hearing process that you are lending to this
important issue, both last week, this week and as we continue
to work with the Subcommittees. It is very important, as you
have noted from your statements, that we try to get it right
and that we try to develop a balanced, comprehensive energy
policy that in my view, or I like to refer to, uses all the
energy tools in our energy toolbox, both with near-term,
interim and long-term strategies to reduce our dependency on
foreign sources and to make us less reliant on fossil fuels.
Having said that, for the record, I would like to, without
objection, submit the National Academy of Sciences report
published in 2002; and I want to know, just quickly, by nods of
heads by the witnesses whether or not you agree, it indicates
after a compendium of looking at studies that, in fact, today's
accidental spills from platforms represent one percent of
petroleum inputs in North America waters and about three
percent worldwide. Do you support the National Academy of
Sciences report? All heads nodding. Without objection.
Not a lot of time, obviously. I want to talk about the
discussion last year that I thought was not as thoughtful as
the ``Drill, Baby.'' Comparable to that was the ``Use It or
Lose It.'' I would like to get your concepts. I mean, I thought
most of them were not very thoughtful, both responses.
Why does ``Use It or Lose It'' not relate to the realities
of the availability of the carbon, the oil and the natural gas,
and why should, therefore, we consider opening up? Because I do
believe that OCS, as well as Federal lands, is part of one of
the energy tools in the energy toolbox. Who wants to take the
first crack at that?
Mr. Nichols. I will take a crack at that. The oil and gas
industry has absolutely no incentive to continue paying the
Federal government leases to maintain a lease that is not
serving us some use. If you go through the history of a lease,
we first identify broad prospects and then go through the
leasing process with the government.
Mr. Costa. And then you do a bid.
Mr. Nichols. You do a bid, and if you get the leases, then,
since you own those leases for a period of time----
Mr. Costa. Now, don't the bids differ in price? I mean, not
all bids are alike.
Mr. Nichols. They do. Yes.
Mr. Costa. And that is based upon a guesstimate, estimate
of what the carbon content is in a leased lot? A leased lot is
three-by-three miles?
Mr. Nichols. Each company has its own assumptions on what
may be underneath that prospect, underneath that lease. No one
has knowledge, I mean good knowledge.
Mr. Costa. Which is why the price varies on what the lease
bids are?
Mr. Nichols. It varies widely from block to block, and the
price can vary widely on what each----
Mr. Costa. From millions to hundred millions, and then last
year there was a record price of what, a billion dollars?
Mr. Nichols. Yes. They vary widely because we don't know
what is under there. We have guesses and estimates of what is
under there.
Mr. Costa. What are the chances in the Gulf of Mexico or
elsewhere that you will hit a find after you spend millions or
hundreds of millions of dollars on a lease that you have
successfully bid on?
Mr. Cejka. If you take the Gulf of Mexico all in, it is a
25 percent chance.
Mr. Costa. Twenty-five percent chance. That is after you
have successfully bid whatever you have bid, that is after you
have done your due diligence five to six years, after you have
done the test well to determine whether the carbon footprint in
that three-by-three square mile is sufficient enough to put a
permanent well in.
Mr. Cejka. That is correct, and it may be several three-by-
three miles put together.
Mr. Costa. No, they are, generally speaking when you do
your bids.
Mr. Cejka. But, you know, that is using the best technology
we have because we have been in the Gulf of Mexico a long, long
time, and a lot of the more obvious things have been found.
Mr. Costa. Logically, in terms of the concept of whether or
not we provide additional OCS leases or not is really--I mean,
logic would tell you that all the leases that you currently are
holding under the concept of ``Use It or Lose It'' would seem
to suggest that the carbon content in each lease provision is
the same in terms of the volume of oil or natural gas and,
therefore, you should be using all of it and be drilling all of
them concurrently, right? Am I missing something?
Mr. Nichols. Yes. No, that is the assumption there. Of
course, it is an invalid assumption because once you own a
lease, as you continue to do more detailed geophysical work and
seismic work, you may decide that the assumptions upon which
you bought that lease in the first place are no longer valid,
and so you drop the lease. So, the gap between when you do the
leasing and when you actually have a discovery, those are
leases in process. They are leases we are working on.
Once we get to the conclusion that that lease is not one
that is going to continue to be a prospect that will be worth
drilling, then we drop it because there is no incentive to pay
the government a delay rental, an annual rental, to maintain a
lease that you are not going to ultimately drill.
Mr. Costa. Go ahead.
Mr. Cejka. If I can give you some statistics. For our
company in particular, about half the acreage we hold is under
production, the other half is under active exploration, and
only four percent, under that definition, would be inactive. We
are dropping those acres and giving them back to the government
this year. That is how we keep that cycle moving. So, you know,
``Use It or Lose It'' is what we do on a daily basis.
Mr. Costa. My time has expired, but let me just for the
record state that when I was in Iraq last year, I was talking
to an Army Corps of Engineers colonel who was helping
rehabilitate the fields there in Iraq. I was asking about the
chance of success when they put a hole in the ground in Iraq
versus the Gulf of Mexico, where you say it is a 25 percent
chance of success. He says it is 70- to 80 percent chance of
success in Iraq when they put a hole in the ground.
That low-risk investment versus the Gulf of Mexico, I
think, ought to be considered. I just would say, members of the
Committee, that for me ``Use It or Lose It'' is as nonsensical
as ``Drill, Baby, Drill.'' They are both nonsensical. I want to
thank the Chairman for the time that you have given me.
The Chairman. Yes. The Committee will stand in recess for
five minutes. I am going to run over and vote and come back and
resume the Committee hearing. Anybody want to get in line and
be recognized immediately for questions?
[Whereupon, a short recess was taken.]
The Chairman. Committee will resume its sitting, and the
gentleman from Colorado, Mr. Lamborn, is recognized.
Mr. Lamborn. Thank you, Mr. Chairman, and thank all of you
witnesses as well for staying around and working with our
disjointed schedule this morning. The question I would like to
ask any one of you could answer, but I would like to just keep
this, for the sake of time, to one of you. Mr. Odum, could you
explain what the permitting process requires in terms of the
length of time that it takes before a lease can actually become
productive, and how many permits are required per well?
Mr. Odum. Thank you, Congressman. I think it is a really
important question. If I can, because I have just been through
the cycle, let me just focus on offshore Alaska. The time
period is multiple years, so it is important to remember that
before a lease sale ever takes place, the Department of the
Interior does an environmental impact assessment. That is all
part of that process.
That takes place ahead of time. The determination is made
that a lease program can go ahead and then that is when we, as
companies, come in and bid and move forward. Now, for just the
exploration phase to drill a well offshore Alaska, there is
probably 39-or-so permits. I would say major permits, probably
15 to 20 major permits. That is the first phase.
Now, as we think about, you know, bringing the production
on, the second phase is once you discover something and you
define it, then you go through another environmental impact
study, the government will, to define what a development would
look like and what are the acceptable parameters around a
development. That is also a multi-year project. I have looked
ahead at that for Alaska and there is something on the order of
150 permits associated with getting a development to move
forward.
Mr. Lamborn. We are up to almost 200 permits?
Mr. Odum. That is right. In my opening statement, that is
one of the reasons that I pointed to as an area where Congress
may want to have a look is that whole system that we just
described is extremely important to make sure we get the right
elements----
Mr. Lamborn. Real quick.
The Chairman. Are you talking Alaska only?
Mr. Odum. Well, that is specific to Alaska, which is where
I have most recently seen the numbers.
Mr. Lamborn. To build on what the Chairman just referred
to, would there be a similar type of red tape process for
either the Pacific Coast, or Atlantic Coast, or Gulf of Mexico?
Mr. Odum. Yes.
Mr. Cejka. In the Gulf of Mexico, for example, on the last
phase Mr. Odum referred to, it would be about 90 permits.
Mr. Lamborn. Should Congress, as a way to cut through the
red tape and get energy to the consumer faster, and to reduce
our reliance on foreign producers faster, should we look at
something like consolidating this process? Maybe having a
multiagency one-stop permitting station, if you will, or
something like that?
Mr. Cejka. We would highly support that. It allows the
broad look at the features being permitted, it takes all the
variables in place, and it gives you one place to have a
discussion.
Mr. Odum. I agree completely, and it allows the various
agencies as a lot of these permits to work together to use the
same information. I think it increases the quality of the
product as well.
Mr. Lamborn. OK. Thank you. There are so many questions
that I would like to ask you, but for the sake of time,
obviously we have to focus, so for any one of you, there is a
general philosophical question I would like to ask. There are
some critics who say that since you can't solve all of our
energy needs by doing offshore drilling on the Outer
Continental Shelf, we shouldn't even bother to go there at all.
I don't agree with that, but how would you answer that
criticism that if this isn't a silver bullet, we just shouldn't
even mess with it?
Mr. Nichols. I think in all of our testimony we have
alluded to that, and that the answer to the United States has
to be ``all of the above''. Using the same rationale that if
one source is not going to solve all of the problems we
shouldn't use it, logically you would be against solar, and you
would be against wind, and you would be against any of the
sources. We need them all. We need to develop our renewable
resources, but we also need to develop coal and natural gas in
all of the places where it can be developed in an
environmentally responsible way.
Mr. Lamborn. Any of the rest of you would like to respond
to that?
Ms. Harbert. I think it is time to stop taking options off
the table for the American consumer. We need to put all the
options back on. It will keep energy affordable, reliable, and
it will be a long-term investment, if we do that, for a long-
term economic recovery.
Mr. Lamborn. OK. Thank you for your answers, and thank you
for being here today.
The Chairman. I am going to make a few comments and perhaps
ask a question here, and use just a bit of time to see if any
of my other colleagues show up for questions. If not, we will
dismiss the panel. Just summarizing what I have heard today,
matter of fact, in all the panels that we have had, there
certainly seems to be more commonalities than there are
disagreements, and that is what I have been trying to use this
series of hearings to explore, and certainly those
commonalities will not be lost on this Committee during our
future deliberations.
Where those deliberations take us, where this whole series
of hearings takes us, is not defined at this particular moment,
except to say that we do need to develop a comprehensive
national energy policy out of this Congress. I think we all
agree that we need to use ``all of the above'' in our options,
and ``nothing'', as you have just said, Karen, can be taken off
the table. I am certainly an advocate of ``all of the above''
as long as they are domestically produced energy resources.
As we look to the future, certainly the development of any
comprehensive national energy policy will not fall entirely
within this Committee's jurisdiction. It will involve multiple
committees in the Congress, and it would involve expertise of
many others. It is my hope that when called upon, and whether
called upon or not, this Committee will have in place the
parameters, if not more, for a legislation that will address
issues within our jurisdiction.
The OCS is certainly one of those areas of jurisdiction. We
developed a bill in the past, a lot of us called it a
compromise bill last summer. It did not have everybody's
support but, during that process, I noted there was a lot of
give and take. That is what I envision this process to be in
the future--a lot of give and take.
I know, Mr. Odum, you said there is no tradeoffs, but
transition, but I think perhaps there are some areas where we
do need to call it a tradeoff because of the legislative acts
of compromise while reaching that transition, while exercising
that transition, I guess I should say. I do hope that at the
end of the day when these negotiations are undertaken and when
the compromises are made, they are done in good faith and that
the commonalities are not etched in stone, but at least etched
in our good faith negotiations and that we can reach an
agreement.
In other words, if there is a compromise made, then we
don't find that there is something else that needs to be done
on down the pipe, and therefore, that particular compromise did
not elicit the support of groups for which it was addressed in
the beginning to elicit support. I may be a little fuzzy there,
but what I am trying to say is that I hope we can reach those
areas of common agreement and have everybody onboard when it
comes our turn to develop a piece of legislation. Anybody like
to comment on that? If not, I will go to Mr. Boren on our side,
recognize him.
Mr. Boren. Thank you, Mr. Chairman. This has been an
interesting experience. I mean, I think we have had multiple
panels on this issue. Earlier we had Philippe Cousteau and Ted
Danson, we have had now executives of the industry, and how
pleasing it is to have you all here today. I was a little bit
late to the hearing because, on the Intelligence Committee, we
were visiting with the new Director of National Intelligence.
Something that he talked about was the world economy, the
global economy, the price of oil and gas and the fact that even
though prices have gone down, eventually they are going to go
back up, and for us to keep an eye on it. I told him, I said,
``You know, what better way to ensure our national security
than to develop the resources that we have in the United
States.''
And so I want to thank you all as patriots and for being
part of the group that is actually exploring and keeping our
dollars in the United States, and not having to rely as much on
foreign oil. I have a few questions, and I want to start with
my home state leader, Larry Nichols. If he could start, and
then the rest of the panel may want to respond.
First question. How do you respond to groups that say
drilling offshore is environmentally dangerous, that it can
pose major long-term risks to sensitive ocean ecosystems, will
damage beaches, hurt marine life, pollute our seas, and will
worsen climate change?
Mr. Nichols. Thank you. I think all you have to do is look
at the track record that this industry has developed offshore.
Hurricanes have roared through the Gulf of Mexico year after
year, and yet, the record of this industry is outstanding.
There have been no significant spills at all, despite
hurricanes, which are the greatest threat that we have. We have
seen that year after year with no spills at all coming from
that record.
The technology of this industry has developed dramatically
over the decades, and the proof of that is just shown in that
track record.
Mr. Boren. Great. Any others?
Mr. Odum. Well, I really like Larry's answers, and I think
it is. Look at our track record. I would just put out the
invitation to come, we are completely transparent on this
point, and to come have a look and experience it for yourselves
any time.
Mr. Boren. OK. Another question I have--I think it was
mentioned earlier about increased production and when it will
be able to come on line with the moratorium being lifted. How
fast do you all think that we can come on line for your
individual companies, and not only how fast, but is there
something that we can do to speed up the process, whether it be
regulatory burdens being lifted, or something else that we can
help your industry with?
Mr. Luquette. Mr. Odum mentioned earlier, you missed the
response that he provided on the issue of inefficiencies in the
permitting process. I think there is fertile ground for
industry to work with the regulator in trying to improve the
efficiency of that process so that permits can be obtained in a
more timely manner.
With respect to timing, it all depends on the nature of the
resource, the location of the resource. I will give you some
examples. Something that is discovered in the Gulf of Mexico is
closer to infrastructure, close to existing pipes, and gas
plants and refineries. Clearly, from the time you let the lease
to the time you achieve first oil or gas would be shorter than
as you extend it out into the deeper waters of the Gulf of
Mexico, or went onto the Atlantic or Pacific basins where you
would have to have infrastructure put in, in addition to the
exploration process in order to move toward commercial
production.
Mr. Boren. Great. A question again for Mr. Nichols. You had
mentioned in your testimony that the estimated amount of
natural gas and oil resources available if we opened up the OCS
for more exploration and production, you used terms like
``billions of barrels of oil'' and ``trillions of cubic feet of
gas.'' Could you estimate? Do you have any idea what your
industry could be producing offshore if we had allowed access a
few years ago?
Because I think the argument is, well, we won't get these
resources for 20 years. Well, why don't we start now? What
would have happened if we had done it 10 years ago, or 15 years
ago?
Mr. Nichols. Yes. The argument of, it takes a long time, is
an argument that you could use against any natural resource.
You could use it against developing solar, or wind, or anything
else. They all take time. The sooner we start, the sooner we
get there. With regard to offshore, as Mr. Luquette said, there
are some resources that are right next to infrastructure in the
eastern half of the Gulf of Mexico that could be brought on
very soon, in a matter of a year or two.
There is an existing gas discovery that could be brought on
exceptionally fast. Others will take a longer period of time.
The volume itself is hard to say. Just bear in mind that the
original estimates for the western part of the Gulf of Mexico
that we can explore for now, we have already discovered eight
times what was originally forecast.
Will that hold true for the eastern half of the Gulf of
Mexico, or Alaska, or Pacific, or Atlantic? Impossible to say,
but you do have that track record showing that these early
estimates tend to be very, very conservative. A lot of that is
caused by new technology that continues to open up areas that
were unforeseeable not that long ago. So, this is a significant
resource that could be brought on in a meaningful timeframe for
our country.
Mr. Boren. Mr. Chairman, I see my time is running out. I do
want to thank the industry. This is an industry that employs a
lot of blue-collar Democrats that are in my district, and, you
know, we always see these high numbers of profits and
everything else. Right now with the prices down, I mean, there
are layoffs that are occurring in my district, and so you
notice the talk of the windfall profits tax has kind of gone
away.
We need to remember that prices go up, but they also go
down, and people lose their jobs. This is an industry that is
vital to our national security. I will continue as long as I am
in Congress to support these individuals who employ a lot of
people in my district. I yield back.
The Chairman. Thank you, Mr. Boren. Gentleman from South
Carolina, Mr. Brown.
Mr. Brown. Thank you, Mr. Chairman. Thank you very much for
coming and being a part of this discussion. Like the gentleman
from Oklahoma said, we have been debating this issue now for, I
guess, a couple of weeks and we are glad to have your testimony
today. We recognize you are on the forefront of making the
deliveries and creating the energy that we so badly need in
this great country. Are all of the oil just domestic energy
exploration, or are you dealing in foreign fields, too?
Mr. Cejka. I have responsibility for global exploration for
ExxonMobil, so domestic, as well as the rest of the world.
Mr. Brown. So, you are already doing offshore drilling in
other countries then?
Mr. Cejka. Yes. Very much so.
Mr. Brown. OK. All of the oil is involved then? You are
not. OK. So, the ones that are involved in, say, offshore--
other countries--what is the difference in, say, permitting a
well in one of those countries versus, say, permitting a well
in the Gulf or off California, where else?
Mr. Cejka. No simple answer, sir. It depends on the
country. A lot of the countries, we go to the Ministry of Oil
and Gas, and that really is our one-stop shop. So, although we
may have long negotiations with that ministry we are not going
to multiple places for multiple different permits. The other
thing that is really different is the size of the acreage
available.
The three-mile-by-three-mile blocks that the U.S. offers is
probably the smallest on a global basis. That affords you, of
course, an opportunity to explore more area to have a greater
chance of success. Those are really the primary differences
that we see. As you would imagine, some countries are easier to
get your permits, and some are more difficult.
Mr. Brown. In comparison to the one that you just mentioned
about going and getting sort of a one-stop shop, how long would
it take you to get a permit so you could go from buying or
leasing the fields, to getting a permit, to actually getting
resources out of the ground? How long does it normally take?
Mr. Cejka. Do you want to take it? There is not a normal.
Mr. Brown. Well, just take the best country or the worst
country, whichever one. I am just leading up to another
question.
Mr. Odum. If I could, it may steer it in just a slightly
different direction, but I think, I will look to the panel here
to see how much agreement there is. In terms of the efficiency
of getting permits and moving forward with the projects in the
Gulf of Mexico, I would say it is pretty good. It is
competitive with the world in general.
I would express or describe a difference experience that we
are having in Alaska right now. Where it was open for leasing,
we bought the leases and we are finding it to be a fairly slow,
fairly cumbersome prospect. And so I think the question looking
forward--how are we going to design this for the new areas that
we open--is very important.
Mr. Brown. Well, I guess that is my problem. My question, I
know that we keep talking about it, but it doesn't do any good
to permit it if it is going to take 20 years. You know, where
will we be in the energy cycle in 20 years? I notice, Mr.
Nichols, that piece of, I guess rock or whatever you had there
earlier, you said it came from New Jersey.
Mr. Nichols. Yes. It was offshore, a well that was drilled
in 1979.
Mr. Brown. Was that to explore to see if there was some
energy down there?
Mr. Nichols. That well actually discovered oil and gas. It
was not commercial at that time and the bans took place shortly
thereafter, so that lease was abandoned.
Mr. Brown. So, no cost recovery at all on that?
Mr. Nichols. No. No. In fact, the company that bought that,
Tenneco, paid the government $8 million just for the lease, and
remember this was 1979, so $8 million was more then, and then
drilled what amounted to a dry hole.
Mr. Brown. OK. So, there was no energy there?
Mr. Nichols. There was oil and gas there, but at the time
they did, there was not enough of it that could be economically
produced so the lease was abandoned.
Mr. Brown. Could you go back and reclaim it?
Mr. Nichols. You certainly could go back and reevaluate
that with modern technology.
Mr. Brown. But the moratorium has been lifted. I was just
wondering if there was any movement to go back and----
Mr. Nichols. No. We can't do anything until the Department
of the Interior grants leases, and no leases have been granted.
They haven't really started the process. As you know, that
process has now been delayed for another six months, so the
process to allow us to start bidding has not yet begun.
Mr. Brown. But the oil lease is still not active then?
Mr. Nichols. No. That oil lease expired decades ago.
Mr. Brown. Most of them are predicated if you don't deliver
in a certain period of time, it expires? Is that the way it
works?
Mr. Nichols. Yes. That is exactly the way it works. You are
given a certain amount of time to explore on that lease and
unless you establish commercial production, the lease expires.
Mr. Brown. But you have to pay for it whether it is good or
bad?
Mr. Nichols. Yes.
Mr. Brown. One other question, Mr. Chairman. I notice my
time has expired, too, but the Ranking Member requested that
you all would give him some kind of a tax figure to what your
companies are paying. What I would also like to see added to
that is the number of dollars that you pay out in dividends. I
just feel like you are getting a bad shake.
You all are absolutely making this country strong because
we have the greatest energy source in the world, and sometimes
you get sort of a black mark for doing it. I was just trying to
project some of the good things that you all do, and there is a
lot of it out there. Thank you for letting the light stay on.
Thank you.
Mr. Nichols. Thank you.
The Chairman. Gentleman from New York, Mr. Hinchey.
Mr. Hinchey. Thank you very much, Mr. Chairman, and thanks
for organizing this. Gentlemen, thank you very much for being
here. Sorry I wasn't here for the early part of the hearing,
for probably the most important part of the hearing, but I was
engaged in some other things here and, of course, we couldn't
get here. I just wanted to have an opportunity to ask a couple
of questions, simple ones.
We know how the effect of the price of energy has had on
our economy and how sometime around the middle of last year we
saw the price of a barrel of oil hit its highest; and the price
of a gallon of gasoline also hit its highest, sometime I think
probably last summer, if I remember correctly. But now the
barrel of oil has gone down to somewhere below $40 a barrel.
I don't know what the exact price is. What is it? $34 or
something like that? $34 a barrel. In spite of the fact that
the price has dropped, the price of gasoline and the price of
home heating oil is pushing its way up again. Can you tell us
why that is happening? Doesn't seem to make any sense.
Mr. McKay. I can give you a view. In the fourth quarter of
last year when gasoline prices were at their lowest, that was
on the back of one of the most volatile and severe demand drops
that we have seen in the last 25 years, and inventories were
strong and the market was supplied----
Mr. Hinchey. I can't hear you.
Mr. McKay. Sorry.
Mr. Hinchey. Just speak louder. It is just you and me here.
Mr. McKay. OK. All right. Good point. Demand fell big time
in the fourth quarter. Lots of inventory. Gasoline was
essentially sold at zero margin. Refiners were not making money
selling gasoline. In quarter one, the markets rebalanced, and
if you take the historical norm for what the cost of crude, the
ingredient, on a gallon basis, add the taxes, then add the cost
of refining, marketing and distribution, you get right out----
Mr. Hinchey. No, I know all of that is, they are all
important parts in the cost of the produced product, but what I
am trying to figure out is, why is it that when the price of a
barrel has dropped down now to $34, why is it that the price of
a gallon of gasoline, the price of a gallon of home heating oil
isn't more consistent with the price of a barrel of oil out on
the market?
Mr. McKay. The prices I saw a few days ago, $1.90 and $38 a
barrel, that is consistent with the norms for taxes, price of
ingredients, crude oil----
Mr. Hinchey. Taxes haven't increased; taxes have stayed the
same. Everything has stayed essentially the same, but the price
of a barrel has gone down. But nevertheless, when you go out
and buy gasoline and you start pumping it, you look at the
price and you see the price has gone up a few cents today, a
few cents yesterday.
Mr. McKay. Let me just add the components together. If you
take $38 a barrel, divide by 42 gallons in a barrel, you get 90
cents or so. It is about 47 cents in Federal and state taxes
and then it is about 50 cents to refine, distribute and market
that. That is $1.90 a gallon. That matches the normal price for
that level of crude oil.
I would also add that the crude oil that goes into all our
refineries, 65 percent of it is imported, and those prices are
higher than WTI by as much as $6 to $10 a barrel. The blended
price is higher than the posted WTI price.
Mr. Hinchey. So, in other words, when we see the price of
oil go down, we can't expect that the price of a gallon of
gasoline is going to go down accordingly?
Mr. McKay. No, I am sorry; I am not saying that. I am
saying the price of gasoline matches the price of oil to
historical norms.
Mr. Hinchey. Well, OK. Your answer is interesting, but I
can't see how the price of a gallon of gasoline matches the
price of a barrel of oil when we see these changes taking
place, and the fact that the price of gasoline and home heating
oil isn't following the drop in the price of a gallon of oil.
Mr. McKay. I would only say I believe it has fallen. It has
gone from $4.30 a gallon to about $1.90, last price I saw.
Mr. Hinchey. Obviously, this needs some further insight and
further investigation. I know that a lot of the companies are
now focusing some attention and some resources on renewable
energy, alternative energy. We see that in the advertisements
all the time. Can you give us some idea as to what percentage
of your expenditures are now being focused on alternative
energy, solar energy, for example? Anyone?
Mr. McKay. Our capital----
Mr. Hinchey. BP?
Mr. McKay. BP capital that we spend on total energy in the
U.S., it is about eight percent of our total capital in terms
of alternatives. Eight percent.
Mr. Hinchey. The total that you spend is eight percent?
Mr. McKay. On alternatives as compared to total capital.
Mr. Hinchey. On alternatives. What are the specific
objectives of that?
Mr. McKay. We are working on solar, wind and biofuels, and
we spent, as an example, about right at $1 billion last year on
all those three.
Mr. Hinchey. According to the Department of Energy, the
natural gas and petroleum receives over $2 billion in tax
subsidies just in 2007. We don't know what it is in 2008 yet.
We know that the oil companies have been very successful. $119
billion in profits last year. Do you think that it is necessary
to continue those subsidies in the neighborhood of $2 billion a
year in spite of the fact that the profits are close to $120
billion?
Mr. Nichols. What subsidies do you think we get?
Mr. Hinchey. Well, I am just saying, these are subsidies
that are talked about by the Department of Energy. They say
that Federal money goes out to the oil companies, and these are
subsidies for the production of oil for petroleum and gas, and
that they amounted to $2 billion in tax subsidies in 2007. Are
they wrong about that?
Mr. Nichols. I am unaware of any subsidies that my company
gets.
Mr. Hinchey. No tax subsidies?
Mr. Nichols. Correct.
Mr. Hinchey. No tax subsidies? No companies get any tax
subsidies from the Federal government?
Mr. Odum. I would just say that there is a set of tax laws,
of course, and regulations and that is what we follow and that
is what we pay to, so I agree with Mr. Nichols' comments.
Mr. Hinchey. Well, are you saying that there are tax
subsidies?
Mr. Odum. No. What I am saying is there are clear tax laws,
clear regulations that dictate what that payment to the
government is, and that is exactly what we follow.
Mr. Hinchey. No, of course. That is obvious. We all do that
as good as we can, but we are also informed that there are $2
billion in tax subsidies that benefit the industry. That is not
correct?
Mr. Nichols. I do not believe that is a fair statement. No,
sir.
Mr. Hinchey. OK. Well, we will have to go back to the
Energy Department and figure out exactly what they are saying.
My time is up, and I thank you very much.
The Chairman. Thank you. Gentleman from Texas, Mr. Gohmert.
Mr. Gohmert. Thank you, Mr. Chairman. I appreciate the
chance of having this important hearing. Let me follow up on
that. I am from East Texas, and oil and gas has always been
important. There in East Texas now they are exploring, they are
producing. People are doing everything they can to try to help
the country with its energy needs, and it always amazes me how
everyone in the country is using energy but not in my backyard
do you produce it. You know, as much of a team player as we try
to be in our neck of the woods, we kind of need a little help
from some of the rest of the country.
On the tax law issue, I think there may be some confusion
because there are those who, in their efforts to vilify
companies that are producing energy, have talked in terms of
subsidies, when actually my understanding is there are tax laws
obviously that affect every manufacturer, every company that is
producing anything, and there has been a push to try to
eliminate the deductions for operating costs that the energy
industry has that every other industry has a chance to deduct
in order to get to what the profit is and that this movement is
to say, ``Well, we are not going to allow them to actually
deduct the actual costs of generating oil or gas from the money
that they take in so that they will have to pay higher tax
basically on what they get in.'' Is that your understanding?
Mr. Nichols. Yes.
Mr. Gohmert. OK. People talk about subsidies. Nobody is
sending you a check, isn't that right?
Mr. Odum. That is absolutely correct.
Mr. Gohmert. We are talking about the deduction of
operating expenses that are real and true operating expenses,
but one way of raising taxes on energy companies is to say you
may have to put these rigs out there and pay all these people
to do all these things to get it out of the ground, but we are
not going to let you deduct all of that; therefore, you pay the
government more tax. That is my understanding, and so it is a
little bit of a misnomer.
Now, I understand that it was mentioned earlier about the
pipeline in the Gulf of Mexico, for example. We hear all this
talk about, well, it takes 10 years to get ANWR on line, it
takes 10 or 20 years to get the OCS on line, but they are not
giving credit to what has occurred over the last 20 and 10
years. It is my understanding there is a pipeline in the Gulf
of Mexico that was not there 20 years ago, correct?
Mr. Nichols. I don't know when that pipeline was built, but
there is a pipeline there now that goes by a trillion-cubic-
feet gas field that could easily be brought onstream very
quickly.
Mr. Gohmert. A trillion cubic feet of gas that is not being
produced, isn't that correct?
Mr. Nichols. That is correct.
Mr. Gohmert. OK. Now, here we are talking about the crunch
and needing more money, and, gee--where is it going to come
from, and when you talk about a trillion cubic feet of gas, do
you know what the existing royalty being paid on profits from
gas is on new contracts? Anybody?
Mr. Cejka. I don't have that for gas.
Mr. Gohmert. Well, let me, I was part of some of the
discussions with this Committee back in 2006 when we pushed
through the House an OCS drilling package, and, you know, in my
neck of the woods it was always standard that oil companies,
energy companies would pay a one-eighth royalty to the
landowner. So, you got one-eighth, and there are people that
got very wealthy by getting that one-eighth of the profit--not
for lifting a finger--just happened to own the property that
the well was drilled on.
But it is my understanding that that one-eighth had been
pushed up and up and that it may now on Federal lands if we
talked about drilling right now, probably 16 percent. Is that
your understanding of kind of what the discussion is?
Mr. Luquette. New OCS leases are three-sixteenths, so 18.
Mr. Gohmert. Yes. It is bumped up because the Federal
government has all this, and that is money the Federal
government wouldn't have to lift a finger to get, billions of
dollars that ultimately could come into our treasury without a
taxpayer having to pay another dime. These are just resources
we refuse to utilize and recognize, isn't that right?
Mr. Nichols. That is right.
Mr. Gohmert. There is no prohibition against this Federal
Government saying, ``We will lease the OCS, we will take our
three-sixteenths undivided interest to profits and we will use
a big hunk of that to finance the exploration, the
experimentation of the next generation of energy,'' and you
couldn't do anything about it, right? Isn't that correct?
Mr. Nichols. That is correct.
Mr. Gohmert. Thank you. What gets me is, the demigods are
going to say my time is expired, but it goes back to Philippe
Cousteau was sitting where you guys are and his grandfather did
more to open up the ocean and the eyes of the world to what is
in the ocean, but he had to admit the Calypso his grandfather
used was not a sailboat. It ran on diesel and because of diesel
fuel, we had the ocean opened up. Thank you very much, Mr.
Chairman.
The Chairman. The gentleman from Washington, Mr. Inslee.
Mr. Inslee. Thank you. Mr. Cejka, I have been noticing an
ad that your company has been running on television for the
last year quite heavily. It talks about your company's efforts
in renewable resources. What percentage, just rough estimate,
do you think that ad is of your total television advertising
budget over the last year? Just rough.
Mr. Cejka. I will have to get it for you. I am not even
involved in the advertising. I have no idea what the percentage
is.
Mr. Inslee. I mean, it is the one that stands out in my
mind, certainly. It seems like it is over 50 percent of the ads
you are running. Is that fair, you think, or not?
Mr. Cejka. I don't know.
Mr. Inslee. OK. What percentage of your total revenues are
dedicated to the research and development of what you might
call ``renewable sources of energy?''
Mr. Cejka. I don't calculate the percentages but we spend
about $100 million in developing a new process called
``controlled free zone'' to help separate CO2 from
the natural gas stream to better be able to inject it. If that
process is successful--this is an experiment--it could reduce
the cost of separation of CO2 by over two-thirds.
So, $100 million there, $100 million we have spent at
Sanford in developing and supporting public research available
to everybody, with other companies also contributing to look at
alternatives as well as to look at renewables and
sequestration. We spent $1 billion looking for ways to gain
efficiency. Efficiency is one of the best ways we can
contribute by lessening the impact on our greenhouse emissions.
We are one of the world leaders in cogeneration. In
cogeneration of electricity, we have over 30 facilities, and
what we have done through that and other efforts to reduce our
energy use has brought our emissions down five million metric
tons, which would be the equivalent of taking a million cars
off the road.
Mr. Inslee. Mr. Cejka, I was just kind of looking for a
rough percentage of your revenues. Could I ask you to provide
that to the Committee, please?
Mr. Cejka. Sure.
Mr. Inslee. OK. I will ask you to do two things. If you can
provide that to the Committee, could you also provide the
percentage of your message about renewable energies to your
total TV budget for the last 12 months? If I could ask you to
provide those two numbers. I appreciate that. Gentlemen, I want
to ask you if--I am making an assumption you are all
capitalists, and market-oriented capitalists.
One of those assumptions of capitalists is we pay for what
we use, and some folks believe that the industry as a whole is
using the atmosphere because CO2 is a pollutant that
comes from the use of the product you produce. I just want to
ask if you believe there should be some national cap on the
amount of carbon dioxide that goes into the atmosphere that we
should have as a nation?
To the extent you can give me a ``yes'' or ``no'' question
due to the limits of time. You can supplement your answers in
writing if you think that is appropriate. Mr. Odum, would you
like to start?
Mr. Odum. I will start by just saying that, you know, we
have been out there in favor very strongly of a cap-and-trade
system in the U.S. for a number of years now.
Mr. McKay. Yes. BP also supports cap-and-trade.
Mr. Nichols. Any cap-and-trade system or any carbon tax has
to be used very carefully. Any additional taxes on the American
public at a time when we are in one of the worst economic
recessions of any people's lives could be a very detrimental
effect to the American public.
Mr. Inslee. So, that is, you would consider it, or not now,
or what do you think?
Mr. Nichols. I think not now. I think now would be a very
dangerous time to do either.
Mr. Inslee. OK.
Mr. Cejka. We are in support of a carbon tax.
Mr. Luquette. Chevron would also support a national
framework.
Ms. Harbert. While not representing a particular company, I
will say, from the Chamber of Commerce's perspective, we have
to be very careful as we wade into this debate that we are very
clear about what the costs are to our economy, what type of job
dislocations there will be, and we certainly cannot be
selective on whose industries has to pay for such a scheme. It
is very important that there be a very transparent debate and a
very honest discussion about the costs and the tradeoffs.
Mr. Inslee. I assure you it will be transparent. It will be
on C-SPAN. I don't know if anybody will watch, but it will be
transparent. Thank you for that answer. Mr. Cejka, I believe
you said Exxon favored a carbon tax. A carbon tax does not have
an enforceable cap on the amount of CO2 that goes
into the atmosphere. Are you saying that you would resist a cap
on CO2?
Mr. Cejka. No. We are saying that, as your beginning
statement was, we are all capitalists. We believe the financial
market, by having the carbon tax, will get people's behavior to
change and it will actually induce or incentivize the reduction
of carbon. That is what I mean when I say that. We believe that
has the impact of causing that.
Mr. Inslee. So, you would resist an actual cap then, do I
take it?
Mr. Cejka. It is a hard question. It depends on how it is
phrased, but yes.
Mr. Inslee. OK. Thank you. I look forward to your further
information, Mr. Cejka. Thank you very much.
The Chairman. The gentleman from Utah, Mr. Bishop.
Mr. Bishop. Thank you, gentlemen, for being here. I
appreciate your time and your patience, and especially for the
interruptions that we have had. You have seen, obviously, here
that Congress is horrifically bad at time management. If you
ran your companies' time management the way we do, you would
probably be as far in debt as this government is at the same
time. I appreciate that.
I also appreciate your consideration because I understand
every time we speak, we emit carbon dioxide into the air, so
hopefully you will be very careful on what kind of carbon tax
you place on. I am not sure exactly to whom to address a couple
of questions I have that go into areas you haven't been asked.
Maybe Ms. Harbert or Mr. Nichols at first.
I understand that former Governor Engler either has, or
will, send a letter to the Committee talking about the impact
of energy on manufacturing. Indeed, in this country,
manufacturing consumes one-third of our nation's energy, a
third or 30 percent of the electricity that we produce, and
that since the national gas prices began to climb in the year
2000, we have had the loss of 3.7 million jobs in the
manufacturing sector of this country.
If I could have perhaps Ms. Harbert or somebody else just
speak about the impact on manufacturing jobs a rising energy
cost gives. Perhaps a second resource of that is that we
sometimes have this idea that what we are talking about is
simply cars running, and, yet, for all the gas that is
produced, a significant portion of that has nothing to do with
transportation.
We are talking about pharmaceuticals. We are talking about
plastics, even feed. Something like, for every barrel that is
produced, about 19 percent actually goes to transportation. The
rest have ancillary products that impact and influence our
life. If I could just ask you to comment on those two.
Ms. Harbert. I think the point is a very good one. If we
make smart energy policy decisions, we have the ability to
actually increase the productivity of this country, increase
jobs, increase manufacturing jobs in this country. But if done
poorly, there will be a very big, deleterious effect on this
economy, which we can ill afford in the financial crisis in
which we find ourselves.
You know, the energy industry employs six million people
across this country. INA has the potential to employ more. I
think as we look at a long-term recovery, energy is not just at
the heart of it, but it is part of the solution. It is not part
of the problem.
I think this Committee, and some of the tenor that we are
hearing, is trying to vilify parts of the energy industry
rather than recognizing that they have a viable contribution to
make in sustaining the very backbone of our economy and, in
fact, growing our economy and reducing our dependence on
foreign oil. That is a very important argument that needs to be
kept on the table.
Mr. Bishop. I thank you. Mr. Cejka. You did give me the
estimates of how far off our estimate is for the Gulf of
Mexico. You had the numbers there in your opening testimony.
Can you just give me those again?
Mr. Cejka. It was originally estimated in 1987 to be about
nine billion, and now we believe it to be 45 billion.
Mr. Bishop. OK. I thank you for repeating those numbers for
me. There have been legislative proposals that say anything
that we do in the OCS beyond 100 miles of the coastline should
be given without offering revenue sharing to the states. Are
any of you in favor of such a proposal? Mr. Nichols?
Mr. Nichols. Yes. I think we would all be in favor of a
proposal where areas that had legitimate environmental needs--
that needed special protection, say, around a coral reef--that
those were protected.
We all want to protect those sort of natural resources for
this country, but simplistic bans that are based on arbitrary
numbers without any real science behind them don't make much
sense, particularly since we can drill from onshore, we can
access oil and gas that is within six miles or so of the
shoreline. We also have the potential to have exploration and
wellheads that have a very low visibility.
Mr. Bishop. Let me try and focus you a little bit more. I
probably was not clear in what I was talking about. There are
proposals about royalty payments being made that would exclude
states. As I understand, anything done on ground, on the land
is basically, well, it used to be 50/50. We have kind of fudged
it in favor of the national government.
Mr. Nichols. The industry has historically been in favor of
including the states in some formula in the royalties that are
received.
Mr. Bishop. I realize I have like 20 seconds. This is where
I come in, once again, as an old schoolteacher that still gets
a retirement check. I am concerned about a state landlock, like
Utah, to try to build an education system when this wonderful
Federal government owns 70 percent of our land. We have a
difficult time to do that.
The other day Representative Lummis was talking about what
they are doing in Wyoming. Wyoming pays their starting teachers
$20,000 a year more than one of her neighboring states because
of part of the royalty payments that they use as the basis of
their education system. One of the groups we had before us was
talking about the potential of California getting $900 million
in just royalty payments from offshore drilling, which hit me
because every year California comes and hits us up on rural
free school monies.
In fact, I had one of the superintendents talking to me and
I said ``Don't you equalize somewhere in California?'' The
superintendent said, ``No, no, we are kind of left on our
own.'' It would be brilliant to actually consider the impact
these systems have on building an effective education system.
My state cannot survive without a vibrant mining and a vibrant
manufacturing base, in addition to trade and tourism, and
everything else that we have going on with it.
I say that simply as someone who wishes to look at public
policy, who wants to make sure that our university system is
there for my last two kids that I have to fund going through
it. I am over. I am over by a minute, and I apologize for that,
Mr. Chairman. I had a couple other questions, but we have kept
you here a long time. I will yield back.
The Chairman. The lady from California, Ms. Capps.
Ms. Capps. Thank you, Mr. Chairman, and thank each of you
from the industries, and also the Chamber, for spending your
time with us here. This is our third, as you know, hearing.
Credit our Chairman with getting us into a topic that is very
important, and when we discuss energy, it is important to you
as well--offshore drilling and the industry's perspective.
I am going to start with you, Mr. Nichols, if I could, as
you represent the API. I take it the API isn't particularly
pleased with Secretary Salazar's decision to extend the comment
period on the 2010 five-year plan by six months. That has been
inferred previously. Is that a fair assessment?
Mr. Nichols. Yes.
Ms. Capps. But it has been pointed out by both sides in
this debate, it takes a very long time for production to start
from new leases. I think you all agree with that as well. The
industry has been very clear that it takes many, many years to
get production going once you do get a lease, and we are a
number of years away, no doubt, from even being able to lease,
if we in fact do lease, new areas.
So, when we are looking at a 10- to 15-year period before
we could get new production, I am questioning why a six-month
review period to make sure we are being careful, and that our
leasing decisions are based on the strongest science available,
is that really that much of a burden? You want to expand on
that a little bit?
Mr. Nichols. Well, yes. Let me first, with due respect,
challenge one of your assumptions. We have not said, and this
comment is made by all of us at different times during this
hearing today, that the 10- to 15-year timeframe that you
utilized is not entirely valid.
Ms. Capps. I am not arguing that point. No. That is the
given. That is the norm in your industry. I know that from my
district that I represent as well.
Mr. Nichols. No, that is not the norm or the given. For
example, there are pipelines that go right through from
Louisiana over to Florida, there is a natural gas pipeline that
goes within a few miles of an existing trillion-cubic-feet gas
discovery that could be brought onstream very, very quickly. It
could have been brought onstream in the past. It could be
brought onstream very, very quickly if the leases were granted
by the Federal government.
There are undoubtedly other discoveries that could be made
in that part of the Gulf of Mexico that are near infrastructure
that could be brought on, not in 10 to 15 years, but in a much,
much shorter timeframe.
Ms. Capps. But you still agree that the six-month timeframe
that the Secretary is asking for in terms of a study, those
studies that might be necessary to make sure that the science
is there, that that is unnecessary.
Mr. Nichols. We have already had a moratorium for 27 years.
You could argue that another six months doesn't make much
difference. The concern is really focusing on the fundamental
issue of are we going to open up those areas or not? If this is
a process, the Department of the Interior has already received
tens of thousands of comments on this in the timeframe already.
It is an area because of the nature of the offshore areas
and because there has been no studies on this for so many
decades, the information that is available to anyone is really
not very viable and very worthwhile because it is based upon
very old seismic data, very old science.
Ms. Capps. Right. I am very aware of that. We are not just
talking about the Gulf, but we are talking about opening up
OCS.
Mr. Nichols. Exactly.
Ms. Capps. I will get to that in a minute, but back to this
10 or 15 year window, or the delays in the leasing process, or
whatever it is that is causing this timeframe. I would think
you might be using some of that time, and also your very best
profits--we all sit up and take note when the quarterly reports
come out and we see, particularly the contrast with our
declining economy, what the profit margins have been for many
of your companies.
This came up with my colleague, Mr. Hinchey, in a previous
set of questions. I want to get specific on how you are
addressing renewable energy technologies. A lot of advertising
has gone on with respect to some of you for the public in
talking about what you are doing. I want to ask you, Mr.
Nichols, you can represent the industry, but if anyone else
wants to chime in, you are certainly welcome to. What
percentage?
British Petroleum, you have mentioned eight percent of all
of your profits. I would like to have a percentage from each of
you, if I could, please, and if you want to get back in writing
if you don't have the numbers with you. I'd like the actual
dollar amount per year, or within a timeframe, that you are
spending on research into renewable energies or production of
renewable energy sources as you are, kind of sitting, waiting
for the OCS to open up--and the percentage of that in terms of
your profit. So, Mr. Nichols, maybe can you speak for the
industry as a whole or maybe your company?
Mr. Nichols. There are others that could speak better on
one of those issues.
Mr. Odum. I will just start.
Ms. Capps. Sure.
Mr. Odum. And be happy to provide----
Ms. Capps. I would like it in writing, actually, in
addition to what you are saying because I think that is good
information for us to have.
Mr. Odum. I will tell you for us, specifically,
representing Shell as a company, there is really three areas of
main focus. Second-generation advanced biofuels, we think, is
an area that holds great promise so we are putting a tremendous
amount of effort into that, and we have a strong wind business
in the U.S. already. I think we are up to about, with our
partners, 900 megawatts of wind energy.
We also do some in solar, more international than in the
U.S., but we are working in that area and, of course, hydrogen
as well. The first two are the main pieces of business for us.
The other one, which Mr. Cejka mentioned, is a really important
one, and that is efficiency. You know, our existing energy
structure, to the extent we can make it more efficient, that is
a very important resource, so we spend a lot there.
Ms. Capps. How many dollars are you putting into that, sir?
Mr. Odum. You know, I don't have a number off the top of my
head, but I know we look at every one of our facilities and
say, how can we increase the efficiency of this facility?
Ms. Capps. Right. Is it possible to put something like that
into a report?
Mr. Odum. I think we could certainly estimate something
that would be reasonable.
Ms. Capps. Right. I would appreciate that very much for the
record, if we could ask for that. Others want to respond?
Mr. McKay. I just want to clarify. In the last five years
or so in the U.S., in the U.S., we have put about $1.7 billion
of investment in the U.S. Our primary investments are in wind--
our largest investment where we have about 1,000 megawatts
turning now in five states. As for the other areas we have
worked, we have worked solar for 31 years, I believe.
We are also working on biofuels research, similar to what
Mr. Odum said. We believe in working in better molecules,
better feedstock, and better processes for changing those
molecules into useable fuels.
Ms. Capps. Mr. Nichols, and then I am actually going to
stop it there, if you don't mind, because I am actually going
to ask indulgence as if this were a second round. Thank you.
Mr. Nichols. If I might add, since 2000 the oil and gas
industry has invested $42 billion, and zero in low-carbon
research and development. That amount is 45 percent of the
combined spending by all U.S. companies and the Federal
government. So, the industry has done quite a bit in this area,
particularly in relationship to the Federal government. That is
according to a report by T2 & Associates in the Center for
Energy Economics at the University of Texas.
Ms. Capps. Thank you.
Ms. Harbert. I do think there is an important data point
there, that the Federal government on an annual basis has been
investing $3 billion in clean energy research and development,
which is less today than the Federal government invested after
the Arab oil embargo. It is important that we look at the
private sectors putting more money into clean energy research
and development than the Federal government has for quite some
time.
Ms. Capps. I think that is a very important piece of
evidence to have as part of this hearing. I am glad we can make
this part of the record, and I thank you for that. Any other
submissions in writing, I think, would really be useful for us
to understand. You are energy companies, you are not just doing
drilling, which there is an assumption, particularly on my side
of the aisle, that this is the case. I appreciate that you are
giving this information to us.
I have been given some kind of permission, especially now,
we have a new minority leader here, to continue my questioning.
It will be as if it is my second round. This is an open
question to each of you, at least the oil company
representatives. There has been a lot of discussion about the
fact that we really don't know much about what resources are
under the former moratorium areas, and that new inventories are
needed. That was just mentioned now.
I should disclose, I guess I should, that I represent Santa
Barbara and the coastal area of California, where we do a lot
of drilling offshore and onshore, and that the resources under
the OCS are of quite a bit of interest to us. There are a lot
of earthquake faults running through there. These inventories
can get quite expensive.
MMS has estimated it might be up to $80 million to do
seismic estimates in each frontier area. I want to ask each of
you to answer if your companies would be willing to pay for
these investigations of what the resources are. Any of your
companies willing to do that?
Mr. Cejka. We would prefer to do it rather than have the
government do it. We would prefer to pay for the seismic.
Ms. Capps. OK. And is that something that you are doing or
you need to be asked to do?
Mr. Cejka. We will not put the investment in until we know
there is going to be a stable leasing regime. Otherwise, it
would be wasted money.
Ms. Capps. So, you would wait until the decision about
offshore oil drilling is made, and that study would need to be
done before the lease could be granted.
Mr. Cejka. We need the long-term security to know it is a
reality.
Ms. Capps. OK. Any of the other companies want to respond?
Mr. Odum. Well, I would just like to make a point that
while we don't know exactly what is out there and how much it
is----
Ms. Capps. Right.
Mr. Odum.--I think what we do know, as an industry and as a
government, is that they are very substantial, large resources.
I don't want to somehow give the impression we don't know, so
there may not be very much. We know there is a lot. We just
don't know exactly how much it is.
Ms. Capps. OK. I just, I guess, want to get this on the
record as well and see if there is dispute about the fact that
your five companies made a combined $119 billion in profits
last year, and so this would seem to me, and it seems like some
of you are agreeing at least, a reasonable expectation that
some of these profits could go into doing those studies.
They would have to be verified as being independently
accurate, but that is something that is possible to do. Anyone
else wish to comment on this? We will leave it to those who
have spoken up. I have another question to ask, an open one, to
the panel. We hear a great deal about how the industry has made
vast technological improvements in recent decades. I have heard
this a lot because my ocean was the scene of the 1969 blowout
on Platform A.
It has been pointed out to me many times that over the
decades risks of spills have been, if not removed, but at least
drastically improved. I have pointed out at some of our
previous hearings that it is not just the spills from pumping
the oil that is of concern to many of us, but it is other
impacts as well. According to MMS, over the past 10 years there
have been an average of 6,200 barrels of various hazardous
fluids spilled each year on the OCS.
In the 20 years before that, the average was just over
3,000 barrels spilled per year. My question is going to be
about what kind of improvements have there been made, but I
want to let you know that there is a company called Greka that
is operating in northern Santa Barbara County onshore--I
believe the parent company is Green Dragon Gas that is based in
China--and they have spilled hundreds of thousands of barrels
into our creekbeds and into our wildlife areas in that region.
EPA calls this company in my Congressional district the
biggest polluters in our state, and they actually consider, and
they have said publicly, that the fines that they pay are the
cost of doing business. So, some of us in my Congressional
district have a little jaundiced view of progress that has been
made over the past years. I will give you this chance on
borrowed time. I do have one final question to ask Mr. Nichols.
You want to just highlight some of the improvements that would
give someone like me confidence about opening up the OCS? Any
of you?
Mr. Odum. Well, first of all, I would support the
discussion, and clearly you have been a big part of that in
terms of what have been the technological improvements, so I
won't go over that again. What I would actually like to do is
provide the actual numbers from our operations. I don't have
them all right here with me----
Ms. Capps. And that could be done in writing.
Mr. Odum. This is an area where I think it is extremely
important. It is has got to be a major area of questioning for
people as we think about opening new areas. I say, let us look
exactly at the track record. I would open that look at what we
do in the Gulf of Mexico.
Ms. Harbert. I would like to note that the U.S. has the
most stringent environmental regulations on production than any
other country in the world, and so if we are not going to open
up here, and we are going to be more and more reliant on
imported oil, that oil will be coming from places that have
less stringent environmental regulations. So this is an energy
and environmental choice. We can produce it here, cleanly with
the best technology, or we can import it from places that don't
necessarily have our interests at heart, and certainly don't
have the type of stringent environmental regulations that we
have here in this country.
Ms. Capps. I think that is a very good point that should be
part of discussion, and I appreciate that you have offered
that. Anyone else before I turn to the last question? Still on
borrowed time. Then I will sum up by taking exception, I guess
I will say, Mr. Nichols, to the part of your testimony where
you insinuate that the United States is not proactively
developing our domestic natural gas and oil resources.
This idea, I consider it a false idea, is used by a lot of
our colleagues, my colleagues, that support new drilling as
well. Mr. Luquette pointed out--I hope I said your name
properly--I am sorry if I didn't--we are an energy powerhouse,
you said that, producing the third most oil of any country in
the world, second in natural gas, and that we drill more wells
than any other company. Did I get that right in your statement?
We also lease huge swaths of land in the Gulf of Mexico and
in the Arctic Ocean. There are 24 billion barrels of unleashed,
undiscovered oil still in the central and western Gulf of
Mexico. Is this not true? Unleased, undiscovered oil available
in the Gulf? I have been told that is correct. And every year
we put those resources up for lease twice, two times a year. Am
I correct on that?
Mr. Nichols. I am not sure where you got the numbers. I
mean, there are leases that are put up regularly that the oil
and gas industry does not believe that oil and gas is there and
therefore don't lease them. So, the fact they are unleased just
means that we don't think there is any oil and gas there.
Ms. Capps. Well, these figures came from MMS, so I will
have them entered into the record, but I will note that that is
the source of it. You are welcome to challenge that if you
think these figures are wrong. In 2005, I was a part of the
Energy and Commerce Committee--where we passed it out of the
committee and then in the Congress--new tax incentives and
royalty relief to incentivize drilling.
This is my question to you. Can you really, in light of
that, continue to say with a straight face, I am assuming, that
the U.S. is not developing our domestic resources?
Mr. Nichols. Absolutely can say that. The United States, as
you well know, has had a moratorium on all of the Atlantic
Coast, all of the Pacific Coast, all of the eastern half of the
Gulf of Mexico, and all of Alaska. There is no other country in
the world that has that kind of moratorium on 85 percent of its
offshore lands.
That includes very environmentally conscious countries,
like Norway and England, that have stellar records, as we do. I
think it is a very accurate statement, when you look at the
sheer percentage of offshore lands that have been under a
moratoria for decades, to say that the United States has not
been doing what it could do to develop our resources.
Ms. Capps. Yes, I have heard that. It is not the first time
I have heard that, but you didn't really address the issue of
the undeveloped leases or available land in the Gulf, resources
that have not, by your decisions--all of you, or any number of
you, have chosen twice a year as the MMS has offered these, you
have passed on them.
Mr. Nichols. The answer to that is very simple. There is
not oil and gas under every single lease or under every single
acre that the United States owns as Federal lands. We pass on
those as an industry because each company individually, using
their own geological and geophysical information, concludes
that there is not something there worth exploring for.
Mr. Luquette. Many of these leases that you are referring
to, bonuses were paid, rentals were paid, seismic studies were
done, in some cases wells drilled, and these leases were
returned because of the determination they were nonprospective.
I am having a difficult time reconciling MMS resources with the
open lease count, but there are a number of these leases that
have been through a number of bid cycles, and many of them have
garnered significant investments in the investigation process.
Ms. Capps. I guess I am belaboring the point. The area
offshore that I am very familiar with off Santa Barbara's
coastline, many of those leases as well were not tapped into
because of the technology that wasn't available in previous
times. Now, with things like slant drilling, there are many
more projects being proposed, and I am curious that your
industries have in the past explored, or maybe made
assessments, and that you have said ``no,'' and you continue to
say ``no.''
Have you thought of the new technologies that might make,
as we have seen with some natural gas fields, that these are
now available with new technology? Again, you have talked about
areas on land. How about offshore in the Gulf?
Mr. Luquette. Well, just let me attack that problem from a
technology standpoint. If you look at the industry's track
record, we used whatever technology we had available. In the
early days, we drilled shallow wells in shallow water. Now, the
companies represented here are drilling in ultra-deep water to
ultra-deep depths. As the technologies evolve, we move out to
those.
So, a particular lease that might have sat in 6,000 feet of
water 20 years ago would have been uninteresting to us because
we didn't have the technology. When we have the technology and
it is available, we pursue.
Ms. Capps. So, you wouldn't pass on some of these onshore
or in the Gulf that you have passed on in the past, but you
don't have the technology now?
Mr. Luquette. If there was a new idea. People come up with
new ideas. If one of us drills a dry hole somewhere else, it
may give a different company a different idea and they can come
back to a lease that had been abandoned with a new idea and
potentially find something. So, we turn these leases over, as
an industry, on a constant basis, and it is this generation of
new ideas, this generation of new technology, that allows us to
continue, but there is a point of no return. I mean, we are
drilling depths now at 30,000 to 32,000 feet where you----
Ms. Capps. On land or off?
Mr. Luquette. Offshore and on land, where the temperatures
and the pressures are such we are not going to be able to do
that, so we are now drilling on a pincushion, and we are
running out of spaces to do it.
Ms. Capps. And in the Gulf as well are you?
Mr. Luquette. In the Gulf as well.
Ms. Capps. Thank you. I have way overstayed my time. I
appreciate, also, your taking the time to address the issues I
have brought up. Thank you very much.
The Chairman. Do you have any questions, Ms. Lummis?
Ms. Lummis. My name is Cynthia Lummis, I am from Wyoming. I
want to thank the gentlemen and lady for appearing before us
today, and I apologize for being unable to appear until now at
this hearing. I do have a couple of questions for you. I come
from one of America's largest onshore oil, gas and coal
producing states. I have toured sites in the Pinedale Anticline
in Wyoming that even four years ago would not have existed.
Thirty-five wells on one well pad--drilling horizontally
and directionally--producing natural gas that we never could
have recovered four years ago. Stunning developments that have
really reduced the footprint on the surface of the ground. My
familiarity with onshore does not necessarily translate to
offshore, so I would like to ask how has offshore exploration
and production technology changed over the past 40 years? What
have been the impacts of these changes and advancements on
industry's overall environmental impact, specifically offshore?
Mr. Nichols. There is a lot I would love to say about that
but we would be here all afternoon. Let me just give you a
couple of examples about offshore. Ten years ago, the industry
did not really have the capacity to have drilling rigs that
could drill in 8,000 and 10,000 feet of water. We do today. Ten
years ago, we did not have seismic that could see below thick
salt bodies out in the deepest water and see land out there.
If you had asked this industry 10 years ago whether or not
a geologic formation known as the Lower Tertiary would be
prospective, or could even be explored for, the answer would
have been no. It was really beyond technology. Today we have
multiple hundred-million-barrel discoveries out there that the
industry is trying to bring onstream--a major potential
resource. None of it is producing yet, but we are working very
hard to make that happen. So, technology continues to open up
new areas and new ideas offshore, just as it does onshore.
Ms. Lummis. Well, thank you. Follow-up question, Mr.
Chairman. How long will it be before we will start seeing
increased production on the Outer Continental Shelf, assuming
that the lift of the moratorium stays in place. This question
is for anyone who wishes to respond.
Mr. Nichols. You know, part of that is going to depend upon
whether and how long the Department of the Interior takes to
grant the leases. We obviously can't start doing the detailed
research until the leases are granted. At that time, we can
start bidding for the leases in the orderly process that the
Department of the Interior typically does--due to the detailed,
expensive seismic work to refine where prospects might be and
then drill them. The answer, in terms of time, can be very
short to very long.
As I said earlier, on some of the prospects that are
immediately adjacent to the western half of the Gulf of Mexico
where we have been allowed to drill, those oil and gas fields,
if discovered, could be brought onstream in a matter of a year
or two, a couple years. In other areas, it would take longer
because it would take longer to do the fundamental research.
Ms. Lummis. You know, once again, I am more familiar with
onshore than offshore. Could one of you describe the usual
permitting or environmental study process that would occur for
an offshore lease?
Mr. Odum. Well, I will pick an example that we are going
through right now, which is offshore Alaska, and so in terms of
just understanding the timeframe, of course, what is done
before a leasing actually takes place is an environmental
assessment of the area by the government, by the Department of
the Interior. That typically takes a couple of years, I would
say. Then, a leasing process and then, of course, an
exploration plan is developed. That is then analyzed from an
impact and mitigation point of view.
We apply for the permits. That again can be another one to
two years, let us say, and then in the meantime, we are
building the infrastructure to be able to drill, and then we
can go out and drill a well. So, it is multiple years, that
process.
Ms. Lummis. I want to ask a question specific to California
production as well. How many adjacent leases would you be able
to drill nearly immediately after the lease is issued regarding
California production where you could slant drill or use newer
technologies? Anyone?
Mr. Odum. This is going to be a very generic answer, I am
afraid, because it is really all over the map. I mean, some of
it, again, back to Mr. Nichols' point, could happen fairly
quickly. Some would take more time. There are so many variables
involved.
Ms. Lummis. I have another question, Mr. Chairman. It is
with regard to comprehensive resource inventory. Some people
have requested that that is needed on the Outer Continental
Shelf prior to additional leasing on previously off-limit
areas. Would such a process prove helpful, or would it be a
hindrance to responsible offshore development?
Mr. Nichols. The word ``inventory'' implies that there is
something that you can go count. The information we have on the
places that have been under moratorium for almost three
decades--the information there is not very good. It is old
treatises. It is old seismic data that by modern technology is
essentially worthless.
So, the inventory that we could do with existing data won't
really tell you anything other than what we already know, that
by making comparisons to other similar geologic basins around
the world, including the western half of the Gulf of Mexico,
these offshore areas should contain substantial oil and gas
reserves. Exactly where they are and how they might be
developed, each of the companies here, and other companies that
are not here, would have their own separate ideas.
The most efficient way from the government's standpoint
would be to put these up for lease just as it has for decades
in the western half of the Gulf of Mexico, let the industry go
do what we do best at our expense, not at taxpayer expense, and
do the seismic studies there, and then drill the wells, which
is ultimately the only way you really know whether there is
anything there. The model that we have used successfully in the
western half of the Gulf of Mexico for years is the model that
would seem to make the most sense.
Ms. Lummis. Thank you. I am assuming since someone just got
beeped by your caucus that we will be beeped by ours as well to
go vote. Thank you, Mr. Chairman. I have additional questions,
but I think we are getting called to vote.
The Chairman. Gentleman from Oregon, Mr. DeFazio.
Mr. DeFazio. Thank you, Mr. Chairman. Perhaps after a
lengthy session, we can find some consensus on something. I
heard earlier that you want to participate in helping Americans
conserve. Let me give you an observation. A number of you
represent the largest distributors at the retail level. I know
some are franchises, some are company-owned. I don't know the
exact mix, but you have a label out there and you have some
control.
We have numbers showing that if Americans just properly
inflated their tires, according to the Bush Administration, it
would save three million gallons a day. Carnegie-Mellon
students from an extrapolation said 2.4 percent a year in terms
of gallons consumed. There are other estimates out there, but
we know there is a lot. I will just say, as a consumer, what I
reflect is I have to drive past seven gas stations to find one
that has an available pay for air pump.
It used to be everybody had compressors and air pumps at
their stations. As the industry has changed, you don't. I would
suggest if you want to contribute something and really help us
with significant conservation linking, say, to the government
with an education program and you guys making it available.
If the government put out an education program, it would
still be I am driving past seven gas stations halfway through
my town to find the one where I can pay 50 cents to blow up my
tires. Make them free and put them in all your stations and
help us conserve. Anybody interested in that? I hope you are.
Then the other, I understand, in response to Mr. Inslee, that
Shell and BP said they would support cap-and-trade.
I want to know, if you support cap-and-trade how you
envision the market existing in a way that it can't be
manipulated, because economists say, ``Well, it has got to be a
very fungible market because we have to have liquidity.'' To
them, liquidity means hedge funds, it means derivatives, it
means God only knows what new bubble and what new instrument. I
worry that we are going to create profits and cost without
product.
In Europe, cap-and-trade over the last two years has $60
billion of cost and their carbon is up. Now, what is the
objective here? Now some can say, ``Well, they were in the
process of setting a price and the price came out at $60 a ton,
pretty much average over two years.'' That is great, except
now, with a bad economy, it has dropped to $15 a ton. So, if I
made an investment last year at $60 a ton, suddenly, whoa, I am
way underwater here and nobody is going to be wanting to buy my
offsets.
I am just wondering how Shell and BP, if you have a
sophisticated vision, and if you do, I would love to have you
share it with me, because I am very concerned about this market
and the potential for its manipulation. You guys have any
thought on that?
Mr. McKay. I can't answer every one of your concerns, but I
would say the EU cap-and-trade system has gotten better. The
verification and understanding of the emissions themselves, and
the way allowances and credits are utilized, has gotten better.
They are essentially into starting Phase 3.
Mr. DeFazio. $60 billion on top of consumers and business
later, but, yes, OK, we have to experiment.
Mr. McKay. Any price that is put on carbon, whether it is a
tax or a cap on emissions, will have an economic effect.
Mr. DeFazio. Well, here is just the thing. I mean, I am an
old, very simplistic kind of guy. I tell you, I grew up at a
time when the rivers in the East burned and the Willamette
River in Oregon was an open sewer. The government didn't think,
``Well, let us have a market-based system to clean up those
rivers, and we will sell credits to pollute, and we will sell
offsets.''
They said, ``Hey, we are going to stop the polluting. Here
is the schedule. It is predictable. You will pay for permits
and if you don't meet the schedule, you will pay fines. We are
going to clean this darn thing up.'' I think if, as a society,
we adopt that approach and decide we want to deal with carbon,
it is honest, it is predictable and it is long term. I don't
see that in the market. It is certainly not predictable.
Maybe Europe has got its act together now after $60
billion, but since the price just dropped to 25 percent, I
think that is going to create some new problems with cap-and-
trade in Europe ongoing. I think the fascination with the
market, given Enron and given Wall Street, is a little bizarre
at this point in time. If you have thought out how we are going
to have a limited entry or a market that is going to be
resistant to manipulation, I would love to have your thoughts
on it because I am going to be trying to offer amendments as we
move through this what seems to be, unfortunately, an
inevitable process. Thank you. Thank you, Mr. Chairman.
The Chairman. Thank you. That concludes this third in a
series of hearings on OCS oil and gas drilling. Again, I want
to express my deep appreciation to the panel for traveling to
be with us today, I am not going to ask you how you got here--
and also want to say thank you for your time and patience. That
concludes today's hearings.
[Whereupon, at 1:35 p.m., the Committee was adjourned.]
[Additional material submitted for the record follows:]
[ NOTE: Responses to questions submitted for the record by the
witnesses have been retained in the Committee's official
files.]
[The prepared statement of Mrs. Capps follows:]
Statement of The Honorable Lois Capps, a Representative in Congress
from the State of California
Thank you, Mr. Chairman.
I'm pleased the Committee will be hearing today from the oil and
gas industry.
As someone who witnessed the horrible economic and environmental
consequences of the huge 1969 oil spill, I know I have a certain bias
against new offshore drilling.
But, even so, it seems obvious that the renewed interest in
offshore drilling as a potential solution to energy independence hits
many dry holes.
First, even if we wanted to, we simply can't drill our way to
energy independence.
The U.S. has less than 3 percent of world oil supplies, yet we make
up nearly 25 percent of world demand.
More drilling off our coasts isn't going to change those numbers,
so no one should believe arguments that more drilling in pristine areas
means we stop relying on foreign oil.
More drilling won't end our addiction to oil it just enables it.
Second, 80 percent of the oil and gas resources off our coasts are
already available for leasing and drilling.
While large swaths of our coasts are off limits to new drilling,
the areas where most oil and gas are located are not.
Listening to proponents of more offshore drilling, you'd think
we've been locking up all our resources. The opposite is true.
Third, we are drilling more domestically than we have in years.
The Bush Administration's energy policy was basically to drill for
more resources. It leased public lands for drilling throughout the
west, the Gulf Coast and elsewhere at a record pace over the last eight
years.
It even issued a draft proposal days before leaving office that
would result in the leasing of the entire Atlantic coast, and four
areas off my state of California.
Right now, the oil and gas industry has some 6,000 leases in the
Gulf of Mexico where the majority of oil and natural gas reserves are
found that are not being drilled on.
For years, the oil and gas industry has said that it wants to lower
prices for American consumers, but they can't because they're prevented
from drilling. This couldn't be further from the truth.
Finally, the Energy Department says that opening up our coasts to
new drilling would have little to no effect on gas prices today or
tomorrow.
The best estimate is that it would take 10 years for the product to
come on line and then maybe it would affect prices by a few cents.
So, we're drilling domestically more than ever, the oil industry
already has access to most offshore resources, the industry is not
drilling in millions of acres of public land that it has leased and,
even if it did, it wouldn't lower prices and it wouldn't really have
any effect on our reliance on foreign oil.
Mr. Chairman, we should be investing our time, energy and
creativity into real solutions that put us on the right path toward
renewable energy solutions for our future.
America shouldn't be known for chasing after yesterday's energy
technologies, but for leadership toward the clean energy solutions of
today and tomorrow.
Thank you again for calling this hearing.
______
[A letter submitted for the record by Hon. John Engler,
President and CEO, National Association of Manufacturers,
follows:]
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