[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




 
    LEASING AND DEVELOPMENT OF OIL AND GAS RESOURCES ON THE OUTER 
                           CONTINENTAL SHELF

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

                           OVERSIGHT HEARING

                               before the

                       SUBCOMMITTEE ON ENERGY AND
                           MINERAL RESOURCES

                                 of the

                     COMMITTEE ON NATURAL RESOURCES
                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                        Tuesday, March 17, 2009

                               __________

                           Serial No. 111-10

                               __________

       Printed for the use of the Committee on Natural Resources



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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
                                 ------                                


              SUBCOMMITTEE ON ENERGY AND MINERAL RESOURCES

                    JIM COSTA, California, Chairman
           DOUG LAMBORN, Colorado, Ranking Republican Member

Eni F.H. Faleomavaega, American      Don Young, Alaska
    Samoa                            Louie Gohmert, Texas
Rush D. Holt, New Jersey             John Fleming, Louisiana
Dan Boren, Oklahoma                  Jason Chaffetz, Utah
Gregorio Sablan, Northern Marianas   Cynthia M. Lummis, Wyoming
Martin T. Heinrich, New Mexico       Doc Hastings, Washington, ex 
Edward J. Markey, Massachusetts          officio
Maurice D. Hinchey, New York
John P. Sarbanes, Maryland
Niki Tsongas, Massachusetts
Nick J. Rahall, II, West Virginia, 
    ex officio


                                 ------                                
                                CONTENTS

                              ----------                              
                                                                   Page

Hearing held on Tuesday, March 17, 2009..........................     1

Statement of Members:
    Costa, Hon. Jim, a Representative in Congress from the State 
      of California..............................................     1
        Prepared statement of....................................     3
    Lamborn, Hon. Doug, a Representative in Congress from the 
      State of Colorado..........................................     4
        Prepared statement of....................................     6

Statement of Witnesses:
    Farnsworth, James W., President and Chief Exploration 
      Officer, Cobalt International Energy, L.P..................    46
        Prepared statement of....................................    48
        Response to questions submitted for the record...........    50
    Fry, Tom, President, National Ocean Industries Association...    33
        Prepared statement of....................................    35
        Response to questions submitted for the record...........    41
    Kendall, Mary L., Acting Inspector General, U.S. Department 
      of the Interior............................................    18
        Prepared statement of....................................    19
        Response to questions submitted for the record...........    23
    Oynes, Chris, Associate Director, Offshore Energy and 
      Minerals Management Program, Minerals Management Service, 
      U.S. Department of the Interior............................     8
        Prepared statement of....................................    10
    Rusco, Frank, Director, Natural Resources and Environment, 
      U.S. Government Accountability Office......................    25
        Prepared statement of....................................    27
        Response to questions submitted for the record...........    30

Additional materials supplied:
    Congressional Research Service Memorandum from Marc Humphries 
      to House Committee on Natural Resources, ``Federal Lands 
      Offered for Lease Since 1969 by Administration.''..........    69
    New York Times article entitled ``As Oil and Gas Prices 
      Plunge, a Frenzy of Drilling Ends'' by Clifford Krauss 
      submitted for the record...................................    70
    Washington Times article entitled ``EXCLUSIVE: China stocks 
      up on bargain oil'' by Chris O'Brien submitted for the 
      record.....................................................    71
    List of documents retained in the Committee's official files.    72


OVERSIGHT HEARING ON ``LEASING AND DEVELOPMENT OF OIL AND GAS RESOURCES 
                   ON THE OUTER CONTINENTAL SHELF.''

                              ----------                              


                        Tuesday, March 17, 2009

                     U.S. House of Representatives

              Subcommittee on Energy and Mineral Resources

                     Committee on Natural Resources

                            Washington, D.C.

                              ----------                              

    The Subcommittee met, pursuant to call, at 10:05 a.m. in 
Room 1324, Longworth House Office Building, Hon. Jim Costa 
[Chairman of the Subcommittee] presiding.
    Present: Representatives Costa, Lamborn, Holt, Tsongas, 
Gohmert, Fleming, Chaffetz, and Hastings.

   STATEMENT OF THE HONORABLE JIM COSTA, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. Costa. The Subcommittee on Energy and Mineral Resources 
will now come to order.
    This is one of a continuum of oversight hearings that the 
Subcommittee is having in conjunction with the full Natural 
Resources Committee on how we best manage our energy resources 
on public lands, both onshore and offshore, and I appreciate 
the participation and the involvement of not only the 
Subcommittee but the full Committee as we continue to work with 
all of those interested parties that have a role to play in 
trying to properly, and in a balancing fashion, manage 
America's energy resources in the 21st Century.
    Today's hearing is a continuum of that discussion on 
leasing and the development of oil and gas resources on the 
Outer Continental Shelf.
    So let me first begin by wishing everyone Happy St. 
Patrick's Day. I see some of you obliged in the true Irish 
tradition, my lads and lassies, and for you, all that be good. 
For the rest of you, you are in trouble.
    Obviously we are going to be looking at the testimony from 
our panel of respected witnesses. As I have told the 
Subcommittee before, we have a few ministerial actions we have 
to take care of. Under Rule 4[g], the Chairman and the Ranking 
Minority Member can and may make opening statements. We will 
both do that. And if any other Members have statements, we are 
going to submit them for the record today--I hope you do not 
mind--because, under unanimous consent, we would like to get to 
our witnesses' testimony and then to the question-and-comment 
period.
    Additionally, under Rule 4[h], any material submitted for 
inclusion in the hearing record must be submitted no later than 
10 business days following this hearing. We always ask folks to 
try to expedite that process. It makes it better for the staff, 
and we appreciate it very much.
    Let me begin with my opening statement. As I noted, the 
Energy and Mineral Resources Subcommittee is taking a detailed 
look at the process and the data behind the leasing and the 
developing of oil and gas resources which are so critical to 
the United States economy as we talk about our resources--both 
onshore and offshore.
    This is the second hearing of the Subcommittee. It is the 
fifth hearing that the Natural Resources Committee has held on 
the subject matter. I have been very pleased with the tone that 
has taken place thus far in the hearings in trying to find 
common ground among my colleagues, both Republican and 
Democratic, to determine how we in a common-sense fashion deal 
with what is not only a very important issue but an issue that 
has in the past been contentious. As we know, it has been 
politicized. Hopefully we can have a much more calm and cool-
headed discussion.
    One question that kept coming up last year that we heard in 
the debate was, with 68 million acres of nonproducing Federal 
oil and gas leases in the United States that are out there, why 
are they not being utilized?
    One side argued that the energy companies were just sitting 
on these leases, and thus they should ``Use It or Lose It.'' 
The other side argued that these leases had little oil or gas 
or carbon deposits beneath them, and therefore, we needed to 
provide new leases or acreage to the energy industries so they 
could, as it was put by some, ``Drill, Baby, Drill.''
    Now I think many of you have heard my comment last month 
that I thought ``Use It or Lose It'' or ``Drill, Baby, Drill'' 
seemed to me to be nonsensical when you get into the details of 
the issues before us, and I truly feel that way.
    Today, we have two watchdog groups that have looked at the 
question--the Government Accountability Office, and for those 
of my colleagues who have not read their report, ``Oil and Gas 
Leasing: The Interior Department Could Do More To Encourage 
Diligent Development,'' I would urge you to look at it--and the 
Office of the Inspector General from the Interior Department--
and look at their reports.
    I think this much is clear: The answer to how we best use 
our energy resources on public lands, whether they be onshore 
or offshore, are not and cannot simply be reduced to sound 
bites. That may make political hay in some circles, but that 
does not get the job done.
    Companies are not just sitting on their leases and refusing 
to drill, but at the same time, they also are not being blocked 
by lawsuits at every turn or stuck with land that has no 
resources.
    There are many factors I think as I tried to examine and 
get into the details of these issues on why leases that have 
been provided are not producing oil or gas, and I hope that the 
expert witnesses this morning will really detail what those 
complexities are.
    Our witnesses from the National Ocean Industries 
Association, I think, will also help us gain further insight 
into these various factors, and I would urge you to provide 
that information.
    Understanding therefore the reasons in a more thoughtful 
manner I think will allow us to move forward intelligently and 
ultimately help us figure out where the balancing is between 
domestic production of oil and gas on our public lands, both 
onshore and offshore, as we try to do the transition that I 
continue to talk about on a comprehensive energy policy that 
uses all the energy tools in our energy toolbox--at the near 
term, which is defined as the next several years, the midterm, 
which is defined anywhere between the next five to 10 years, 
and the long term, which is suggested as we try to build a more 
robust, renewable energy portfolio over the next 10 to 20 
years.
    I think that is the challenge that this Subcommittee has 
and that the full Committee has. This hearing today is not 
solely about nonproducing leases, but it is also about the 
details of the entire offshore leasing and development program, 
in essence, what works well and maybe what is not working and 
where is there room for improvement.
    I believe that the offshore leasing program generally 
speaking, and our first visit with myself and Chairman Rahall 
and Committee staff was last March--actually it would be about 
a year ago--into the Gulf of Mexico is generally being run 
quite well. We are looking forward to discussions today on how 
the lessons we have learned on offshore can also be put to good 
use onshore.
    So, Members of the Subcommittee, I thank you for being here 
and your participation, and I would now like to recognize the 
Ranking Member, Mr. Doug Lamborn, from Colorado, the great 
State of Colorado, for his opening statement.
    [The prepared statement of Mr. Costa follows:]

            Statement of The Honorable Jim Costa, Chairman, 
              Subcommittee on Energy and Mineral Resources

    Today the Subcommittee on Energy and Mineral Resources will take a 
detailed look at the process and the data behind leasing and developing 
oil and gas resources on the U.S. outer Continental Shelf. This is the 
second hearing by this subcommittee, and the fifth hearing in the 
Natural Resources Committee, on the topic of offshore drilling, and I 
have been very pleased with the tone that has been adopted so far 
throughout these hearings: a tone of cooperation and of trying to find 
the common ground on an issue that was far too contentious and 
politicized in the previous Congress.
    Perhaps no single statistic was used more last year than the number 
``68 million'', as in ``there are 68 million acres of non-producing 
federal oil and gas leases in the United States.'' While an accurate 
number, by itself it told us very little. One side argued that oil 
companies were just sitting on these leases and they should ``use it or 
lose it.'' The other side argued that these leases had no oil and gas 
beneath them, and we needed to provide new acreage to the industry so 
they could drill, baby, drill. To me, both of these positions are 
nonsensical.
    Privately, away from the glare of the tv lights and the blare of 
the pundits, Members of Congress would ask: why? What are the real 
reasons that 75% of the acres under lease are not producing? That is 
one of the questions that I hope we are able to address today. We have 
two watchdogs here, the Government Accountability Office and the Office 
of the Inspector General for the Interior Department, and they both 
have spent quite a bit of time looking at this question in recent 
months.
    From their reports, this much is clear: the answers here are not 
solely on one side or the other. Companies are not just sitting on 
their leases and refusing to drill, but they are also not being blocked 
by lawsuits at every turn, or stuck with land that has no resources. 
Many factors go in to why a lease is not producing oil and gas. There 
are regulatory delays, workforce shortages, equipment shortages, 
deliberate business decisions, and countless other complexities that we 
will hear about today. Our witness from the National Ocean Industries 
Association will also help us gain some insight into these various 
factors. Understanding these reasons in a more thoughtful manner will 
allow us to move forward more intelligently, and ultimately help us 
figure out how domestic oil and gas production will fit into our short 
term, medium term, and long term energy strategies.
    But this hearing is not solely about non-producing leases. It is 
about the details of the entire offshore leasing and development 
program--how it works, where it succeeds, and where there is room for 
improvement. I believe that the offshore leasing program is being run 
quite well, particularly in the Gulf of Mexico, and I am looking 
forward to a discussion today about how the lessons we have learned 
offshore can also be put to good use onshore.
                                 ______
                                 

 STATEMENT OF THE HONORABLE DOUG LAMBORN, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF COLORADO

    Mr. Lamborn. Mr. Chairman, thank you for holding this 
hearing. This is the fifth hearing on the Outer Continental 
Shelf this Congress. I believe these hearings have been very 
helpful in establishing a clear record of the challenges and 
opportunities we have in the OCS as we move forward with new 
development. Today's hearing will focus on the development of 
oil and gas resources in the OCS.
    Last year, we had an extended debate on the issue of 
``nonproducing leases'' and domestic development. The impetus 
for that debate was a report issued by the majority staff on 
this Committee. Unfortunately, that debate was held on the 
House Floor rather than in this Subcommittee. The result of 
that debate, as the Chairman has alluded to, was the 
dissemination of a tremendous amount of misinformation about 
the process and status of oil and gas development on our 
Federal lands and the OCS.
    I quote one majority member from last year, who said, ``It 
is outrageous that oil companies are sitting idle on what could 
be vast reserves of oil.''
    Now we all know that there are no domestic companies just 
sitting idle on vast reserves of oil. There are, however, many 
state-run oil companies overseas that are part of the OPEC 
cartel who are committed to hoarding oil to drive up prices, 
but that is not an option for American companies who only make 
money by bringing oil out of the ground.
    More disturbing than the statements about our domestic 
companies are the new policies proposed by the President, who 
clearly relied on the information presented in that majority 
report. Last year, it was the ``Use It or Lose It'' 
legislation. This year, it is the President's budget, which 
includes a billion dollars in new taxes just on operations in 
the Gulf of Mexico. These new ``nonproducing fees'' will charge 
companies while they wait for Federal permits, evaluate seismic 
data or spend billions to build the infrastructure needed to 
produce oil from deep beneath the ocean floor.
    These fees will not make companies develop any faster. In 
fact, the fees constitute a purely punitive proposal designed 
for what appears to be cheap political gain.
    New fees will, however, harm domestic development by 
discouraging companies from investing in marginal leases, thus 
reducing investments in new development and ultimately leaving 
us more dependent on foreign sources of oil.
    The development of the deepwater Gulf of Mexico is one of 
the greatest technological challenges in the world. There is a 
reason that in the movie, Armageddon, when they wanted to drill 
on an asteroid hurtling toward earth, they picked some 
roughneck oil drillers.
    Just one example of the challenges is the Chevron Buckskin 
Prospect, which recently had a significant discovery. This 
block is approximately 190 miles southeast of Houston. This 
lease was issued in December of 2003. It is a 10-year lease 
covering nine square miles located in 6,700 feet of water.
    The Buckskin No. 1 discovery well is located in 
approximately 6,900 feet of water and was drilled to a depth of 
more than 29,000 feet. It has taken five years to get to the 
successful discovery well and will likely take another five 
years to bring this discovery to development, all before 
Chevron and its partners receive any income from their 
investment. By the time Buckskin goes online, it is not 
unreasonable to expect Chevron and its partners to have spent 
between four and six billion dollars to develop this field.
    I highlight this example of the challenge of OCS 
development because tomorrow the Department of the Interior 
will conduct Lease Sale 208 for oil and gas exploration in the 
Central Gulf of Mexico. One of the most important pieces of 
that sale will be the congressionally mandated sale of the area 
known as ``181 South.'' What is most amazing is that this area, 
like much of the remainder of our Coastal Zone, has been off 
limits for more than 20 years.
    Do we know exactly what lies beneath these areas? Do we 
know exactly how much oil and gas the companies will find? Do 
the companies that tomorrow will spend millions or billions of 
dollars know exactly what their return will be?
    The answer to all these questions is no. We do not know 
exactly what resources these lands hold, which is why critical 
exploration work must be done before any of these lands can be 
tested by drilling, but that exploration and inventory work 
will be done by private companies at no expense to the American 
taxpayer.
    This new exploration will create jobs, creating new 
investment, and should these companies find commercial 
quantities of oil and gas, then we will see development of 
these resources creating even more jobs and revenue for the 
American taxpayer.
    I am focusing on this lease sale because, while it will be 
a great benefit to the American people, it continues the trend 
that we have had in the OCS for decades. America continues to 
place nearly all of our OCS development within the Gulf of 
Mexico. This hurricane-rich area currently provides America 
with 25 percent of our oil and 15 percent of our natural gas. 
Having nearly all of our eggs in this one fragile basket cannot 
be the best energy policy for America.
    At our last hearing, the administrator for the Energy 
Information Administration told us that, by 2030, America will 
still be 80 percent reliant on oil for our transportation 
needs. Meanwhile, the Interior Department has decided to delay 
the planning process for the 2010 OCS Five-Year Plan, pushing 
back the plan to 2011 or later, yet we need these resources 
today.
    I want to submit for the record, Mr. Chairman, an article 
from the Washington Times which highlights the efforts China is 
undergoing to ensure that they have a steady supply of oil for 
their economy. These actions by the Chinese government will 
ensure that when the world economy starts to grow, they will 
have the resources available to fuel their economic growth 
while our lack of development means we could very well see $4 
or $5 gasoline again, which is one of the causes of the current 
economic shock we are in.
    To emphasize that point, I want to submit for the record 
also some research by Professor James Hamilton from California.
    Mr. Costa. Without objection.
    Mr. Lamborn. And to close, Mr. Chairman, I believe in 
American excellence, and I know that everyone in this body is 
committed to the best for America, but we cannot continue to 
dawdle while our competitors get it.
    China is locking up mineral and oil resources. They are 
converting from bicycles to nuclear and building a new coal 
power plant each week. Reports are that Cuba is coordinating 
with Russia to drill exploration wells in the second quarter of 
this year not 60 miles from the Florida coast. Canada is moving 
to open its OCS resources to develop more domestic energy. 
Brazil has had more major OCS finds this decade than nearly 
anywhere else in the world.
    Meanwhile, Americans are worried about our standard of 
living. They are worried about the ability to pay for their 
kids' college and if they can keep their homes, and they are 
worried about paying bills for everyday expenses, including 
energy.
    We know that the resources are there in the OCS, and yet we 
continue to take steps to delay and block development. I 
believe in our ability to bring hope to the entire world, and I 
believe this Committee can help America solve the energy 
problems we face and provide the fuel necessary for economic 
growth and prosperity.
    I thank you, and I look forward to hearing from our 
witnesses.
    [The prepared statement of Mr. Lamborn follows:]

       Statement of The Honorable Doug Lamborn, Ranking Member, 
              Subcommittee on Energy and Mineral Resources

    Mr. Chairman, thank you for holding this hearing. This is the 5th 
hearing on OCS development this Congress. I believe these hearings have 
been very helpful in establishing a clear record of the challenges and 
opportunities we have in the OCS as we move forward with new 
development.
Use or Lose
    Today's hearing will focus on development of oil and gas resources 
in the OCS. Last year, we had an extended debate on the issue of ``non-
producing leases'' and domestic development. The impetus for that 
debate was a report issued by the Majority staff on this Committee. 
Unfortunately, that debate was held on the House Floor and not in this 
subcommittee. The result of that debate was the dissemination of a 
tremendous amount of misinformation about the process and status of oil 
and gas development on our federal lands and the OCS.
    I quote one Majority member from last year who said, ``It is 
outrageous that oil companies are sitting idle on what could be vast 
reserves of oil.'' 1
---------------------------------------------------------------------------
    \1\ Rep. Gabrille Giffords, Press Release
---------------------------------------------------------------------------
    Now we all know that there are no domestic companies sitting idle 
on vast reserves of oil. There are, however, many state run oil 
companies that are part of the OPEC cartel who are committed to 
hoarding oil to drive up prices, but that isn't an option for American 
companies who only make money by bringing the oil out of the ground.
    More disturbing than the statements about our domestic companies is 
the new polices proposed by the President, who clearly relied on the 
information presented in the Majority report.
    Last year it was the ``Use it or Lose it'' legislation. This year 
it's the President's budget, which includes a billion dollars in new 
taxes just on operations in the Gulf of Mexico. These new ``non-
producing'' fees will charge companies while they wait for federal 
permits, evaluate seismic data, or spend billions to build the 
infrastructure needed to produce oil from deep beneath the sea floor. 
These fees will not make companies develop any faster. In fact, the 
fees constitute a purely punitive proposal designed for what appears to 
be cheap political gain.
    New fees will, however, harm domestic development by discouraging 
companies from investing in marginal leases, thus reducing investments 
in new development and ultimately leaving us more dependent on foreign 
sources of oil.
    The development of the deepwater Gulf of Mexico is one of the 
greatest technical challenges in the world. There is a reason that in 
the movie Armageddon when they wanted to drill on an asteroid hurtling 
toward earth they picked some roughneck oil drillers.
    Just one example of the challenges is the Chevron Buckskin prospect 
which recently had a ``significant discovery.'' This block is 
approximately 190 miles southeast of Houston, Texas. This lease was 
issued in December of 2003. It's a 10 year lease covering 9 square 
miles located in 6700 feet of water. The Buckskin No. 1 discovery well 
is located in approximately 6,920 feet of water and was drilled to a 
depth of 29,404 feet. It has taken 5 years to get to the successful 
discovery well and will likely take another 5 years to bring this 
discovery to development. All before Chevron and its partners receive 
any income from their investment. By the time Buckskin goes on line, it 
is not unreasonable to expect Chevron and its partners would have spent 
between $4 and $6 Billion to develop the field.
Lease Sale
    I highlight this example of the challenge of OCS development 
because tomorrow the Department of the Interior will conduct Lease Sale 
208 for Oil and Gas exploration in the Central Gulf of Mexico. One of 
the most important pieces of that sale will be the congressionally 
mandated sale of the area known as 181 south. What is most amazing is 
that this area, like much of the remainder of our coastal zone, has 
been off limits for more than 20 years.
    Do we know exactly what lies beneath these areas? Do we know 
exactly how much oil and gas the companies will find? Do the companies 
that tomorrow will spend millions or billions of dollars know exactly 
what their return will be? The answer to all those questions is NO.
    We don't know exactly what resources these lands hold, which is why 
critical exploration work must be done before any of these lands can be 
tested by drilling. But that exploration and inventory work will be 
done by private companies at no cost to the American taxpayer.
    This new exploration will create jobs, creating new investment, and 
should these companies find commercial quantities of oil and natural 
gas, then we will see development of these resources creating even more 
jobs and revenue for the American taxpayer.
    I am focusing on this lease sale because, while it will be a great 
benefit to the American people, it continues the trend that we have had 
in the OCS for decades. America continues to place nearly all of our 
OCS development within the Gulf of Mexico. This hurricane rich area 
currently provides America with 25% of our oil and 15% of our natural 
gas. Having nearly all of our eggs in this one fragile basket cannot be 
the best energy policy for America.
    At our last hearing, the Administrator for the Energy Information 
Administration told us that by 2030 America will still be 80% reliant 
on oil for our transportation needs. Meanwhile the Interior Department 
has decided to delay the planning process for the 2010 OCS 5-year plan, 
pushing back the plan to 2011 or later. Yet we need these resources 
today.
    I want to submit for the record an article from the Washington 
Times which highlights the efforts China is undergoing to ensure that 
they have a steady supply of oil for their economy. These actions by 
the Chinese government will ensure that when the world economy starts 
to grow they will have the resources available to fuel their economic 
growth, while our lack of development means we could see $4 or $5 
dollar gas again, which is one of the causes of the current economic 
shock we are in. To emphasize that point I want to submit for the 
record some research by Professor James Hamilton from California.
Closing
    Mr. Chairman, I believe in American excellence and I know that 
everyone in this body is committed to the best for America. But we 
cannot continue to dawdle, while our competitors get it, China is 
locking up mineral and oil resources; they are converting from bicycles 
to nuclear and building a new coal power plant each week. Reports are 
that Cuba is coordinating with Russia to drill exploration wells in the 
second quarter of this year, not 60 miles from the Florida Coast. 
Canada is moving to open its OCS resources to develop more domestic 
energy. Brazil has had more major OCS finds this decade than nearly 
anywhere else in the world.
    Meanwhile, Americans are worried about our standard of living. They 
are worried about the ability to pay for their kids' college, and if 
they can keep their homes. And they are worried about paying bills for 
everyday expenses, including energy. We know that the resources are 
there in the OCS and yet we continue to take steps to delay and block 
development.
    I believe in our ability to bring hope to the entire world, and I 
believe this Committee can help America solve the energy problems we 
face and provide the fuel necessary for economic growth and prosperity.
    I thank you and look forward to hearing from our witnesses.
                                 ______
                                 
    Mr. Costa. Thank you very much.
    We will now begin with our panel. We have a good group of 
folks here. We have Mr. Chris Oynes, the Associate Director for 
the Offshore Energy and Minerals Management Program for the 
Minerals Management Service. We have Ms. Mary Kendall, the 
Acting Inspector General for the U.S. Department of the 
Interior; Mr. Frank Rusco, Director of Natural Resources and 
the Environment, the U.S. Government Accountability Office, I 
made reference to the report that the GAO did; and Mr. Tom Fry, 
the President of the National Oceans Industry Association; and 
finally, last but certainly not least is Mr. James Farnsworth, 
the President of Cobalt International Energy.
    Members of the panel, I told you that the light there 
before you gives you five minutes to make your oral testimony. 
It is green for four minutes, it is yellow for one minute, and 
you can test the Chair's patience on how long it is red, but I 
urge you not to do that. Also make sure that your microphone is 
activated.
    So why don't we begin the testimony with Mr. Chris Oynes, 
who is speaking on behalf of, as I noted, the Offshore Energy 
and Minerals Management Program.
    I would urge Members of the Subcommittee if you have not 
done so to take an opportunity, and they will help arrange it 
for you, to go down to the Gulf of Mexico either off the coast 
of Texas or Louisiana. There are a number of places there where 
they have offices. You can spend a morning looking through 
their lease process and then go out and visit one of the 
facilities that are out there. There is a multitude of 
facilities actually.
    Mr. Chris Oynes, please begin on your testimony.

 STATEMENT OF CHRIS OYNES, ASSOCIATE DIRECTOR, OFFSHORE ENERGY 
  AND MINERALS MANAGEMENT PROGRAM, MINERALS MANAGEMENT SERVICE

    Mr. Oynes. Thank you, Mr. Chairman. Mr. Chairman and 
Members of the Subcommittee, thank you for the opportunity to 
appear today to discuss the Minerals Management Service's role 
in promoting environmentally responsible energy and mineral 
development on the OCS.
    The MMS's offshore responsibilities as defined by the OCS 
Lands Act extend over about 1.7 billion acres on the Federal 
OCS. These responsibilities range from initial resource 
assessments and lease sale offerings through the oversight of 
exploration, development, production and ultimately the 
decommissioning of facilities on the OCS.
    The MMS is charged with managing access to and the 
development of energy and mineral resources on the OCS in a 
manner that is environmentally sound and operationally safe, 
prevents waste and provides a fair return for the public's 
resources. This mission is accomplished through our Offshore 
Energy and Minerals Management Office's implementation of three 
major program areas: oil and gas, renewable energy, and marine 
minerals.
    The MMS also administers an environmental studies program 
that has invested about $840 million in research to support our 
environmental stewardship role in the OCS. MMS has conducted 
environmental studies on discharges, biology, physical 
oceanography, chemical effects and other elements of the human, 
marine and coastal environments.
    MMS currently administers about 8,124 offshore leases, 
covering just a little over 43 million acres, and oversees 
3,795 production facilities. In 2008, 1,439 new leases were 
issued in four OCS lease sales for bonus bids that totaled 
nearly $6.9 billion. About one-quarter of the leased acreage on 
the OCS is producing, accounting for about 1.4 million barrels 
of oil per day and 8 billion cubic feet of natural gas 
production per day.
    As was mentioned earlier, the OCS contributes roughly 27 
percent of the domestic oil supply and about 14 percent of the 
domestic natural gas supply.
    The bulk of the Federal OCS offshore production occurs in 
the Gulf of Mexico, illustrating the need to consider the 
diversifying of types of energy we use.
    Significant oil and gas potential remains as both reserves, 
that is, in known fields, and as resources, that is, yet-to-be-
discovered fields. About 64 percent of the nation's estimated 
undiscovered, technically recoverable oil and about 39 percent 
of the undiscovered, technically recoverable natural gas are 
expected to underlie the OCS.
    In 2006, MMS conducted a National OCS Assessment that 
estimated there were technically recoverable OCS resources of 
about 85 billion barrels of oil and 419 trillion cubic feet of 
gas, though not all of this was economically recoverable at 
today's prices. This 2006 assessment it should be noted was 
based on information as of January 1, 2003.
    Figure 4 of my testimony, my prepared testimony--let us see 
if we can get it to come up here--shows the pace of leasing in 
the last several years, and it is from 2002 through 2008, and 
it shows a cumulation of lease sales in those years and how 
many leases were issued, the amount of acreage and where those 
lease sales were held.
    OCS oil and gas lease sales held in Fiscal 2008 contributed 
significantly to the inventory of the acreage leased on the 
OCS. In fact, Sale 2006 held last year in March set the record 
for both high bids, that is, the total number of bids received, 
and the dollar amount as the largest in U.S. leasing history.
    Let me now explain a little bit how oil and gas development 
proceeds under the OCS program. Oil and gas companies cannot 
begin operations once a lease is granted without additional 
approvals. Before drilling begins, a company must provide a 
detailed exploration plan and a development plan explaining how 
its operations will be safely conducted and how potential 
environmental issues will be mitigated. The MMS also has an 
extensive, detailed inspection program to ensure the safety of 
oil and gas operations. In 2008, MMS conducted over 26,000 
inspections.
    The Subcommittee should be aware that not all leases have 
the same amount of oil and gas, and indeed, some leases may 
never have oil and gas, but it may also take time to reach that 
conclusion. Some leases in shallow water, which have only a 
five-year lease term, may take a short period of time either to 
evaluate the lease or to bring it on production. In deeper 
water, as some of the Committee Members noted, it may take 10 
years or longer before that lease is potentially in production.
    In the interest of time, let me jump to the end here. In 
conclusion, Mr. Chairman, thank you for this opportunity to 
provide this testimony for the Committee, and I am certainly 
open to any questions that you may have.
    [The prepared statement of Mr. Oynes follows:]

   Statement of Chris Oynes, Associate Director, Offshore Energy and 
 Minerals Management, Minerals Management Service, U.S. Department of 
                              the Interior

    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to appear here today to discuss the Minerals Management 
Service's (MMS) role in promoting environmentally responsible energy 
and mineral development on the Outer Continental Shelf (OCS). The 
Department of the Interior (Department) and its agencies, including the 
MMS, are public stewards for much of our nation's energy resources; 
about 1/3 of the nation's domestic oil and gas production comes from 
Federal resources managed by the Department. The MMS's 
responsibilities, as defined by the OCS Lands Act, extend over about 
1.7 billion acres of the Federal OCS and range from initial resource 
assessments and lease sale offerings through oversight of exploration, 
development, production, and ultimately decommissioning. Figures 1 and 
2 depict the OCS off of the continental United States (Figure 1) and 
off of Alaska (Figure 2). This Subcommittee has played an important 
role in shaping the Nation's domestic energy program, particularly with 
regard to encouraging environmentally sound development of our domestic 
oil, gas, and renewable energy resources on the OCS.
    The MMS is charged with managing access to and development of 
energy and mineral resources on the OCS in a manner that is 
operationally safe and environmentally sound, prevents waste, and 
provides a fair return for public resources. This mission is 
accomplished through the Offshore Energy and Minerals Management 
office's implementation of its two major programs: managing 
conventional OCS oil and gas development and facilitating new renewable 
energy production on the OCS. In addition, MMS administers the OCS 
revenue sharing programs established by Congress including the 
provisions under section 8(g) of the OCS Lands Act, the Gulf of Mexico 
Energy Security Act (GOMESA), and the 4-year State grants program, the 
Coastal Impact Assistance Program (CIAP)) established under the Energy 
Policy Act of 2005 (EPAct).
    The OCS plays a vital role in domestic energy development, 
including the new OCS Renewable Energy Program established with the 
enactment of the EPAct. Under this new OCS renewable energy program, 
the Secretary of the Interior has oversight and regulatory authority 
for activities on the OCS that produce or support production, 
transportation, or transmission of energy from sources other than oil 
and gas, including wind, wave, and ocean current. The Secretary has 
delegated this authority to the MMS because of its extensive experience 
in offshore oil, gas and marine sand and gravel leasing and 
development.
    My testimony today will highlight MMS's stewardship role in 
managing conventional resource development on the OCS and will focus on 
four areas of the Federal offshore program:
    1.  Data and trends regarding OCS oil and natural gas;
    2.  The OCS oil and gas leasing program;
    3.  The MMS Deepwater Gulf of Mexico 2008 Report and recent 
deepwater development; and
    4.  Our expanding Renewable Energy Program
Data and Trends for the OCS Oil and Natural Gas Program
    In 2007, 14 percent of the nation's natural gas and 27 percent of 
its oil production, including oil for the Strategic Petroleum Reserve, 
came from the OCS. Even as we aggressively pursue renewable energy 
opportunities on the OCS, the OCS's role in conventional energy 
production is likely to remain critical as all sources of energy 
contribute to our Nation's energy security.
    MMS currently administers about 8,124 leases covering 43.4 million 
acres and oversees 3,795 production facilities. In calendar year 2008 
alone, 1,439 new oil and gas leases were issued from four OCS lease 
sale offerings, resulting in bonus bids totaling nearly $6.9 billion.
    To ensure the Federal government receives a fair market return for 
these offshore lease rights, the MMS employs a detailed bid evaluation 
process to determine bid adequacy. This process considers the potential 
income stream to the lessee associated with the lease and all potential 
royalties and rental payments to be paid to the Federal government to 
ensure the bonus received adequately reflects the value of the 
potential resources associated with the lease. As a result of our 
evaluation process, nearly $10 million in high bids were rejected in 
four 2008 sales because they did not meet fair market value criteria.
    About one-quarter of the leased acreage on the OCS is producing, 
accounting for about 8 billion cubic feet of natural gas per day and 
1.4 million barrels of oil per day. As noted earlier, in 2007 the OCS 
contributed roughly 14 percent of the domestic natural gas supply and 
27 percent of the domestic oil supply. According to the MMS 
publication, Gulf of Mexico Oil and Gas Production Forecast: 2007-2016, 
gas production in the Gulf of Mexico has struggled to remain at current 
levels. The 2008 production data, when tabulated, will most likely 
represent a decline from the 2007 statistics due to the impacts on Gulf 
of Mexico production from Hurricanes Gustav and Ike. The bulk of 
federal offshore production occurs on the Gulf of Mexico OCS--about 98 
percent for natural gas and 95 percent for oil--illustrating the need 
to consider diversifying the types of energy we use. While hurricanes 
pose a threat in the Gulf of Mexico, Arctic conditions in Alaska also 
present challenges. Even so, the Northstar and Liberty projects 
represent promising developments in the Beaufort Sea. The Northstar 
project is a federal-state unit with about 18 percent of the production 
allocated to federal leases. In August 2008, MMS approved the Plan of 
Operations for the Liberty project.
    The MMS OCS resource assessment and the USGS national onshore and 
State water assessments of oil and gas resources show significant 
potential remains as both proven reserves (in known fields) or 
undiscovered resources (yet to be discovered fields). The majority of 
the estimated undiscovered technically recoverable oil and natural gas 
are expected to underlie Federal lands--onshore and OCS--with the OCS 
share accounting for about 64 percent of the oil and 39 percent of the 
gas. The 2006 MMS National OCS Assessment estimates that the OCS holds 
15.4 billion barrels of oil and 60.2 trillion cubic feet of gas in 
reserves. Technically recoverable OCS resources are estimated at 85.8 
billion barrels of oil and 419.9 trillion cubic feet of gas, though not 
all of these volumes are economically recoverable at today's prices. 
When the congressional moratoria expired on October 1, 2008, many of 
these resources became available for consideration for potential 
leasing. These newly available OCS areas hold the potential of about 14 
billion barrels of oil and 55 trillion cubic feet of gas. However, 
there is uncertainty in resource estimates for these areas of the OCS 
subjected to long-standing moratoria or presidential withdrawal. In the 
Atlantic and most of the west coast, the last acquisition of 
geophysical data and drilling of exploration wells occurred more than 
25 years ago.
    The MMS manages and tracks an extensive array of information about 
oil and gas lease activity requiring MMS review and approval. As 
requests for MMS approvals come in, the information is recorded in our 
computer system. Every plan of exploration, every development plan, 
every production request, and every pipeline is entered into the 
computer. Every individual well is also captured. Every environmental 
review is captured. Any approval of a lease extension, through a 
suspension of operations or suspension of production, is also captured. 
However, MMS does not capture information at the individual company 
level such as when the lessee is evaluating a lease or a prospect and 
deciding whether to go forward.
    The MMS is a leading participant and supporter of scientific 
research relating to the ocean environment. Environmental stewardship 
is emphasized in all phases of OCS activity, from the development of 
the 5-Year Program through platform decommissioning and removals. A 
fundamental goal of MMS's Environmental Program is to develop workable 
solutions for those activities in the OCS that could adversely affect 
environmental resources. This allows approved exploration and 
development to continue while the environment is safeguarded. In Fiscal 
Year 2008, 29 environmental studies were contracted at nearly $16 
million. In that same time, the MMS also completed 320 environmental 
assessments and 2 detailed environmental impact statements (EIS).
    The MMS also funds research into operational safety, pollution 
prevention, and oil spill response and cleanup capabilities through its 
Technology Assessment and Research (TAR) Program. This research enables 
MMS managers to make better decisions in evaluating operational 
proposals and enables regulators to consider the latest technological 
advancements in enacting new regulations. In Fiscal Year 2008, the MMS 
funded 29 TAR studies at nearly $3 million. As a result, the MMS has a 
robust regulatory system designed to prevent accidents and oil spills 
from occurring. This includes redundant well control equipment, 
emergency plans, and production safety systems as well as a host of 
other requirements. This has proven effective both in the wake of 
hurricanes in the Gulf of Mexico and in the Arctic conditions on the 
Alaska OCS. The MMS also requires oil spill contingency plans because 
spills are always a possibility.
    Oil and gas exploration and development activities do not begin as 
soon as a lease is granted. Rather, in accordance with the OCS Lands 
Act, before any drilling begins, a company must provide a detailed 
exploration plan or development plan explaining how its operations will 
be safely conducted and how any potential environmental issues will be 
mitigated. Many regulatory approvals are required. Air emissions 
permits and water discharge permits must also be obtained as required 
by law. In Fiscal Year 2008, 253 exploration plans and 224 development 
plans were approved by MMS as being technically and environmentally 
sound.
    For major facilities, MMS conducts an onsite inspection before 
allowing production to begin. Often this is a joint inspection with the 
U.S. Coast Guard. The MMS also has an extensive, detailed inspection 
program to ensure the safety of offshore oil and gas operations and 
compliance with environmental stipulations, and to verify production 
quantities. This program places MMS inspectors offshore on drilling 
rigs and production platforms on a daily basis to check operator 
compliance with extensive safety and environmental protection 
requirements. The MMS has a staff of inspectors and engineers that 
daily fly offshore to conduct both planned and unannounced safety and 
environmental inspections. In Fiscal Year 2008 alone, over 26,780 oil 
and gas compliance inspections were conducted including 682 drilling, 
3,632 production, 4,358 environmental, 7,113 meter, 4,908 pipeline, and 
6,087 other (e.g., U.S. Coast Guard, flaring, etc.) inspections.
The OCS Oil and Gas Leasing Program Process
    The MMS manages access to the OCS for oil and gas development 
through the 5-Year OCS Oil and Gas Leasing Program (5-Year Program). 
The process to develop the 5-Year Program, as mandated by section 18 of 
the OCS Lands Act, includes three separate public comment periods, two 
separate draft proposals, development of an environmental impact 
statement, and the final proposal. It culminates in a decision by the 
Secretary of the Interior on a new 5-Year Program. Additionally, there 
is an ``annual review'' step for the years during which a 5-Year 
Program is in place and a new one is not yet being developed. A 5-Year 
Program consists of a schedule of oil and gas lease sales indicating 
the size, timing and location of proposed leasing activity that the 
Secretary determines will best meet national energy needs for the five 
year period following its approval. An area must be included in the 
current 5-Year Program in order to be offered for leasing. Even after 
the Secretary approves a final program, there is a lengthy public 
preparation process for each lease sale that includes consultation with 
stakeholders at several junctures and more specific environmental 
analysis also in accordance with the National Environmental Policy Act 
(NEPA).
Current 5-Year Program: 2007-2012
    The current 5-Year Program covers the years 2007 through 2012 and 
includes 21 sales in eight OCS planning areas. While most of the sales 
scheduled are within OCS planning areas in the Gulf of Mexico and 
offshore Alaska as traditionally offered, the 5-Year Plan also includes 
``new'' areas: Proposed Sale 214 offers a portion of the North Aleutian 
Basin area; Proposed Sale 220 offers an area in the mid-Atlantic 
offshore the Commonwealth of Virginia; Sale 208 offers the newly opened 
``181 South'' area (Figure 4) in the Central Gulf of Mexico; and, Sale 
224 held March 2008, included a newly offered portion of the Eastern 
GOM Planning Area. Because the Eastern Gulf of Mexico Sale 224 was 
mandated by GOMESA to include a half million acres in the Eastern Gulf 
of Mexico, it was not subject to section 18 analysis. Also pursuant to 
GOMESA, 37.5 percent of all revenues from new leases in that area will 
be shared among the four Gulf of Mexico producing states and their 
coastal political subdivisions beginning with the bonuses and first 
year rentals received on blocks in that 0.5 million acre area. Another 
12.5 percent will be distributed to the Land and Water Conservation 
Fund to provide financial assistance to states.
    Since the current 5-Year Program began on July 1, 2007, six sales 
have been held resulting in 2,395 new leases and $10 billion in bonus 
bids. Sale 208, offering acreage in the Central Gulf of Mexico, will be 
held tomorrow. It will be the first sale in the program to offer the 
newly available acreage in the ``181 South Area'' as mandated under 
GOMESA. Revenues from new leases issued in the ``181 South Area'' also 
are subject to GOMESA's immediate revenue sharing provisions.
    As Figure 3 depicts, in recent years, there has been a rising trend 
in OCS oil and gas leases issued and acreage leased. OCS oil and gas 
lease sales held in Fiscal Year 2008 contributed significantly to the 
inventory of acreage leased on the OCS. In fact, Sale 206 in the 
Central Gulf of Mexico held in March 2008 set the record in high bids 
(both number received and dollar amount) in U.S. leasing history. As 
the moratoria were only recently lifted, the Gulf of Mexico and Alaska 
Regions account for the bulk of active leases; all newly leased OCS 
acres are in the Eastern, Central, and Western Gulf of Mexico Planning 
Areas and the Beaufort Sea and Chukchi Sea Planning Areas.
    The MMS has begun the process of preparing an EIS to assess the 
potential impacts of proposed OCS oil and gas leasing, and potential 
subsequent exploration and development activities in the North Aleutian 
Basin Planning Area in the Bering Sea, off southwestern Alaska 
(depicted on Figure 2). Proposed Sale 214 is tentatively scheduled for 
2011. MMS has evaluated the oil and gas resource potential for the 
North Aleutian Basin Planning area. The current knowledge of geology in 
the basin indicates that it is gas prone. The 2006 OCS Resource 
Assessment estimate for this area is a mean value of undiscovered 
technically recoverable natural gas resource of 8.62 trillion cubic 
feet and the mean value of undiscovered technically recoverable oil 
resource of 750 million barrels.
    The MMS has also initiated the first step for a potential lease 
sale offshore Virginia (depicted on Figure 1). The proposed sale will 
be held no earlier than 2011. The MMS published a Call for Information 
and Interest/Nominations and Notice of Intent to Prepare an EIS (Call/
NOI) for Lease Sale 220 in the Federal Register on November 13, 2008. 
The area covered by the Call/NOI is about 2.9 million acres offshore 
Virginia in the Mid-Atlantic Planning Area, and is at least 50 miles 
offshore.
    Under the 2007-2012 5-Year Program schedule, there are 13 other 
proposed sales yet to be held: 4 in the Central Gulf of Mexico; 3 in 
the Western Gulf of Mexico; 2 in the Beaufort Sea; 2 in the Chukchi 
Sea; and 2 special interest sales in Cook Inlet; all are in various 
stages of the sale process. Again, the Central Gulf of Mexico Sale 208 
will be held tomorrow.
New OCS Oil and Gas Leasing Program: 2010-2015
    In the summer of 2008, the Secretary of the Interior directed MMS 
to begin the initial steps for developing a new 5-Year program. On 
August 1, 2008, MMS published a Federal Register Notice requesting 
information on whether to start a new program and what areas should or 
should not be included in a new program. As of October 1, 2008, 
Congress discontinued its longstanding moratoria on new leasing in the 
Atlantic, Pacific and a portion of the Eastern Gulf of Mexico, making 
most of the OCS available for consideration of leasing in a new 
program. (Most of the Eastern Gulf of Mexico and a portion of the 
central Gulf of Mexico are under moratorium until 2022, pursuant to 
GOMESA).
    The Draft Proposed Program (DPP) issued January 16, 2009, is the 
second step in a multi-year process to develop a new oil and gas 
leasing program. The DPP seeks public comment on all aspects of a new 
program beginning as early as 2010 including conventional and renewable 
energy development and economic and environmental issues in the OCS 
areas.
    On February 10, 2009, Secretary Salazar announced his strategy for 
developing an offshore energy plan that includes conventional and 
renewable energy resources. As part of his plan, the comment period for 
the DPP was extended for an additional 180 days to September 21, 2009, 
in order to provide additional time for input from states, stakeholders 
and affected communities. Also, Secretary Salazar directed the MMS and 
the U.S. Geological Survey to assemble a report on offshore energy 
resources along with information regarding sensitive areas and 
resources in the OCS. This report will synthesize the vast knowledge-
base on OCS energy resources and environmental factors in one concise 
document. The report will be delivered to the Secretary at the end of 
this month. Following the publication of the report, the Secretary will 
conduct four regional meetings, one each for the Gulf Coast, Pacific 
Coast, Atlantic Coast, and Alaska in an effort to gain insight and 
comment from all stakeholders in OCS energy.
MMS's 2008 Deepwater Gulf of Mexico Report and Deepwater Development
    The MMS report Deepwater Gulf of Mexico 2008: America's Offshore 
Energy Future highlights the activities, trend analyses and 
technological advancements in this important portion of the Gulf of 
Mexico for 2007. Deep water has continued to be a very important part 
of the total Gulf of Mexico production, providing approximately 72 
percent of the oil and 38 percent of the gas from the region. In 2007, 
MMS approved 15 new technologies for use in the deepwater Gulf of 
Mexico.
    Deepwater continues to play an important role in our nation's 
energy portfolio with 15 deep water discoveries announced in 2008. 
Figure 5 denotes these discoveries and their development options. 
Operators of the Kodiak and the Freedom/Gunflint discoveries have 
indicated that these discoveries could add significant new oil 
production. Several of the natural gas discoveries are already under 
development as subsea tiebacks and additional natural gas discoveries 
are planned for subsea tieback.
    The year 2008 was an active year for leasing activity with 679 
leases covering about 3.9 million acres issued in the deep waters of 
the Eastern, Central, and Western Gulf of Mexico. About 74 percent of 
the acres leased in the Gulf of Mexico OCS in 2008 were in water depths 
greater than 400 meters. Bonus bids accepted for deep water leases 
accounted for nearly 93 percent of all bonus bids accepted in 2008, 
suggesting that this deep water acreage is some of the most promising 
acreage leased in the Gulf of Mexico.
Renewable Energy
    The EPAct encourages the development of renewable energy resources 
as part of an overall strategy to develop a diverse portfolio of 
domestic energy supplies for our future. The quantity of domestic 
renewable energy produced on Federal lands is currently small in 
comparison to conventional resources. However, the need to diversify 
our energy portfolio and transition to a clean energy economy has 
spurred an increased interest in renewable energy development on 
federal lands both onshore and offshore, and the potential for 
increased use of these resources is great.
    The EPAct granted the Department discretionary authority to grant 
leases, easements or rights-of-way for activities on the OCS that 
produce or support production, transportation, or transmission of 
energy from sources other than oil and gas. Simply put, the new 
authorities gave the Department the ability to manage the future 
development of promising new ocean energy sources in the OCS such as 
wind, wave, ocean current, and solar energy. Additionally, the 
Department was given the authority to grant leases, easements, or 
rights-of-way for other OCS activities that make alternate use of 
existing OCS facilities. These other uses would be limited to energy-
related and authorized marine-related purposes, such as offshore 
research, recreation and support for offshore operations to the extent 
that those activities are not authorized by other applicable law.
    Secretary Salazar has stated his commitment to issuing a final 
rulemaking to encourage orderly, safe, and environmentally responsible 
development of renewable energy resources and alternate use of 
facilities on the OCS. The publication of a final rulemaking is pending 
a thorough analysis by the Administration to ensure its completeness 
and clarity in promoting the sound development of OCS renewable energy 
resources.
    The MMS completed a programmatic EIS in November 2007, which 
examines the interface between the marine and human environments and 
the technologies and activities that generate energy from ocean 
renewable energy resources. While the Department is the lead agency for 
this program, the MMS continues to work with its sister agencies to 
make certain that the unique role of each agency is considered and 
addressed in order to ensure that the Federal Government's myriad 
interests in such projects are fully considered and that the Nation's 
economic, environmental and land use interests are adequately 
protected.
    The MMS has also evaluated the Cape Wind Energy Project identified 
by EPAct for concurrent consideration along with the ongoing rulemaking 
process. The Final EIS, which assesses the physical, biological and 
social/human impacts of the proposed Cape Wind Energy Project as well 
as all reasonable alternatives and proposed mitigation, was announced 
on January 16, 2009. A Record of Decision on Cape Wind is pending.
    The MMS's renewable energy program is an integral component of 
Secretary Salazar's commitment to a comprehensive energy plan for the 
OCS. Indeed, developing a comprehensive plan for offshore energy 
development is our focus as we compile our comprehensive report and 
conduct regional meetings to gather more insight into both renewable 
and conventional energy development.
Conclusion
    With President Obama identifying clean energy as an issue critical 
to our Nation's economic recovery, the Department and MMS are poised to 
play a vital role as the manager of OCS energy resources, both 
conventional and renewable. As the MMS now embarks on providing an 
orderly, safe, and environmentally responsible program to develop 
renewable energy on the OCS, we continue our stewardship role in 
managing the Federal offshore oil and gas, and mineral resources. The 
magnitude and complexity of being a responsible steward requires a 
continued commitment to balance our Nation's energy needs with 
environmental protection, safe operations, and receipt of fair returns 
for Federal resources.
    We welcome your input on our Nation's energy initiatives and look 
forward to working with the Committee as we move forward with our OCS 
energy and minerals programs.

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    Mr. Costa. Thank you, and I am sure there will be 
questions.
    And that now brings us to our next witness, Ms. Mary 
Kendall. We thank Ms. Kendall here, who will testify on behalf 
of the Inspector General's Office within the Department of the 
Interior.

 STATEMENT OF MARY L. KENDALL, ACTING INSPECTOR GENERAL, U.S. 
                   DEPARTMENT OF THE INTERIOR

    Ms. Kendall. Thank you, Mr. Chairman. Mr. Chairman and 
Members of the Subcommittee, I appreciate the opportunity to be 
here to testify about the findings of the Office of the 
Inspector General for the Department of the Interior concerning 
oil and gas royalty collection programs.
    The OIG has devoted many resources over the past three 
years to overseeing Minerals Management Service, the bureau 
that collects royalties from offshore oil and gas drilling.
    We discovered weaknesses in the internal oversight of 
royalties, in the drafting of leases, the underpayment of 
royalties and serious ethical lapses. Most recently, we 
completed an evaluation of the status of nonproducing Federal 
oil and gas leases both on and offshore.
    In addition to some very challenging data integrity and 
lease oversight issues, we found that BLM and MMS need to 
develop much clearer policy concerning the expectations of 
production of oil and gas on Federal lands.
    We found that oil and gas companies that own Federal 
drilling leases have little obligation to actually produce, and 
the Department has no formal policy to compel companies to 
bring these leases into production. Both industry and Bureau 
officials cautioned, however, that mandating production 
activities may not necessarily have positive outcomes and could 
in fact be counterproductive by reducing industry interest in 
Federal leases.
    Our evaluation revealed three primary factors that account 
for the nonproducing status of so many Federal oil and gas 
leases, the first being data integrity issues.
    In its publicly accessible data, MMS reported that less 
than half of all Federal oil and gas leases in the United 
States are producing. Without more information, these data 
suggest that existing leases are underutilized but do nothing 
to explain why.
    We looked behind the reported data with hopes of making 
this determination. Unfortunately, we found that both MMS and 
BLM employ inconsistent procedures and definitions and that 
BLM's records are often incomplete and inaccurate, all of which 
call into question both the integrity and usefulness of their 
data.
    Due to incompatible data in the tracking systems used by 
the two bureaus, we found that DOI is at risk of losing 
millions of dollars in royalties. The existing process is 
heavily reliant upon companies doing the right thing.
    We also found inconsistencies in how BLM and MMS define and 
report on the status of leases. Leases that are identified as 
producing by BLM may be reported as nonproducing by MMS.
    Industry also cited a number of obstacles to production. 
Despite the best expectations, millions of dollars are spent on 
exploration and drilling of wells that result in no actual 
production.
    Fluctuating prices have a direct influence on project 
planning. Regulatory restrictions and requirements make 
developing onshore Federal oil and gas leases difficult, 
expensive and time-consuming. A shortage of drilling rigs is a 
worldwide problem, as are transportation availability and a 
shortage of oil and gas field workers.
    Additionally, litigation and public opposition to oil and 
gas production have a significant impact on the ability of 
leaseholders to conduct development activities.
    Finally, there is limited statutory and regulatory support 
for promoting production. A number of laws and regulations 
direct and guide the Department on all aspects of oil and gas 
leasing but include only general due diligence provisions 
concerning production. The Department has done little to 
provide specific guidance to lessees on the due diligence 
production requirements.
    Other OIG efforts that are ongoing are in the other energy 
areas, which include an audit of MMS's process for verifying 
oil volumes delivered as royalty-in-kind, including oil 
destined for the Strategic Petroleum Reserve.
    In addition, we are reviewing the status of the 
recommendations advanced to MMS by the Royalty Policy 
Committee, the OIG and GAO. We also have several law 
enforcement efforts ongoing concerning the underpayment of 
royalties, and we have queued up evaluations of the onshore 
lease auction process that BLM employs, the inspection and 
enforcement program for onshore leases, and the wind, solar and 
geothermal energy programs for the near future.
    Mr. Chairman, this concludes my testimony. I would 
respectfully request that my written testimony be accepted by 
the Subcommittee and made part of the record. I would like to 
thank you for this opportunity to testify today and would 
welcome any questions.
    [The prepared statement of Ms. Kendall follows:]

        Statement of Mary Kendall, Inspector General (Acting), 
                    U.S. Department of the Interior

    Mr. Chairman, members of the subcommittee, thank you for the 
opportunity to appear today and testify about the findings of the 
Office of Inspector General (OIG) for the Department of the Interior's 
(DOI) regarding oil and gas royalty collection programs within the DOI. 
As you know, DOI's revenue collection volume is one of the highest of 
any department in the federal government. Especially in these fiscally 
precarious times, the value to the taxpayers of these collection 
programs is very important, indeed.
    The OIG has devoted many resources over the past 3 years to 
understanding, auditing, evaluating and investigating the role of DOI 
bureaus and offices that collect royalties from offshore oil and gas 
drilling. We discovered weaknesses in the oversight of royalties, in 
communications in the drafting of leases, the under-payment of 
royalties, and a culture in the Royalty-In-Kind program where employees 
felt exempt from the ethics rules that govern all other federal 
employees.
    We recently completed an evaluation, at the request of Chairman 
Dicks for the Interior and Environment Subcommittee of the House 
Appropriations Committee, concerning the status of non-producing 
federal oil and gas leases. In addition to some very challenging data 
integrity and lease oversight issues, we found that the Bureau of Land 
Management (BLM) and Minerals Management Service (MMS) need to develop 
much clearer policy concerning the expectations of production of oil 
and gas on federal lands. We recommended that the Department consult 
with Congress in this regard.
    With respect to non-producing leases, we found that oil and gas 
companies that own federal drilling leases have little obligation to 
actually produce. The Department has no formal policy to compel 
companies to bring these leases into production. While current 
statutes, regulations and policies do promote exploration, production 
activities are not required to commence within the primary lease term. 
The bureaus do not inquire about the production strategies of companies 
and have not attempted to enforce the performance clause included in 
lease agreements. Both industry and bureau officials cautioned, 
however, that mandating production activities may not necessarily have 
positive outcomes, and could, in fact, be counter-productive by 
reducing industry interest in federal leases.
    With few exceptions, the Department does not track oil and gas 
leases until a company applies for an Application for Permit to Drill 
(APD). This means it may be years before the Department records any 
data about a lease. There being no mandate to track a lease, MMS and 
BLM do not begin tracking until the lease holder applies for an APD and 
exploratory activity begins or the primary term of the lease ends.
    Our evaluation revealed three primary factors that account for--or, 
fail to account for--the non-producing status of so many federal oil 
and gas leases. These factors are: data integrity issues in the MMS and 
BLM systems; a litany of obstacles cited by oil and gas companies; and, 
limited statutory and regulatory requirements on either DOI or industry 
to promote production.
    We believe that improved and more comprehensive data would assist 
in instituting a monitoring program for non-producing leases and paint 
a much more accurate picture of the production status of DOI leases. 
Similarly, a better understanding of the processes and problems leading 
to production would lead to a more accurate perception by the public of 
the production status of DOI leases. Further, more explicit statutory 
and/or regulatory mandates would contribute to clearer expectations on 
the parts of both DOI and the oil and gas industry.
Data Integrity Issues
    We found numerous data integrity issues during our evaluation. In 
its publicly accessible data, MMS reports less than half--or 41 
percent--of all federal oil and gas leases in the United States are 
producing. Without more information, these data suggest that existing 
leases are underutilized, but do nothing to explain why. We looked 
behind the reported data with hopes of making this determination. 
Unfortunately, we found that both MMS and BLM employ inconsistent 
procedures and definitions and that BLM's records are often incomplete 
and inaccurate, all of which call into question both the integrity and 
usefulness of their data.
    Due to incompatible data in the tracking systems used by BLM and 
MMS, both of which are responsible for overseeing these leases, we 
found that DOI is at risk of losing millions of dollars in royalties. 
In one case, a breakdown in communications between MMS and BLM could 
have resulted in a loss of nearly $6 million in royalties over a 5-year 
period, had the company holding the leases not sent its first 
production report to both bureaus, not just BLM. The existing process 
is heavily reliant upon companies doing the right thing.
    We also found inconsistencies in how MMS and BLM define and report 
on the status of leases. Leases that are identified as producing by BLM 
may be reported as non-producing by MMS. We identified over 1,400 
onshore leases that were reported as producing by BLM. When we selected 
a random sample to determine how these leases were identified by MMS, 
70 percent of the sample was reported as non-producing.
    From the beginning of our planning efforts for the evaluation, we 
were confronted with lease data availability and reliability issues 
that hindered our progress. For example, BLM reported 6,198 non-
producing leases (19 percent) with no expiration dates (only producing 
leases should have no expiration dates). In addition, there were 528 
producing leases that had expiration dates. Other data errors we found 
include leases that had terms of 8,000 years (expiration date was 
January 1, 9999), leases with no effective dates, and leases with 
negative lease terms (leases expired before the effective date).
Industry Cites Obstacles
    As we were conducting our field work, the Government Accountability 
Office (GAO) issued a report in October 2008 in which it identified 
business, geologic and regulatory factors influencing companies' 
decisions to develop oil and gas leases. During our review, we obtained 
additional information from 11 oil and gas companies that held oil and 
gas leases, 3 oil and gas industry organizations, Interior bureaus, 
subject-matter experts, and our review of leases on each of these three 
factors. Finally, industry cited resource availability as having an 
effect on the production status of leases, including technology, 
equipment, infrastructure and workforce.
    The exploration and production of oil and gas requires significant 
capital investment. And, it requires careful planning while considering 
many variables, such as variations in commodity prices, escalating 
material and labor costs, drilling and transportation infrastructure, 
lease and capital acquisition, and regulatory concerns.
    Despite the best expectations, millions of dollars are spent on 
exploration and drilling of wells that result in no actual production. 
Fluctuating prices can have a direct influence on project planning. For 
instance, the recent downward spiral in oil and gas prices during the 
second half of 2008 directly resulted in decreased domestic exploration 
and production.
    Some leases may be considered non-producing because of geological 
factors. Seismic data for oil and gas inform industry as to the size of 
a potential reservoir and, therefore, assist in the determination of 
how many lease blocks to acquire. Once exploration starts and the 
reservoir is better defined, the leases on the outer edges of the 
reservoir may not be developed and therefore remain non-producing.
    Regulatory issues also are a factor. Federal leases usually have a 
lower royalty rate than state or private leases. But developing onshore 
federal oil and gas leases is much more difficult, expensive and time-
consuming. In large part, this is due to regulatory restrictions and 
requirements. These requirements are designed to protect many of the 
natural, environmental, historical, and cultural resources contained on 
federal lands. But they can also severely limit the amount of time in 
which companies are allowed to access the land to conduct operations. 
Rig availability and cost can become significant hurdles.
    The increasing challenges for discovering and accessing new oil and 
gas reserves have caused a sharp demand for technological advancements, 
which can also delay exploration and production. As a result, there is 
a shortage of drilling rigs worldwide, causing further delays. If oil 
and gas is discovered and a rig is available, industry cites other 
challenges such as transportation availability and a shortage of oil 
and gas field workers.
    Finally, we found that litigation and public opposition to oil and 
gas production have significant impact on the ability of lease holders 
to conduct development activities. Industry advocacy groups emphasized 
this point, citing a dramatic increase in opposition that begins even 
prior to lease issuance and continues throughout the development 
process.
Limited Statutory and Regulatory Support for Promoting Production
    A number of laws and regulations direct and guide the Department on 
all aspects of oil and gas leasing. They also contain more general 
``due diligence'' provisions concerning production, requiring lessees 
to take affirmative action toward diligently developing their leases.
    The Department has done little to provide specific guidance to 
lessees on the ``due diligence'' production requirements. While leases 
typically include a performance clause to promote or compel production, 
the Department has not definitively established the authority in lease 
terms, regulations, or past enforcement actions. For the vast majority 
of leases--99 percent--the Department does not monitor to ensure that 
due diligence is exercised. Accordingly, none of these leases is 
terminated for failure to produce. Rather, the Department allows these 
leases to expire naturally.
Other OIG Efforts
    We are presently conducting an audit of MMS's process for verifying 
oil volumes delivered as RIK, including oil destined for the Strategic 
Petroleum Reserve. In addition, we are reviewing the status of the 
recommendations advanced to MMS by the Royalty Policy Committee in 
2007. At the request of MMS, we have expanded this review to include 
recommendations by OIG and GAO. MMS estimates that there are 
approximately 200 recommendations by these three entities, some of 
which overlap and some that may conflict with one another. We also have 
several law enforcement efforts ongoing concerning the underpayment of 
royalties. And we have queued up evaluations of the onshore lease 
auction process that BLM employs, the Inspection and Enforcement 
Program for onshore leases, and the wind and solar energy programs for 
the near future.
    Mr. Chairman, that concludes my testimony. I would respectfully 
request that my written testimony be accepted by the Subcommittee and 
made part of the record. I would like to thank you for the opportunity 
to testify today and would welcome any questions you might have. 

[GRAPHIC] [TIFF OMITTED] T8079.006

                                 __
                                 

   Response to questions submitted for the record by Mary L. Kendall

Questions from Chairman Jim Costa
1.  Ms. Kendall, the report by the Inspector General's office points 
        out that the 8-year offshore lease is the only case of a 
        federal oil and gas lease that has a specific performance 
        requirement prior to the end of the primary term of the lease, 
        in this case the lessee is required to drill a well in the 
        first five years of the lease. Ms. Kendall, do you believe that 
        including performance requirements such as this on other 
        federal oil and gas leases would be a positive way for the 
        government to encourage diligent development, and when and 
        where do you think it might be appropriate?
    Response: For leases located in ``frontier'' regions, such as 
deepwater leases in the Gulf of Mexico and previously undrilled onshore 
regions, a performance requirement would likely have little benefit. In 
these areas, companies tend to need the full 10-year primary term to 
begin production work. However, for well established producing onshore 
and offshore areas requiring less up-front geophysical study and fewer 
development costs, a performance clause may be more practical. 
Nevertheless, as discussed in our report, oil and gas development is 
usually a prolonged process and companies indicated a need for an 
inventory of leases to enable long-term planning.
2.  Ms. Kendall, your testimony discusses $6 million in royalties that 
        could have been lost due to miscommunication between MMS and 
        BLM. Please provide more detail about this specific occurrence. 
        Can you make any estimates on how common problems like this 
        might be, based on how much effort it took your office to 
        identify this particular example, or based on any other 
        factors?
    Response: The incident described in the report involved leases 
owned by EnCana Oil and Gas, Inc. located in Garfield and Mesa counties 
in western Colorado, a major natural gas producing area. The BLM 
Colorado State Office and the Glenwood Springs Field Office have 
jurisdiction over these leases. Royalty payments started in December 
2003; however, BLM did not have documentation in their files for when 
EnCana notified BLM of first production. In addition, MMS did not have 
any documentation in their files that BLM notified MMS of EnCana's 
first production. After we notified BLM of this problem, the Glenwood 
Springs Field Office notified the Colorado State Office of the status 
of these leases on February 5, 2009. BLM needs to be vigilant on 
industry activity due to the large number of wells and leases that the 
bureau oversees. In Colorado alone, BLM manages 8,161 wells on 1,977 
leases. Nationwide, the bureau manages 127,858 wells on 22,959 leases.
    Because we did not use scientific sampling techniques during our 
fieldwork, we cannot estimate with precision how common such incidents 
may occur. Nevertheless, 4 of the 60 leases (7 percent) in our sample 
did have the problem, so it can logically be reasoned that this was not 
an isolated case.
3.  Ms. Kendall, one of the major themes that was present in your 
        written testimony, and also arose during the discussion at the 
        hearing, was the idea that the MMS leasing program is more 
        comprehensive and methodical than the BLM onshore leasing 
        program. To your knowledge, are there any reasons why an MMS-
        style leasing program--with multiyear planning, minimum 
        acceptable bids, and other features that are unique to MMS--
        would not be appropriate for the onshore leasing program?
    Response: In a separate evaluation that began in January, we are 
examining various aspects of the BLM lease auction process. As part of 
that review, we are comparing various aspects of the leasing programs 
managed by both BLM and MMS, and hope to determine if MMS has best 
practices that BLM should adopt. Concerning minimum acceptable bids, 
many years ago BLM developed minimum bid amounts for leases located in 
known geological structures. However, the bureau discontinued the 
practice because it could not reliably predict the value of the 
production that could be extracted from the leases.
4.  Ms. Kendall, both the IG and GAO make it clear that when companies 
        get a 10-year lease, they get extensions provided they have 
        initiated drilling activities by the end of those 10 years. Is 
        there any reason a company can't get the lease, hold it in an 
        inactive state for 9 years and 11 months, then start drilling a 
        well right before the expiration date and get the 2 additional 
        years automatically? Are there any requirements for 
        leaseholders to do anything on their 1O-year leases prior to 
        the end of the primary term?
    Response: At the company's discretion, it may begin production 
activities at the tail end of the primary term and receive an 
extension, since there is no requirement to develop the lease during 
the primary term. In fact, as long as the leaseholder pays the required 
annual rental payments on a timely basis, it may even choose never to 
develop the lease. In this case, the lease would administratively 
expire after 10 years.
5.  Ms. Kendall, have either of you taken a look at the oil and gas 
        activities of the Bureau of Indian Affairs? Is there any sense 
        of whether they have similar problems as BLM when it comes to 
        data reliability and communication with MMS?
    Response: We did not look at the oil and gas activities of the 
Bureau of Indian Affairs during our review, and so we do not know if 
the bureau has similar issues as BLM. We do plan to conduct reviews of 
BIA's energy leasing activities in the future.
6.  Ms. Kendall, do you believe that it would make sense--either 
        fiscally, environmentally, or from a diligent development 
        viewpoint--for the BLM to extend the term of leases to take 
        into account stipulations that limit the amount of time that 
        lessees can conduct operations on their leases?
    Response: As noted in our report, MMS and BLM are inconsistent in 
their administration of seasonal restrictions. Whereas MMS extends a 
lease for the accumulated length of time an operator is not physically 
allowed on the premises, BLM does not grant an extension. It may be 
fair for BLM to adopt the MMS practice, although, from a diligent 
development perspective, we could not verify that approving time 
extensions has resulted in increased production activity.
7.  Ms. Kendall, your report points out that BLM may impose a diligence 
        requirement for onshore units, such as requiring a well to be 
        drilled every six months. Do you have any data that indicates 
        how many leases they have imposed that diligence requirement 
        on?
    Response: We did not determine the number of leases on which the 
diligence requirement has actually been imposed. However, BLM manages 
about 1,400 units and bureau policy is to require that a well be 
drilled somewhere on the unit at least once every six months until 
production is established.
Questions from Ranking Member Doug Lamborn
1.  How many leases offered by the federal government had no diligence 
        requirement in the lease?
    Response: We did not research the number of leases that contain the 
performance (diligence) clause, but for many years this has been 
standard language contained in both offshore and onshore federal 
leases. It is likely that the vast majority of federal leases include 
the clause.
2.  How much do you believe the additional reporting and accounting 
        suggestions which you made for BLM and MMS might cost?
    Response: We do not have an estimate of the costs, as this would 
depend on the level of oversight the bureaus choose to conduct. The 
costs for both industry and government could be kept to a minimum if 
the bureaus keep the process informal and merely request that lessees 
provide an annual update on the development progress on federal leases.
3.  Do you believe those accounting changes will result in any 
        additional oil production on federal lands?
    Response: Because development decisions are ultimately controlled 
by oil and gas companies, improved accounting on the part of the 
government would probably not result in additional production. Rather, 
the benefit of these accounting changes would be increased transparency 
about the status of activity on federal oil and gas leases. In 
fulfilling their roles as responsible land managers, the bureaus may 
find this information useful.
                                 ______
                                 
    Mr. Costa. Thank you very much. We appreciate your 
timeliness.
    And that brings us to Mr. Frank Rusco, the director for 
natural resources and the environment at the U.S. Government 
Accountability Office, and I made reference earlier to the GAO 
Report. Mr. Rusco?

   STATEMENT OF FRANK RUSCO, DIRECTOR, NATURAL RESOURCES AND 
       ENVIRONMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Rusco. Thank you, Mr. Chairman and Members of the 
Subcommittee. I am pleased to be here today to discuss the 
Department of the Interior's management of Federal oil and gas 
leasing. Interior's Bureau of Land Management oversees Federal 
onshore oil and gas leases while Interior's Minerals Management 
Service oversees offshore leases and collects revenues for all 
Federal leases.
    The past 15 years have been a volatile period in energy 
markets. For example, the spot price of West Texas Intermediate 
crude oil, a commonly used benchmark for world oil prices, was 
near to $10 per barrel in the late 1990s. It rose as high as 
$146 last summer and currently sits around $46 per barrel.
    Similarly, the monthly average price of natural gas at the 
wellhead was as low as $1.43 per thousand cubic feet in 1995. 
It rose to near $11 in June 2008 before falling and last 
December was down to $5.87.
    Oil and gas company profits rise and fall with oil and gas 
prices, as do oil and gas development to some extent.
    In recent years, there has been an increase in the annual 
number of new oil and gas leases sold by BLM onshore and MMS 
offshore but an even more rapid increase in the amount of 
development activity and drilling on these and already existing 
leases.
    In the past five years, GAO has found many deficiencies in 
Interior's management practices that raise doubts about the 
accuracy of oil and gas production data and revenue collection. 
We have made numerous recommendations to improve Interior's 
practices, and Interior has generally agreed with and is 
implementing most of these recommendations.
    My statement today will discuss two areas in which Interior 
has not fully agreed with, nor addressed, important 
recommendations to comprehensively reevaluate its revenue 
collection and lease management practices and policies.
    First, the Federal government collects a smaller share of 
oil and gas revenue than do most other resource owners for 
which we have information. According to a study by one of the 
preeminent energy consultancies, the share of oil and gas 
revenue collected by the Federal government on Gulf of Mexico 
leases ranked 93rd lowest of 104 resource owners, including 
most major oil-producing countries and regions.
    The Federal revenue collection system is also relatively 
unstable because it collects a large share of oil and gas 
company revenues when these companies' profits are low and a 
smaller share of revenue when profits are high. This system has 
led to ad hoc adjustments to royalty rates.
    For example, in the mid-1990s, low oil and gas prices 
prompted companies to seek and Congress to grant royalty relief 
for deepwater leases sold in the Gulf of Mexico between 1996 
and 2000. For two of these years, this royalty relief was not 
linked to thresholds for oil and gas prices. As a result, when 
prices of these commodities rose, the royalty relief on these 
leases was not removed. Litigation by one company has 
challenged the authority of the Secretary of the Interior to 
apply thresholds on any of the deepwater leases granted royalty 
relief.
    GAO reported last year that the cost to the Federal 
government in terms of forgone royalty revenues as a result of 
this litigation could be in the range of between 21 and 53 
billion dollars.
    In contrast to the mid-1990s, in 2007, when oil and gas 
prices were high and rising, Interior twice increased royalty 
rates for new leases in the Gulf of Mexico. Subsequently, 
prices of oil and gas fell significantly.
    We recommended that Interior undertake a comprehensive 
reevaluation of how much and how it collects revenues from oil 
and gas companies and that it convene an expert panel, 
including industry representation, to do so.
    We also recommended that Interior evaluate revenue 
collection systems that increase the share of revenue collected 
when prices and profits are high and decrease the share when 
prices and profits are low to reduce the likelihood of future 
ad hoc adjustments to royalty rates.
    Second, Interior could do more to encourage diligent 
development of Federal leases. Some states and private 
landowners use more tools than Interior to encourage rapid 
development of oil and gas. For example, some charge rental 
rates that escalate significantly over time unless and until 
companies develop the leases and begin paying royalties. While 
Interior does include escalating rental rates, both the initial 
rental rates and the escalation are small compared to some 
states and private landowners.
    Some states and private landowners also use shorter lease 
terms for lands that are deemed to be more likely to produce 
significant volumes of oil and gas and longer lease terms for 
more speculative properties. In contrast, Interior does not 
make distinctions in its lease terms for how productive the 
agency believes a lease will be.
    We recommended that Interior undertake a comprehensive 
reevaluation of its lease management practices to determine if 
it could apply some of these tools, particularly on leases that 
are most likely to produce economic volumes of gas and oil.
    To conclude, Interior has not undertaken a comprehensive 
look at its oil and gas revenue collection and lease management 
policies for over 25 years despite a great deal of change in 
the oil and gas industry.
    We believe that without such a reevaluation, the public 
will not have a reasonable assurance that it is receiving an 
appropriate share over time of oil and gas revenues produced on 
Federal leases and that the management of these leases is done 
efficiently and in the public interest.
    Thank you. This concludes my statement. I would be happy to 
answer any questions the Subcommittee may have.
    [The prepared statement of Mr. Rusco follows:]

Statement of Frank Rusco, Director, Natural Resources and Environment, 
                 U.S. Government Accountability Office

    Mr. Chairman and Members of the Subcommittee:
    We appreciate the opportunity to participate in this hearing to 
discuss the Department of the Interior's management of federal oil and 
gas leases. In Fiscal Year 2008, the Department of the Interior 
(Interior) collected over $22 billion in royalties for oil and gas 
produced on federal lands and waters, purchase bids for new oil and gas 
leases, annual rents on existing leases, making revenues from federal 
oil and gas one of the largest nontax sources of federal government 
funds. Within Interior, the Bureau of Land Management (BLM) manages 
onshore federal oil and gas leases and the Minerals Management Service 
(MMS) manages offshore leases, while MMS is responsible for collecting 
royalties for all leases. In recent years, GAO and others, including 
Interior's Inspector General have conducted numerous evaluations of 
federal oil and gas management and revenue collection processes and 
practices and have found many material weaknesses. These weaknesses 
place an unknown but significant proportion of royalties and other oil 
and gas revenues at risk and raise questions about whether the federal 
government is collecting an appropriate amount of revenue for the 
rights to explore for, develop, and produce oil and gas on federal 
lands and waters. Specifically, our recent work has found the 
following:
      Interior does less to encourage development of federal 
oil and gas leases than some state and private landowners. Interior 
officials cited one lease provision that may encourage development--
escalating rental rates. For example, the rental rates for 10-year 
onshore federal leases increase from $1.50 per acre per year for the 
first 5 years to $2 per acre per year for the next 5 years. Compared to 
Interior, the eight states we reviewed undertook more efforts to 
encourage development on their oil and gas leases, using increasing 
rental rates as well as shorter lease terms and escalating royalty 
rates. Some states also do more than Interior to structure leases to 
reflect the likelihood of oil and gas production, which may encourage 
faster development. Specifically, while Interior uses varying lengths 
for offshore leases, with deeper waters receiving longer lease terms, 
this provision is not explicitly related to the expected productivity 
of the lease. On the other hand, five of the states that we reviewed--
Alaska, Louisiana, Montana, New Mexico, and Texas--vary lease lengths 
or royalty rates to reflect the likelihood that the lease will produce. 
We also found that private landowners have used various leasing methods 
to encourage faster development, including lease terms as short as 6 
months.
      The annual number of federal oil and gas leases issued 
and the pace of development have generally increased in recent years. 
Over the past 20 years, the total number of oil and gas leases Interior 
issued has varied each year but generally increased in recent years, as 
has the amount of development activity, and industry officials told us 
that a range of factors influence their decisions to acquire and 
develop leases. The number of offshore leases issued annually from 1987 
through 2006 had two large peaks--in 1988 and 1997--and has generally 
been increasing since 1999. Onshore leases peaked in 1988 and then 
declined until about 1992, remaining at these lower levels until about 
2003 when they increased, coinciding with rising oil and historically 
higher natural gas prices. Drilling and production activity on federal 
leases was higher from 1997 through 2006 than from 1987 through 1996, 
but the increase was more dramatic for onshore leases. Industry 
officials told us that several factors influence their decisions to 
acquire and develop federal oil and gas leases, including oil and gas 
prices; the availability and cost of equipment; the geology of the land 
underlying the lease; and regulatory issues, such as limitations on 
when drilling can occur.
      Development and production activity in a sample of leases 
issued from 1987 through 1996 varied considerably. We reviewed data on 
about 55,000 offshore and onshore federal leases issued from 1987 
through 1996--those that have exceeded their primary 10-year lease 
terms. We then tracked development activity on that sample of leases 
through 2007 to determine what, if any, development activity occurred, 
and at what point in time. We identified three key findings regarding 
development. First, development occurred at some point during the 
period 1987-2007 on about 26 percent of offshore and 6 percent of 
onshore leases in the sample. Production was less frequent, with about 
12 percent of offshore leases and 5 percent of onshore leases 
ultimately achieving production. Second, shorter leases were generally 
developed more quickly than longer leases, but not as frequently during 
the term of the lease. Finally, for those leases that eventually 
produced oil or gas, a substantial amount of the initial drilling 
activity--about 25 percent onshore--took place after the scheduled 
expiration of the lease, following a lease extension.
      MMS and BLM employ different practices for deciding which 
federal properties to lease and when, determining the initial length of 
the lease, and determining the price at which the leases are sold. In 
addition, some states and private resource owners use more tools than 
the federal government, including incentives for early development or 
penalties for later development, to encourage rapid development, 
particularly of leases that are deemed to be likely to contain 
significant oil and gas resources. In this regard, we found that 
Interior could do more to encourage faster development of certain 
federal oil and gas leases that are relatively more likely to have 
significant oil and gas resources. 1
---------------------------------------------------------------------------
    \1\ GAO, Oil and Gas Leasing: Interior Could Do More to Encourage 
Diligent Development, GAO-09-74 (Washington, D.C.: Oct. 3, 2008).
---------------------------------------------------------------------------
      BLM has encountered persistent problems in hiring and 
retaining sufficient and adequately trained staff to keep up with an 
increasing workload as a result of rapid increases in oil and gas 
operations on federal lands. For example, between 1999 and 2004, when 
applications for permits to drill more than tripled, BLM was unable to 
keep up with the commensurate increase in its workload, in part, as 
result of an ineffective workforce planning process, the lack of key 
data on workload activities, and a lack of resources. As a result of 
this staffing shortfall, BLM was unable to meet its requirements to 
mitigate environmental impacts of oil and gas development. 2 
More recently, we reported that BLM's inability to attract and retain 
sufficient trained staff have kept the agency from meeting requirements 
to inspect drilling and production of oil and gas on federal lands. 
This puts federal revenues at risk because when inspections are made, 
violations have been found, including errors in the volumes of oil and 
gas reported by operators to MMS. 3
---------------------------------------------------------------------------
    \2\ GAO, Oil and Gas Development: Increased Permitting Activity Has 
Lessened BLM's Ability to Meet Its Environmental Protection 
Responsibilities, GAO-05-418 (Washington, D.C.: June 17, 2005).
    \3\ GAO, Mineral Revenues: Data Management Problems and Reliance on 
Self-Reported Data for Compliance Efforts Put MMS Royalty Collections 
at Risk, GAO-08-893R (Washington, D.C.: Sept. 12, 2008).
---------------------------------------------------------------------------
      The federal government receives one of the lowest shares 
of revenue for oil and gas resources compared with other countries. For 
this and other reasons, the United States is an attractive country for 
investment in oil and gas development. Specifically, in 2007, the 
revenue share that the federal government collects on oil and gas 
produced in the Gulf of Mexico ranked 93rd lowest of 104 revenue 
collection regimes around the world that were studied. However, despite 
significant changes in the oil and gas industry over the past several 
decades, Interior has not systematically re-examined how the federal 
government is compensated for extraction of oil and gas for over 25 
years. In contrast, some other countries have recently increased their 
shares of revenues as oil and gas prices rose and, as a result, will 
collect between an estimated $118 billion and $400 billion, depending 
on future oil and gas prices. 4
---------------------------------------------------------------------------
    \4\ GAO, Oil and Gas Royalties: The Federal System for Collecting 
Oil and Gas Revenues Needs Comprehensive Reassessment, GAO-08-691 
(Washington, D.C.: Sept. 3, 2008).
---------------------------------------------------------------------------
      In 1995, a time when oil and natural gas prices were 
significantly lower than they are today, Congress passed the Outer 
Continental Shelf Deep Water Royalty Relief Act (DWRRA), which 
authorized MMS to provide ``royalty relief'' on oil and gas produced in 
the deep waters of the Gulf of Mexico from certain leases issued from 
1996 through 2000. This ``royalty relief'' waived or reduced the amount 
of royalties that companies would otherwise be obligated to pay on the 
initial volumes of production from leases, which are referred to as 
``royalty suspension volumes.'' We recently reported that litigation 
over this royalty relief for deep water leases sold between 1996 and 
2000 could cost the public in the range of $21 billion to $53 billion 
in forgone revenue over the next 25 years, depending on how much oil 
and gas is eventually produced on these leases and the prices at which 
the oil and gas is sold. 5
---------------------------------------------------------------------------
    \5\ GAO, Oil and Gas Royalties: Litigation over Royalty Relief 
Could Cost the Federal Government Billions of Dollars, GAO-08-792R 
(Washington, D.C.: June 5, 2008). The Department of the Interior has 
since lost the case on appeal. Kerr-McGee Oil & Gas Corp. v. Dept. of 
Interior, 554 F. 3d 1082 (5th Cir. 2009).
---------------------------------------------------------------------------
      Interior's verification of federal oil and gas production 
is insufficient. Specifically, we found that Interior is not meeting 
statutory or agency targets for inspections of certain onshore and 
offshore leases and metering equipment for measuring oil and gas 
production, raising questions about the accuracy of company-reported 
oil and gas production figures. In addition, we found that MMS's 
management of cash royalty collection lacks key controls, such as the 
ability to effectively monitor and validate oil and gas company 
adjustments to self-reported royalty data including those made after 
audits have been completed, which could have implications for the 
amount of revenue collected. Further, we found that MMS's royalty 
compliance efforts rely too heavily on self-reported data and that the 
more consistent use of available third-party data as a check on self-
reported data could provide greater assurance that royalties are 
accurately assessed and paid. 6 We have an ongoing 
engagement further examining production verification issues expected to 
be completed later this year.
---------------------------------------------------------------------------
    \6\ GAO, Mineral Revenues: Data Management Problems and Reliance on 
Self-Reported Data for Compliance Efforts Put MMS Royalty Collections 
at Risk, GAO-08-893R (Washington, D.C.: Sept. 12, 2008).
---------------------------------------------------------------------------
      More could be done to verify production levels for 
Interior's royalty-in-kind (RIK) program, in which companies provide 
the federal government with oil or gas in lieu of cash royalty 
payments. Specifically, we found that under the RIK program, MMS's 
oversight of natural gas volumes is less robust than its oversight of 
oil volumes--a finding that raises questions about the accuracy of 
company-reported volumes of natural gas from which MMS must determine 
whether it is receiving its appropriate share of production. In 
addition, we found that MMS's annual reports to Congress do not fully 
describe the performance of the RIK program and, in some instances, may 
overstate the benefits of the program. 7 We also have an 
ongoing engagement examining the RIK program expected to be released 
later this year.
---------------------------------------------------------------------------
    \7\ GAO, Oil and Gas Royalties: MMS's Oversight of Its Royalty-in-
Kind Program Can Be Improved through Additional Use of Production 
Verification Data and Enhanced Reporting of Financial Benefits and 
Costs, GAO-08-942R (Washington, D.C.: Sept. 26, 2008).
---------------------------------------------------------------------------
    In response to recommendations made by GAO and others, Interior has 
put into place a wide-ranging plan to significantly modify its current 
practices. We acknowledge Interior's efforts to change and improve many 
of its current practices as an important first step to address material 
weaknesses in the existing system. However, we are concerned that 
Interior may lack the resources and skills to simultaneously address 
significant changes in its practices while effectively meeting its 
routine responsibilities. If steps are not taken to effectively manage 
these challenges, the agency may face a decline in staff morale, 
continued employee turnover at its senior levels, and ongoing 
challenges hiring qualified new staff, further putting federal revenues 
at risk.
    More importantly, we believe that Interior needs to fundamentally 
reexamine the way in which federal oil and gas resources are managed. 
Specifically, we recommended that Interior develop a strategy to 
encourage faster development of oil and gas leases on federal lands for 
those leases deemed to be more likely to produce oil and gas. 
8 In developing this strategy, Interior could benefit from 
evaluating alternative leasing practices used by some states and 
private land owners, as well as other countries, to determine what 
changes to federal leasing practices and the law is needed to speed up 
development of some specific leases that are likely to be highly 
productive. While Interior generally agreed with our recommendation and 
is looking at some of these issues in a study, we do not believe 
Interior's study is sufficiently comprehensive to meet the needs we 
identified. As a result, we believe this puts at risk the agency's 
mission to effectively manage federal oil and gas resources in the 
public interest.
---------------------------------------------------------------------------
    \8\ GAO, Oil and Gas Leasing: Interior Could Do More to Encourage 
Diligent Development, GAO-09-74 (Washington, D.C.: Oct. 3, 2008).
---------------------------------------------------------------------------
    In addition, we believe that a comprehensive reassessment of how 
much revenue the federal government collects from oil and gas produced 
on federal lands and waters, and in what manner, is long overdue, and 
we recommended to Interior that it undertake such a reassessment in our 
draft report, Oil and Gas Royalties: The Federal System for Collecting 
Oil and Gas Revenues Needs Comprehensive Reassessment. 9 
However, in commenting on this recommendation, Interior stated that 
such a reassessment would be premature in light of a study the agency 
had under way that was looking at some aspects of these issues. Because 
we believe Interior's ongoing study is too limited in scope and scale, 
in the final report we proposed that Congress consider directing the 
Secretary of the Interior to convene an independent panel to perform a 
comprehensive review of the federal system for collecting oil and gas 
revenue. In the event that the Secretary of the Interior convenes a 
panel, the panel and Interior should utilize available information 
about the share of oil and gas revenues that other resource owners, 
including states and other countries, collect and the ways in which 
they structure these collections to create more stable investment 
environments in their oil and gas industries. Until this comprehensive 
reassessment is undertaken and completed, the federal government will 
not have reasonable assurance that it is collecting an appropriate 
share of revenue from oil and gas produced on federal lands and waters.
---------------------------------------------------------------------------
    \9\ GAO, Oil and Gas Royalties: The Federal System for Collecting 
Oil and Gas Revenues Needs Comprehensive Reassessment, GAO-08-691 
(Washington, D.C.: September 3, 2008).
---------------------------------------------------------------------------
    Mr. Chairman, this concludes my prepared statement. I would be 
pleased to respond to any questions that you or other Members of the 
Subcommittee might have.
                                 ______
                                 

      Response to questions submitted for the record by Dr. Rusco

Majority Question Responses
 1.  Mr. Rusco, the report by the Inspector General's office points out 
        that the 8-year offshore lease is the only case of a federal 
        oil and gas lease that has a specific performance requirement 
        prior to the end of the primary term of the lease, in this case 
        the lessee is required to drill a well in the first five years 
        of the lease. Mr. Rusco, do you believe that including 
        performance requirements such as this on other federal oil and 
        gas leases would be a positive way for the government to 
        encourage diligent development, and when and where do you think 
        it might be appropriate?
    Response: Our review of the Department of the Interior's (Interior) 
leasing practices found that it was not structuring lease terms to 
encourage development as some states do. In particular, some states and 
private land owners use more tools to encourage quicker development of 
leases that are deemed to be more likely to be productive, while 
allowing more time to develop more speculative properties. To the 
extent that Interior could link performance requirements to the 
likelihood of finding economic volumes of oil and gas, this would be 
consistent with our recommendation to explore whether the tools used by 
states and private landowners could be useful for managing federal oil 
and gas leases.
 2.  Mr. Rusco, from your extensive studies of how things can go awry 
        with our leasing program, whether it is data collection or 
        revenue collection, what should we keep in mind if we start to 
        look at opening new areas of the Outer Continental Shelf? Are 
        there things that we should do beforehand to ensure the same 
        problems do not keep happening?
    Response: New areas in the outer continental shelf hold promise for 
significant new oil and gas discoveries compared to most areas onshore 
that have been more thoroughly explored and developed. As Interior 
considers whether or where to allow increased exploration and 
development in offshore areas that have been previously off limits, it 
is essential that Interior undertake the comprehensive reviews of how 
much it can collect and in what way it collects revenues and manages 
such leases before it begins opening these new areas. Only in this way 
can we be more certain that the federal government is correctly 
balancing the need to promote energy security, a competitive energy 
sector, environmental protection, and ensuring that the American public 
is receiving an appropriate share of revenues from new oil and gas 
production and that the leases are managed efficiently in the public 
interest.
 3.  Mr. Rusco, during the hearing you indicated that the GAO had 
        previously taken a look at the impact of litigation on federal 
        oil and gas leases, but that you did not have the conclusions 
        from that study with you at the time. What were the conclusions 
        that GAO found regarding the impact of litigation on leasing, 
        exploration, and development? Did GAO determine what percentage 
        of potential lease tracts, either onshore or offshore, were 
        protested prior to sale, and if so, what are the figures? Did 
        GAO determine what percentage of issued leases were the subject 
        of subsequent litigation, and if so, what are those figures?
    Response: In our report, Oil and Gas Development: Challenges to 
Agency Decisions and Opportunities for BLM to Standardize Data 
Collection, GAO-05-124, November 30, 2004; we found that areas on the 
Outer Continental Shelf open to offshore oil and gas development 
experienced few public challenges. According to data provided by MMS 
officials, between fiscal years 1999 and 2003, the agency was 
challenged on only one of its 1,631 decisions approving offshore oil 
and gas development and production, and only one of its 1,997 decisions 
approving offshore oil and gas exploration.
    For the period we examined, MMS reported no lawsuits challenging 
its 5-year offshore management plan or the land parcels included in its 
13 lease sales. The 13 lease sales offered 42,994 tracts covering 
230,493,810 acres for lease sale. Of the tracts offered for sale, 3,541 
tracts covering almost 18,659,610 acres were leased. MMS also reported 
that there were no challenges to the 2,850 drilling permits it issued.
 4.  Mr. Rusco, one of the major themes that was present in your 
        written testimony, and also arose during the discussion at the 
        hearing, was the idea that the MMS leasing program is more 
        comprehensive and methodical than the BLM onshore leasing 
        program. To your knowledge, are there any reasons why an MMS-
        style leasing program--with multiyear planning, minimum 
        acceptable bids, and other features that are unique to MMS--
        would not be appropriate for the onshore leasing program?
    Response: To support its work overseeing the leasing of offshore 
areas, MMS has developed both the geologic and economic modeling skills 
necessary to develop multi-year plans and determine minimum acceptable 
bids. BLM, however, may not currently posses the requisite geologic 
information or the staffing and skills required to implement such a 
program for the onshore areas it oversees. Therefore, while an MMS 
style leasing program may be a desirable goal for onshore leases, it 
would face some challenges in implementation.
 5.  Mr. Rusco, one of the statistics in your diligent development 
        report shows that the amount of time it takes to produce oil 
        and gas from a lease closely tracks the length of the primary 
        term of the lease--5 year leases take just under 5 years to 
        produce and 8 year leases take just under 8 years to produce. 
        Has GAO been able to determine if the longer lease terms 
        accurately reflect the inherent time necessary to produce oil 
        and gas at different depths on the OCS, or if the longer lease 
        terms provide an incentive for companies to create a timeline 
        that would result in production occurring towards the end of 
        the primary lease term?
    Response: While our review did not specifically attempt to gauge 
the amount of time it takes to develop leases at various depths in the 
Gulf of Mexico, companies have told us that deep water developments 
require both more time and money than developments located closer in to 
shore where there is often more existing pipeline and other 
infrastructure.
 6.  Mr. Rusco, both the IG and GAO make it clear that when companies 
        get a 10-year lease, they get extensions provided they have 
        initiated drilling activities by the end of those 10 years. Is 
        there any reason a company can't get the lease, hold it in an 
        inactive state for 9 years and 11 months, then start drilling a 
        well right before the expiration date and get the 2 additional 
        years automatically? Are there any requirements for 
        leaseholders to do anything on their 10-year leases prior to 
        the end of the primary term?
    Response: At present, a company holding a lease onshore may keep 
that lease for 9 years and 11 months, begin drilling prior to the end 
of the lease expiration date, and subsequently keep the lease for up to 
an additional two years. The only requirement is that companies pursue 
``reasonable diligence'', though Interior has not yet provided a clear 
definition of that term.
 7.  Mr. Rusco, you mentioned in the hearing that the analysis GAO 
        undertook of government take did not include bonus bids because 
        while they are observable, there are a lot of payments in other 
        countries that are not observable. Could you elaborate on this, 
        and provide examples of what you mean by unobservable payments?
    We do not know the extent to which foreign companies operating in 
countries other than the United States are pressured or encouraged to 
pay money or spend resources in other ways in order to be able to do 
business in other countries. For example, we reported in 2004 that, 
``[i]ndexes, surveys, and studies indicate that corruption in sub-
Saharan Africa is pervasive, but assessing it is inherently difficult. 
Indexes published by the World Bank Institute and Transparency 
International have limitations; for example, both focus on perceptions 
of corruption, and both recognize their measures to be imprecise. 
Regional surveys indicate that many businesses are affected by 
corruption, although perceptions of corruption levels vary among 
countries.'' 1
---------------------------------------------------------------------------
    \1\ GAO, U.S. Anticorruption Programs in Sub-Saharan Africa Will 
Require Time and Commitment, GAO-04-506 (Washington, D.C., April 26, 
2004).
---------------------------------------------------------------------------
 8.  Mr. Rusco, have you taken a look at the oil and gas activities of 
        the Bureau of Indian Affairs? Is there any sense of whether 
        they have similar problems as BLM when it comes to data 
        reliability and communication with MMS?
    Response: The BLM is also responsible for leasing oil and gas lands 
for Indians, though we have not included Indian leases in our work. 
This is principally due to Cobell lawsuit and the resulting shut down 
of several of Interior's information technology systems, which has made 
Indian data much more difficult for MMS to access.
 9.  Mr. Rusco, do you believe that it would make sense--either 
        fiscally, environmentally, or from a diligent development 
        viewpoint--for the BLM to extend the term of leases to take 
        into account stipulations that limit the amount of time that 
        lessees can conduct operations on their leases?
    Response: To date, we have not studied this in sufficient detail to 
give a simple definitive answer. However, we would point out that while 
federal leases may be subject to more strict stipulations, some states 
and private land owners provide significantly shorter primary lease 
terms--as little as 3 years--and also provide incentives or 
requirements for more rapid development, particularly of promising 
leases.
10.  Mr. Rusco, how many total leases are encompassed by the 1,393 
        active onshore units, and how many are encompassed by the 215 
        active offshore units?
    Response: We do not have the number of leases encompassed by either 
the offshore or onshore units because those numbers did not result from 
our analysis and are not readily available in published form from MMS 
or BLM. In addition, I would note that some leases may be part of more 
than one unit, depending on the specific circumstances, which makes the 
evaluation of the number of leases encompassed by existing units 
complicated.
Minority Question Response
1.  In your report on Diligent Development you state that, 
        ``development occurred on about 26 percent of offshore and 6 
        percent of onshore leases issued during the sample period. 
        Production was less frequent, with about 12 percent of offshore 
        leases and 5 percent of onshore leases ultimately achieving 
        production.'' How many of these leases paid a bonus bid up 
        front to the federal government? How many of these leases made 
        rental payments to the federal government during their term? Do 
        you believe that companies will hold leases and pay rental fees 
        and bonus on leases which they know will not produce oil and 
        gas?
    Response: For offshore leases, MMS estimates the fair market value 
of each lease it sells, which becomes the minimum acceptable bid. If 
MMS determines that it did not receive the minimum acceptable bid, then 
MMS may withdraw the lease and offer it again at a future sale, at 
which point MMS may receive an acceptable bonus bid. Onshore, if the 
lease is not secured through a competitive bonus bid, a company may 
obtain it non-competitively without offering a bonus bid. We do not 
have summary data from BLM to assess what proportion of leases actually 
paid a bonus bid.
    Federal law requires that all non-producing leases held by 
companies pay annual rent to the government. Therefore, all of the 
leases identified in our report should have paid rent.
    It is unlikely that a company would bid on a lease and subsequently 
pay rent for the duration of the lease knowing that the lease will 
never produce viable quantities of oil and gas. However, some leases 
may be economically viable to produce only if prices are above a 
certain level. Individual companies must take into consideration the 
amount of potentially recoverable resource, the costs of accessing 
them, and their own expectations for future oil or gas prices.
2.  In your report you state that ``Interior does less to encourage 
        development of federal leases than some state and private 
        landowners.'' Is failing to process permits in a timely manner 
        one of the ways interior fails to encourage development on 
        federal leases? There are companies with leases in the Alaska 
        OCS that have been waiting nearly 3 years for a federal permit, 
        would that constitute a hindrance to diligent development by 
        the federal government?
    Response: The length of time it takes BLM to process a drilling 
permit certainly impacts the rate at which a company can develop a 
lease. Our review did not examine timeframes related to processing 
drilling permits for Alaska's outer continental shelf. However, we 
found that BLM has shifted staffing and resources to processing these 
permits from other important agency functions. We found that this has 
had the effect of reducing the agency's ability to keep up with other 
parts of its mission, including overseeing environmental mitigation on 
federal onshore leases. Given this shifting of priorities and 
resources, it is likely that the speed at which BLM has been able to 
process drilling permits was increased, but we cannot say by how much.
3.  In your report, you state ``while Interior uses varying primary 
        terms for offshore leases, depending on water depth, with 
        leases in deeper waters receiving longer primary lease terms, 
        this is not explicitly related to the expected productivity of 
        these leases.'' Could the reason Interior offers longer terms 
        in the deepwater have to do with the technical challenge 
        expected from drilling and developing leases 9,000 feet below 
        the water and 25,000 feet below the sea floor? You frequently 
        compared lease terms between state and federal leases, how many 
        state leases were deepwater leases? How many state leases that 
        you examined required infrastructure costing more than $5 
        billion?
    Response: Developing leases in deepwater is time consuming, 
complicated, and costly, which are reasons why Interior offers leases 
in the deep waters of the Gulf of Mexico with a 10 year lease term. 
Because the federal government has jurisdiction over the outer 
continental shelf, there are no deepwater state leases. Rather, most 
offshore state leases in the Gulf of Mexico are closer-in, shallower, 
and in areas with more existing infrastructure. And because of these 
factors one would expect development costs to be less than for 
development of federal leases located in deeper, and further out 
locations in the Gulf of Mexico. What we have recommended is that both 
MMS and BLM explicitly consider all the available tools for managing 
federal leases, paying particular attention to leases that are deemed 
to be more likely to be productive, and to evaluate whether or not it 
is possible to utilize some of these tools to encourage more rapid 
development of some oil and gas leases.
                                 ______
                                 
    Mr. Costa. Thank you. It is interesting to note in the 
report on what type of incentivizing we can look at and the 
differences between private and state leases in terms of how 
you did your comparative analysis.
    Last year--Members of the Subcommittee, you probably know 
this--it was the largest year for revenue from payments 
received from our program--$18 billion. It was the second-
largest source of revenue to the budget to the Federal Treasury 
outside of American tax dollars.
    Our last witness--no, second-to-last witness, excuse me, is 
Mr. Tom Fry, president of the National Ocean Industries 
Association. Mr. Fry, please begin.

               STATEMENT OF TOM FRY, PRESIDENT, 
             NATIONAL OCEAN INDUSTRIES ASSOCIATION

    Mr. Fry. Thank you very much, Mr. Chairman, Mr. Ranking 
Member, and Members of the Committee. It is a pleasure to be 
with you today.
    I represent the National Ocean Industries Association, a 
group of companies who work in the offshore energy business. It 
is not only oil and gas but people in the renewable energy 
business who work in the offshore.
    My testimony is testimony that has been approved not only 
by NOIA but also a number of other trade associations that are 
also involved in representing folks in the offshore oil and gas 
industry.
    As we look to our energy future, we feel very strongly that 
there are a number of things that have to be done. We are going 
to have to find ways to conserve. We are going to have to find 
ways to use renewable energy: wind, solar and others. We are 
going to have to use coal. We are going to have to use oil and 
gas. All of these things are going to be necessary if we are 
going to meet our energy needs.
    I am concerned that we may be lulled into some complacency 
because of low prices today. Let me suggest to you that the oil 
and gas industry is a very cyclical business--prices go up, 
prices go down; production goes up, production goes down--and 
there is certainly the possibility that we will see high prices 
in the future.
    I have to point out here that we are in a world now that we 
have not been in for a long time. We do not have moratoria 
anymore. The congressional or Presidential moratoria have gone 
away. However, leasing takes place under the auspices of the 
OCS Lands Act, administered by MMS, and they have to have a 
five-year plan. That five-year plan lists all the leases that 
will occur. If it is not in the five-year plan, a lease cannot 
take place. About 13 percent of all of the OCS land is in the 
current five-year plan, meaning that only 13 percent would have 
been available for leasing even without the moratoria.
    So we are still in a situation where we have lots of acres 
that have not been looked at or explored, and this is true even 
though over 20 percent of our domestic production comes from 
the offshore.
    Is there more oil and gas out there? Most likely. We have 
found five times more oil and gas in the Gulf of Mexico than 
was thought to be there when the first estimates were made by 
the government.
    There is also a jobs component to this. It has been 
estimated that if we were to open up additional areas of the 
OCS, we might create 76,000 jobs. These are high-paying jobs. 
They average today about $93,000 a year. That compares with the 
average for the country of about $44,000 a year. It has 70 
percent lower incidences of injury and illness than industry in 
general.
    As the Chairman pointed out, last year we were treated to a 
whole number of catchy phrases that I think had the tendency to 
polarize us at a time when we need to be talking seriously 
about how we develop and how we supply energy to this country. 
This needs to be a serious discussion. It does not need to be 
wrapped around phrases.
    The Chairman has been to Independence Hub where they are 
now producing one billion cubic feet of natural gas a day. He 
has been to a drill ship where he has seen the technology that 
industry is able to bring to bear where a ship can sit in 
10,000 feet of water with no anchors and stay still and drill 
in 10,000 feet of water and maybe as much as 30,000 feet of the 
crust of the Earth.
    The technological advances are staggering in terms of what 
industry has been able to do. Sometimes we compare it to NASA 
of 15 to 20 years ago. This is high technology.
    I think we also need to point out the enviable safety 
record of the oil and gas industry. The National Academy of 
Sciences study showed that of all the oil that is in the sea, 
less than one percent comes from offshore exploration activity. 
Interestingly enough, two-thirds of the oil that is in the sea 
comes from natural seeps; it just comes out of the ground 
naturally.
    So science and technology will lead us to the ability to 
find new opportunities for oil and gas development if the 
country has the will and the wherewithal to allow for the safe 
and proper development.
    With that, I will yield my nine seconds, Mr. Chairman.
    [The prepared statement of Mr. Fry follows:]

 Statement of Tom Fry, President, National Ocean Industries Association

    Mr. Chairman and members of the Committee, thank you for inviting 
me to speak before you today about leasing and development of oil and 
natural gas resources on the nation's Outer Continental Shelf (OCS). My 
name is Tom Fry, and I am the President of the National Ocean 
Industries Association, which represents nearly 300 companies working 
to explore for and produce energy resources from the OCS in an 
environmentally sensitive manner.
    I am here today also representing the Independent Petroleum 
Association of America, the U.S. Oil & Gas Association, the American 
Exploration and Petroleum Council, the International Association of 
Drilling Contractors, the American Petroleum Institute, the Natural Gas 
Supply Association, and the Petroleum Equipment Suppliers Association. 
Together, we represent thousands of companies, both majors and 
independents, engaged in all sectors of the U.S. oil and natural gas 
industry, including exploration, production, refining, distribution, 
marketing, equipment manufacture and supply, and other diverse offshore 
support services.
    Through the development and application of technology, as well as 
adherence to a scientifically rigorous regulatory process, the 
companies of the offshore industry continue to improve their ability to 
bring new supplies of oil and natural gas online. For over fifty years, 
these companies have learned how to operate in deeper and deeper waters 
and locate resources that were once not accessible. At the same time, 
the technological advances pioneered by these companies have allowed 
for less impact on the environment and a wise stewardship of the 
resources beneath the ocean.
    The need to safely harness these domestic energy sources is 
amplified by recent trends which show still-increasing American 
dependence on foreign sources of oil amidst a global economic downturn 
which has stifled energy prices from their record highs of last year. 
But when global economic conditions improve in the future, demand for 
energy will increase and we must begin preparing for this reality 
today.
    Certainly, conservation and efficiency gains are the most immediate 
means to lowering energy use and helping to moderate prices in the 
short term. Simultaneously, renewable and alternative energy sources 
are growing every day and aggressive investment in these sectors must 
continue. As witnesses from the U.S. Energy Information Administration 
and the International Energy Agency recently testified before this 
committee, we must also face the fact that traditional fossil energy 
will continue to play the predominant role in meeting our energy needs 
for decades to come.
    This reality dictates that responsible domestic production of these 
resources be encouraged, not hindered; and that risk and innovation 
aimed at improving our understanding of how better to find and produce 
oil and natural gas be rewarded, not punished.
    Simply stated, given renewable energy sources' limited contribution 
to the current energy portfolio, and the massive investments and long 
time horizons needed to grow them to any meaningful level, the world 
will require more oil and natural gas to meet future energy demand. The 
oil and gas industry can increasingly produce these resources here in 
America safely and cleanly, including from the OCS.
New Areas Hold Unknown Potential
    The United States' OCS is conservatively estimated by the Minerals 
Management Service (MMS) to hold undiscovered technically recoverable 
resources of over 419 trillion cubic feet of natural gas and 86 billion 
barrels of oil.
    That's estimated to be enough natural gas to heat 100 million homes 
for 60 years, and enough oil to drive 85 million cars for 35 years or 
to replace current Persian Gulf imports for almost 60 years.
    In fact, there may be even more than that. In the parts of the Gulf 
of Mexico (Gulf) where industry has been allowed to buy leases and 
explore, they have found about five times as much oil and three times 
as much natural gas as was once thought to be there. In 1987, MMS 
estimated that the Gulf of Mexico held about 10 billion barrels of oil 
and 100 trillion cubic feet of natural gas; yet, earlier this decade 
the Gulf was estimated to have 45 billion barrels of oil and 230 
trillion cubic feet of gas yet to be discovered, in addition to the 6 
billion barrels of oil and 75 trillion cubic feet of gas already 
produced since the 1987 estimates. The more industry explores, the more 
they find.
    I know the Chairman has personally seen OCS oil and gas facilities 
such as Independence Hub and Thunder Horse on a past offshore trip with 
MMS officials, and recommend that all committee Members see it for 
themselves. Twenty years ago, the part of the Gulf visited by the 
Chairman was not well understood and exploration had not started, thus 
explaining the significantly underestimated resources.
    Technology and the actual act of drilling led to some of the 
incredible finds of the OCS. Independence Hub has the capability of 
producing a billion cubic feet of gas per day. Thunder Horse has the 
capacity of producing 250,000 barrels of oil per day. The five fold 
estimate increase may not be the case in all places, but it does appear 
to be clear that the more industry looks, the more they find. Imagine 
the potential of those places where exploration has been off-limits for 
over 25 years. We need that information and we can have it with no cost 
to the taxpayer.
    Another way to quantify the energy potential held within new OCS 
areas is to examine the size of those offshore areas producing our 
energy now. The OCS currently is producing 27% of the entire U.S. oil 
production. However, that 27% of domestic oil production comes from 
only one half of one percent of the 1.7 billion acres of OCS lands.
    When you consider how much oil is coming from a comparatively small 
amount of land, it becomes increasingly clear just how much potential 
resource may exist in areas in which we haven't looked.
    As decision makers, Congress doesn't have all of this information. 
The information we do have is often over thirty years old and reliant 
on outdated technology. We know there are plenty of areas where oil and 
gas exploration may not be compatible with the landscape. We also know 
there will be parts of the ocean where resources will not be present or 
will not be economic. With talk of opening up areas or closing some 
down, shouldn't we increase our knowledge base so we can have an 
informed discussion about the consequences?
Safely Providing Energy and Jobs
    Producing energy from previous moratoria areas in the OCS also 
holds the potential for hundreds of thousands of jobs and hundreds of 
millions of dollars in revenue. According to a recent study, oil and 
natural gas resources in former or current OCS moratoria areas could 
generate $1.3 TRILLION in additional federal, state, and local 
government revenue, and over 76,000 jobs. Importantly, we already know 
that these will be family-supporting jobs, as oil and gas exploration 
and production wages averaged $93,575 per year, according to 2007 
Bureau of Labor Statistics data--over twice the average annual pay of 
$44,458 across all U.S. industries.
    These are significant resources that can be developed safely and 
that we ignore to our consumers' disadvantage. Yet until last year, 
more than 85 percent of the nation's OCS around the lower 48 states was 
off limits to oil and gas exploration because of presidential 
withdrawals and congressional moratoria, even though 1.4 million 
barrels of oil is produced from the OCS every day with less than .001 
percent spilling into the ocean from drilling and extraction, according 
to MMS.
    Similarly, as Chairman Costa often notes, a 2002 National Academy 
of Sciences (NAS) report entitled ``Oil in the Seas III'' found that 
less than 1% of oil in North American waters is from drilling and 
extraction, while 63% comes from natural seepage and the remainder from 
non-point sources. Clearly, the offshore oil and gas industry enjoys an 
enviable environmental record, and we appreciate committee members and 
witnesses alike recognizing this fact in hearings earlier this year.
Moving Beyond Slogans
    Also mentioned in earlier hearings was the Chairman's desire to 
move beyond the ``Use It or Lose It'' and ``Drill, Baby, Drill'' 
slogans of last year. I agree it is important to have a serious 
discussion about the pace and development of offshore leases and 
appreciate these hearings presenting such a forum. Perhaps citing a 
real world example may help in this regard.
    In the mid 1990's deep water was considered anything over 1,000 
feet and not terribly far offshore, operating on what is known as ``the 
shelf''. But at that same time some companies bought leases in 
thousands of feet of water over a hundred miles from shore. They 
essentially placed a bet on themselves and advancing technology that 
might allow them to deal with water depths of almost two miles and 
drilling and producing depths of six miles or more. In addition, much 
of this area beneath the ocean floor is patterned with thick layers of 
salt, in some cases thousands of feet, that at the time prevented 
accurate seismic readings.
    While some of these leases ended up having producible resources, 
many did not. Even many of the leases that had economically recoverable 
quantities were too technically difficult to produce for many 
companies. This resulted in leases that were turned back into the 
government because either the lease term had run its course or the 
tract was not deemed prospective enough.
    Then in March of last year, the federal government conducted the 
largest lease sale in OCS history. Why? While not the only factor, a 
large part can be attributed to the availability of some of these same 
deep water tracts that had been turned back in. Seismic technology has 
greatly improved to get a better understanding of resources below the 
salt. Platforms and drill ships now can work and handle the water 
depths and pressures associated with 10,000 feet of water and total 
depths over 30,000 feet.
    That sale is the very essence of ``use it or lose it.'' The 
companies that made it work are producing. The ones that could not 
turned in their leases after having previously paid bonuses and 
rentals, while those same blocks were leased back out for a combined 
sale of over $3.6 billion dollars to the taxpayer.
    Looking at utilization rates of offshore drilling rigs can also 
help to illustrate the pace with which offshore leases are being 
developed. Toward the end of last year, nearly 90 percent of the 
roughly 700 offshore drilling rigs in the global fleet were being 
utilized. In the U.S. Gulf, about 90 rigs were working, including a 
record of close to 15 drillships in deep water and ultra-deep water. 
Daily rental rates for the newest generation of drillships reached as 
high as $650,000 a day.
    While the global economic downturn is expected to lead to some 
reductions in the exploration and production budgets of some companies, 
the drilling market in the deep Gulf should remain fairly positive, 
according to many drilling contractors. At the start of 2009, about 120 
rigs were on order in shipyards. Subsea equipment suppliers predict an 
active year for components such as subsea completions and shut off 
valves.
A Process Shaped by Science and Stakeholders
    Another commonly discussed issue in previous committee hearings is 
the desire that science-based decision making guide our national energy 
and environmental policy. This standard certainly is worthy of 
following, and indeed the current process of allowing for offshore 
exploration and production of natural gas and oil is rich with public 
input, deliberate in its manner, and is certainly exposed to the utmost 
scientific scrutiny and examination.
    In order for oil and gas to ultimately be produced from the 
offshore, the process must essentially go through four separate phases: 
development of a Five Year OCS Leasing Program, planning for a specific 
lease sale within that Program, preparation of an Exploration Plan, and 
finally the preparation of a Production Plan. During the course of 
these various phases, no less than half a dozen separate environmental 
reviews are conducted.
    Additionally, under the Coastal Zone Management Act (CZMA), all 
these activities must be consistent with a given coastal state's 
science-based Coastal Zone Management Plan. Enacted in 1972, the CZMA 
created a national, science-driven program intended to comprehensively 
manage and balance competing uses of, and impacts to, coastal 
resources. The CZMA's consistency provisions require the federal 
government to certify that its activities are consistent with the 
scientific policies of a state's federally approved coastal management 
plan.
    In fact, when working their way through the regulatory processes 
inherent with offshore production, oil and gas companies must abide by 
a long series of statutes which ensure science-based decision making, 
including: CZMA, the National Environmental Policy Act, the Endangered 
Species Act, the Marine Mammal Protection Act, the National Marine 
Sanctuaries Act, the Outer Continental Shelf Lands Act, the Clean Air 
Act, the Clean Water Act, and many others.
    Stringent regulatory oversight helps maintain environmental 
performance, as offshore operators work under at least 17 major permits 
and must follow numerous sets of federal regulations from across 
several different federal agencies--including MMS, the Environmental 
Protection Agency, the U.S. Coast Guard, the National Oceanic and 
Atmospheric Administration, the National Marine Fisheries Service, and 
the U.S. Fish and Wildlife Service--each of which impart their own 
scientific rigor into their various rulemaking and permit granting 
processes.
    For decades, the offshore oil and gas industry has relied upon 
science-based decisions to guide their operations; and will continue to 
do so as new innovations allow them to explore more areas.
A Source of Constant Technological Innovation
    Today's offshore technology allows us to produce more energy by 
reaching places that would never before have been possible. New world 
records are always being set.
    Industry recently set one of these records by drilling a well in 
water depths exceeding 10,000 feet. That's the equivalent of 
successfully navigating nearly two miles down from the surface of the 
ocean before even beginning to drill, sometimes another 30,000 feet 
into the earth below the sea floor. The technology required to drill, 
complete and produce this type of well must overcome an environment of 
high pressure (in excess of 20,000 pounds per square inch) and high 
temperature (exceeding 350+F). Deep wells such as this are expensive, 
costing as much as $100 million apiece.
    After coming from the ground, the oil or natural gas then travels 
through a pipeline where the temperature is just above freezing and the 
formation of ice crystals threatens to block the flow unless constantly 
supervised and adjusted. At depths far beyond where humans can travel, 
sometimes as much as 5,000 feet or more below the ocean surface, 
Remotely-Operated Vehicles (ROVs) are used to perform maintenance and 
repairs.
    All this is possible with fewer facilities and less impact--even 
visual--than ever before. For example, multiple subsea wells can be 
connected by tiebacks to a single platform over great distances. Such 
an installation is capable of reaching wells on the ocean floor dozens 
of miles away in all directions while connecting to an ocean surface 
platform one mile above.
    Directional drilling also allows for extraction of resources which 
are miles away from the point where the actual well is drilled.
    This cutting edge technology doesn't come cheap, however. The total 
cost of this type of project, including wells drilled and the subsea 
connection system, can exceed $5 billion.
An Exemplary Record of Environmental Protection and Stewardship
    The outstanding environmental record of U.S. companies operating 
offshore around the world is well recognized as ``technologies are 
allowing the offshore industry to venture into deeper waters than ever 
before, while protecting marine life and subsea habitats'' 
1--even in the most challenging areas such as the Arctic and 
North Sea and in otherwise catastrophic weather.
---------------------------------------------------------------------------
    \1\ Clinton Administration DOE report: Environmental Benefits of 
Advanced Oil and Gas Exploration and Production Technology, 1999.
---------------------------------------------------------------------------
    Off the part of our coast in which exploration and production has 
historically been allowed, the safety of our operations was recently 
demonstrated in the most severe hurricane situations. Though many of 
the exploration and production facilities in the Gulf of Mexico were 
severely damaged or destroyed, the high-tech safety and environmental 
protection equipment and processes worked.
    Careful scientific environmental study and operational planning 
always precede OCS activity. For example, our offshore geophysical 
companies, which conduct seismic work that allows us to ``see'' 
geologic structures beneath the seabed, have worked with the National 
Marine Fisheries Service and MMS to implement many procedures and 
practices designed to avoid harm to marine mammals, including:
      Monitoring for the presence of animals of concern
      Shutdown or no start-up when they are too close
      Slow, gradual ramp-up of operations just in case
    During exploration, jack-up or semi-submersible rigs and drill 
ships have multiple systems and physical barriers to ensure that no 
spill occurs. Most important, along with multiple, redundant remote 
control systems, are ``blowout preventers'' which in deepwater are 
installed on the well at the seabed and are capable of immediate 
closure in event of any emergency.
    Also, a ``downhole safety valve'' in the well itself below the 
seabed provides an added protection barrier in the event of some 
catastrophic event.
    As a result of these safeguards, the offshore oil and gas industry 
has a laudable environmental record, as noted in the previously 
mentioned ``Oil in the Seas III'' NAS study, which finds that although 
the amount of oil produced and transported on the sea continues to 
rise, improved production technology and safety training of personnel 
have significantly reduced both blowouts and daily operational spills.
    The industry remains under intense scrutiny by its two primary 
regulators--the MMS and the U.S. Coast Guard--as well as a host of 
other governmental agencies with oversight responsibilities such as the 
Environmental Protection Agency and the National Oceanic and 
Atmospheric Administration. However, it is the MMS that regulates all 
exploration, development, and production activities on about 8,000 
active leases to ensure that these activities are conducted safely and 
in an environmentally sound manner. The MMS reviews and approves 
industry exploration and development plans before allowing any 
operations to commence, monitors all lease operations to ensure that 
industry is in compliance with relevant requirements, and conducts 
scheduled and unscheduled inspections. In 2008, MMS conducted over 
25,000 inspections of OCS facilities.
    To summarize, the latest technology and sound management practices 
not only allow for the continued production of domestic energy 
resources, but they have also made the U.S. offshore industry the envy 
of the world. Its environmental record is superb:
      Since 1985, more than 8 billion barrels of oil were 
produced in federal offshore waters with less than 0.001 percent 
spilled--a 99.999 percent record for clean operations.
      There has not been an incident involving a significant 
oil spill from a U.S. exploration and production platform in nearly 30 
years (since 1980).
      Government statistics show that the injury and illness 
rate for offshore workers is about 70 percent lower than for all of 
private industry.
      Today's modern technology includes such environmental 
protections as automatic subsea well shut-in devices, including sub-
seabed safety valves.
    As mentioned earlier, the industry's performance during the 2005 
hurricanes, which moved through a core area of offshore operations, is 
instructive. While it is true that 115 platforms were destroyed, the 
storm threatened over 3,000 facilities, the vast majority of which 
survived. Despite sustained winds reaching 170 miles per hour and 
towering waves and the resulting destruction of numerous platforms and 
rigs, there was no significant spill from production wells and no 
injury or loss of life among the 25,000--30,000 workers who are 
offshore at any given time.
    Because today's weather forecasting capabilities provide ample 
lead-time as storms approach, operators are able to follow routine 
shutdown and evacuation procedures. In the case of the Katrina, Rita, 
Gustav, and Ike hurricanes, 100% of oil production was shut-in ahead of 
the storms.
Conclusion
    The offshore oil and natural gas industry will continue to make 
advances in the development of new technologies, and to abide by the 
science-based regulatory processes which guide their operations. This 
innovation and adherence to scientific rigor will allow the industry to 
keep bringing reliable supplies of energy to market while also ensuring 
the safe and efficient management of the nation's energy resources.
    Thank you for allowing me to be here with you today.
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       Response to questions submitted for the record by Tom Fry

Answers to Questions from Chairman Jim Costa, from the State of 
        California
    1. Current statute dictates that any offshore oil and gas lease on 
which no production activity is taking place at the conclusion of the 
primary lease term must be returned to the Department of the Interior 
so that it may be re-leased in a subsequent sale. This is true for all 
leases, regardless of their length. As such, leaseholders currently 
operate under strict performance requirements which provide ample 
incentive to diligently develop leases or else return those leases to 
the government and lose all economic investment in the form of bonus 
bids, rental payments, and other data acquisition and lease development 
costs. Companies bear this economic risk from the outset of every lease 
acquisition, realizing they may not find sufficient quantities of 
economically recoverable resources and may have to relinquish the 
lease, often voluntarily before the expiration of the primary lease 
term. We have witnessed this very scenario most recently when several 
leases offshore Alaska in the Beaufort Sea were voluntarily returned to 
the government before their expiration upon regulatory, legal, and 
technological challenges proving too great to overcome. Amidst such 
circumstances, industry feels that sufficient performance requirements 
exist with regard to offshore oil and gas lease development.
    2. Requiring that leaseholders provide additional information to 
MMS with regard to the status of non-producing leases, even while 
providing that the information would only be published or disseminated 
by MMS in the aggregate and individual lease information would be 
treated as proprietary and confidential, may seem attractive in theory; 
however, its implementation in practice raises serious questions and 
concerns. Among these are the specific data that would be accumulated 
to provide this information; the methodology in defining various phases 
of ``non-production''; industry's role in developing such definitions; 
and the ultimate purpose in obtaining, and use of, such information. 
Answers to these and other questions would be helpful in determining 
industry's feelings on the larger issue.
    3. The notion of structuring offshore oil and gas lease terms 
according to resource ``prospectivity'' assumes that one is able to 
accurately predict, in a very detailed fashion, the amount of potential 
resources contained within a given lease. This is simply not possible; 
and furthermore, this notion seems to rely on the same faulty logic 
used to develop the so-called ``use it or lose it'' theory which 
Chairman Costa has criticized at numerous Committee hearings this year. 
Geologically speaking, there is no such thing as a ``common'' OCS 
lease. Natural gas and oil resources do not occur on all leases and are 
not always economically recoverable. Companies invest millions of 
dollars in hopes that a given area may hold significant resources 
without any way to verify their assumptions, short of investing 
additional resources on an exploratory well which also does not 
guarantee a positive economic outcome. While some states may use 
``prospectivity''--at least in part--to guide terms for onshore leases, 
operating in the deep waters of the OCS presents numerous technological 
and physical challenges on a scale which renders any comparison between 
the two operating environments moot. Namely, predicting resource 
potential a few hundred or thousand feet below the onshore surface is 
not comparable to predicting resource potential beneath, by way of 
example, 10,000 feet of water and another 20,000 feet below the ocean 
floor. For these reasons, it would be unwise to structure offshore oil 
and gas lease terms according to some definition of ``prospectivity'' 
which is inevitably theoretical in nature and not based on the 
realities of offshore lease development.
    With regard to the notion of structuring offshore lease terms based 
on proximity to existing infrastructure, one must again take into 
account the dramatic differences between operating in the deep waters 
of the OCS and on a traditional onshore lease. When considering the 
inherit challenges of producing in the offshore under current lease 
terms, one must view any further lease conditions with caution and 
prudence. Furthermore, no matter the presence or absence of existing 
infrastructure, leaseholders must still navigate the same pre-
production approval processes, and this significant component of the 
lease development timeline will remain unchanged.
    4. While being very careful not to paint all offshore lease 
development timelines with the same broad brush, it can be said that 
upon successfully bidding on a given offshore lease, companies may 
sometimes seek a vested interest in a nearby lease via partnership or 
purchase. As noted in the Inspector General's report, this practice is 
``common to mitigate the risk associated with lease development.'' This 
is not to say, however, that other development activities are not 
concurrently moving forward, such as the acquisition and interpretation 
of seismic and other geological data, or the gathering of specific 
environmental, archaeological, and biological information needed to 
obtain MMS approval to drill.
    5. When it comes to managing multiple uses of the OCS, NOIA firmly 
believes that existing processes governing oil and gas exploration and 
production have proven to be sufficient. Indeed, they ought to serve as 
the model for developing any additional offshore multiple-use planning. 
Further, we believe that any effort to complete a one-time, 
comprehensive assessment of all ocean resources might be misused to 
delay (and perhaps prevent) the expansion of offshore energy 
development.
    One of the principal assumptions behind the call for a 
comprehensive system of ocean zoning or marine spatial planning is that 
there is no coordination in the current management of the oceans. This 
could not be further from the truth.
    In designing the current regulatory system that governs the 
offshore development of energy resources, the writers of the Outer 
Continental Shelf Lands Act (OCSLA) anticipated that there would be a 
need for multiple uses to successfully coexist. For that reason, 
development of the 5-Year Leasing Plan, and every single exploration 
and development plan that stems from it, includes multiple public 
comment periods and an interagency sign-off. This allows for local 
communities to make their voices heard, for commercial and recreational 
fishermen to weigh in, and for the military to inform the decisions 
about the suitability of certain areas for energy development.
    In addition, the Coastal Zone Management Act (CZMA) requires 
coordination of offshore energy development with the coastal states 
that abut that development. Further, the National Environmental Policy 
Act (NEPA) mandates that new development must be compliant with other 
prevailing environmental regulations and be subject to scientific 
analysis.
    In its 2004 final report, the U.S. Commission on Ocean Policy 
stated that ``...the scope and comprehensiveness of the OCS oil and gas 
program can be a model for the management of a wide variety of offshore 
activities.'' (Page 356) If the current offshore energy regime should 
serve as a guide for any additional offshore multiple use planning 
efforts, the principal aspect that must be accommodated is flexibility 
and regular review as the cornerstone. The Interior Department did not 
conduct a one-time review of offshore resources; it conducts a new one 
every five years. In fact, that five-year review may be started anew at 
any point if the current leasing program is deemed to fall short of 
evolving national energy priorities.
    The reason for such regular reassessment is that our understanding 
of the resources in and below our oceans is constantly expanding. At 
the same time, our technological capacity to safely and economically 
harness those resources is perpetually improving. Today, wells are 
routinely drilled in water depths exceeding 5,000 feet, which would 
have been impossible just a decade ago. Likewise, a 1984 resource 
assessment conducted by the Minerals Management Service estimated there 
to be approximately 6 billion barrels of oil remaining beneath the Gulf 
of Mexico; today, even after 25 years of continuous, safe development, 
we now believe there to be an additional 45 billion untapped barrels of 
oil. Technology advances, often exponentially.
    With that in mind, it would be short-sighted at best to believe 
that we could adequately assess both the resources and our ability to 
safely harness them with only the information available at this moment 
in time. The same is true of fish stocks, recreational uses of the 
offshore, the nascent ocean renewable energy technologies, commercial 
shipping, subsea telecommunications, etc. Any attempt at planning for 
multiple uses of the complex ocean environment must, by its nature, be 
ongoing and adaptive. NOIA's concern is that ``comprehensive'' is 
really code for one-time, static planning that will cut the offshore 
energy industry out of future areas where they might safely and 
economically develop the energy resources the nation requires.
    6. Areas being included in a Final Five Year OCS Oil and Gas 
Leasing Program, with assurance that those areas would not be subject 
to a de-facto moratorium in the form of unnecessary regulatory delay or 
open-ended legal challenges, is sufficient incentive for industry to 
conduct pre-lease activities such as seismic surveys. As we have seen 
in the Western and Central Gulf of Mexico planning areas, when 
favorable conditions exist industry has, and will continue to, 
aggressively conduct seismic surveys. Similarly, MMS has already 
received significant interest from industry in conducting seismic 
surveys off the Atlantic coast in preparation for a possible lease sale 
offshore Virginia. When new areas are included in a Five Year Program 
with reasonable certainty as to their potential development, industry 
has proven their willingness to conduct seismic surveys at no cost to 
the taxpayer.
    7. NOIA does not maintain the detailed data sought by this 
question. As inferred in the question, MMS is the more appropriate 
source for such information.
    8. Yes, the industry has taken steps to reduce the impact of 
seismic surveys on whales and other marine life, and efforts are 
ongoing to continue to do so. For more than a quarter-century, the 
energy industry has sponsored and conducted research in the field of 
anthropogenic (human-generated) sound and its potential effects on 
marine mammals. The industry has significantly expanded its research 
effort with plans for a multi year global research program commenced in 
2006 with a budget projected in excess of $20 million. The energy 
industry is undertaking this effort because it recognizes that while 
much has been learned about marine mammals and anthropogenic sound, 
some gaps remain in our knowledge base. The industry will continue to 
be committed to developing a sound scientific understanding of our 
operations on marine mammals. In addition, the industry strongly 
supports the need for additional scientific investigation by 
government, academic and other stakeholders on marine sound and 
associated effects on marine mammals, at both the individual and 
population level.
    9. When discussing zero discharge operations, one must consider the 
many varying types of drilling operations currently used in the 
offshore. Different types of drillships, collection systems, and other 
operation facilities make it difficult to provide a single, uniform 
characterization as to the feasibility of requiring zero discharge 
operations in the U.S. Furthermore, companies within our membership may 
have differing opinions on this subject, precluding us from offering an 
industry-wide position.
    10. Generally speaking, rig availability is one factor, among many, 
impacting lease development. Other such factors include permitting 
bottlenecks, legal challenges, and limited access to leasable acreage.
    However, the existing fleet of offshore drilling rigs has 
successfully met current demand, and the industry is capable of meeting 
future demand. Over 100 new rigs are under construction globally, many 
of them for the deepwater, and many in Asian shipyards. However, 
significant domestic rig production is occurring in several Gulf state 
shipyards as well, including in Texas and Mississippi. Production 
platforms are also built domestically in the Gulf region, including in 
Texas and Louisiana. It is also noteworthy that components for rigs and 
platforms are manufactured in approximately 34 U.S. states.
    The Committee may be interested in contacting the International 
Association of Drilling Contractors for more detailed information 
regarding the precise number of rigs built in recent years and expected 
to be built in future years.
    11. The offshore oil and gas industry is required to comply with 
numerous federal statutes when conducting their operations, including 
both the Clean Air Act (CAA) and the Clean Water Act (CWA). NOIA is not 
aware of any exemptions to offshore operators with regard to the CWA or 
CAA.
    12. It is not readily apparent what the Inspector General means by 
``prioritize projects'' in the lease timeline chart on page 6 of their 
report. In terms of the chart's accuracy, it is obviously extremely 
difficult to characterize a ``typical'' offshore lease. However, charts 
such as this are useful in demonstrating that the offshore lease 
development process is filled with necessary pre-production activities, 
all of which accumulate significant costs to the leaseholder with no 
guarantee that economical resource quantities will ever be found.
    13. Industry faces many challenges in attempting to develop its 
offshore leases; and certainly workforce and infrastructure issues are 
among these. However, factors which play a far greater role in 
hampering offshore lease development include permitting bottlenecks, 
unreasonable legal challenges, and limited access to leasable acreage.
Answers to Questions from the Ranking Member Doug Lamborn, from the 
        State of Colorado
    1. In order for oil and gas to ultimately be produced from the 
offshore, the process must essentially go through four separate phases: 
development of a Five Year OCS Leasing Program, planning for a specific 
lease sale within that Program, preparation of an Exploration Plan, and 
finally the preparation of a Production Plan. During the course of 
these various phases, numerous separate environmental reviews are 
conducted, in addition to several public comment periods, state 
reviews, and other assessment periods.
    The five-year leasing program is subject to analysis under the 
National Environmental Policy Act of 1969 (NEPA), which requires 
comprehensive analyses of the environmental and socioeconomic impacts 
of potential activities. The Minerals Management Service (MMS) will use 
the highest level of review and documentation under NEPA, and the 
resultant the Environmental Impact Statement (EIS), to evaluate the 
five-year leasing program. It will identify any adverse environmental 
effects that cannot be avoided or mitigated, alternatives to the 
proposed action, the relationship between short-term resources and 
long-term productivity, and irreversible and irretrievable commitments 
of resources. This process also incorporates opportunities at several 
steps in the process for public and stakeholder review and comment.
    When planning for each specific lease sale within a given Five Year 
Program, MMS must conduct separate EIS reviews, as well as conduct 
state consistency reviews under the Coastal Zone Management Act (CZMA). 
The EIS for an individual lease sale focuses on the potential 
environmental effects on biological, physical, and socioeconomic 
environmental resources from oil and gas exploration, development, and 
production activities on the OCS. MMS may also gather supplemental 
environmental information apart from the EIS review, as was the case in 
a recent MMS-hosted workshop in Williamsburg, VA on the environmental 
research needs in support of potential Virginia offshore oil and gas 
activities. The focus of the workshop was on the existing scientific 
knowledge base along the Virginia coast and the information gaps that 
need to be addressed should a lease sale for oil and gas activities be 
held offshore Virginia.
    If the decision is made to conduct a given lease sale and leases 
are acquired, a company would then need to submit an exploration plan 
(EP) to MMS proposing to drill wells on specific sites. Upon acquiring 
a lease, any lessee who wants to drill an exploration well must submit 
an extensive EP application containing an array of environmental, 
monitoring, and mitigation information that must demonstrate to MMS 
that the proposed EP activities ``...do[es] not cause undue or serious 
harm or damage to the human, marine, or coastal environment.'' (See 30 
CFR 250.202, 250.212-228.) The MMS would review the EP to determine any 
potential impacts on the environment and ensure engineering safety. 
Affected States would also review the EP and determine its consistency 
with the State's coastal zone program. After all reviews, MMS would 
approve the EP, if acceptable. Other Federal agencies also review and 
issue permits for aspects of the activities. For example, the 
Environmental Protection Agency issues the water discharge permits.
    Before any development or production activities can begin, a 
development plan must be submitted to MMS for review and approval. 
Again, the proposed development plan must contain a full array of 
environmental, monitoring, and mitigation information that must 
demonstrate to MMS that the proposed activities do not harm the 
environment. Specific environmental, archaeological, and biological 
information must be submitted in support of the plans. The plans and 
supporting information are evaluated for seafloor or drilling hazards; 
air and water quality impacts; hydrocarbon resource conservation; 
appropriate mitigation of potential impacts; and compliance with NEPA, 
MMS operating regulations, and other requirements. Other Federal 
agencies and the designated coastal zone management agencies in 
Atlantic Coast states may take part in the review process.
    As previously mentioned, the CZMA also plays a prominent role in 
offshore energy development. Enacted in 1972, the CZMA created a 
national program intended to comprehensively manage and balance 
competing uses of, and impacts to, coastal resources. The CZMA's 
consistency provisions require the federal government to certify that 
its activities are consistent ``to the maximum extent practicable'' 
with the policies of a state's federally approved coastal management 
program. A federal agency is forbidden from granting a license or 
permit unless the state has determined that the activities are 
consistent with its plan, or unless the Secretary of Commerce elects to 
override the state's objections. Even with a secretarial override, the 
appeals process can take a significant amount of time. Commerce appeals 
have taken up to four years, and rulings have never been made in some 
cases.
    In addition to NEPA and CZMA, offshore oil and gas operators must 
abide by many other statutes, including the Clean Air Act, the Clean 
Water Act and the Marine Mammal Protection Act. Under the Clean Water 
Act, oil and gas operators must be granted a permit from the 
Environmental Protection Agency for possible discharges before drilling 
may be authorized by the MMS. EPA Region 6 issues a general National 
Pollutant Discharge Elimination System (NPDES) permit for discharges 
associated with offshore exploration facilities in the Gulf of Mexico. 
Over the years, there have been problems getting the permits issued in 
a timely manner and ensuring that there are not unnecessary 
restrictions placed on the permits.
    The Marine Mammal Protection Act (MMPA) was enacted in 1972 to 
protect and conserve marine mammal populations. The original Act 
established a moratorium on the taking or importing of marine mammals 
and marine mammal products except for certain activities which are 
regulated and permitted. The MMPA defines ``take'' as ``to harass, 
hunt, capture, or kill or attempt to harass, hunt, capture, or kill any 
marine mammal.'' Under the Act, the Secretary of the Interior has 
jurisdiction over sea otters, polar bears, manatees, dugongs, and 
walruses, while the Secretary of Commerce has jurisdiction over all 
other marine mammals.
    The MMPA was last amended in 1994 and a number of new provisions 
were added to the Act. Since the enactment of the 1994 amendments, 
lawsuits have hindered the agency's permitting process for scientific 
research, and the regulated communities have questioned the agencies' 
implementation of certain provisions in the Act.
    For decades, the offshore oil and gas industry has relied upon this 
deliberate, statutorily guided and public-driven process to reach 
science-based decisions which shape their operations; and will continue 
to do so as new innovations allow them to explore more areas.
    2. Geologically speaking, there is no such thing as a ``common'' 
OCS lease. Economically recoverable quantities of natural gas and oil 
do not occur on all leases. Companies invest millions of dollars in 
hopes that a given area may hold significant resources without any way 
to verify their assumptions, short of investing additional resources on 
an exploratory well which also does not guarantee a positive economic 
outcome.
    Said a bit more technically, an OCS lease is a regulatory 
designation that defines the boundaries where a leaseholder can explore 
for oil and natural gas; it has nothing to do with the underlying 
geology, which controls whether a particular lease contains oil or 
natural gas. Oil and gas explorers do not drill leases per se, they 
develop and drill exploration prospects within leases. Exploration 
prospects are based on geological conditions. And while a given 
petroleum basin may have some geological similarities, such as 
reservoir type, the specific geological conditions of a particular 
prospect make each prospect/lease different.
    3. Strong disincentives to avoid non-producing leases already exist 
as offshore leases are not open-ended in duration and rent is paid 
annually on leases to the federal Treasury (leases are for 5, 8, or 10 
year terms depending on water depth). If exploratory wells do not 
indicate economically recoverable resources and companies do not 
produce a given lease, they must relinquish the lease back to the 
federal government at the conclusion of the primary lease term. Often, 
companies voluntarily relinquish leases before the conclusion of the 
primary lease term, as recently witnessed in the Alaska OCS where 
several leases in the Beaufort Sea were voluntarily returned to the 
government upon regulatory, legal, and technological challenges proving 
too great to overcome. Amidst such circumstances, industry feels that 
sufficient performance requirements exist with regard to offshore oil 
and gas lease development.
Answers to Questions from Representative Dan Boren, from the State of 
        Oklahoma
    1. Oil and gas companies are not ``sitting'' on sizable acres worth 
of offshore leases, intentionally allowing them to remain ``inactive.'' 
In fact, there is no such thing as an ``inactive'' lease. All leases 
are under near constant review, whether environmental assessments are 
being conducted, permits are being secured, seismic data is being 
acquired or processed, the lease is undergoing appraisal, or other pre-
production processes are taking place.
    The notion of an ``inactive'' lease doesn't make business sense 
because companies must ensure an adequate return on shareholders' pre-
production investments. After investing millions of dollars in lease 
acquisition that includes an initial bonus payment and annual rental 
payments during the pre-production period, ``sitting'' on leases would 
mean companies are shirking their responsibilities to shareholders that 
all assets and capital expenditures are being utilized toward ultimate 
development and production to ensure an adequate return on that 
investment.
    Furthermore, the notion of ``inactive'' leases assumes that there 
are natural gas and/or oil resources on every lease and that all non-
producing leases represent untapped resource potential. This is clearly 
not the case, as exploring for oil and gas is not akin to planting 
crops on farmland. Natural gas and oil resources do not occur on all 
leases in economically recoverable quantities. Companies invest 
millions of dollars in hopes that a given area may hold significant 
resources without any way to verify their assumptions, short of 
investing additional resources on an exploratory well which also does 
not guarantee a positive economic outcome.
    Strong disincentives to avoid non-producing leases already exist as 
offshore leases are not open-ended in duration and rent is paid 
annually on leases to the federal Treasury (leases are for 5, 8, or 10 
year terms depending on water depth). If exploratory wells do not 
indicate economically recoverable resources and companies do not 
produce a given lease, they must relinquish the lease back to the 
federal government at the conclusion of the primary lease term.
    There is simply no evidence of any lack of diligence by the 
companies in pursuing the development of their lease holdings in the 
Gulf of Mexico. On the contrary, the development effort in the Gulf has 
been spectacular. 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 deep water have expanded by 620 and 535 percent, respectively 
(2006 data).
    2. Please see the response to question # 1 for a discussion on the 
so-called ``use it or lose it'' doctrine. Clear incentives already 
exist to actively develop offshore leases, and these results are 
demonstrated in the sizable contributions of the offshore toward our 
domestic oil and natural gas production. In 2007, the OCS accounted for 
27% of domestic oil production and 14% of domestic natural gas 
production.
    As the global economy recovers and energy demand continues to rise, 
we will need even more oil and gas. As noted in my testimony, witnesses 
from the U.S. Energy Information Administration and the International 
Energy Agency recently testified before this committee that we must 
face the fact that traditional fossil energy will continue to play the 
predominant role in meeting our energy needs for decades to come.
    The oil and gas industry can increasingly produce these resources 
here in America safely and cleanly, including from the OCS, if only 
given the chance. Yet, industry's access to OCS areas continues to be 
hindered. According to MMS, roughly only 2% of total OCS acreage 
(continental U.S. and Alaska) is currently leased; and roughly only 6% 
of OCS acreage within the continental U.S. is currently leased. Also, 
less than 15% of OCS acreage is even included for possible leasing in 
the current Five Year OCS Oil and Gas Leasing Program. In order to 
continue meeting rising demand for oil and gas, industry must be given 
increased access to new OCS areas that can be developed in an 
environmentally sensitive manner utilizing modern technological 
advancements.
                                 ______
                                 
    Mr. Costa. Thank you.
    Our last witness, and we will then begin the questioning, 
is Mr. James Farnsworth. He is the President of Cobalt 
International Energy. Mr. Farnsworth?

         STATEMENT OF JAMES W. FARNSWORTH, PRESIDENT, 
               COBALT INTERNATIONAL ENERGY, L.P.

    Mr. Farnsworth. Thank you, Mr. Chairman. I would like to 
spend just a few minutes talking about my experiences with the 
OCS.
    I have degrees in geology and geophysics, 28 years in the 
industry, and I work for Cobalt International Energy, a 
relatively new startup company. And prior to Cobalt, I worked 
for BP where I was responsible for their global exploration 
program. I became very familiar with the world's great 
hydrocarbon basins and also the fiscal terms of the different 
countries around the world.
    Within the U.S., my career has really centered on the OCS 
where I have been responsible for over 30 lease sales in the 
Gulf of Mexico, the East Coast and Alaska.
    Cobalt International Energy, which was formed in November 
2005, is a privately held company based in Houston, Texas, and 
founded by four seasoned executives, of which I am one. Our 
intent was to build a company with a unique business model and 
through access to great talent, the latest technology and 
sufficient capital, compete and succeed in some of the world's 
most technically challenging prospective areas and against some 
of the world's largest companies as well, all this with about 
50 or 60 people.
    The Gulf of Mexico is a key basin in our business model, 
and a well-established and stable OCS leasing process was 
essential to our success. From my experience, the deepwater 
Gulf of Mexico is one of the most technically challenging 
hydrocarbon basins in the world. It is highly complex, and to 
be successful requires scientific expertise and the disciplined 
application of the very latest technology. Above all, it 
requires a long-term, multi-decade commitment, and a lot of 
experience also helps.
    Since its inception in late 2005, Cobalt has hired 
approximately 50 employees, including world-class 
geoscientists, engineers and commercial experts. These people 
have both in-depth experience in the Gulf of Mexico and 
substantial experience in other basins around the world.
    Within the first year, Cobalt spent over $200 million on 
state-of-the-art seismic data and technology which was used to 
understand the geology of the Gulf of Mexico and then high-
grade specific areas which might have the potential for large 
oil and gas accumulations.
    This then allowed our experts to evaluate thousands of 
leases in deepwater Gulf of Mexico prior to bidding on only a 
small fraction. Over the past two years, Cobalt spent over $635 
million acquiring the rights on 142 leases and four separate, 
highly competitive, record-breaking OCS lease sales. We were 
amongst the top two or three bidders in terms of money spent 
and competitive bids won. This gives us nothing more than the 
right to explore on those leases. There is no guarantee of us 
finding oil and gas. This scientific, highly technical and 
costly endeavor is no place for guessing or dart boards.
    Earlier this year, three years after our inception, we and 
our partners completed drilling Cobalt's first two wells in 
over 5,000 feet of water. The first well cost over $100 
million; the second, well over $200 million. The average 
industry success rate on these types of prospects is less than 
one in three.
    Let me say this another way: We and our partners were 
prepared to invest over $300 million in these two wells alone 
with absolutely no guarantee of success. This is the nature of 
our business. We were very fortunate that those first two wells 
actually did discover big new oil fields.
    Cobalt and Partners will now begin additional seismic 
analysis and drill more wells in these discoveries in order to 
understand their size and commercial potential. This will 
likely take at least another two years to execute, and it is 
absolutely essential before committing to multi-billion-dollar 
developments.
    In addition, we will continue to test the rest of our 
inventory in the Gulf of Mexico and elsewhere in the world. In 
fact, we have committed to a brand-new deepwater floating rig, 
which will cost us approximately half a million dollars a day 
to operate and will work in up to 8,000 feet of water. The 
construction of this rig is expected to be completed and arrive 
in late 2010. That is five years after the founding of Cobalt 
and four years after acquisition of our first leases.
    In late 2005, when Cobalt was founded, the oil price was 
approximately $45 a barrel and, as you know, climbed up to over 
$140 a barrel. It is now back down to $40 a barrel. Our costs 
also went through the roof with rig rates, services and costs 
of steel more than doubling. These unfortunately have not yet 
come down.
    What also has increased has been the cost of leases. When 
we first started the company with leasing, the maximum cost was 
about a million dollars or so; now, recently, over $100 million 
per lease.
    But fluctuations in costs and price are something we are 
used to. What we are not used to and what we were not expecting 
were increased royalty rates and increases in lease rental 
costs. Those have gone up by nearly 50 percent in each case. We 
have always thought the complexity of the Gulf of Mexico and 
the technical challenges were offset by a stable environment, 
and now, after four years, we are finding that the physical 
environment is shifting on us.
    As you can appreciate, this process does not take 
overnight. It takes many, many years, but we are up for the 
challenge, and we are here to be successful, and what we are 
looking from the government is for a stable environment, a 
stable fiscal environment where we know the terms and know the 
timetable and we can participate in it.
    What you can expect from us from the industry is a very 
self-funded model, and we will compete. We will compete against 
the biggest companies in the world and other national oil 
companies, but having that stable environment is extremely 
important to us.
    Thank you for your time this morning. I deeply appreciate 
it.
    [The prepared statement of Mr. Farnsworth follows:]

Statement of James Farnsworth, President and Chief Exploration Officer, 
                   Cobalt International Energy, L.P.

    Mr. Chairman and Committee Representatives:
    Thank you for the opportunity to be with you this morning to 
discuss the leasing and development of oil and natural gas resources on 
the U.S. Outer Continental Shelf.
    My name is Jim Farnsworth. I'm President and Chief Exploration 
Officer of Cobalt International Energy, L.P. My degrees are in Geology 
and Geophysics and I have 28 years of experience in the Energy field. 
Prior to Cobalt, I worked for BP where I was responsible for their 
world-wide Exploration business. During that time, I became familiar 
with the geologic complexity of many of the world's petroleum 
provinces, and also their fiscal and tax regimes. Within the U.S. my 
career has centered on the OCS, participating in over 30 Lease Sales 
and the drilling of many wells in The Gulf of Mexico, Alaska and 
Atlantic East Coast.
    In my brief remarks this morning I would like to cover three 
things: First, I would like to give you an overview of Cobalt, a 
relatively new start-up. I'll do this only to provide some context and 
insights into the offshore leasing and exploration process; second, 
give some insight into the significant challenges and risks we face 
(financial, geological, technical, and commercial) in exploring for and 
then developing hydrocarbons in the deepwater Gulf of Mexico; and 
finally the importance of creating a comprehensive energy strategy for 
the OCS.
    Cobalt International Energy, which was formed in November 2005, is 
a privately held company, headquartered in Houston, Texas and founded 
by four seasoned internationally experienced industry executives, of 
which I'm one. Our intent was to build a company with a unique business 
model and through access to great talent, the latest technology and 
sufficient capital, compete and succeed in some of the most technically 
challenging and prospective areas in the world, and against some of the 
world's largest companies. All with about 50-60 people.
    The Gulf of Mexico is a key basin in this business model and a well 
established and stable OCS leasing process was essential for our 
success. From my experience, the deepwater Gulf of Mexico is one of the 
most technically challenging hydrocarbon basins in the world. It is 
highly complex and to be successful requires scientific expertise and 
the disciplined application of the very latest technology. Above all it 
requires a long-term, multi-decade commitment. Many years of experience 
also helps.
    Since its inception in late 2005 Cobalt has hired approximately 50 
employees, including world-class geoscientists, engineers and 
commercial experts. These people have both in-depth experience in the 
Gulf of Mexico and substantial experience in other basins and oil and 
gas projects around the world. Within the first year, Cobalt spent over 
$200 million on state of the art seismic data and technology, which 
we've used to understand the geology of the Gulf of Mexico and high-
grade specific areas which might have the potential for large oil and 
gas accumulations.
    This allowed our experts to evaluate thousands of leases in the 
deepwater Gulf of Mexico prior to bidding on only a small fraction. 
Over the past two years, Cobalt has spent over $635 million acquiring 
the rights on over 140 leases at four separate, highly competitive, 
record breaking OCS Lease Sales. We were amongst the top 2-3 bidders in 
terms of money spent and competitive bids won. This gives us nothing 
more than the right to explore on those leases. There is no guarantee 
of finding any oil or gas. This scientific, highly technical and costly 
endeavor is no place for guessing or dart boards.
    Earlier this year, three years after our inception, we and our 
partners completed drilling Cobalt's first two wells in over 5000 feet 
of water. The first well cost over $100 million, the second, well over 
$200 million. The average industry success rate for these type of 
prospects is less than one success in three attempts., Let me say this 
another way, we and our partners were prepared to invest over $300 
million on these two wells alone with absolutely no guarantee of 
success. This is the nature of our business. We were very fortunate in 
that both wells resulted in significant new oil discoveries.
    Cobalt and Partners will now begin additional seismic analysis and 
drill more wells on these discoveries in order to understand their size 
and commercial potential. This will likely take at least another two 
years to execute and is absolutely essential before committing to 
multi-billion dollar developments of the new discoveries. In addition 
we will continue to test our inventory of other exploration 
opportunities both in the Gulf of Mexico and elsewhere in the world. In 
fact a new 5th generation floating deepwater rig is being built now for 
Cobalt's use. The rig will be capable of operating in 8000 feet of 
water and drill wells 6 miles deep at a cost of over $500,000 a day. 
The construction of the rig is expected to be completed and arrive for 
Cobalt's use in the Gulf of Mexico in late 2010, five years after the 
founding of Cobalt and four years after acquisition of our first 
leases.
    In late 2005 when Cobalt was founded, the oil price was 
approximately $45/bbl, pretty close to today's price. As you know, oil 
prices climbed briefly to over $140/bbl and back down again to the $30-
$40/bbl level. Our costs also went through the roof, with rig rates, 
services, and costs of steel more than doubling. These unfortunately 
have not yet followed the oil prices down. The cost of offshore leases 
also increased substantially with high bids escalating from a few 
million dollars to in some cases over $100 million dollars. Tomorrow 
there will be another Gulf of Mexico lease sale and it will be 
interesting to see the level of interest by industry.
    Fluctuations in prices and costs are something we in the industry 
have come to expect and have learned to manage. What has taken us by 
surprise however, is the change in fiscal terms in the United States. 
For us, the high cost and technical complexity of the Gulf of Mexico 
was off-set by a stable tax and royalty system. Since 2005 when Cobalt 
was founded and we began investing over $1 billion dollars, Federal 
royalty rates in the offshore have increased by 50%, and lease rental 
costs have increased by 47%. This increase has occurred despite the 
fact that oil prices have reverted back to 2005 levels. Additional 
taxes and fees are now being considered to add even more burden to 
companies that are trying to find new oil and gas fields here in the 
U.S.
    As you can appreciate, the process I have just described does not 
take place overnight. On average, starting from seismic acquisition 
through discovery, appraisal and development, to first production, can 
take 7-10 years in the deepwater Gulf of Mexico. Thus it's important 
that the lease duration fully reflects and supports the ability for the 
industry to successfully implement the exploration discovery to 
production process. It is Cobalt's view that the current leasing 
process is working.
    Our actions confirm that Cobalt and the industry are keenly 
interested in domestic offshore oil and gas exploration and development 
opportunities. Currently only a very small proportion of the OCS is 
available for leasing. We strongly support additional area-wide opening 
of the OCS, including the Atlantic East Coast. This approach in the 
Gulf of Mexico has been remarkably successful for the United States.
    The Federal Government's scientific assessment suggests that there 
are 86 billion barrels of oil and 420 trillion cubic feet of natural 
gas that is undiscovered and technically recoverable on the federal 
OCS. What the study doesn't provide of course is the precise location 
of these prospective resources. That would require enormous work and 
investment, just as it has in the deepwater Gulf of Mexico and other 
basins in the world.
    While we really don't know the true potential, with close to 30 
years in this industry, I would assert the assessment will probably 
prove to be conservative. The Energy Information Administration has 
observed that ``the estimate of ultimate recovery increases over time 
for most reservoirs, for the vast majority of fields, all regions, all 
countries, and the world.'' This is not because the initial assessments 
were flawed. Rather it is because as we explore and develop oil and 
natural gas resources, our knowledge of the subsurface improves, which 
leads to better geologic models, new technologies and new exploration 
ideas.
    This point is emphasized as we look back at the hydrocarbon 
exploration and development history of the Gulf of Mexico. Initially, 
the focus was the shelf in relatively shallow water. We then moved to 
the deeper water, but with the objective of tapping geological 
reservoirs that were still relatively shallow. We have now progressed 
to exploring in the deepwater, looking for hydrocarbon reservoirs some 
30,000 to 35,000 feet deep, below huge salt canopies that distort our 
ability to accurately target the objectives.
    The U.S. offshore oil and gas industry has and continues to be a 
significant economic driver creating both direct and indirect benefits. 
These range from the development of skilled jobs here at home, the 
continual supply of goods and services needed by the industry, taxes 
and royalties paid, to capital expenditures on the order of billions of 
dollars.
    The U.S. oil and gas offshore industry has a tremendous track 
record in the application of science to exploration, development and 
production of hydrocarbons. Through the continuous development and 
implementation of new technology (most of it developed in the U.S.) 
coupled with the rigorous environmental and safety standards of the 
federal government, our industry is well positioned to prove the 
potential resource base in those areas now restricted in the OCS. If 
successful, I'm convinced this would result in new sources of domestic 
supply.
    It is Cobalt's view that through a consultative process with 
industry, the key areas of the OCS where the potential is greatest 
could be refined. This must be driven by geological and geophysical 
analysis. Some of these resources will be far from shore, others will 
be closer in. But scientific understanding should guide this process, 
so that the nation's resources are developed most efficiently for the 
benefit of its people.
    It will take a partnership to create new domestic supply.
    The oil and gas industry will look to the government to do its 
part; creating a comprehensive and diversified energy strategy. Further 
investment and new supply can be encouraged by an energy policy which 
combines new access opportunities, efficiency, conservation and stable 
and competitive fiscal and royalty terms.
    The oil and gas industry will do our part. In our risky, capital 
intensive business, the government can look to our ``self funded'' 
industry to continue to invest in new technology to safely, 
environmentally and efficiently explore, develop, and produce 
additional energy in new and existing domestic offshore basins.
    On behalf of Cobalt International Energy, L.P., I would like to 
thank you for the opportunity to participate in this very important 
hearing.
                                 ______
                                 

 Response to questions submitted for the record by James W. Farnsworth

Questions from Chairman Jim Costa, from the State of California
1.  Mr. Farnsworth, the report by the Inspector General's office points 
        out that the 8-year offshore lease is the only case of a 
        federal oil and gas lease that has a specific performance 
        requirement prior to the end of the primary term of the lease, 
        in this case the lessee is required to drill a well in the 
        first five years of the lease. Mr. Farnsworth, what is the 
        industry's opinion on the performance requirement in the 8-year 
        leases? Did the industry object to the establishment of the 8-
        year leases with the current performance requirement? Would the 
        industry object to including similar performance requirements 
        in other leases, particularly if those requirements were 
        coupled with an overall longer primary lease term?
    The performance requirement of the 8 year lease is the drilling of 
a well within the first 5 years.
    While I cannot speak for industry, in my opinion, the 8 (5+3) year 
lease initially was established as an effective compromise between the 
5 years for shallow water and 10 years for deep water when shallow, 
lower cost prospects were being targeted for exploration by industry. 
Those shallow prospects have now largely been drilled. What remains to 
be explored are much deeper (30,000 plus ft.) and much more complex 
sub-salt deep Miocene and Lower Tertiary prospects. Because of the 
higher cost and complexity of these prospects, the current form 8 year 
leases have become much less effective in attracting industry interest 
and multiple competitive high bids and thus exploration activity.
    The performance requirement to drill within 5 years requires an 
operator to: 1) put together a multi-block partnership, 2) complete the 
time consuming acquisition and processing of depth seismic data, 3) 
procure an acceptable heavy duty deepwater rig and 4) drill a well in 
the first 5 years. Extending this performance requirement condition to 
the rest of deep water would have an immediate negative impact on the 
industry's interest in these leases, the value companies would place on 
leases in the deepwater Gulf of Mexico and thus bid levels would 
decrease, and finally the number of exploration wells would fall.
2.  Mr. Farnsworth, at our March 24th hearing, three witnesses, 
        including a witness invited by the minority, expressed their 
        desire to see a ``zero-discharge'' policy applied to U.S. 
        offshore operations. One witness testified that this was now a 
        requirement imposed by the Norwegian government for operations 
        offshore of their country. What sort of additional effort would 
        be required by the U.S. industry in order to implement zero-
        discharge operations? Would the industry be able to comply with 
        such a requirement if it was made a condition of being able to 
        operate in a frontier OCS area?
    It is important to understand that the Norwegian zero discharge 
policy is not a true total prohibition on any and all overboard 
discharges; but a policy aimed at reducing the amounts of oil and 
environmentally hazardous chemicals discharged during the course of 
normal exploration & production activities on the Norwegian continental 
shelf. The term ``zero discharge'' was introduced in a white paper 
1 on environmental policy for sustainable development around 
2003 and has since been refined into a more precise definition.
---------------------------------------------------------------------------
    \1\ Storting White Paper No. 25 (2002-2003) The Environmental 
Policy of the Government and the State of the Environment in Norway.
---------------------------------------------------------------------------
    Based upon our examination of the legislative record and literature 
the U.S. EPA, in general, already sets zero discharge limits and 
prohibits the discharge of oil, oil-based drilling fluids, and certain 
chemicals (such as produced sand, water and drilling wastes) 
demonstrated to be toxic to the marine environment. Offshore operations 
in frontier areas typically tend to deploy newer, state-of-the-art 
technologies that incorporate the latest environmental protection 
safeguards and as a result do not generally have undo difficulty in 
meeting current requirements.
Questions from the Ranking Member Doug Lamborn, from the State of 
        Colorado
1.  You have been working in the deepwater of the OCS for a number of 
        years now, can you explain to this committee the difference in 
        the technology since say 1990? What was the major cause for the 
        advances in the technology?
    Over the past 20 years, there have been several important 
technological advances in the offshore. I'll mention only 3. The 
enormous improvement in seismic imaging (the ability to ``see'' into 
the earth) is closely tied to the advances in computing power and 
computational algorithms. Many of the most powerful computers on earth 
are used in industry exclusively for seismic imaging of the earth. Just 
as in medical imaging technology, the imaging of the earth has made it 
possible to ``see'' into the earth with greater clarity, depth and 
detail. The result has been the identification of new areas and targets 
for hydrocarbon exploration that had never been tested or conceived of 
before. Closely associated with these advances have been huge advances 
in deepwater drilling technology. Not simply to greater water depths, 
but much deeper depths in the earth. Twenty years ago, drilling in 
3000-4000 ft. water depths was considered extreme and the industry only 
dreamt of drilling beyond 5000 ft. of water. Wells are now being 
drilled in 10,000 ft of water. Suggestions of drilling wells to depths 
of 30,000-35,000 ft. were considered laughable. Now this is almost 
becoming routine. Lastly is the design and deployment of deepwater 
production platforms that ``float'' in the ocean at great depths, are 
located hundreds of miles from shore and safely produce oil and gas. 
These complex and often enormous facilities use the latest metallurgy, 
satellite positioning, and state of the art marine, safety and 
environmental engineering.
2.  Cobalt operates not just in U.S. waters correct? What is the 
        business climate like in some of the other countries that you 
        have worked in? Do any of those countries limit access to the 
        OCS the way America does? Given a choice, would you rather work 
        in the U.S. or overseas?
    The business climate varies tremendously outside the United States 
and hence it's difficult to generalize. In deciding where to explore, 
most companies consider several factors including 1) the hydrocarbon 
resource potential and technical risk (could there be a lot of 
recoverable oil and gas?), 2) the commercial terms (what are the costs 
and how is the value of what is discovered and produced split between 
government and industry?) and 3) the commercial or political risks (is 
the country stable and will they stand behind their agreements and 
contracts?). We evaluate all opportunities, including those within the 
U.S., using these criteria. Most companies choose to work both in the 
U.S. and elsewhere to balance their technical and commercial risks. The 
U.S. is the most heavily drilled country in the world and hence the 
discovery sizes tend to be smaller than in other countries. This is 
off-set by a more stable political climate and until recently, a more 
consistent royalty and tax regime. I would prefer to work in the U.S., 
but in the end the industry will invest where the opportunities exist 
to profitably find and produce oil and gas. There is a global 
competition by countries to attract quality companies to find and 
produce their oil and gas, and a global competition by companies for 
the ``best'' opportunities in the world.
3.  On March 18th MMS held a lease sale in New Orleans where the 181 
        south area will be offered for lease for the first time in more 
        than 20 years. I was wondering if you were hired to do work in 
        this area what kind of timeline would you foresee for 
        development from lease to production?
    Given the remote location, the extreme water depths and my view of 
the technical risks, I would foresee a time-scale of 7-10 years. This 
assumes no delays due to environmental permits, availability of seismic 
vessels, or deepwater rigs.
4.  Geologically speaking, is there such a thing as a ``common'' OCS 
        lease?
    Each lease, or from a geological perspective, each exploration 
prospect is unique. Even though there are trends of similar geological 
characteristics within most petroleum basins, these trends represent 
only high level similarities, such as sandstone reservoirs or carbonate 
reservoirs.
    Geological variations, ranging from sea floor conditions, which 
dictate facility design, to variations in reservoir characteristics, 
which dictate well design, make each lease/prospect different.
    An OCS lease is a regulatory construct, a series of lines on a map 
that define the areal boundaries of where a leaseholder is able to 
explore. As such, it has nothing to do with the underlying geology, 
which controls whether a particular lease contains oil or natural gas.
    When an exploration company bids on a lease, it has typically made 
an initial assessment of the underlying geology and determined based on 
that assessment that the probability of finding oil and gas there is 
high enough to warrant submitting a bid. It is pursuing an exploration 
concept. There is no guarantee that the concept will work, and that 
they will find oil and natural gas on a particular lease. Finding 
petroleum requires drilling at least one exploration well in the area. 
That is the only way to determine whether for certain leases contain 
oil and natural gas.
    If the exploration concept works, and the exploration well 
discovers commercial quantities of hydrocarbons, the process of field 
development begins. A designation by MMS of an oil or natural gas 
field, and the approval to produce the petroleum contained therein, is 
a regulatory boundary with geological significance.
    But if the company does not find oil and natural gas during their 
exploration program, that doesn't necessarily mean that the lease is 
barren. It means that the exploration concept didn't work. The data 
obtained during the exploration phase may enable the company to refine 
its exploration idea, or to try a different idea with a future 
exploration well. Or they relinquish the lease, and subsequent 
exploration companies try a different exploration concept.
    There is a misperception that all oil and natural gas leases 
contain petroleum, and that if companies would just ``drill the 
leases'' we would find the oil and natural gas contained therein. The 
exploration process is actually based on the scientific method: 
developing a hypothesis and then testing that hypothesis. It is reliant 
on scientific and technical advances. Each region of the OCS and in 
fact each lease block has geologic variability that determines whether 
it contains oil and natural gas.
Questions from Representative Dan Boren, from the State of Oklahoma
1.  You already have 68 million acres you are sitting on. Please tell 
        us why we would give you more access to acreage.
    The industry does not ``sit'' on its leases, nor were we ``given'' 
acreage. In fact, Cobalt paid the Federal government over $630 million 
to acquire leases over the past two years. The last thing we or our 
investors wish to do is sit or delay activity on leases and the 
investments we've made. Cobalt and the entire industry make money by 
efficiently exploring, developing and producing from leases. We spend 
an enormous amount of time and money after we've acquired the leases, 
evaluating their potential through the use of seismic and geologic 
technology prior to drilling. The analysis of the data helps to better 
define the areas that are most likely to contain oil or gas. Despite 
our investment, most of our leases will in the end not contain oil and 
gas. Oil and gas fields are quite rare and difficult to find. Sometimes 
after drilling we find that our ideas were wrong and that we have to 
look elsewhere, either on existing leases or on un-leased areas. 
Regardless of whether or not we find oil and gas, to retain the leases 
Cobalt will also pay to the U.S. Government approximately $5.6 million 
each year in lease rentals. Not progressing work on these leases is 
like continuing to pay rent on an empty house or commercial building. 
It adds absolutely no value.
2.  Many of my colleagues assert that the oil and gas industry already 
        has access to a vast amount of acreage of the OCS, but you have 
        developed only a fraction of it and thus no new leasing is 
        necessary until those leases have been utilized, the so called 
        ``use it or lose it'' doctrine. So why does your industry need 
        more leases when you haven't developed the ones you already 
        have?
    The MMS estimates that only about 15% of the OCS is currently 
available for leasing. Of this only a tiny fraction will actually 
contain oil and gas. Areas are leased because one of the dozens of 
exploration companies thinks it ``may'' contain oil and gas. Many turn 
out to be wrong. No one knows until much more technical evaluation and 
possibly drilling is completed. The most compelling reason to offer 
more leases is simply because it offers the country the best 
opportunity to find substantial new oil and gas resources. Science, 
geology and technology should lead in identifying where leasing and 
drilling should be done. I'm convinced the industry can safely and 
efficiently find and produce significant new resources if leasing is 
expanded. Every barrel of oil we can find in the U.S. means one less 
barrel that will need to be shipped across the oceans in tankers and 
imported into the U.S.
                                 ______
                                 
    Mr. Costa. Thank you, Mr. Farnsworth.
    We are now at the part that I think most of the 
Subcommittee Members look forward to, and that is an 
opportunity to question our witnesses and make comments.
    Let me begin. Mr. Rusco and Ms. Kendall, in your testimony 
and reading the GAO Report, I was struck by the differences 
between the Minerals Management Service's process for leasing 
and the Bureau of Land Management and the more methodical 
seemingly at least from the layperson's perspective, that being 
mine, the more comprehensive and methodical system on offshore 
as opposed to onshore.
    Would you care, both of you, to comment as to whether or 
not you think we ought to maybe put them all under one agency 
or whether or not we should employ the same sort of process 
that MMS uses with BLM?
    Ms. Kendall. I think that there certainly are some 
economies of scale that could be had, whether it is putting 
them all under one or having the bureaus work together in 
several areas. I agree with you that the MMS leasing process is 
much more methodical, much more well thought out.
    Mr. Costa. More comprehensive?
    Ms. Kendall. And more comprehensive, yes, sir. I believe 
that with the recent----
    Mr. Costa. I mean, why couldn't they be done by one? We 
might even save some money.
    Ms. Kendall. I do not know that there is a reason.
    Mr. Costa. OK. Because it is my understanding, I spoke 
actually with Secretary Salazar, and he is looking at this, 
after the State of the Union, and for Members of the 
Subcommittee's information, this was actually created 
organically as I understand but not by statute, and so this 
bears more looking.
    Mr. Rusco, could you care to comment?
    Mr. Rusco. Yes. I agree with what Ms. Kendall said in 
general. There seem to be differences in the way that MMS and 
BLM manage leases that have more to do with historical accident 
or bureau culture than sort of a comprehensive plan to manage 
the resources, and that is why what we have called for is for 
Interior to undertake a comprehensive review of how it is going 
to manage these resources, and if that leads to different 
practices onshore than offshore, some of those are likely 
warranted. But we would just like to have some assurance that 
if there are going to be differences in the way these leases 
are managed, that it is a reasoned decision and one that has 
been given enough due diligence.
    Mr. Costa. And so both of you basically have indicated that 
in terms of a more predictable and transparent process that we 
could do a lot more in standardization, using computer modeling 
as well.
    Ms. Kendall. I think certainly in our most recent review, 
we found a number of areas where they use inconsistent terms, 
they measure things differently, one bureau from the other. So 
getting together so at least you have consistent measurement, 
consistent management and consistent oversight would certainly 
go a long way.
    Mr. Costa. Thank you. We want to explore that further, but 
before my time is up, Mr. Oynes, you indicated on the lease 
provisions that you cited last year the striking difference 
between different leases that were bid on in Alaska and other 
parts that were made available. Could you cite off the top of 
your head the extreme differences on what the successful bids 
were?
    Mr. Oynes. I do not remember the successful bids, but we 
did have a very successful sale in the Chukchi Sea in Alaska 
last year. It was a record-setting sale.
    Mr. Costa. As much as over a billion dollars or more?
    Mr. Oynes. It was over $2 billion.
    Mr. Costa. That is what I thought.
    Mr. Oynes. Yes.
    Mr. Costa. And, of course, some leases were down in the 
hundreds of millions of dollars and less, right?
    Mr. Oynes. Right. That is correct.
    Mr. Costa. And what does that tell you? I mean, what would 
that tell me as the layperson? Some leases are more valuable 
than others?
    Mr. Oynes. Well, some have more prospectivity as to whether 
the hydrocarbons are there and whether there are more 
significant accumulations. Until you do drill, though, it is 
not known.
    Mr. Costa. Right. No, I understand that. Because my time is 
limited, I would like to get to Mr. Farnsworth on that point, 
and it gets back to what I think is nonsensical about ``Drill, 
Baby, Drill'' or ``Use It or Lose It.'' I could be humorous 
here, but I will not.
    My time is up, but, please, both of you, take a crack at 
this. We want to incentivize this balanced portfolio that you 
have heard me speak of, but yet the New York Times article that 
came out--that I hope most of you saw--talks about how as oil 
and gas prices plunge, the frenzy of drilling ends. There are 
various citations in there by some of your cohorts that 
indicate that one company, Devon, has gone from a 35-rig count 
down to eight. It talks about the ratcheting back down.
    And, I mean, I guess you could make more leases available, 
as we did with this most recent lease that my colleague from 
Colorado cited, but nonetheless, which begs the question, back 
last fall, a lot of it is determined by market prices. So how 
do we incentivize you if we want to get a better balance and 
less dependency on foreign sources of oil and gas, in 
particular if in fact the prices have plummeted and there is 
less incentive for you folks to take availability because of 
market forces of that resource that is there? Do you understand 
the question?
    Mr. Farnsworth. I think I do. Let me give it a shot.
    You referenced the companies dropping rigs, Devon in 
particular. I am pretty sure that most of those rigs they were 
talking about were actually onshore where they are drilling 
gas. In the deep water offshore, because of the long duration 
of the time from exploration to development and production, we 
have not seen any decrease in deepwater rigs because of the 
long-term commitment to that region.
    So I think the incentives in the deep water and the OCS are 
well in place. Despite the collapse of oil prices, we have not 
seen companies pick up and move their rigs elsewhere because 
the Gulf of Mexico is a robust basin and the terms are 
sufficient to attract capital there.
    Mr. Costa. So your point is it is more in marginal leases.
    Mr. Fry, you want to make a comment?
    Mr. Fry. Yes, Mr. Chairman. I agree with Mr. Farnsworth. 
The thing about the Gulf of Mexico we have to remember, though, 
is it is a mature basin. It has been there for many, many 
years, like some of the leases that you have in your district 
that have been there for over 100 years producing.
    Mr. Costa. Yes.
    Mr. Fry. There are new areas that are being looked at, but 
it is because of technology. The technology has taken us into 
the deeper water, into more harsh environments. So there were 
incentives that got people into those areas, but there is going 
to come a point where no matter how much we continue to work 
the Gulf of Mexico we are not going to be able to replace what 
is currently coming out of there.
    So part of the incentive would be to look at some other 
areas. We do not say you ought to drill everywhere, but I think 
you have to look at some other places, some other places where 
prospects are.
    Mr. Costa. I want to get back to that, but my time has 
expired. The gentleman from Colorado, the Ranking Member, Mr. 
Lamborn.
    Mr. Lamborn. Thank you, Mr. Chairman.
    Mr. Oynes, there was some discussion that we need a 
comprehensive inventory of the OCS before we act on leasing in 
new areas, but in Section 357 of the Energy Policy Act of 2005, 
Congress directed the Secretary of the Interior to provide a 
report titled Comprehensive Inventory of OCS Oil and Natural 
Gas Resources. This document was completed in February 2006 and 
is a collection of assessments completed over the years by the 
MMS and the U.S. Geological Survey. No new government-sponsored 
geological or geophysical data acquisition was undertaken in 
this inventory.
    What would be the cost if government created a 
comprehensive inventory of the OCS using geological and 
geophysical data? How long would it take, and in your opinion, 
does MMS have the resources to create this type of inventory?
    Mr. Oynes. Thank you for the question. I think I would be 
better serving the Committee if I could provide a more detailed 
answer to that question.
    Certainly it would depend a lot on what is the extent of 
the area that you are trying to do this assessment over. As an 
example, if you are trying to do it over the entire OCS, you 
are talking probably several hundred millions of dollars to 
acquire new seismic data in that kind of range of area. It 
would also depend on how extensive, how close, the line 
shooting is for the seismic. Again, it would just depend on a 
lot of variables. So I guess I would prefer to provide that 
kind of more finite estimate to the Committee later.
    Mr. Lamborn. Well, I can understand that. Take a crack if 
you would at the timeframe that would be involved because time 
is critical when we are talking about energy.
    Mr. Oynes. I think, first of all, if you are trying to do 
the entire OCS, you would potentially run into a question of 
lack of seismic vessels that would impede the timing; that is, 
you would have to do this over a pretty good number of years in 
order to acquire that kind of data for an extensive area like 
that. Again, it would depend on the scope of what you would 
initiate.
    Mr. Lamborn. So a pretty good number of years.
    Mr. Oynes. Probably three to five at minimum, probably 
three to five at minimum, again, if you are talking the entire 
area.
    Mr. Lamborn. OK. OK. Thank you.
    Now, Mr. Fry, you just heard the answer from Mr. Oynes. A 
common refrain we seem to be hearing from both sides of the 
debate is that we need more information in terms of what 
potential resources are out there. Is a government-funded 
inventory with the timeframe and the cost that you just heard 
him take a stab at the most cost-effective and efficient way to 
determine the best-possible areas for further exploration in 
the OCS?
    Mr. Fry. I do not believe that having government do it is 
the most efficient way. The situation with the lease sale that 
is taking place tomorrow, 208, once that area was opened for 
leasing by the Congress and people knew there was going to be a 
lease sale, the companies went in and spent the money to get 
that geophysical work done. The same thing would happen in 
other areas if those areas were open for potential leasing. You 
could have industry pay for the whole thing and it would not 
cost taxpayers a penny.
    Mr. Lamborn. OK. Thank you.
    Mr. Oynes, back to you. In January, the MMS submitted a 
notice of intent to begin an environmental impact statement for 
seismic activity in the Atlantic. The notice specifies that, if 
started in early 2009, then the EIS would be completed in late 
2010, which would open the door for private companies to submit 
applications for seismic inventories in the Atlantic. Can you 
give the Committee an update on this EIS? Also, will funding be 
available, and in your estimation, if we begin the EIS soon, 
could it be completed by 2010?
    Mr. Oynes. Thank you for the question. The update is that 
MMS just finished closing or will be closing here in the next 
couple of days the comment period on that notice of intent. We 
had a 60-day comment period. So we are waiting first of all for 
that.
    Second, as we indicated in the notice, the Federal Register 
notice, MMS does not currently have the funding to do that EIS, 
so we are considering whether there are other options for other 
sources of potential funding for that for preparation of that 
environmental impact statement. It would probably be again 
very, very late 2010 before such a document could be done, but 
if the decisions were made somewhat shortly, I believe we could 
have it done by that time.
    Mr. Lamborn. I will reserve any further questions for 
another round. Thank you.
    Mr. Costa. Thank you. Next is the gentleman from New 
Jersey, Mr. Holt.
    Mr. Holt. Thank you. Thank you, Mr. Chairman.
    Mr. Oynes, let me first turn to a question on a different 
subject. It was announced today that there is an agreement in 
principle between Interior and FERC to work on permitting 
renewable energy in offshore waters. The conflicting or 
mismatched jurisdictions there have certainly put a lot of 
uncertainty into that development, and so I am interested to 
know what this actually means. How soon do you expect there 
will be working groups? When will we see these mismatched 
jurisdictions resolved?
    Mr. Oynes. I think you will see that resolved relatively 
shortly. I would like to be able to talk with the Secretary as 
to what kind of discussions he has already had with FERC before 
I would get more specific than that. I know that he and the 
acting chairman have had some discussions, and certainly I am 
anticipating that the two staffs of FERC and the MMS and the 
Department of the Interior will be put together very, very soon 
to conclude an agreement on this.
    Mr. Holt. OK. Well, I will watch, more than watch, with 
interest.
    Mr. Fry, the question of the day and the question I keep 
getting from folks back home has to do with what are regarded 
as unused leases or oil companies sitting on leases for eight 
years and finally getting around to doing something or 
prospectors, oil companies, spending their lease time buying 
other leases, neighboring leases, working out agreements and so 
forth.
    The GAO Report indicates that only about a quarter of the 
leases in the OCS ever get drilled, and I am trying to 
understand why that is. The question I get from back home is, 
``Why are we talking about more leases?'' There are millions 
and millions of acres out there that never see a drill bit. Is 
it technology barriers? I mean, you have the lease, and you are 
just not quite sure how to drill it? Mr. Farnsworth's high-tech 
folks have not shown up yet? Or is it a shortage of rigs? There 
just are not enough to purchase or hire, or are you waiting for 
a higher price? What is going on there?
    Mr. Fry. Thank you, Congressman. There are a number of 
factors that come into play here. As Mr. Farnsworth talked 
about, you may have a lease that is not producing, but it does 
not mean it is idle. You have things going on. You may be 
working on the seismic. You may be working on getting permits.
    Mr. Holt. That is three-quarters of them, is that right?
    Mr. Fry. That is right. Certainly over half of what is out 
there that is not producing is----
    Mr. Holt. For the Committee's purpose, you might explain 
``working on seismic.'' You know, you are getting into 
technical jargon here, and people need to understand what you 
are talking about.
    Mr. Fry. I am sorry. ``Seismic'' is the geophysical work 
where the companies will go out and try to take a picture of 
what is under the crust of the Earth, and then there is lots of 
work that has to be done to determine how to interpret that 
data. Oftentimes, it is below salt, which is hard to see 
through. So there have been lots of advancements in terms of 
trying to determine what is there.
    So a company will do some of that before they engage in a 
lease sale, and then after the lease sale, they may go buy more 
seismic data in order to interpret that.
    There are permits that are required, 17 different permits, 
from the time you get a lease until you actually have 
production.
    Mr. Holt. Let me try to find out in the limited time I have 
then does this activity start right away, the seismic activity, 
the prospecting, using the site, preparing the site, or are 
they, as it certainly appears to many of us outside the 
industry, just sitting on it?
    Mr. Fry. Let me say it one other way.
    Mr. Holt. My time is just about up.
    Mr. Fry. I am sorry. I thought you were asking me.
    Mr. Costa. I will grant the gentleman the extra time 
because I think his question should be answered.
    Mr. Holt. OK. All right. Thank you.
    Mr. Costa. On both sides.
    Mr. Holt. So, Mr. Fry, please continue.
    Mr. Costa. Yes. Finish your answer.
    Mr. Holt. If the gentleman would yield me a little more 
time, I would like to hear Mr. Fry's answer.
    Mr. Costa. Yes, I will.
    Mr. Holt. But I do want to get to Ms. Kendall.
    Mr. Costa. Yes. Mr. Fry?
    Mr. Holt. Mr. Fry, please.
    Mr. Fry. Yes. I am rethinking my answer. I had it there for 
a second. Why don't we get Ms. Kendall's answer, and I will 
come back to mine if that is all right.
    Mr. Holt. Ms. Kendall?
    Ms. Kendall. Much of what we relied on in our report and 
our analysis was information provided to us by industry. I 
can't tell you today, Mr. Congressman, when they start, whether 
it is right away or not, but I do know that we were advised 
that oftentimes industry will buy other leases and they will 
spend time working on seismic and geological information to 
determine how much area really they need to have to have sort 
of the optimal amount of space over a reservoir and then figure 
out where to drill optimally to get the most out of the 
reservoir.
    One of the things that we discovered as a part of this, I 
think ``unitizing'' is the term where a number of leases will 
come together and be considered a unit. It may just have one 
lease that is being drilled on, but it is pulling out the 
resources from the other leases, which depending on whether it 
is BLM or MMS reporting these leases out as producing or 
nonproducing, BLM reports all leases that stand over a 
reservoir as producing whereas MMS will only report the single 
lease as a producing lease while the others that are over the 
reservoir are not.
    Mr. Gohmert. Mr. Chairman, I ask unanimous consent to have 
Mr. Fry finish the answer that he was in the process and was 
actually saying the words in talking about the delay that over 
half of the leases, and that is when you had said, ``Why don't 
you explain seismic.''
    Mr. Costa. Are you stumping for him today?
    [Laughter.]
    Mr. Gohmert. I was getting ready to write down what he 
said. I am curious as to what half of the leases were.
    Mr. Costa. Yes. Sometimes I think we are a little bit--I 
mean, as long as we have the collegiality and the amicability 
taking place, because oftentimes you cut people in the middle 
of their answer. We live in a world with too many sound bites I 
think.
    Mr. Gohmert. I thought it was a good question to explain 
``seismic,'' but I was curious what he was going to say about 
``over half of the leases.''
    Mr. Costa. Yes, because, I mean, for those Members who have 
not been out there, it is really as I understand it technology 
that was used to determine earthquake studies for faults that 
lie throughout the country to better determine them.
    What they do is they take a radar shot that goes down to 
the capability of 30 to 40,000 feet, and they are able to in a 
three-dimensional fashion determine the structure of the Earth 
30, 40,000 feet, and then from the fractures, they are able to 
make assessments based upon what they think the carbon 
footprint may be 30 to 40,000 feet with the seismic technology, 
which is when he says the term ``seismic,'' unless you have 
actually seen it and watched it in front of you, you do not 
know what is ``seismic.'' I only know it because I went down 
there.
    Mr. Holt. No, I mean, I certainly know that, and certainly 
many of my classmates, my physics classmates have gone into the 
field, so I understand. So I would like to hear more about 
that. Thank you.
    Mr. Costa. Mr. Fry, please.
    Mr. Fry. Yes. I apologize. To kind of get on with where I 
was trying to go with that, my understanding from the MMS data 
is that of those leases that are not producing out there that 
over half of them or right at half of them are less than five 
years old, so you are talking about a process.
    Usually when somebody asks us how long will it take you 
from the time you get a lease until you can actually produce it 
in the deepwater Gulf of Mexico, the answer to that question is 
on the short end seven years, and it may well be longer than 
that if you have to put in a large gathering facility to gather 
that.
    Mr. Costa. And it varies from deep water to shallower 
water.
    Mr. Fry. That is correct. If you drill a well onshore, you 
drill the well, and if you have hydrocarbons, you start 
producing it if you have a pipeline. That is not the case here. 
You have to drill a number of exploratory wells, not trying to 
produce them, just trying to delineate the field, and then 
ultimately you will come in with a production plan that again 
has to be approved by the MMS before you start producing.
    The one last point I would like to make on this, there is 
no incentive for a company not to develop their leases. They 
are paying money first off every year. The amount of money goes 
up each year. It is something the government sets. It is called 
a ``rental.''
    Companies, if they have taken a lease and find out that 
because of what they have learned around that lease that it is 
not going to be producible, they will turn those back, and 
there are a number that get turned back to the government 
before the lease expires.
    Mr. Holt. All right. Thank you, Mr. Chairman, and I just 
hope the Committee will explore what appears to me to be a 
disconnect if not a contradiction between the first three 
witnesses and Mr. Fry on that particular point.
    Mr. Costa. Certainly. We are going to have a second round. 
You will get a chance.
    I do not think you can do it today, but I am a big believer 
in comparative analysis,. It would seem to be helpful to the 
Subcommittee and the full Committee's work, Mr. Oynes, if you 
could help provide the information. The others who were 
testifying can provide input to give us a snapshot between the 
development of producing wells, and I do not know what 
threshold you would determine on a field that is a good field 
that is in production. How long did that take between deep 
water, shallow water versus other efforts that ended up not 
producing? The timelines and the permit process could all kind 
of be laid out so we could look at it.
    Mr. Chaffetz? Did I pronounce that properly?
    Mr. Chaffetz. You are getting closer, Chaffetz, long ``A.''
    Mr. Costa. Chaffetz.
    Mr. Chaffetz. Chaffetz.
    Mr. Costa. Chaffetz.
    Mr. Chaffetz. You can call me ``rookie'' or ``freshman.'' 
That would be fine.
    [Laughter.]
    Mr. Costa. The new Member from Utah. You have been patient.
    Mr. Chaffetz. Hey, you. I answer to that as well.
    Mr. Costa. I answer to many things.
    Mr. Chaffetz. No. Thank you, Mr. Chairman.
    Mr. Costa. You have been patient. Go ahead.
    Mr. Chaffetz. I appreciate it, and thanks to all of you for 
being here and preparing your testimonies. I have just a couple 
of moments, so I need to move swiftly.
    Ms. Kendall, my first question is really directed toward 
you. In order to develop these leases and these relationships, 
it takes two parties, right? It takes the United States of 
America and it takes a contracting company or a private company 
that will develop a contract, and that is a two-way 
relationship.
    Now, in those contracts, in those types of agreements, if 
the company unilaterally just decided that they were going to 
pay us less or just decided that they did not want to pay as 
much as they had originally contracted to, we would take great 
issue with that, wouldn't we?
    Ms. Kendall. I believe so, yes.
    Mr. Chaffetz. And so, if we were to unilaterally as a 
contracting party, the other side, if we were to just 
unilaterally go and change the terms of that contract, would 
that be fair?
    Ms. Kendall. I do not believe so.
    Mr. Chaffetz. OK. So the idea that we would just 
unilaterally after developing and signing a contract with a 
company, if we would actually go and impose a new fee that they 
did not have before, do you think that would be fair to those 
companies? Would that be right and legal?
    Ms. Kendall. Without context, without an actual case in 
point, I do not know whether ``legal'' or ``not legal'' would 
be something that I could opine on. I think if you have a 
contractual relationship and an agreement, you are bound by 
those terms.
    Mr. Chaffetz. I guess my concern is just as if the company 
decided unilaterally not to pay us as much money as they had 
contracted to, if we as the United States of America imposed a 
new fee, the President here had introduced in his budget $1.1 
billion over 10 years for ``charging a new fee on nonproducing 
leases in the Gulf of Mexico,'' that that would constitute a 
change in the contract and the relationships that we already 
have.
    Ms. Kendall. I do not feel qualified to opine on that quite 
frankly, but I think you would need to look at the terms of the 
lease document themselves and see whether there is an 
opportunity in that lease document--I am truly not familiar--
some of these lease documents are inches.
    Mr. Chaffetz. OK. Yes. Just the concept I think is what I 
am concerned about.
    Mr. Rusco, if I can ask you a couple quick questions.
    Of the leases that you looked at in the study here, how 
many of these leases paid a bonus bid up front to the Federal 
government, what percentage of those contracts?
    Mr. Rusco. Actually I do not know the answer to that. That 
was not in the data that we looked at. I would have to look 
into that, but I am not sure that we could easily answer that.
    Mr. Chaffetz. Do you have any idea how many of these leases 
made rental payments to the Federal government during their 
term?
    Mr. Rusco. Almost certainly all or most of them did, yes.
    Mr. Chaffetz. Ms. Kendall, do you have any idea how many of 
these leases paid a bonus bid up front?
    Ms. Kendall. I am not familiar with that information.
    Mr. Chaffetz. Or how many pay a rental fee along the way, a 
rental payment I guess to the Federal government?
    Ms. Kendall. No. I am afraid I cannot answer that.
    Mr. Chaffetz. Going back to Mr. Rusco, in your report, you 
state that ``Interior does less to encourage development of 
Federal leases than some states and private landowners.'' Is 
failing to process permits in a timely manner one of the ways 
Interior fails to encourage development on Federal leases? Does 
that slow down the process?
    Mr. Rusco. In a previous report--I cannot remember the date 
of the report, but maybe four or five years ago--we looked into 
BLM's inability to match workforce planning with the increase 
in leasing and drilling applications. Essentially what happened 
was the drilling applications shot way up. BLM was not prepared 
to put more staff on that, so they put essentially all their 
staff on that and were not taking care of some of their other 
responsibilities, including environmental inspections.
    Mr. Chaffetz. There are companies, my understanding is, in 
the Alaska OCS that have been waiting nearly three years for a 
Federal permit. Would that constitute a hindrance of diligent 
development by the Federal government?
    Mr. Rusco. I do not know how to evaluate ``diligent 
development'' from the perspective of what the government 
requirements are. I mean, diligent development would include 
meeting all the requirements set by statute and regulation, but 
if you are asking is the process a lengthy process to get 
applications to drill, sometimes very lengthy, yes.
    Mr. Chaffetz. And lawsuits, would that slow down the 
process?
    Mr. Rusco. We have not studied the incidence of lawsuits 
recently, but if there were a lawsuit, it could.
    Mr. Chaffetz. OK. And in your report, you frequently 
compared the lease terms between state and Federal leases. How 
many state leases were deepwater leases?
    Mr. Rusco. For the state and private, almost all of them 
were onshore.
    Mr. Chaffetz. OK. So there were no state leases that were 
offshore, correct?
    Mr. Rusco. There may be a few, but most of them are 
onshore.
    Mr. Chaffetz. OK. Thank you, Mr. Chairman.
    Mr. Costa. Thank you. Now the gentleman from Texas, who has 
got his green tie on. Good to see you, Mr. Gohmert.
    Mr. Gohmert. I like your green tie too, Mr. Chairman.
    Mr. Costa. Flattery will get you everywhere.
    Mr. Gohmert. Well, there we go. Well, I can help my friend 
from Utah with the issue of what is legal because we have seen 
that happen here.
    Normally theft, for example, is described as taking 
someone's property without their permission, yet we have the 
ability to pass a law that we will send you to jail if you do 
not pay your taxes and therefore take your property without 
your permission, and that theft is legal unless you are the 
Secretary of the Treasury, and then it is not an issue.
    But anyway, we have the power to legalize things that may 
be immoral or unfair, and that is why we should have an 
obligation to look at what is fair.
    I did not know, Mr. Fry, where you were going with ``over 
half of the leases,'' but it is interesting. You said that over 
half of those leases that are not being produced are less than 
five years old and that, on average, it takes around seven 
years to get to production. And then Mr. Holt had mentioned 
there was some difference or dichotomy here.
    So I would just like to ask our first three witnesses, do 
you have any different information than what Mr. Fry said about 
the average that well over half of those leases being less than 
five years old?
    Mr. Rusco. Well, we looked at two things in our report 
looking at development of leases, and one is we picked a sample 
of leases, a 10-year sample of leases from 1987 through 1996. 
We picked that sample so we could look through the whole life 
of the lease because a lease typically was 10 years, and for 
the second half of that sample, it was five years onshore prior 
to that.
    And what we found in looking at that sample and following 
it all the way up to the point at which we reported was that 
there was a big difference between the degree to which onshore 
versus offshore leases were developed. Specifically, 
development activity, significant development activity, 
including drilling, occurred on only about six percent of the 
onshore leases and about 26 percent of the offshore leases, and 
actual production occurred on about five percent of the onshore 
leases and six percent of the offshore leases.
    And, unfortunately, we were unable to follow each piece of 
property through its life cycle because it is possible that a 
lease onshore or offshore is issued, is not developed during 
the term of its lease, is given back to the government, 
eventually reissued and then eventually drilled, but we had a 
10-year window, and we looked as long as we could look.
    So I think you would have to look at the whole life cycle, 
especially onshore. This is important because a great deal of 
the land onshore has kind of been picked over, and many of the 
leases that exist today were past leases that did not produce 
and then they have been resold.
    Mr. Gohmert. And they find new structures. I mean, we have 
seen that in Western Louisiana and East Texas, a new formation 
that they did not realize would produce the natural gas that it 
does.
    But you said something interesting. You said that we have 
not studied it, but if there were a lawsuit, perhaps it could 
delay. You have not looked at the effect of lawsuits on these 
leases? Because we heard information here at one point--I 
forget what the area was--that virtually every lease that was 
let by the government was litigated. You have not looked at 
that at all?
    Mr. Rusco. In the past, we have looked at that, and I 
hesitate to comment on that, that was not my work, but I do not 
believe that every lease is litigated. But I do not want to 
comment further without looking.
    Mr. Gohmert. OK. Well, let me ask, and this is more of the 
MMS, but it is my understanding that no exploration wells had 
been drilled on the leases for the OCS north of Alaska and one 
company supposedly had been trying to do it for three years. Do 
you know whether they stopped the work?
    Mr. Oynes. On that question, there has been litigation on 
several of the more recent lease sales. Just to slightly modify 
your statement, though, Congressman, there were prior lease 
sales in the Arctic area that there have been wells drilled. So 
there is a current controversy, there is current litigation, 
but there have been some wells drilled. In fact, there are two 
projects that are proceeding to production.
    Mr. Gohmert. Do you know what the controversy in litigation 
is?
    Mr. Oynes. Well, it is on several different levels. There 
is trying to block the exploration plans that the companies 
have filed for. There is also a challenge on the Chukchi sale 
that I mentioned with the Chairman earlier. There is a 
challenge to that lease sale, and that still is pending 
litigation. So that puts some degree of a cloud even on those 
leases that were issued from that sale.
    Mr. Gohmert. OK. Thank you, Mr. Chairman.
    Mr. Costa. I thank the gentleman from Texas.
    We are going to do one more round here.
    Ms. Kendall, in your examination of the efforts, do you 
think the eight-year lease is a good model for us to apply in 
other instances, and does it fly in the face of ``Use It or 
Lose It''?
    Ms. Kendall. I am sorry, Mr. Chairman. Your question was 
the eight-year lease?
    Mr. Costa. Yes. Is that a good model for other areas in 
terms of application of these lease provisions?
    Ms. Kendall. I do not personally have enough information to 
give you an opinion on that. I am sorry, Mr. Chairman.
    Mr. Costa. All right. All right. Mr. Rusco, do you have any 
thoughts on that?
    Mr. Rusco. I think that a standard lease of any length may 
not be the answer for all properties because the properties 
differ a great deal. Some properties you know exactly what you 
are looking for and you know essentially where it is. You can 
look at some onshore gas basins and the companies know where 
the gas is.
    Mr. Costa. But I am talking about where companies are 
required to drill in the first five years of the lease.
    Mr. Rusco. I do think that there is merit in looking into 
that, and I think that it is a complicated factor. There are a 
lot of complicating factors, but I do think that one of the 
most important things that would influence that decision is how 
prospective the property is. If it is very prospective, I think 
that having a shorter lease term may make some sense. If it is 
a very speculative property, then I think probably less.
    Mr. Costa. It also depends I guess if it is deep water 
versus shallow water in the case of the offshore.
    Mr. Oynes, is it possible that Minerals Management Service 
could do a better job in providing the information on the 
leases? The Inspector General's report suggested that it would 
take a considerable amount of effort to track the status of the 
nonproducing leases, but is that true?
    Mr. Oynes. I think in terms of what I think I understand 
the report to have said in the areas that they were focusing 
on, it would take a considerable effort. For one thing, MMS 
does not have any current requirements, and we might even need 
new statutory authority, to require the companies to submit 
some kind of status report of where they are.
    As an example, if they are processing and analyzing seismic 
data, until they come to MMS with a proposed exploratory 
project for an exploratory permit, we will not know that. We 
would be assuming that they are getting ready to file an 
exploration plan, but we have no mandatory----
    Mr. Costa. Could you collect more data on the unleased 
properties?
    Mr. Oynes. Again, within the statutory framework that we 
have, we probably could collect some.
    Mr. Costa. Ms. Kendall, you talked about smarter 
production, and I was curious, what do you mean by ``smarter 
production''?
    Ms. Kendall. I am not sure what I meant by ``smarter 
production,'' Mr. Chairman.
    Mr. Costa. Well, I mean, I thought we pulled it out of the 
comments there. Faster production?
    Ms. Kendall. Oh, it is certainly in our report, and we were 
relying on academic resources that we interviewed. I want to 
say the Colorado School of Mines was one of our primary 
sources. Their assessment, which really sort of follows Mr. 
Rusco's discussion, is faster is not necessarily----
    Mr. Costa. Smarter?
    Ms. Kendall.--better or smarter, yes.
    Mr. Costa. OK. All right. OK. I want to close here again 
with Mr. Fry and Mr. Farnsworth.
    Having read the two reports, GAO and the other, what would 
your comment be quickly, because I want to go to another 
question on the reports?
    Mr. Fry. Well, I think you have really covered the question 
that I have about the GAO Report. In that report, it talks 
about royalty rates being so low in the U.S., but my 
understanding is it does not take into account the bonus bids 
that are paid or the rentals that are paid.
    Mr. Costa. OK. That is the deficiency you think in the GAO.
    Mr. Fry. Yes. I think if you put those back in, we would be 
on a par with the rest of the world.
    Mr. Costa. Mr. Farnsworth?
    Mr. Farnsworth. The only thing I would add to that is that 
the size of the leases in the Gulf of Mexico and the United 
States are about one-two-hundredth to one-four-hundredth the 
size of a lease elsewhere in the world.
    Mr. Costa. Do you agree with Mr. Fry's comment then?
    Mr. Farnsworth. I do, yes.
    Mr. Costa. OK. Mr. Rusco, what do you think?
    Mr. Rusco. It is difficult to compare, but companies and 
governments do it----
    Mr. Costa. In other parts of the world.
    Mr. Rusco.--in other parts of the world, and the study that 
we cite did include rental rates. It did not include bonus 
bids, and the reason it did not is because there are bonus bids 
and other kinds of payments that are unobservable. Ours are 
observable, but lots of places all over the world they are not, 
so there is a difficulty there.
    Mr. Costa. As to who is paying who.
    Mr. Rusco. That is part of the problem. But it is a fact 
that the United States is a very popular place to invest in oil 
and gas. When in the last five or six years the number of 
drilling rigs in operation in the world doubled, much more than 
half of the increase was in the United States alone. So that 
kind of indicates that we are a popular place.
    Mr. Costa. Well, I think a lot of it has to do with 
stability I would surmise.
    Mr. Rusco. Yes. We are a politically stable place.
    Mr. Costa. Right.
    Mr. Rusco. I mean, there is a lot that goes into it.
    Mr. Costa. And then you have Louie and me, but we are the 
bedrock of stability here.
    Mr. Rusco. We are stable politically, but one of the things 
that we pointed out is that our fiscal terms are not terribly 
stable, and that we think is something that Interior should 
look at.
    Mr. Costa. All right. My time has expired. The gentleman 
from Colorado.
    Mr. Lamborn. Mr. Chairman, I am glad we are in such good 
hands.
    [Laughter.]
    Mr. Lamborn. OK. Mr. Fry or Mr. Farnsworth, you mentioned 
the technological advancements that have been made to be able 
to find more oil and gas and in a safer manner. Can you give us 
a quick example maybe of that, and what was the cause for the 
advances that have been made in this area of technology?
    Mr. Farnsworth. The two big advances have been, as we 
discussed, the seismic where we have a much better image of 
what the Earth is doing below us. Having said that, it is still 
extremely difficult. Oil and gas fields are very rare, and so 
only a few of the leases will end up having major oil and gas 
fields.
    The other thing is in drilling. The drilling technology has 
advanced tremendously over the last 10 years. We could not do 
what we are doing now 10 years ago. It would have been 
impossible.
    Mr. Lamborn. OK. Thank you.
    Moving right along, Mr. Oynes, Secretary Salazar announced 
last week that permits for renewable projects will be getting 
priority, and I think we can all agree that expediting the 
permit process for energy development on public lands is 
important and I believe for whatever the type of energy we are 
looking for. But my question is, do we have to slow down oil 
and gas permits in order to process renewable permits if they 
are going to be getting priority?
    Mr. Oynes. I do not believe so. I think we have resources 
to continue to move oil and gas forward.
    Mr. Lamborn. OK. OK. Thank you.
    And my last question builds on what was asked a moment ago 
by the Chairman comparing the reports that the GAO does--this 
would be for Mr. Rusco--with other countries, and I know you 
have already touched on that, but are these other countries 
limiting access to their offshore drilling the way that the 
U.S. is? I mean, don't we have more burdens on the private 
companies with what they have, the permitting and the 
regulations, the litigation, than the other countries impose 
upon the people drilling there?
    Mr. Rusco. Well, it is a very mixed bag. I mean, many of 
the countries do not allow private investment at all or have 
extreme restrictions on ownership of resources and do not have 
stable property rights, so there is that factor.
    In terms of our environmental requirements compared to 
other countries, I do not know. We have not studied that. There 
are certainly countries that have far less environmental 
requirements than we do, but there are many countries in 
Europe, for example, and Canada that must be very similar to us 
in that regard.
    Mr. Lamborn. Would any of those countries have the same 
litigation environment that the U.S. has?
    Mr. Rusco. I do not know. We have not studied that.
    Mr. Lamborn. OK. Thank you, Mr. Chairman.
    Mr. Costa. All right. The gentleman from Texas, Mr. 
Gohmert.
    Mr. Gohmert. Thank you, Mr. Chairman. I have a question, 
Ms. Kendall, just very briefly. This Committee is aware of the 
investigation into wrongdoing at the NLCS program. Do you know 
what the status of that is?
    Ms. Kendall. At which program, sir?
    Mr. Gohmert. The National Landscape Conservation System 
this Committee has dealt with or the full Committee. Are you 
familiar with the investigation by your office into that?
    Ms. Kendall. I am familiar with the investigation. I am not 
familiar with its status right now.
    Mr. Gohmert. OK. Well, another issue too. You know, the 
leases which recently the checks were sent back for the shale 
in Utah, Colorado and Wyoming, we had heard in here in this 
room that actually that was a seven-year-long process of 
companies doing their investigation, leading up to award of the 
leases, the auctioning of the leases. Do you know for sure how 
long that was in progress leading up to the award of the leases 
before the end of last year?
    Ms. Kendall. I am not aware of that, sir.
    Mr. Gohmert. Mr. Oynes, do you know?
    Mr. Oynes. No, I don't, no.
    Mr. Gohmert. OK. Are you aware of any time the Federal 
government has ever just awarded leases without a lead-up 
process to that?
    Ms. Kendall. I do not know of any. I do not know one way or 
the other.
    Mr. Oynes. I am more familiar with the offshore portion 
rather than the onshore, and the offshore portion, it would be 
statutorily mandated. We have a long lead-in process.
    Mr. Gohmert. Right, right. OK. I would submit that is what 
we do everywhere. There is a long lead-in process. So to say 
that something like that was done at the midnight hour is not 
terribly accurate without getting into motivation.
    Are any of you, any of the five of you, aware of any nation 
in the world that has put its coasts off limit to energy 
development? Anybody?
    [No response.]
    Mr. Gohmert. As we used to say in picking juries, I take it 
by your silence that nobody knows of anything. But, Mr. Fry, do 
you have a comment?
    Mr. Fry. The answer is of course other than here.
    Mr. Gohmert. Other than here, yes.
    Mr. Fry. There are certainly incidences where people have 
taken certain areas off limits in certain countries. There have 
been discussions about that in Canada from time to time, but 
Canada does have a process in order to try to open these areas.
    Mr. Gohmert. We do not drill the Great Lakes, do we?
    Mr. Fry. We do not. Canada does.
    Mr. Gohmert. Well, that is what I mean, and as I 
understand, they are nice enough to sell us the energy that 
they suck out of the Great Lakes. They sell it back to us after 
they have sucked it out from our part, and that is what you 
want from a good neighbor.
    Well, I appreciate the written testimony that has been 
submitted. I appreciate the information you have. If anybody 
has any other thoughts, we would really welcome them. The 
Chairman always says if you want to add, you have five days to 
do so, but a lot of people overlook that, but it is a chance.
    Mr. Costa. Ten days.
    Mr. Gohmert. Ten days. That gives us additional information 
that you may think of when you do not have to look at people 
like us up here. All right. Thank you very much, sir.
    Mr. Costa. Yes. I recognize the Ranking Member.
    Mr. Lamborn. Mr. Chairman, in addition to the two articles 
I mentioned earlier, I would ask unanimous consent to submit 
for the record also a staff report on leasing and a CRS report 
on acreage for the record.
    Mr. Costa. Without objection.
    You know, Mr. Gohmert, I am just a farm boy from 
California, from Fresno, but you must have been fascinating to 
hang out with in the courtroom. I suspect that was not only 
insightful but probably just good humor and fun. We make sure 
that we do not take ourselves too seriously when we apply the 
law in the courtroom.
    Mr. Gohmert. I had to be very careful about my little quips 
because they can be the basis for appeals.
    Mr. Costa. Yes, I would think so.
    I want to thank the members of this panel for your 
testimony and for your responses to our questions, and I have 
some others that I would like to get a better sense of in terms 
of incentivizing the expiration of those leased properties and 
those that may come up for leases in an attempt to reduce our 
dependency on foreign sources of oil and gas and how that helps 
bridge the transition in light of these depressed market 
prices, which is good news for our economy right now actually, 
but at the same time, if in fact if that is a disincentive, how 
we move forward in this comprehensive energy portfolio that we 
are trying to develop and transcend to. So I will submit that 
in the form of questions and you can provide your best answers.
    Thank you very much. This Subcommittee hearing is now 
adjourned.
    [Whereupon, at 11:45 a.m., the Subcommittee was adjourned.]

    [Additional material submitted for the record follows:]
    [Congressional Research Service Memorandum from Marc 
Humphries to House Committee on Natural Resources, ``Federal 
Lands Offered for Lease Since 1969 by Administration,'' 
follows:]

[GRAPHIC] [TIFF OMITTED] T8079.010


    .eps[A New York Times article entitled ``As Oil and Gas 
Prices Plunge, a Frenzy of Drilling Ends'' by Clifford Krauss 
submitted for the record follows:]
The New York Times
March 15,2009
As Oil and Gas Prices Plunge, a Frenzy of Drilling Ends
By CLIFFORD KRAUSS

    FORT WORTH--The great American drilling boom is over.
    The number of oil and gas rigs deployed to tap new energy supplies 
across the country has plunged to less than 1,200 from 2,400 last 
summer, and energy executives say the drop is accelerating further.
    Lower prices are bringing to an end an ambitious effort to squeeze 
more oil from aging fields and to tap new sources of natural gas. For 
the last four years, companies here drilled below airports, golf 
courses, churches and playgrounds in a frantic search for energy. They 
scoured the Rocky Mountains, the Great Plains, the Gulf of Mexico and 
Appalachia.
    But the economic downturn has cut into demand. Global oil prices 
and American natural gas prices have plummeted two-thirds since last 
summer. Not even an unseasonably cold winter drove down unusually high 
inventories of natural gas.
    The drop has been good news for American consumers, with gasoline 
now selling for $1.92 a gallon, on average, down from a high of $4.11 
in July. But the result for companies is that it is becoming 
unprofitable to drill.
    The reversal of fortune could have important implications for the 
future health of the nation's energy companies, for consumer wallets 
and for national aspirations to rely less on foreign energy sources.
    The drilling cutback has been particularly stark for natural gas. 
Gas exploration had soared in recent years after technology advances 
enabled the exploitation of gas trapped in huge shale beds found around 
Fort Worth, western Pennsylvania, upstate New York and elsewhere.
    But that boom has created such abundant supplies that companies are 
not only drilling less but also deciding not to pump from wells already 
drilled.
    Thousands of oil and gas workers who migrated around the country to 
work in new fields for fat salaries have been laid off.
    ``The big bonanza is over,'' said Jay Ewing, the completion and 
construction manager for Devon Energy in the Bamett Shale field here, 
where so far this year his company has brought its rig count from 35 to 
8. ``Everyone is really shocked how fast everything has turned.''
    Energy experts and company executives warn that oil and gas 
companies now cutting back on investments will be unable to respond 
quickly to a future economic recovery. John Richels, Devon's president, 
said that if the slump lasted two years, it could then take 18 to 24 
months for companies to reassemble rig crews.
    That means a glut could rapidly turn to scarcity, sending energy 
prices soaring again. Already, experts are predicting that lower 
domestic gas production by the end of the year will require increased 
imports of liquefied natural gas from places like Qatar.
    Through most of this year, gas supplies are not likely to decline 
sharply because so many shale wells came on line recently. But those 
wells should start to decline in productivity by next year, potentially 
leading to tight gas supplies if industrial and residential use picks 
up significantly in the second half of 2010.
    ``Inevitably, the market doesn't react; it overreacts and shoots 
itself in the foot,'' said Adam J. Robinson, director of commodities at 
Armored Wolf, a California hedge fund.
    Domestic oil production is expected to increase this year over 
last, for the first time since 1991, according to projections by the 
Energy Department. That swing is attributable in part to increased 
production in the Gulf of Mexico from two giant new platforms that were 
years in the making. But some potential onshore production is likely to 
go untapped, as companies cut back on new drilling and abandon 
expensive efforts to flush extra oil from aging fields.
    Many energy executives had thought the drilling renaissance, coming 
after years of declines, represented a new era, particularly for gas 
production. Domestic natural gas output rose by almost 8 percent last 
year from 2007, the biggest annual jump in more than a generation.
    That jump reversed the widely held notion that domestic gas fields 
were in irreversible decline. It enabled the Texas billionaire T. Boone 
Pickens to promote a plan to use natural gas instead of gasoline in the 
nation's cars.
    But such ambitions are sputtering, as falling prices force 
companies to cut their drilling expenditures. Oil now costs $46.25 a 
barrel, down from a peak of more than $ 145 in July, and natural gas 
costs just less than $4 per thousand cubic feet, down from a peak of 
more than $13.
    One reason companies need to make cuts is that the cost of drilling 
and servicing operations, while falling, is still roughly double the 
2005 level, while the prices oil and gas companies earn from their 
production are suddenly below the 2005 level. Meanwhile, the cost of 
borrowing money for exploration and production has soared recently in 
the credit crisis.
    ``When everybody sobers up after the first quarter and sees what 
their real cash flow is going to be,'' said G. Steven Farris, chairman 
and chief executive of the energy company Apache, ``people are going to 
be very discouraged about how much capital they have to spend and that 
will depress the rig count even further.'' So far economists say the 
energy patch is still doing better economically than the rest of the 
country. The surge of drilling and leasing poured enough money into 
communities with oil and gas resources that they did not begin to feel 
the pain of the recession until the end of last year.
    However, a slowdown appears to be coming in local tax revenue and 
businesses like restaurants that cater to oil workers. Residents here 
who receive monthly royalty checks for gas pumped through long 
horizontal wells tapping gas deposits deep below their homes say their 
payments are getting smaller or disappearing altogether.
    Perhaps most nervous are the rig workers themselves. With the rig 
count in the Barnett Shale field down to less than 100 from a high of 
227 in October--and expected to go as low as 60 before the year is 
over--thousands of gas field workers have already lost their jobs here.
    One who is worried is Chris Stamper, 32, a derrick hand from Union, 
Miss. A former furniture factory worker, he doubled his salary, to 
$80,000 a year, when he came to the Barnett Shale field two years ago 
to learn to work on a rig. Fifteen of 20 workers on Mr. Stamper's crew 
have already been laid off, replaced by more senior workers from other 
crews that were disassembled in recent weeks. He keeps thinking about 
the $216,000 house he bought for his family back in Union.
    ``I have to pay for it,'' he said. ``That's what I worry about.''
                                 ______
                                 
    [Washington Times article entitled ``EXCLUSIVE: China 
stocks up on bargain oil'' by Chris O'Brien submitted for the 
record follows:]
Washington Times Thursday, March 12, 2009
EXCLUSIVE: China stocks up on bargain oil
Chris O'Brien
EXCLUSIVE:

    BEIJING I--China is forging ahead with an overseas spending 
splurge, snapping up resources especially oil at bargain prices and 
strengthening its long-term prospects for growth before Western 
economies can bounce back.
    A series of high-profile energy deals and mining bids in the past 
month marked an end to the nervousness that appeared to impinge on 
Communist Party leaders at the outset of the global financial crisis. 
Attention has turned from hoarding foreign exchange reserves worth 
close to $2 trillion to locking up future supplies. Oil has emerged at 
the top of China's shopping list.
    In February, China secured oil supply deals totaling $41 billion 
with Russia, Brazil and Venezuela.
    Among the most lucrative: an agreement reached with Russia, in 
which China will lend $25 billion to Russian oil giant Rosneft and oil 
pipeline company Transneft. In return, according to Russian news 
reports, China will receive 300,000 barrels of crude a day for the next 
20 years at a rate of about $20 a barrel less than half the current 
price of $45.
    While touring Latin America, Vice President Xi Jinping signed a 
deal to lend $10 billion to Brazil's state-owned oil company Petrobras. 
China will receive up to 160,000 barrels a day, again over a 20-year 
period.
    A subsequent announcement from China's National Energy 
Administration further clarified Beijing's intentions. China is 
considering setting up a fund for China's three state-owned energy 
giants PetroChina, Sinopec and the China National Offshore Oil Corp. 
(CNOOC) to purchase oil and gas companies overseas. The firms will 
benefit from low-interest loans and direct capital injections, the 
announcement said.
    The oil deals complement efforts to buy into the Australian mining 
industry. China's biggest aluminum producer, Chinalco, has submitted a 
bid of $19.5 billion to buy an 18 percent stake in beleaguered mining 
company Rio Tinto. Chinese firm Minmetals has offered $1.7 billion for 
Oz Minerals.
    China also is seeking diversification of its foreign exchange 
reserves, now heavily in dollars. The head of China's energy bureau, 
Zhang Guobao, said earlier this week that China should accumulate more 
gold and uranium as well as other strategic commodities.
    The spending spree extends to fast cars. Last month, a delegation 
of 90 Chinese companies, headed by Commerce Minister Chen Deming, 
toured Europe. Purchases included 37,000 BMWs from Germany and 13,000 
Jaguars from Britain.
    The purchases were a shrewd diplomatic move, pleasing European 
manufacturers, making a small dent in China's huge trade surpluses and 
undercutting the U.S. ``buy American'' drive, a policy that Chinese 
officials have been quick to criticize.
    Song Hang, a researcher at the Chinese Academy of Social Sciences, 
summed up the strategy in the China Daily newspaper on the eve of the 
European tour, saying, ``Chen can take a positive message to the world: 
China, as a major trading power, has no interest in adopting 
protectionism.''
    Parliamentary sessions in Beijing have spurred lively debates about 
how best to deploy China's mountain of cash. Commentaries in state 
media have called for the country to push forward with overseas 
acquisitions.
    China ``should take advantage of the current weak commodity prices 
in global markets by boosting certain strategic resource imports and 
converting some capital reserves into resources reserves,'' said an 
editorial in Outlook magazine, owned by the official news agency, 
Xinhua.
    Much less coverage has been devoted to possible political stumbling 
blocks if China wields its purchasing power too assertively.
    China faces opposition from those who feel Chinese companies, 
propped up by state cash, have an unfair advantage.
    Rumbles can be heard in Australian parliamentary circles in light 
of the recent mining bids. Critics in Australia fear China is being 
granted too firm a grip on the country's resource markets, enabling 
Beijing to influence the prices of commodities.
    Similar concerns derailed a bid by CNOOC to buy Californian oil 
firm Unocal for $18.5 billion in 2005. The Chinese company withdrew the 
bid after Congress vehemently opposed the proposed deal. Unocal was 
sold to Chevron, which had submitted a lower bid.
    Global intelligence firm Stratfor warns of a backlash as other 
economies stabilize.
    ``China's rush to buy up resources, allies and markets faces 
charges of imperialism on an epic scale, bottom-feeding and taking 
advantage of the downtrodden,'' Stratfor said in a report.
    U.S. companies have received minimal interest from China. The 
Unocal affair sticks in the government's memory, nestled just behind 
recent investments in Morgan Stanley and the Blackstone Group in which 
China lost billions of dollars.
    A major factor, said Nicholas Lardy, a senior fellow at the 
Peterson Institute for International Economics in Washington, is that 
China's acquisitions have been focused on resources that tend to be 
found outside the U.S.
    But if China starts looking at U.S. firms, such as the struggling 
car industry, it might avoid another Unocal moment. Western economies 
are in such a weak position that they may not be so selective.
    ``If there were some opportunities in the U.S., there might be less 
congressional opposition than with Unocal,'' Mr. Lardy said. ``The 
focus is on the domestic recovery and there is a greater recognition in 
the Congress that as long as we save little, we depend on capital 
inflows.''
                                 ______
                                 
    [NOTE: The documents listed below have been retained in the 
Committee's official files.]
    1.  ``Drilling for Truth and Coming Up Empty,'' compiled by 
Minority Staff of the Committee on Natural Resources, submitted for the 
record by The Honorable Doug Lamborn.
    2.  ``The Oil Shock and Recession of 2008: Part 1.'' Blog Posts by 
James Hamilton, Econbrowser, submitted for the record by The Honorable 
Doug Lamborn.
    3.  Government Accountability Office Report to Congressional 
Requesters. October 2008, ``OIL AND GAS LEASING, Interior Could Do More 
to Encourage Diligent Development. GAO-09-74, submitted for the record 
by The Honorable Jim Costa. See http://www.gao.gov/new.items/d0974.pdf.

                                 
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