[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
HARNESSING AMERICAN
RESOURCES TO CREATE JOBS
& ADDRESS RISING GASOLINE
PRICES: DOMESTIC RESOURCES
AND ECONOMIC IMPACTS
=======================================================================
OVERSIGHT HEARING
before the
COMMITTEE ON NATURAL RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
Thursday, March 17, 2011
__________
Serial No. 112-12
__________
Printed for the use of the Committee on Natural Resources
Available via the World Wide Web: http://www.fdsys.gov
or
Committee address: http://naturalresources.house.gov
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65-212 PDF WASHINGTON : 2011
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COMMITTEE ON NATURAL RESOURCES
DOC HASTINGS, WA, Chairman
EDWARD J. MARKEY, MA, Ranking Democrat Member
Don Young, AK Dale E. Kildee, MI
John J. Duncan, Jr., TN Peter A. DeFazio, OR
Louie Gohmert, TX Eni F.H. Faleomavaega, AS
Rob Bishop, UT Frank Pallone, Jr., NJ
Doug Lamborn, CO Grace F. Napolitano, CA
Robert J. Wittman, VA Rush D. Holt, NJ
Paul C. Broun, GA Raul M. Grijalva, AZ
John Fleming, LA Madeleine Z. Bordallo, GU
Mike Coffman, CO Jim Costa, CA
Tom McClintock, CA Dan Boren, OK
Glenn Thompson, PA Gregorio Kilili Camacho Sablan,
Jeff Denham, CA CNMI
Dan Benishek, MI Martin Heinrich, NM
David Rivera, FL Ben Ray Lujan, NM
Jeff Duncan, SC John P. Sarbanes, MD
Scott R. Tipton, CO Betty Sutton, OH
Paul A. Gosar, AZ Niki Tsongas, MA
Raul R. Labrador, ID Pedro R. Pierluisi, PR
Kristi L. Noem, SD John Garamendi, CA
Steve Southerland II, FL Colleen W. Hanabusa, HI
Bill Flores, TX Vacancy
Andy Harris, MD
Jeffrey M. Landry, LA
Charles J. ``Chuck'' Fleischmann,
TN
Jon Runyan, NJ
Bill Johnson, OH
Todd Young, Chief of Staff
Lisa Pittman, Chief Counsel
Jeffrey Duncan, Democrat Staff Director
Rick Healy, Democrat Chief Counsel
------
CONTENTS
----------
Page
Hearing held on Thursday, March 17, 2011......................... 1
Statement of Members:
Hastings, Hon. Doc, a Representative in Congress from the
State of Washington........................................ 1
Prepared statement of.................................... 3
Markey, Hon. Edward J., a Representative in Congress from the
State of Massachusetts, Prepared statement of.............. 28
Prepared statement of.................................... 85
Statement of Witnesses:
Caruso, Guy, Senior Advisor, Energy and National Security,
Center for Strategic and International Studies............. 41
Prepared statement of.................................... 42
Foss, Michelle Michot, Ph.D., Chief Energy Economist,
University of Texas........................................ 29
Prepared statement of.................................... 31
Newell, Hon. Richard G., Administrator, Energy Information
Administration, U.S. Department of Energy.................. 4
Prepared statement of.................................... 6
Pierce, Brenda S., Program Coordinator, Energy Resources
Program, U.S. Geological Survey, U.S. Department of the
Interior................................................... 13
Prepared statement of.................................... 14
Rusco, Frank, Director, Natural Resources and Environment,
U.S. Government Accountability Office...................... 44
Prepared statement of.................................... 46
Highlights of testimony.................................. 51
Whitney, Gene, Ph.D., Energy Research Manager, Congressional
Research Service........................................... 18
Prepared statement of.................................... 20
OVERSIGHT HEARING ON ``HARNESSING AMERICAN RESOURCES TO CREATE JOBS AND
ADDRESS RISING GASOLINE PRICES: DOMESTIC RESOURCES AND ECONOMIC
IMPACTS.''
----------
Thursday, March 17, 2011
U.S. House of Representatives
Committee on Natural Resources
Washington, D.C.
----------
The Committee met, pursuant to call, at 10:02 a.m. in Room
1324, Longworth House Office Building, Hon. Doc Hastings,
[Chairman of the Committee] presiding.
Present: Representatives Hastings, Bishop, Lamborn,
Wittman, Broun, Fleming, Thompson, Denham, Rivera, Duncan of
South Carolina, Tipton, Gosar, Southerland, Flores, Harris,
Landry, Fleischmann, Johnson, Markey, Kildee, DeFazio, Holt,
Bordallo, Costa, Sutton, and Hanabusa.
STATEMENT OF HON. DOC HASTINGS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF WASHINGTON
The Chairman. The Committee will come to order. The Chair
announces the presence of a quorum. Today, the Committee on
Natural Resources is meeting to hear testimony on Harnessing
American Resources to Create Jobs, and Address Rising Gasoline
Prices: Domestic Resources and Economic Impacts.
Under Rule 4[f], opening statements are limited to the
Chairman and the Ranking Member of the Committee, so that we
can hear from our witnesses more quickly. So I ask for
unanimous consent that any Member that desires to have an
opening statement in the record shall be granted, and without
objection, so ordered.
The Chair will recognize himself for an opening statement.
Every American is feeling the pain from rising gasoline prices.
There is no escaping it. It costs more to drive to work, and it
costs more to run errands. It costs more to take the kids to
school.
Even those who do not own a car are paying more for
groceries and other goods because of the transportation costs
to get products to market. The Natural Resources Committee has
jurisdiction over all Federal lands, both onshore and offshore.
This is where the majority of America's energy reserves are
located, and also where the Obama Administration has done the
most to block energy production. The purpose of today's hearing
is to examine how to harness these energy resources on Federal
lands to help create jobs and address the issue of rising
gasoline prices.
A recent report from the Congressional Research Service
detailed just how large our energy reserves are in the United
States. Our combined recoverable oil, natural gas, and coal
resources total 1.3 trillion barrels of oil equivalent, the
largest in the world, more than Saudi Arabia, China, and Iran.
And this figure does not even account for our vast oil
shale reserves in the West, which the United States Geological
Survey estimates to be greater than one-and-a-half trillion
barrels of oil.
The best way for the United States to insulate itself long
term from unpredictable world events and rising gasoline prices
is to produce more energy here at home.
We have the resources to produce our own energy, and we
have the best and latest technology to accomplish this safely,
but for some baffling reason, this Administration is choosing
not to do so.
Since the President's earliest days in office, his
Administration has blocked, delayed, hindered, and obstructed
energy production across America, from coast to coast, onshore
and offshore, all the way to Alaska.
This Administration has canceled leases in Utah, delayed
oil shale production in Colorado, imposed a de facto moratorium
on the Gulf of Mexico, blocked offshore energy on both the
Atlantic and Pacific coasts, retroactively withdrew a permit
for a coal mine in West Virginia, blocked energy production on
tribal lands throughout the country, and impeded both onshore
and offshore production in Alaska, and the list goes on and on.
All of these actions cost American jobs and lead to higher
gasoline and energy costs. Incredibly, the President and the
White House have been telling a very different story, but their
rhetoric does not match reality.
The White House has even been touting statistics on
increased United States oil production, but they are trying to
claim credit for actions that took place long before President
Obama took office.
An increase in oil production today is the result of pro-
energy policies of previous Administrations, not this one. Less
production, higher gasoline prices, jobs being shipped
overseas, and deeper dependence on foreign countries, these are
the real results of this Administration's policies.
I am a firm believer in expanding all types of American
energy, from solar and wind, to hydro and biomass. However,
oil, natural gas, and coal are integral parts of our daily
lives, and are used for far more than just fuel and
transportation.
They enable millions of Americans to heat their homes in
the winter. They are essential ingredients in producing
plastics, tires, farm fertilizers, computers, and other high-
tech devices, even Blackberries and iPhones that Members and
staff can never seem to put down, are in this category.
I announced yesterday my intention to introduce bills that
will help produce more energy by putting people in the Gulf
back to work, and reversing this President's offshore drilling
ban.
These will be the first of several bills that will be
introduced. We are working on an array of specific proposals
that will be introduced as part of the American Energy
Initiative.
So really it all comes down to one very simple choice. Do
we want to produce our energy here in America, and create
American jobs, or do we want to jeopardize our national
security by deepening our reliance on foreign countries for
energy? To me, the answer is not a difficult one.
So with that, since I see that the Minority, and some of
their Members are not here, and in fact, I now know why. The
Ranking Member is on the Floor of the House, I see, and so
modern innovations allow me to see that. You don't see it, but
I see it.
And so when he comes back, we will give him the opportunity
to make his statement. I am advised that we are going to have
votes here in as short as 10 minutes. That happens in this
process, but I want to call the first panel, and I see that
they are seated.
We have The Honorable Richard G. Newell, Administrator of
the United States Energy Information Administration; Ms. Brenda
Pierce, who is the Energy Resources Program Coordinator for the
United States Geological Survey; Mr. Gene Whitney, Manager of
Energy Research, Congressional Research Service; Dr. Michelle
Foss, Chief Energy Economist, Center for Energy Economics,
Bureau of Economic Geology, Jackson School of Geosciences,
University of Texas; Mr. Guy Caruso, Senior Advisor, Energy and
National Security Center for Strategic and International
Studies; and Mr. Frank Rusco, Director, Natural Resources and
Environment, Government Accountability office.
So we will proceed with our panel right now, and I would
like to recognize Richard Newell. And I might mention that
under the rules that we have here, we have a timing mechanism
there.
Your full statement will appear in the record, but I would
like to ask you if you would keep your oral testimony to five
minutes. When the green light is on, it means that you have up
to four minutes. When the yellow light goes on, there is one
minute, and when the red light goes on, I would ask you to
close up your remarks if you could. So, Mr. Newell, you are
recognized for five minutes.
[The prepared statement of Chairman Hastings follows:]
Statement of The Honorable Doc Hastings, Chairman,
Committee on Natural Resources
Every American is feeling the pain from rising gasoline prices.
There's no escaping it.
It costs more to drive to work, costs more to run errands, and
costs more to take the kids to school. Even those who don't own a car
end up paying more for groceries and other goods because of
transportation costs to get products to market.
The Natural Resources Committee has jurisdiction over all federal
lands--both onshore and offshore. This is where the majority of
America's energy reserves are located and also where the Obama
Administration has done the most to block American energy production.
The purpose of today's hearing is to examine how to harness these
energy resources on federal lands to help create jobs and address
rising gasoline prices.
A recent report from the Congressional Research Service detailed
just how large our energy reserves are in the United States. Our
combined recoverable oil, natural gas, and coal resources total 1.3
trillion barrels of oil equivalent--the largest in the world. More than
Saudi Arabia, China and Iran.
And this figure doesn't even account for our vast oil shale
reserves in the West, which the U.S. Geological Survey estimates could
be greater than 1.5 trillion barrels of oil.
The best way for the United States to insulate ourselves long-term
from unpredictable world events and rising gasoline prices is to
produce more American energy here at home.
We have the resources to produce our own energy and we have the
best and latest technology to accomplish it safely. But, for some
baffling reason this Administration is choosing not to do so.
Since the President's earliest days in office, his Administration
has blocked, delayed, hindered and obstructed energy production across
America--from coast to coast, onshore and offshore, and all the way up
to Alaska.
This Administration has canceled lease sales in Utah, delayed oil
shale production in Colorado, imposed a de facto moratorium in the Gulf
of Mexico, blocked both the Atlantic and Pacific coasts from offshore
energy production, retroactively withdrew a permit for a coal mine in
West Virginia, blocked energy production on tribal lands throughout the
country and impeded both onshore and offshore production in Alaska. The
list goes on and on...
All of these actions cost American jobs and lead to higher gasoline
and energy prices.
The President and the White House have been telling a very
different story. But their rhetoric doesn't match reality.
The White House has even been touting statistics on increased U.S.
oil production. But they are trying to claim credit for actions that
took place long before President Obama took office. An increase in oil
production today is the result of the pro-energy policies of previous
Administrations, not this one.
The Obama Administration's energy policies are moving us backwards.
This is why future projections show a decline in U.S. production and an
increase in imports.
The Energy Information Administration's projections show total U.S.
crude oil production declining by 110 thousand barrels per day in 2011
and 130 thousand barrels per day in 2012.
Less production, higher gasoline prices, jobs being shipped
overseas and deeper dependence on foreign countries--those are the real
results of the Obama Administration's energy policies.
I'm a firm believer in expanding all types of American energy--
everything from solar and wind, to hydropower and biomass. However,
oil, natural gas and coal are integral parts of our daily lives and are
used for far more than just fuel and transportation. They enable
millions of American to heat their homes in winter. They are essential
ingredients in producing plastics, tires, farm fertilizers, computers
and other high-tech devices. Even the Blackberries and iPhones that
Members and staff can never seem to put down belong in this category.
I announced yesterday my intention to introduce bills that will
help produce more American energy by putting people in the Gulf back to
work and reversing the President's offshore drilling ban.
These will be the first of several bills. We are working on an
array of specific proposals that will be introduced as part of the
American Energy Initiative.
So, it all comes down to one very simple choice: Do we want to
produce our energy here in America and create American jobs in the
process, or do we want to jeopardize our national security by deepening
our reliance on foreign countries for energy? The answer is not a
difficult one.
______
STATEMENT OF HON. RICHARD G. NEWELL, ADMINISTRATOR, UNITED
STATES ENERGY INFORMATION ADMINISTRATION, UNITED STATES
DEPARTMENT OF ENERGY
Mr. Newell. Thank you, Mr. Chairman. I appreciate the
opportunity to appear before you and the Committee today. The
Energy Information Administration is the statistical and
analytical agency within the United States Department of
Energy. EIA does not promote or take positions on policy
issues, and has independence with respect to the information
and analysis that we provide.
Therefore, our views should not be construed as
representing those of the Department of Energy, or other
Federal agencies. Starting with the near term for oil and
gasoline markets, EIA expects continued tightening of world oil
markets over the next two years, particularly in light of
recent events in North Africa and the Middle East, the world's
largest oil producing region.
Our latest forecast issued earlier this month projects that
regular gasoline at the retail pump will average $3.70 per
gallon this summer, and $3.56 per gallon for the entire year,
which is about 77 cents per gallon higher than last year's
level.
There is significant regional variation in gasoline prices,
and there is also significant uncertainty surrounding these
forecasts as discussed in my written testimony.
In considering how energy markets might be affected by the
issues being considered in this hearing, it is important to
recognize important differences in the markets for oil and
natural gas.
The prices of oil and gasoline produced from it generally
reflect conditions on the world oil market, including the
global balance between supply and demand, and concerns related
to actual and potential supply disruptions.
In contract, the price of natural gas is largely determined
by the balance of supply and demand in North America. For this
reason, I will address natural gas and oil separately, starting
with natural gas.
In 2010, overall United States natural gas production
increased, while prices were generally stable. We expect these
trends to continue, although natural gas prices can be volatile
often due to weather related events.
The current United States natural gas market reflects the
tremendous growth in shale gas production, which more than
doubled between 2008 and 2010, and in 2010 represented 22
percent of total natural gas production in the United States.
United States approved reserves of natural gas grew by over
63 percent in the last decade, and have now reached the highest
level since 1971. EIA sees considerable potential for continued
growth in shale gas production, with shale gas production
projected to supply nearly half of United States natural gas
production by 2035.
EIA's 2011 annual energy outlook reference case, which
assumes the continuance of current laws and regulations,
projects a continued increase in natural gas production over
the next 25 years, with United States net imports of natural
gas expected to fall from 11 percent of consumption in 2010, to
only about one percent of consumption by 2035.
Because domestic shale gas resources are located primarily
under private and state lands, we would not expect access
issues on Federal lands to have a major effect on our
projections for United States natural gas production, reserves,
or prices.
Let me now turn to issues surrounding oil production and
markets. When considering the effects of changes in future oil
production, it is important to recognize that resource access
does not typically translate into immediate or near term
production.
In addition, the impact on market prices depends not only
on the magnitude and timing of actual production flows, but
also on the magnitude relative to global liquid supply, which
is currently about 88 million barrels per day.
In the short term, oil markets constantly react to many
competing factors in a global context, and it is extremely
difficult to disentangle the near term impact of mid- to long-
term developments in the context of oil markets that see
typical daily price movements in the range of one to two
percent, and much higher fluctuations at times.
Long term, we would not expect additional volumes of oil
that could flow from resources on Federal lands due to greater
access to have a large impact on oil and gasoline prices.
This is due to the globally integrated nature of the world
oil market, and the more significant long-term responsiveness
of oil demand and supply to price movements, compared to short-
term responsiveness.
Given the increasing importance of OPEC supply and the
global oil supply and demand balance, another key issue is how
OPEC production would respond to any increase in non-OPEC
supply, potentially offsetting any direct price effect of
increased United States production.
Of course, greater domestic crude oil production, no matter
what the cause, be it increased development, higher resource
potential in current known fields, or wider application of
advanced technology, would impact local economic activity and
net oil imports.
My written testimony provides additional information on
EIA's resource estimates and projections. Mr. Chairman, and
Members of the Committee, this concludes my testimony. I would
be happy to answer any questions.
[The prepared statement of Mr. Newell follows:]
Statement of Richard Newell, Administrator,
Energy Information Administration, U.S. Department of Energy
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to appear before you today to address
the issue of rising gasoline prices and the role of available domestic
oil and natural gas resources.
The Energy Information Administration (EIA) is the statistical and
analytical agency within the U.S. Department of Energy. EIA collects,
analyzes, and disseminates independent and impartial energy information
to promote sound policymaking, efficient markets, and public
understanding regarding energy and its interaction with the economy and
the environment. EIA is the Nation's premier source of energy
information and, by law, its data, analyses, and forecasts are
independent of approval by any other officer or employee of the United
States Government. The views expressed in our reports, therefore,
should not be construed as representing those of the Department of
Energy or other Federal agencies.
My testimony today focuses on several aspects of the hearing topic,
including EIA's near-term outlook for energy prices; EIA's evaluation
of U.S. resources, reserves, and production of oil and natural gas; and
ways in which domestic supply levels of oil and natural gas may
influence energy markets and prices over different time horizons.
The outlook for energy prices in 2011 and 2012
Oil, including gasoline and other products produced from it, and
natural gas together provided more than 60 percent of total U.S.
primary energy use in 2010. While both oil and natural gas are
internationally traded commodities, the market for oil is much more
globally integrated than the market for natural gas, reflecting the
fact that transport costs and logistical barriers for moving oil and
oil products around the world are typically far lower relative to their
value than is the case for natural gas. Differences in the degree of
global integration for oil and natural gas markets mean that while the
price of oil and gasoline produced from it generally reflect conditions
on the world oil market--including the global balance between supply
and demand and concerns related to actual and potential supply
disruptions--the price of natural gas is largely determined by the
balance of supply and demand and market conditions within North
America. This key difference between oil and natural gas markets
affects both the divergent trends in current and projected prices,
discussed in this part of my testimony, and the effect of domestic
resource development in the more distant future.
The discussion which follows is based on EIA's March Short-Term
Energy Outlook, issued on March 8. It therefore does not reflect the
impacts of recent and contemporaneous events in Japan, which can be
expected to affect energy markets. The net effect of those events is
too current to ascertain at this time.
Starting with the outlook for oil and gasoline markets, which we
recognize is of great concern to both the Committee and the American
people in light of recent developments, EIA expects continued
tightening of world oil markets over the next two years--particularly
in light of the recent events in North Africa and the Middle East, the
world's largest oil producing region. The current situation in Libya
increases oil market uncertainty because much of that country's 1.8
million barrels per day of liquids production, which represents about 2
percent of total world supply, has been shut in and it is unclear how
long this situation will continue. Many participants in oil markets
remain concerned that the unrest in the region could continue to
spread. This concern, along with other factors influencing prices, is
reflected in the prices of spot market crude oil and related futures
and options contracts, as discussed below.
Crude oil and wholesale gasoline prices. West Texas Intermediate
(WTI) and other crude oil spot prices have risen about $15 per barrel
since mid-February partly in response to the disruption of crude oil
exports from Libya. Continuing unrest in Libya as well as other North
African and Middle Eastern countries has led to the highest crude oil
prices since 2008. As a result, EIA has raised its monthly Short-Term
Energy Outlook forecast for the average cost of crude oil to refiners
to $105 per barrel in 2011, $14 higher than in the February edition of
the Outlook. The wholesale price of gasoline is closely linked to the
price of crude oil, and the average wholesale price forecast for
gasoline in 2011 is $2.91 per gallon, 39 cents per gallon higher than
projected in the February Outlook. EIA projects a further small
increase in crude oil prices in 2012, with the refiner acquisition cost
for crude oil averaging $106 per barrel.
Retail gasoline prices. The recent rapid increase in crude oil and
wholesale gasoline prices has led to a significant rise in the retail
price of gasoline at the pump. Absent a near-term decline in crude oil
prices, motorists currently experiencing a jump in pump prices will
likely see further increases from now through the spring since the
recent increase in crude oil prices has not yet been fully passed
through to retail gasoline prices. EIA expects the retail price of
regular-grade motor gasoline in the United States to average $3.56 per
gallon in 2011, 77 cents per gallon higher than the 2010 average, and
$3.57 per gallon in 2012. EIA projects gasoline prices will average
about $3.70 per gallon during the peak driving season (April through
September) in 2011 with considerable regional and local variation.
While EIA strives to provide accurate forecasts, it is important to
recognize that there is significant uncertainty surrounding these
projections. For example, as of March 3, the current market value of
futures and options contracts for gasoline was suggesting about a one-
in-four chance that the national monthly average retail price for
regular gasoline could exceed $4.00 per gallon during summer 2011. EIA
regularly tracks the uncertainty regarding future oil and gasoline
prices implied by the market price of energy-related derivatives in a
Market Price and Uncertainty Report that is issued alongside each
month's Outlook.
Natural gas prices. Unlike oil prices, which reflect world market
conditions, natural gas prices in the United States are largely
determined by the balance of supply and demand within North America.
Strong growth in the U.S. supply of natural gas in recent years, led by
increased production of shale gas, which grew from 2.7 billion cubic
feet (bcf) per day in 2006 to an estimated 13.3 bcf per day in 2010,
has contributed to a significant moderation in natural gas prices. The
price of natural gas at the Henry Hub in Louisiana, a major trading
point for natural gas, averaged $4.39 per million British thermal units
(Btu) in 2010 and is forecast to average $4.10 per million Btu in 2011.
Since an average barrel of crude oil contains 5.8 million Btu of
energy, the projected $4.10 per million Btu natural gas price projected
for 2010 is less than $25 per barrel when expressed in ``oil
equivalent'' terms. The fact that natural gas is so much cheaper than
oil in energy-equivalent terms has strongly encouraged users with an
option to switch from oil to natural gas to do so. Given the abundant
natural gas resource in the United States, one important issue for the
future is the prospects for natural gas to make inroads into more uses
of energy.
EIA expects modest declines in natural gas production through 2011
because of a falling gas-directed drilling rig count in response to
lower prices. While EIA expects total 2011 natural gas consumption will
remain close to 2010 levels, expected increasing consumption in 2012,
led by strong growth in the electric power sector, contributes to
higher prices and to an economic incentive for producers to resume
drilling. EIA expects the natural gas market to begin to tighten in
2012, with the Henry Hub spot price increasing to an average of $4.58
per million Btu.
Current and near-term domestic liquids production and imports.
Domestic crude oil production, which increased by 150,000 barrels per
day in 2010 to 5.51 million barrels per day, is forecast to decline by
110,000 barrels per day in 2011 and by a further 130,000 barrels per
day in 2012. The 2011 forecast includes production declines in Alaska
of 60,000 barrels per day in 2011 and an additional decline of 10,000
barrels per day in 2012 because of maturing Alaskan oil fields. EIA
expects production from the Federal Gulf of Mexico (GOM) to fall by
240,000 barrels per day in 2011 and by a further 200,000 barrels per
day in 2012. These production declines in Alaska and the GOM are
partially offset by projected increases in lower 48 non-GOM production
of 190,000 barrels per day and 70,000 barrels per day in 2011 and 2012,
respectively.
EIA expects slow growth in fuel ethanol production over the next 2
years. Ethanol production increases by a projected 40,000 barrels per
day, to 900,000 barrels per day in 2011, followed by an additional
10,000 barrels per day increase in 2012.
Liquid fuel net imports, including both crude oil and refined
products, fell from 57 percent of total U.S. consumption in 2008 to 49
percent in 2010, primarily because of the decline in consumption during
the recession and rising domestic production. EIA forecasts that liquid
fuel net imports will average 9.7 million barrels per day in 2011 and
10.0 million barrels per day in 2012, comprising 50 percent and 52
percent of total consumption, respectively.
Current and near-term natural gas production and imports. Total
marketed natural gas production grew strongly throughout 2010,
increasing from 59.7 Bcf per day in January to an estimated 63.8 Bcf
per day in December. The large price difference between petroleum
liquids and natural gas on an energy-equivalent basis contributes to an
expected shift towards drilling for liquids rather than for dry gas.
Projected natural gas production in 2011 is 0.8 percent higher than in
2010 as an increase of 1.0 Bcf per day in the lower-48 States is
partially offset by a decline of 0.5 Bcf per day in the GOM. However,
expected increasing consumption in 2012, led by strong growth in the
electric power sector, contributes to higher prices and to an economic
incentive for producers to resume drilling. Total domestic natural gas
production is projected to increase by a further 0.9 percent in 2012.
EIA expects U.S. reliance on natural gas imports will decline from 7.0
Bcf per day in 2010 to 6.5 Bcf per day in 2012, or from 11 percent to
10 percent of consumption.
Longer-term perspective on U.S. resources, reserves and production of
oil and natural gas
Domestic oil and natural gas production. In the Annual Energy
Outlook 2011 (AEO2011) Reference case, which assumes the continuance of
current laws and regulations in place of fall 2010, EIA projects total
U.S. crude oil production will remain above the 2009 level of 5.4
million barrels per day through 2035, increasing to 6.0 million barrels
per day by 2017 and remaining near that level throughout the rest of
the projection period. The primary contributors to this growth are
onshore shale oil development and enhanced oil recovery in the short-
term, and deepwater offshore production in the mid- to long-term. Note
that here ``shale oil'' refers to oil in liquid form that is trapped in
rock of low porosity, in contrast to ``oil shale'' which refers to
kerogen, which is a solid form of hydrocarbon found in Wyoming, Utah
and Colorado.
Oil production from shale plays, particularly the Bakken shale in
North Dakota, has been rising rapidly. Using horizontal drilling and
hydraulic fracturing, operators increased Bakken production from about
3,000 barrels per day in 2005 to 137,000 barrels per day in 2009 and
225,000 barrels per day in 2010. Oil production from other shale plays
is also growing. In Eagle Ford, for example, production increased from
under 100 barrels per day in 2006 to roughly 22,000 barrels per day in
2010. EIA projects shale oil production in the Bakken, Eagle Ford,
Austin Chalk, and Avalon formations in 2035 to be 0.6 million barrels
per day, more than double the current level.
Additionally, there is a significant opportunity for growing crude
oil production using enhanced oil recovery (EOR) techniques that inject
carbon dioxide (CO2) into reservoirs that had previously
been tapped by conventional drilling. In 2010, EIAs estimates that
281,000 barrels per day of crude oil, accounting for more than 5
percent of total U.S. crude production, was produced using
CO2-based EOR techniques. This reflects rapid growth from a
2004 production level of 206,000 barrels per day. In its AEO2011
Reference case, which assumes no new policies to reduce CO2
emissions, EIA projects that U.S. crude oil production using
CO2-based EOR techniques will grow to 0.4 million barrels
per day by 2015 and 1.1 million barrels per day in 2025. In a scenario
where a cost is associated with carbon emissions, additional carbon
capture would likely occur that would, in turn, result in additional
crude oil to be produced using CO2-based EOR techniques.
Several of the carbon capture and storage demonstration plants being
built around the United States are being partly paid for by the
production of crude oil using this technology.
The lower 48 offshore was a major source of U.S. crude oil
production in 2010, with the vast majority (1.6 million barrels per
day) coming from the GOM. In the AEO2011 Reference case, drilling in
the deepwater GOM Outer Continental Shelf (OCS) is expected to resume
in 2011, resulting in increasing Gulf crude oil production after 2012,
reaching 1.9 million barrels per day by 2018. EIA projects that total
lower 48 offshore production will account for 1.8 million barrels per
day of the total U.S. crude oil production of 5.8 million barrels per
day in 2035.
Shale gas. The growth in shale gas production in recent years is
one of the most dynamic stories in U.S. energy markets. A few years
ago, many analysts foresaw a growing U.S. reliance on imported sources
of natural gas, and significant investments were being made in
regasification facilities for imports of liquefied natural gas (LNG).
Today, the biggest questions are the size of the shale gas resource
base (which by most estimates is vast), the price level required to
sustain its development, and the extent to which technical or
environmental factors might dampen its development. Beyond those
questions, the level of future domestic natural gas production will
also depend on the level of natural gas demand in key consuming
sectors, which will be shaped by prices, economic growth, and policies
affecting fuel choice.
Natural gas. Annual natural gas production is projected to increase
from 21 trillion cubic feet of dry gas to 26 trillion cubic feet
between 2009 and 2035 as a result of continued exploration and
development of shale gas resources. Shale gas is the largest
contributor to the growth in production, while production in tight
sands, coalbed methane deposits, and offshore waters remain relatively
stable from 2009 to 2035. By 2035, shale gas production accounts for 46
percent of U.S. natural gas production, up from 16 percent in 2009.
While production from tight sands and offshore resources do not
contribute to the total growth in production, they remain an important
source, contributing 23 and 11 percent respectively in 2035.
Domestic oil and natural gas proven reserves and technically
recoverable resources. Reserves are those volumes of oil and natural
gas that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Technically recoverable
resources are an estimate of the total amount of oil and gas, both
known and unknown, that is technically producible using currently
available technologies and industry practices. EIA's crude oil and
natural gas production projections are based on specific assumptions
regarding technically recoverable resource assumptions. Estimates of
technically recoverable crude oil and natural gas resources are highly
uncertain and change over time as new information is gained through
drilling, production, and technological and managerial development.
The domestic crude oil and natural gas industry has undergone a
technological revolution that has revitalized the resource base in the
onshore lower-48 states. The use of horizontal drilling in conjunction
with hydraulic fracturing has greatly expanded the ability of producers
to profitably produce crude oil and natural gas from low permeability
geologic formations, particularly shale formations. As a result of this
technological revolution, natural gas reserves grew 63 percent between
2000 and 2010, increasing from 167.4 trillion cubic feet at the start
of 2000 to 272.5 trillion cubic feet at the start of 2010, the highest
level since 1971. This increase in reserves occurred despite cumulative
production of 246.7 trillion cubic feet during the 10-year period
between those estimates. Even though total U.S. crude oil reserves have
declined slightly over the same period, decreasing from 22.0 billion
barrels at the start of 2000 to 20.7 billion barrels at the start of
2010, additions to oil reserves still replaced over 93 percent of
cumulative production of 19.6 billion barrels over the decade. Notably,
states with drilling focused on shale oil have experienced a growth in
crude oil reserves. The primary example is North Dakota where proved
crude oil reserves have increased from 270 million barrels in 2000 to
over 1.0 billion barrels in 2010, most of it in the Bakken formation.
Total U.S. technically recoverable crude oil resources are
estimated to be 219 billion barrels in the AEO2011 Reference case,
including 21 billion barrels of proved reserves. Resources in areas
where drilling is officially prohibited (for example, national parks)
are not included. It is estimated that there are nearly 24 billion
barrels of technically recoverable crude oil in the Bakken and three
other shale formation plays.
Focusing on natural gas, the growing importance of shale gas
resources is reflected in the AEO2011 energy projections, with
technically recoverable shale gas resources estimated at 862 trillion
cubic feet. Given a total natural gas resource base of 2,543 trillion
cubic feet in the AEO2011 Reference case, shale gas resources
constitute 34 percent of the domestic natural gas resource base
represented in the AEO2011 projections and 50 percent of lower 48
onshore resources. EIA estimates the remaining onshore non-associated
natural gas technically recoverable resources in tight gas formations
at 455 trillion cubic feet, coalbed methane at 138 trillion cubic feet,
and other more conventional resources at 352 trillion cubic feet. The
lower 48 offshore and Alaska are each estimated to contain nearly 300
trillion cubic feet of technically recoverable natural gas resources.
Impacts of greater access
When considering the effect of increased access to Federal lands,
it is important to recognize that access does not typically translate
into immediate or near-term production. The impact of greater access on
market prices depends in part on actual production flows, on
differences in the extent of global integration in oil and natural gas
markets that have been discussed above, and on how a decision to
increase access might affect market expectations--a factor that is very
difficult to assess in today's supply environment. In the short-term,
oil markets react to many competing factors in a global context, and it
is extremely difficult to disentangle the near-term impact of mid-to-
long-term developments in the context of oil markets that see typical
daily price movements in the range of 1-2 percent, and much higher
fluctuations at times. Long term, we do not project additional volumes
of oil that could flow from greater access to oil resources on Federal
lands to have a large impact on prices given the globally integrated
nature of the world oil market and the more significant long-term
compared to short-term responsiveness of oil demand and supply to price
movements. Given the increasing importance of OPEC supply in the global
oil supply-demand balance, another key issue is how OPEC production
would respond to any increase in non-OPEC supply, potentially
offsetting any direct price effect.
In the longer-term, greater domestic crude oil production no matter
the cause--increased development on Federal lands, higher resource
potential in current known fields, or wider application of advanced
technology--would impact local economic activity, net oil imports, and
the associated U.S. international trade balance resulting from oil
imports.
Access to offshore federal resources. As of January 2009, the mean
estimate of technically recoverable crude oil resources located in
Federal offshore areas of the lower-48 states is 64.1 billion barrels.
Of this amount, 3.7 billion barrels are estimated to exist in the
Eastern/Central Gulf of Mexico region that is still under a Federal
leasing moratorium.\1\ In addition, the mean estimate of technically
recoverable resources of crude oil located in the Alaska OCS area is
26.6 billion barrels. Note that these and other technically recoverable
resource estimates provided here tend to be higher than resource
estimates from the USGS because the USGS estimates only include
undiscovered resources, where as the EIA estimates used for modeling
purposes also include proved reserves, inferred reserves, and
undiscovered resources in areas not yet assessed by the USGS. In
addition, the resource estimates provided here do not reflect recent
downward revisions by USGS to resource estimates for the National
Petroleum Reserve Alaska.\2\
---------------------------------------------------------------------------
\1\ These resource figures are based on the oil resource profile
used for EIA's AEO2011 energy projections, including resources in the
North Atlantic, North Pacific, and Central Pacific OCS where EIA's
projections assume that leasing does not occur before 2035.
\2\ In October 2010, the USGS revised NPRA oil resources to 0.9
billion barrels from 10.6 billion barrels and gas resources to 52.8
trillion cubic feet from 61.4 trillion cubic feet. Note that this would
not affect EIA modeling results because these resources do not get
developed in the current Annual Energy Outlook.
---------------------------------------------------------------------------
From the above, it is evident that the Eastern/Central Gulf oil
resources now subject to a formal leasing moratorium represent only a
small part of the Federal OCS. Even if the moratorium that restricts
leasing in this region were to be lifted, lags associated with the
awarding of new Federal offshore leases and with the exploration and
development of such leases suggest that production would be unlikely to
occur until after 2020.
Given that OCS areas not under any leasing moratorium are estimated
to account for over 95 percent of the total mean estimate of
technically recoverable OCS resources, perhaps the most significant
Federal OCS development issues relate to those areas that are already
open to Federal oil and gas leasing. One such issue revolves around
when newly available offshore areas, particularly in the Pacific and
Atlantic, will be made available to oil and gas producers in future
Federal lease sales. Areas where OCS leasing has been available for
many years--including the Western Gulf, most of the Central Gulf, and
Alaska--hold the vast majority of estimated technically recoverable OCS
oil resources. The AEO2011 generally assumes that both leasing and
regulatory approvals in areas where OCS leasing has been available for
many years will proceed in a manner that supports their continued major
contribution to overall U.S. oil production. Were leasing and/or
regulatory processes to slow or speed up significantly, projected OCS
production could be reduced or increased from the level of 1.5 to 2
million barrels per day that is projected in the 2014 though 2035
period in the AEO2011 Reference case.
Access to onshore federal resources: ANWR. The Arctic National
Wildlife Refuge (ANWR) is not open to petroleum development, and is
therefore not included in the AEO2011.\3\ However, if legislation were
enacted in the near term that approved oil and natural gas leasing in
the 1002 Area, one could potentially see ANWR oil production starting
soon after 2020. This timetable reflects the time required to obtain
leases, drill an initial exploratory well, develop a production
development plan if a commercial oil reservoir has in fact been
discovered, construct the feeder pipelines, fabricate oil separation
and treatment plants and transport them to the North Slope by ocean
barge, construct drilling pads, drill to depth, and complete the wells.
---------------------------------------------------------------------------
\3\ The technically recoverable resource estimate of 10.4 billion
barrels for ANWR is not included in the 219 billion barrels total
estimate for the U.S.
---------------------------------------------------------------------------
Based on this timetable and the assumption that the largest ANWR
fields would be the first to go into production, peak ANWR oil
production could occur around 2030 at about 700,000 to 800,000 barrels
per day. In this scenario, the greatest impact on crude oil prices
could occur around peak ANWR production with oil prices projected to be
perhaps about one percent lower as a result.
Access to onshore federal resources: lower-48 states. The AEO2011
estimates that total onshore lower-48 technically recoverable oil
resources available for development are 113.9 billion barrels (as of
January 1, 2009), including about 6.6 billion barrels located on
Federal lands with lease stipulations in addition to standard lease
terms--which is about 6 percent of total onshore lower-48 oil
resources.\4\ Federal lease stipulations dictate what oil and natural
gas producers can and cannot do on Federal lands. Oil and natural gas
producers can employ a variety of technologies to comply with such
stipulations, such as drilling extended reach wells to avoid drilling
in sensitive habitat areas, drilling multiple wells from a single
drilling pad to minimize the surface area disturbed, using water
purification equipment to clean produced water before it is discharged,
or replanting indigenous species to restore the land. While lease
stipulations may tend to increase costs, they do not preclude oil and
natural gas production on Federal lands. Given the relatively modest
volume of the oil resources on these lands--compared to total U.S. oil
resources--changing lease stipulations on Federal lands is unlikely to
have a significant long-term impact on U.S. oil production or prices.
---------------------------------------------------------------------------
\4\ The 6.6 billion barrel figure does not include any oil
resources estimated to exist under Federal lands that are deemed to be
forever precluded from oil and natural gas leasing, such as those under
national parks.
---------------------------------------------------------------------------
Interaction between production and prices
When exploring the possibility of substituting domestic resources
for international resources or substituting one domestic fuel for
another, it is important to consider the current distribution of fuels
used in sectors of the U.S. economy. Three-quarters of liquid fuels
(both petroleum and biofuels) are used for transportation and most of
the remaining liquid fuels are used in industrial activities, primarily
as feedstock for petrochemical production. Natural gas is used in
roughly equal portions in industry, buildings and electricity
generation. Over 90 percent of coal generates electricity, with most of
the remainder used for metals and cement processing. Nuclear,
hydroelectric, wind and solar energy is used exclusively for generating
electricity. Starch and oil- rich biomass is used to generate liquid
transportation fuels and the remainder of biomass is burned for heat
and electricity generation.
Natural gas demand tends to be somewhat more price responsive in
the short-run than petroleum demand in the United States, mainly
because of a larger presence of natural gas in sectors where a moderate
range of substitution possibilities exist (i.e. the industrial and
power sectors). Nevertheless, demand shocks (in particular from
weather) can have powerful feedback effects on natural gas demand
through domestic natural gas prices, sometimes neutralizing output
effects from the demand shock that might otherwise be supposed to ensue
(e.g. electric power sector demand for natural gas during the heating
season). Also, because near-term domestic natural gas market
equilibrium tends to depend much less on the availability of foreign
supplies at the margin compared to petroleum, demand shocks
(particularly due to winter weather) will tend to induce sharp natural
gas price increases that encourage reductions in consumption, most
notably in the industrial sector.
Competition among fuels in the United States. Interfuel competition
driven by price differences is most likely in the three sectors that
use natural gas because of the expanding recoverable natural gas
resources which are expected to provide sustained lower prices relative
to oil. Over the past decade the share of electric generation fueled by
natural gas has been increasing, driven by lower new plant construction
costs for natural gas relative to coal and recently by lower natural
gas prices. Many existing coal plants are economical even at very low
natural gas prices, but there is also a significant portion of older
and/or less efficient coal plants whose production will decline when
gas prices are low enough, reflecting the trade-off in the generation
mix that has been experienced in the past few years. Construction costs
for all new plants have risen dramatically in recent years, but the
construction cost increases have been much more significant for new
coal plants, which are more capital intensive and utilize more complex
engineering technologies, relative to gas-fired turbines and combined
cycle plants.
The potential for natural gas to compete with oil in the transport
sector--whether directly or indirectly as electricity--depends on the
price differences between the fuels, the vehicles, and the fueling
infrastructure. Currently 97 percent of energy for transportation is
provided by fossil liquids and biofuels and only 3 percent is supplied
by natural gas. Most of this natural gas is consumed in the operation
of pipelines (primarily in compressors) and a small amount is consumed
as vehicle fuel for buses and taxis. There is great uncertainty
surrounding how effective proposed legislation would be in stimulating
the deployment of natural gas vehicles even though operating costs may
be significantly lower compared to diesel and gasoline. Natural gas
vehicles face significant range and infrastructure limitations, in
addition to higher upfront capital costs, that drastically diminish the
market for natural gas vehicles even in the presence of tax credits for
capital, infrastructure, and fuel.
In the AEO2011 Reference case, which reflects current laws and
regulations, EIA projects the sale of 12,100 new light-duty natural gas
vehicles and 26,000 new heavy-duty natural gas vehicles (representing
2.8 percent of total new heavy-duty vehicle sales) in 2035. Without a
greatly expanded consumer market for natural gas vehicles based on
infrastructure expansion, tax credits for natural gas vehicles will
probably only impact sales for a niche market in both light- and heavy-
duty vehicles. One AEO2010 side case examined the impact of
implementing tax incentives for vehicles, fueling stations and fuel--
starting in 2011 and beginning to phase out in 2027--on heavy-duty
natural gas vehicle sales, and found that sales could reach 270,000
(representing 35 percent of total new heavy-duty vehicle sales) in
2035.
Oil and gasoline price shocks impact on the U.S. economy. There are
three primary channels through which oil price shocks affect real
economic activity. First, and arguably most important, is a rise in the
import bill for imported oil, which reduces U.S. incomes, wealth, and
aggregate demand. Second, a redistribution of domestic income from
consumers to producers occurs, with mixed effects that are likely
negative on balance. Third, a lower level of output can be produced
with the existing stock of capital and supply of labor as firms
economize on energy inputs. This effect, while difficult to quantify,
has considerable longer-term importance.
However, the effects of oil price shocks on the economy depend
importantly on the nature of the shock. Increases in oil prices caused
by strong demand are less damaging to overall activity than those
caused by a supply shortage. Increases in oil prices that are expected
to be temporary have smaller consequences on activity than those that
are perceived to be persistent.
Conclusion
In addition to preparing the Reference case projections that are
reviewed above, the full Annual Energy Outlook to be published this
spring will include a large number of sensitivity cases that examine
the impact of different market, technology, and policy assumptions.
Several of these sensitivity cases will address the implications of
alternative assumptions about the level of technically recoverable
resources and access to those resources.
This concludes my testimony, Mr. Chairman and members of the
Committee. I would be happy to answer any questions you may have.
______
The Chairman. That is absolutely perfect timing, Mr.
Newell. If that is a template for how we are going to do this,
this is going to be a wonderful hearing. Thank you very much.
Now the pressure is on Ms. Pierce. Ms. Pierce, you are now
recognized for five minutes.
STATEMENT OF BRENDA S. PIERCE, ENERGY RESOURCES PROGRAM
COORDINATOR, UNITED STATES GEOLOGICAL SURVEY, UNITED STATES
DEPARTMENT OF THE INTERIOR
Ms. Pierce. Thank you, Mr. Chairman, and Members of the
Committee, thank you for the opportunity to appear here today
to discuss with you the United States Geological Survey's role
in studying, understanding, and assessing domestic energy
resources.
The USGS conducts scientific investigations and assessments
of geologically based energy resources, including conventional
and unconventional resources. The mission of the USGS Energy
Resources Program is to understand the processes critical to
the formation, accumulation, occurrence, and alteration of
geologically based energy resources, to conduct scientifically
robust assessments of those resources, and to study the impact
of energy resource occurrence and/or production on the use of
both environmental and human health.
The results from these scientific studies are used to
evaluate the quality and distribution of energy resource
accumulations, and to assess energy resource potential of the
Nation, exclusive of the Federal offshore waters, and that is
ANWR, and the petroleum resource potential of the world.
One important goal of USGS domestic energy activities is to
conduct research and assessments of undiscovered, technically
recoverable, oil and natural gas resources of the United
States, exclusive of the Federal Outer Continental Shelf.
The amount of undiscovered, technically recoverable,
resources changes over time because of advances in geological
understanding, changes in technology and industry practices,
and other factors.
This necessitates that resource assessments be periodically
updated to take into account such advances. Recent examples
include the USGS assessment of the Balkan formation in the
United States portion of the Wollaston Basin.
This assessment, released in 2008, shows an estimated 3 to
4.3 billion barrels of undiscovered, technically recoverable,
oil, compared to the USGS 1995 mean estimate of 151 million
barrels of oil.
Our geologic understanding of this space has evolved since
1995, and significant technological advances redefine what was
technically recoverable in 2008, as compared to 1995.
Another example is the USGS assessment of gas hydrates on
the Alaskan north slope. As a result of advances in our
understanding of this emerging resource, the USGS assessment
estimates a mean of 85.4 trillion cubic feet of technically
recoverable gas from gas hydrates on the Alaskan north slope.
Recent challenges remain to determine if this technically
recoverable resource will be economically recoverable, but
current multi-organizational, including the USGS, and multi-
disciplinary efforts focusing on overcoming these obstacles,
the USGS is conducting a systematic inventory of the
technically and economically recoverable coal resources of the
significant minable coal beds in the United States, to provide
a comprehensive estimate of how much of the Nation's coal
endowment is actually accessible for development, and available
under certain market conditions and mining constraints.
The first basin being assessed is the Powder River Basin of
Wyoming and Montana. The USGS assessment of the Powder River
Basin will be the most thorough and comprehensive inventory of
the Nation's most significant coal basin to date.
This inventory, with the others on the schedule, will
provide policy and decision makers with important information
and valuable planning tools. The USGS also evaluates renewable
resources, such as geothermal energy.
The USGS recently completed a national geothermal resource
assessment, the first one in more than 30 years. The USGS
assessment also indicates that full development of conventional
identified systems could expand geothermal power production by
about 260 percent of the currently installed geothermal total
in the United States.
The estimate for unconventional Enhanced Geothermal
Systems, or EGS, is more than an order of magnitude larger than
the combined estimates of both identified and undiscovered
conventional geothermal resources. If successfully developed,
EGS could provide an installed geothermal electric power
generation capacity equivalent to about half of the currently
installed electric power generating capacity of the United
States.
Energy resources, research, and assessments, are
traditional strengths of the USGS. As the Nation's energy mix
evolves, and USGS will continue to seek ways to expand its
research and assessment portfolio to better include a
comprehensive sweep of energy resources.
USGS resource assessments and research can provide valuable
information for the public and government discourse about the
energy resource future of the Nation. The USGS looks forward to
working with Congress to examine these challenges and
opportunities.
Thank you for this opportunity to provide an overview of
USGS research and assessments of geologically based energy
resources, and I would be happy to answer any questions.
[The prepared statement of Ms. Pierce follows:]
Statement of Brenda S. Pierce, Program Coordinator, Energy Resources
Program, U.S. Geological Survey, U.S. Department of the Interior
Mr. Chairman and Members of the Committee, thank you for the
opportunity to appear here today to discuss with you the U.S.
Geological Survey's role in studying, understanding, and assessing
domestic energy resources.
Role of the U.S. Geological Survey in Energy Resource Assessments
The USGS conducts scientific investigations and assessments of
geologically based energy resources, including conventional resources
(oil, gas, and coal), emerging resources (gas hydrates), underutilized
resources (geothermal), and unconventional resources (shale gas, shale
oil, tight gas, tight oil, coalbed methane, and heavy oil). The USGS
also conducts research on the effects associated with energy resource
occurrence, production, and (or) utilization. The mission of the USGS
Energy Resources Program is: (1) to understand the processes critical
to the formation, accumulation, occurrence, and alteration of
geologically based energy resources; (2) to conduct scientifically
robust assessments of those resources; and (3) to study the impact of
energy resource occurrence and (or) production and use on both
environmental and human health. The results from these scientific
studies are used to evaluate the quality and distribution of energy
resource accumulations and to assess the energy resource potential of
the Nation (exclusive of Federal offshore waters) and the petroleum
resource potential of the world.
The results from these studies provide impartial, robust scientific
information about energy resources that directly supports the U.S.
Department of the Interior's (DOI's) mission of protecting and
responsibly managing the Nation's natural resources. USGS information
is used by policy and decision makers, land and resource managers,
other federal and state agencies, the energy industry, foreign
governments, nongovernmental groups, academia, other scientists, and
the public. Recent examples of USGS domestic research and assessments
include the first-ever estimate of undiscovered, technically
recoverable gas from natural gas hydrates and the first national
geothermal assessment in more than 30 years.
It is important to note the distinction between the terms
``resource'' and ``reserves.'' Resource is a concentration of naturally
occurring solid, liquid, or gaseous hydrocarbons in the Earth's crust,
some of which is, or potentially is, technically and (or) economically
extractable. Reserves specifically refer to the estimated quantities of
identified (discovered) petroleum resources that, as of a specified
date, are expected to be commercially recovered from known
accumulations under prevailing economic conditions, operating
practices, and government regulations. Primarily, the USGS conducts
assessments of undiscovered, technically recoverable oil and gas
resources. The USGS also conducts select assessments of economically
recoverable resources. These resources include coal and oil and gas in
frontier areas such as Arctic Alaska. Economically recoverable
resources are a subset of technically recoverable resources and are
generally less than the technically recoverable amount.
USGS National Research and Assessment Activities
USGS National Oil and Gas Resource Activities
One important goal of USGS domestic energy activities is to conduct
research and assessments of undiscovered, technically recoverable oil
and natural gas resources, both conventional and unconventional, of the
United States (exclusive of the Federal outer continental shelf). These
are resources that have yet to be found (drilled), but if found, could
be recovered using currently available technology and industry
practice.
The purpose of USGS assessments is to develop robust, geology-
based, statistically sound, well-documented estimates of quantities of
petroleum resources having the potential to be added to reserves and
thus contribute to the overall energy supply. The USGS uses resource
assessment methodologies that are thoroughly reviewed and externally
vetted so as to maintain the transparency and robustness of the
assessment results. To further the transparency and understanding of
what we do, the USGS petroleum resource assessment methodology is
published and is available online at http://energy.cr.usgs.gov/oilgas/
noga/methodology.html.
The USGS distinguishes between conventional and unconventional
petroleum accumulations for purposes of research and resource
assessment (Figure 1), as they are very different types of resources
with very different geologic and physical characteristics. Briefly, a
conventional gas accumulation is one that is defined by discrete field
boundaries and is typically outlined by dry or uneconomic wells. An
unconventional accumulation is one in which gas saturation is regional
in extent, is in extremely low permeability rock, and typically
requires stimulation (fracturing) to produce the gas. Estimated
ultimate resource recoveries are typically lower in unconventional
wells than in conventional wells. Many shale gas, tight gas, and
coalbed gas accumulations can be described using these characteristics.
The amount of undiscovered, technically recoverable resources
changes over time. There are several reasons for this, including: (1)
technological developments and advances regarding the discovery and
production of petroleum resources, (2) scientific advances regarding
geologic understanding, and (3) reserve growth. Advances in geologic
understanding, as well as changes in technology and industry practices,
necessitate that resource assessments be periodically updated to take
into account such advances. One example of this change is the USGS
assessment of the Bakken Formation in the U.S. portion of the Williston
Basin. This assessment, released in 2008, shows an estimated 3.0 to 4.3
billion barrels of undiscovered, technically recoverable oil, compared
to the USGS 1995 mean estimate of 151 million barrels of oil. Our
geologic understanding of this basin evolved since 1995, but
significant technological advances redefined what was technically
recoverable in 2008 as compared to 1995. This phenomenon is equally
true for natural gas assessments such as that of the Barnett Shale and
others, which have shown significant increase in the volumes of
technically recoverable gas resources. Much of the technology developed
for production of gas in the Barnett Shale was used to develop the oil
in the Bakken Formation. The Barnett Shale Newark East field now ranks
first in the United States in estimated 2009 proved reserves and is
first in total production, having recently surpassed the San Juan
Basin.\1\
Another example of significant changes in assessments over time is
the USGS assessment of gas hydrates on the Alaskan North Slope. Gas
hydrates are a crystalline solid formed of water and gas; they look and
act much like ice, but they contain huge amounts of methane, which may
be a potential energy resource. Substantial investments in gas hydrate
research now support categorizing some accumulations of gas hydrates as
technically recoverable. As a result of advances in our understanding
of this resource, the USGS assessment estimates a mean of 85.4 trillion
cubic feet of technically recoverable gas from gas hydrates on the
Alaska North Slope (this total is included in the mean conventional gas
estimates outlined below). Research challenges remain to determine if
this technically recoverable resource will be economically recoverable,
but current multi-organizational (including the USGS) and multi-
disciplinary efforts are focused on overcoming these obstacles.
Reserve growth is a well-documented phenomenon in the United States
and is a major component of the updates to the Nation's remaining oil
and natural gas resources, especially in conventional fields. In fact,
most additions to world oil reserves in recent years are from growth of
reserves in existing fields rather than new discoveries. Reserve growth
occurs for a variety of reasons, including: (1) extensions of existing
fields, infill drilling and new field discoveries and (2) application
of new recovery technologies and improved efficiency. The assessment of
the resource endowment, which includes both undiscovered resources and
reserves from discovered fields and reservoirs, requires estimation of
reserve growth. The USGS has recently developed a state-of-the-art
methodology and approach for better quantifying domestic and global
contributions of reserve growth to the petroleum resource endowment and
is actively engaged in estimating this important component of the
resource endowment
The current USGS mean estimates for technically recoverable oil and
gas resources of the onshore and State waters portion of the United
States are as follows:\2\
Mean technically recoverable conventional oil resources--31.7
billion barrels
Mean technically recoverable unconventional oil resources--6.1
billion barrels
Mean technically recoverable conventional gas resources--356.9
trillion cubic feet
Mean technically recoverable unconventional gas resources--399.4
trillion cubic feet
The Department of the Interior's Bureau of Ocean Energy Management,
Regulation, and Enforcement has responsibility for evaluating resources
in the Federal Outer Continental Shelf; their current oil and gas
estimates for the U.S. Outer Continental Shelf are as follows:\3\
Mean technically recoverable conventional oil resources:
Alaska--26.61 billion barrels
Atlantic--3.82 billion barrels
Gulf of Mexico--44.92 billion barrels
Pacific--10.53 billion barrels
Mean technically recoverable conventional gas resources:
Alaska--132.06 trillion cubic feet
Atlantic--36.99 trillion cubic feet
Gulf of Mexico--232.54 trillion cubic feet
Pacific--18.29 trillion cubic feet
USGS National Coal Resource Activities
The USGS is conducting a systematic inventory of the technically
and economically recoverable coal resources of the significant minable
coal beds in the United States, to provide a comprehensive estimate of
how much of the Nation's coal endowment is actually accessible for
development and available under certain market conditions and mining
constraints. The first basin being assessed is the Powder River Basin
in Wyoming and Montana.
Within this effort, the USGS completed an assessment of the
technically and economically recoverable coal resources in Wyoming's
Gillette coalfield, the most prolific coalfield in the Nation and a
part of the Powder River Basin. By utilizing an abundance of new data
from coalbed methane development in the region, the USGS was able to
produce the most comprehensive assessment to date of this area. The
Gillette area accounts for nearly 40 percent\4\ of the Nation's current
coal production, making it the single most important coalfield in the
United States. The USGS assessment indicates that there is a total of
165 billion tons of original coal resources in the six coal beds
included in the evaluation. Original coal resource is the total amount
of coal in-place before production. Of that original resource, 10.1
billion tons (6 percent) can be classified as economically recoverable
resources at the current average estimated sales price. However, about
67 billion additional tons are estimated to be recoverable assuming
increased market prices will support the higher costs needed to recover
deeper coal. The USGS has just released the assessment of the Northern
Wyoming Powder River Basin, an area north of the Gillette coalfield.
The total original coal resource in the Northern Wyoming Powder River
Basin assessment area for 24 coal beds assessed was calculated to be
285 billion tons. Available coal resources are estimated at about 263
billion tons (about 92.3 percent of the original coal resource).
Available coal resource is the amount of the original resource that is
accessible for mine development under current regulatory and land-use
constraints. Recoverable coal was determined for seven coal beds to
total about 50 billion tons. The economically recoverable portion of
the coal resources was determined to be about 1.5 billion tons of coal
(about 1 percent of the original resource total) for the seven coal
beds evaluated. The analysis and results for the Southwestern Wyoming
Powder River Basin area is currently in review, and the analysis of the
Montana portion of the Powder River basin has begun.
The USGS assessment of the Powder River Basin will be the most
thorough and comprehensive inventory of the Nation's most significant
coal basin to date. This inventory, with the others on the schedule,
will provide policy makers a valuable planning tool needed to develop
long-term energy strategies and provide decision makers with important
information about what coal resources are currently or potentially
technically and economically recoverable.
USGS National Geothermal Resource Activities
In addition to petroleum and coal resources, the USGS also
evaluates renewable resources such as geothermal energy. The USGS
recently completed a national geothermal resource assessment, the first
one in more than 30 years. The USGS evaluated 241 moderate- and high-
temperature geothermal resources capable of producing electricity. The
USGS assessment\5\ estimates the following domestic geothermal
resources:
(1) 9,057 Megawatts-electric (MWe) of power potential from
conventional, identified geothermal systems,
(2) 30,033 MWe of power generation potential from
conventional, undiscovered geothermal resources, and
(3) a provisional estimate of 517,800 MWe of power generation
potential from unconventional Enhanced Geothermal Systems (EGS)
resources.
The USGS assessment results indicate that full development of the
technically recoverable conventional, identified systems could expand
geothermal power production by approximately 6,500 MWe, or about 260
percent of the currently installed geothermal total of more than 2,500
MWe in the United States. The provisional resource estimate for
unconventional EGS is more than an order of magnitude larger than the
combined estimates of both identified and undiscovered conventional
geothermal resources and, if successfully developed, could provide an
installed geothermal electric power generation capacity equivalent to
about half of the currently installed electric power generating
capacity of the United States.
Because of the significant potential of unconventional geothermal
resources to contribute to domestic energy resources, ongoing research
at the USGS focuses on refining our understanding and characterization
of EGS and improving the assessment methodology to incorporate the
latest advances in EGS technology. The USGS is also working with the
Department of Energy to characterize geothermal resources in
sedimentary basins, particularly low temperature resources that were
not included in the most recent assessment. Additionally, the USGS is
working with the Bureau of Land Management to acquire new data and
develop a more refined understanding of geothermal potential on Federal
lands.
Conclusion
Energy resources research and assessments are a traditional
strength of the USGS. As the Nation's energy mix evolves, the USGS will
continue to seek ways to expand its research and assessment portfolio
to better include a comprehensive suite of energy sources, including
hydrocarbon-based (for example, unconventional gas from coal, oil and
gas from shale, and gas from hydrates) and nonhydrocarbon-based sources
(for example, geothermal resources and uranium) and to address the
effects of such resources on land use, ecosystem health, and human
health. USGS resource assessments and research can provide valuable
information for the public and government discourse about the energy
resource future of the Nation. The USGS looks forward to working with
Congress as it examines these challenges and opportunities.
Thank you for this opportunity to provide an overview of USGS
research and assessments of geologically based energy resources. I
would be happy to answer your questions.
References
\1\ EIA http://www.eia.doe.gov/pub/oil_gas/natural_gas/
data_publications/crude_oil_
natural_gas_reserves/current/pdf/top100fields.pdf
\2\ USGS http://energy.cr.usgs.gov/oilgas/noga/
assessment_updates.html
\3\ BOEMRE http://www.boemre.gov/revaldiv/RedNatAssessment.htm
\4\ BLM http://www.blm.gov/wy/st/en/programs/energy/Coal_Resources/
PRB_Coal/
production.html and EIA http://www.eia.doe.gov/cneaf/coal/page/special/
tbl1.html
\5\ USGS http://pubs.usgs.gov/fs/2008/3082/pdf/fs2008-3082.pdf
Figure 1. Conceptual diagram illustrating the different geologic
settings between conventional and unconventional (sometimes called
``continuous'' because they are continuous across the basin) resource
accumulations (http://pubs.usgs.gov/fs/fs-0113-01/fs-0113-01.pdf).
______
The Chairman. Thank you very much. Boy, this is an all-star
panel now, I will tell you. Next, Dr. Gene Whitney, from Energy
Research at the Congressional Research Service. You are
recognized, sir, for five minutes.
STATEMENT OF GENE WHITNEY, Ph.D., MANAGER,
ENERGY RESEARCH, CONGRESSIONAL RESEARCH SERVICE
Dr. Whitney. Mr. Chairman and Members of the Committee, on
behalf of the Congressional Research Service, I would like to
thank the Committee for its invitation to testify today to
address the subject of rising gasoline prices and domestic
resources.
Domestic energy production contributes to the economic
vitality of the Nation, and reduces reliance on foreign energy
sources. Much of our domestic energy production takes place on
Federal lands, or on the Federally owned Outer Continental
Shelf.
Congress has worked hard to ensure that resources developed
on Federal lands provide revenues to the American people
through lease purchase, rents, and royalties, but energy
production, like many industrial processes, involves some risks
to human health and safety, and to environmental quality.
Thus, numerous laws have been passed in recent decades to
ensure that energy production in the United States is done in a
safe and responsible manner. Policies have been established
through statute, and through Federal agency rulemaking to
provide controlled access to Federal lands, and to regulate the
activities of energy production.
The purpose of my testimony today is to describe the
responsibilities and authorities of the Federal Land Management
Agencies, and through that description, to outline the
processes that energy companies must navigate in order to
explore for, develop, and produce oil in the United States.
There is an ongoing tension between the expansion of energy
production, in which companies seek access to Federal lands and
waters to find and produce oil, and regulation by Federal
agencies to ensure the exploration and production proceeds
safely, and with minimal environmental impact.
This tension has been especially high in the wake of the
deep water Horizon event. Access to onshore Federal lands for
energy exploration and production is managed primarily by the
Interior Department's Bureau of Land Management, and by the
United States Forest Service, and the Department of
Agriculture.
Resources on the Federal Outer Continental Shelf are
managed by the Bureau of Ocean Energy Management Regulation and
Enforcement in the Department of the Interior. Each of these
agencies develops land use plans and resource management plans
that determine how and when Federal lands and offshore areas
are developed.
The plans for onshore development seek to accommodate
various uses of public lands, including energy and minerals
development, grazing, recreational activities, timber
harvesting, and preservation of wildlife habitat and waterways,
among others.
Offshore development must coexist with fisheries, shipping,
recreational activities, and preservation of marine ecosystems.
Resource management plans are developed with public input, and
must comply with the requirements of the National Environmental
Policy Act, the Endangered Species Act, Air and Water Quality
Regulations, and several other applicable statutes and
regulations.
Each resource management plan includes a schedule of energy
and mineral leases for the planning units. Leases for oil and
gas on Federal lands and offshore are sold at public auction.
The winning bid for a particular parcel purchases the lease,
and gains the right to produce oil and gas from the lease area.
The leaseholder must pay rent on the leased lands and
royalties are paid on any oil and gas produced. A portion of
these royalties is shared with the States. The owner of a lease
must obtain a permit to drill on the lease.
The permitting process is also guided by a number of laws
and regulations, including several new requirements instituted
by the Interior Department after the deep water Horizon
incident.
The process of approval of an application for a permit to
drill is affected by the ability of Federal agencies to process
the application, as well as the ability of the permit applicant
to meet the requirements for approval.
Other non-procedural issues may delay or prevent oil and
gas development from proceeding on a particular lease,
including a shortage of drilling rigs or other equipment, a
shortage of skilled labor, or issues associated with the
company's financial strategy.
Legal challenges against the government or against the
energy company might also delay or prevent development on
Federal leases. In summary, the process of leasing Federal
lands and waters, the approval of permits to drill, and the
logistics of exploration and production are lengthy and complex
processes, subject to a large number of laws and regulations,
which make simple characterizations of the overall process
difficult.
Thank you for the opportunity to provide this information
on behalf of the Congressional Research Service. I will be glad
to answer any questions.
[The prepared statement of Dr. Whitney follows:]
Statement of Gene Whitney, Energy Research Manager,
Congressional Research Service
Mr. Chairman and Members of the Committee, on behalf of the
Congressional Research Service, I would like to thank the Committee for
its invitation to testify today to address the subject of this hearing,
``Harnessing American Resources to Create Jobs and Address Rising
Gasoline Prices: Domestic Resources and Economic Impacts.''
Introduction
Energy companies seeking to develop energy resources in the United
States must comply with a number of state and federal requirements,
including environmental and safety regulations and a permitting process
that allows them to explore for and produce oil and natural gas, or
other energy resources. I would like to briefly discuss issues of
access, permitting, and regulation that affect domestic energy
production. Because the hearing is focused on rising gasoline prices, I
will concentrate primarily on domestic oil production. Furthermore,
because we are discussing federal policy, I will focus primarily on
energy development on federal lands and on the federally owned Outer
Continental Shelf. Many of these processes and requirements I describe
for oil development could be similar for other fossil fuels or for
deployment of certain renewable energy technologies. The purpose of
this testimony is to illustrate the responsibilities and authorities of
the federal land management and regulatory agencies, and through that
illustration to demonstrate the processes that energy companies must
navigate in order to explore for, develop, and produce oil in the
United States.
Access to Resources on Federal Lands and Outer Continental Shelf
Access to onshore federal lands for energy exploration and
production is managed primarily by the Interior Department's Bureau of
Land Management (BLM) and by the U.S. Forest Service (USFS), which is
an agency of the Department of Agriculture. BLM manages over 245
million acres of federal land, plus 700 million acres of subsurface
mineral estate. Most BLM lands are in the western United States. The
USFS manages 193 million acres of national forests. Other land
management agencies such as the National Park Service or the Fish and
Wildlife Service manage lands that are mostly, but not entirely, off
limits to energy development by statute or by Executive Order. BLM and
USFS develop and maintain management plans for the lands under their
jurisdiction per the Federal Land Policy and Management Act of 1976 and
the National Forest Management Act of 1976, and those plans are open to
public input. The USFS is currently in the process of revamping its
planning process.
Development of onshore federal oil and natural gas resources
includes five phases:\1\
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\1\ http://www.blm.gov/wo/st/en/prog/energy/oil_and_gas/
leasing_of_onshore.html
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1. Land Use Planning (development of a Resource Management
Plan)
2. Parcel Nominations and Lease Sales
3. Well Permitting and Development
4. Operations and Production
5. Plugging and Reclamation
The process of developing a 5-year Resource Management Plan for
each unit of federal lands may require months or years to complete, and
the plans must comply with the requirements of the National
Environmental Policy Act (NEPA), the Endangered Species Act (ESA), air
and water quality under Environmental Protection Agency regulations,
and several other applicable statutes enacted by Congress.
The steps in developing a Resource Management Plan (RMP) include
the following:\2\
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\2\ http://www.blm.gov/wo/st/en/prog/planning/
frequently_asked_questions.html#4
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1. Issue a Notice of Intent to Prepare the RMP
2. Conduct Scoping (i.e. public process to assist in the
identification of planning issues)
3. Analyze the management situation
4. Develop alternatives to address planning issues
5. Analyze the effects of the alternatives
6. Select a preferred alternative
7. Prepare a draft RMP/draft environmental impact statement
(EIS)
8. Provide a 90-day public comment period
9. Prepare a proposed RMP/final EIS based on comments
received
10. Provide a 30-day public protest period upon publication of
the proposed RMP/final EIS
11. Approve the RMP through a record of decision once the
protests have been resolved
12. Implement, monitor, and evaluate plan decisions
Each plan must include an environmental evaluation process under
the NEPA rules. The plans attempt to accommodate varied uses of public
lands, including energy and minerals development, grazing, recreational
activities, timber harvesting, preservation of wildlife habitat and
waterways, preservation of cultural heritage sites, wild land fire
mitigation, among others. This multiple-use approach results in some
areas being fully available for energy development via a set of leasing
and permitting processes, some areas are available but restricted in
timing or surface occupancy, and some areas are placed off limits to
energy development.
An inventory of oil and natural gas resources and leasing
restrictions on federal lands was completed in 2008 by a consortium of
federal agencies \3\ in response to the Energy Policy Act of 2000, as
amended by the Energy Policy Act of 2005. That inventory, reported in
phased publications (the main publication was ``Inventory of Onshore
Federal Oil and Natural Gas Resources and Restriction to Their
Development'' released in 2008), listed nine categories of access to
federal lands ranging from complete inaccessibility to full access
under standard leasing terms. See Table 1. Of the 279 million acres of
federal land surveyed, 60% was inaccessible, 23% was accessible with
restrictions, and 17% was accessible under standard lease terms. The
largest proportion of inaccessible lands includes lands withheld from
leasing by Executive Order or statute, inaccessibility based on
discretionary decisions made by the land management agency (which may
include endangered species habitat and historical sites), lands that do
not yet have a completed management plan, and lands that do not afford
surface occupancy.
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\3\ Inventory of Onshore Federal Oil and Natural Gas Resources and
Restriction to Their Development, Prepared by the U.S. Departments of
the Interior, Agriculture, and Energy, 2008, http://www.blm.gov/wo/st/
en/prog/energy/oil_and_gas/EPCA_III.html.
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Access to offshore areas for energy development is managed by the
Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE),
which is ``the federal agency responsible for overseeing the safe and
environmentally responsible development of energy and mineral resources
on the Outer Continental Shelf''.\4\ The Outer Continental Shelf Lands
Act of 1953 (OCSLA), as amended, provides for the leasing of OCS lands
in a manner that protects the environment and returns revenues to the
federal government. BOEMRE manages about 1.7 billion acres of the OCS,
divided into 26 planning areas. Certain parts of the OCS are off limits
to oil and gas development by statute or Executive Order, including
shipping lanes, certain military operational zones, and National Marine
Sanctuaries. In addition to NEPA, ESA, and other laws applied to
onshore planning, the planning process for offshore areas is subject to
compliance with additional statutes and regulations relevant to the
ocean environment, coastal zone management, fisheries, and marine oil
spill regulations, among others.
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\4\ http://www.boemre.gov/aboutBOEMRE/
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The Oil and Natural Gas Leasing Process \5\
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\5\ http://www.blm.gov/wo/st/en/prog/energy/oil_and_gas/
leasing_of_onshore/og_leasing.html
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Subsequent to the completion of a Resource Management Plan,
individual parcels within the planning area may be nominated for oil
and natural gas leasing. The leasing process follows the Minerals
Leasing Act of 1920 as amended, the Federal Land Policy and Management
Act of 1976, the Federal Onshore Oil and Gas Leasing Reform Act of
1987, and the Onshore Oil and Gas Order No. 1 of 2007. Anyone may
nominate a parcel for lease, but the parcel is only subject to lease if
it is available, and any stipulations from the RMP must be attached
before the parcel is placed for sale. Lease sales are held quarterly by
each state BLM office, are open to the public, are announced in
advance, and are conducted via competitive auction. Bonus bids are
often entered for areas with particularly high resource potential, and
these bonus bids may reach millions of dollars. The winner of a bid for
a particular parcel gains the right to explore, drill, and produce oil
and gas from the lease area. As long as there is one producing well on
the parcel, the lease is valid for ten years. The lease holder must pay
rent ($1.50 to $2.00 per acre per year) on the leased lands, royalties
are paid on any oil and gas produced, and those royalties are split
between the state and federal government.
BLM launched a series of reforms to its leasing process in 2010.
These reforms were in response to an increasing rate of protests on
leases, and in an effort to increase public and stakeholder input into
the leasing process. According to the Department of the Interior, BLM
launched the reforms ``in an effort to improve protections for land,
water, and wildlife and reduce potential conflicts that can lead to
costly and time-consuming protests and litigation of leases,'' \6\ and
``for ensuring orderly, effective, timely, and environmentally
responsible leasing of oil and gas resources on federal lands. The
leasing process....will create more certainty and predictability,
protect multiple-use values when the Bureau of Land Management makes
leasing decisions, and provide for consideration of natural and
cultural resources as well as meaningful public involvement.'' \7\
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\6\ http://www.doi.gov/news/doinews/BLM_energy_reform.cfm
\7\ http://www.blm.gov/wo/st/en/prog/energy/oil_and_gas.html
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BOEMRE follows a series of 5-year programs for oil and gas lease
sales on the OCS, and the most recent plan extends from 2007 to 2012.
However, two lawsuits filed in 2007 resulted in a court order that
required the Department of the Interior to ``'conduct a more complete
comparative analysis of the environmental sensitivity of different
areas.' The Court found the Department failed to properly analyze the
environmental sensitivity of different areas of the OCS, thus hindering
Interior's ability to comply with the balancing requirement specified
in the OCS Lands Act, which directs the Secretary of Interior to
consider `the relative environmental sensitivity and marine
productivity of the different areas of the outer Continental Shelf.'''
\8\ The Interior Department subsequently released a Revised Program for
2007-2012 in December of 2010 that is intended to address the issues of
environmental sensitivity. Because of the timing of the program
revision, the revised program was also informed and influenced by the
explosion and subsequent oil spill from the Deepwater Horizon on April
20, 2010. For example, there is recognition that certain environmental
baselines in the Gulf of Mexico have changed as a result of that spill.
Also, some leases scheduled in the original program were cancelled and
others were combined and/or rescheduled. The revised program does not
include information from the National Academy of Engineering study of
the Deepwater Horizon incident, nor from the President's Oil Spill
Commission.
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\8\ http://www.boemre.gov/5-year/RelatedLitigation.htm
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Lease holders are to be fully informed about the requirements for
compliance with appropriate statutes and regulations. As stated in the
report, Inventory of Onshore Federal Oil and Natural Gas Resources and
Restriction to Their Development 2008, ``All oil and gas leases on
Federal lands, including those issued with only the standard lease
terms, are subject to full compliance with all environmental laws and
regulations. These laws include, but are not limited to, the National
Environmental Policy Act, Clean Water Act, Clean Air Act, Endangered
Species Act, and National Historic Preservation Act. While compliance
with these laws may delay, modify, or prohibit oil and gas activities,
these laws represent the values and bounds Congress believes
appropriate to manage Federal lands.'' \9\
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\9\ Inventory of Onshore Federal Oil and Natural Gas Resources and
Restriction to Their Development, Prepared by the U.S. Departments of
the Interior, Agriculture, and Energy, 2008, http://www.blm.gov/wo/st/
en/prog/energy/oil_and_gas/EPCA_III.html.
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Drilling Permit Process:\10\
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\10\ http://www.blm.gov/wo/st/en/prog/energy/oil_and_gas/
leasing_of_onshore/og_permitting.html
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Once a lease has been acquired, the owner of the lease must obtain
a permit to drill on the lease. The permitting process is guided by
NEPA, the Onshore Oil and Gas Order No. 1 of 2007, the Energy Policy
Act of 2005, and an internal body of BLM standards and guidelines--The
Surface Operating Standards and Guidelines for Oil and Gas Exploration
and Development 2007--referred to as The Gold Book. The Gold Book
contains requirements in the Code of Federal Regulations at 43 CFR 3000
and 36 CFR 228 Subpart E; Onshore Oil and Gas Orders, and Notices to
Lessees. BOEMRE uses a series of Notices to Lessees to communicate the
regulatory expectations contained in the Code of Federal Regulation for
offshore drilling.\11\
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\11\ http://www.boemre.gov/ntls/
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The lease holder may not disturb the surface of the leased parcel
until necessary permits have been acquired. The leaseholder must file
an application for permit to drill (APD) which includes a surface use
plan of operations. The APD package consists of: \12\
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\12\ http://www.blm.gov/wo/st/en/prog/energy/oil_and_gas/
best_management_practices/
gold_book.html
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1. Form 3160-3, Application for Permit to Drill or Reenter
2. Surface use plan of operations
3. Drilling plan
4. A well plat certified by a registered surveyor
5. Evidence of bond coverage
6. Operator certification
7. Original or electronic signature
8. Other information required by order, notice, or regulation
Under NEPA, operations expected to have significant environmental
impacts require an environmental impact statement (EIS). Other
activities may be analyzed with a less extensive environmental
assessment (EA), which sometimes reveals the need for a full EIS.
Certain activities that are deemed to have little or no net
environmental impact may be covered by categorical exclusions under
NEPA. Section 390 of the Energy Policy Act of 2005 created a set of new
categorical exclusions that apply to onshore oil and gas exploration
activities. These new categorical exclusions were intended to reduce
the paperwork required in the permitting process and to speed the APD
process. BLM inspects the parcel to identify potential environmental
impacts or other concerns. When BLM is satisfied that applicable
statutes and regulations have been complied with, it may approve the
APD for a period of two years or until the lease expires, whichever is
first.
Permitting of offshore oil and gas wells is similar to the onshore
process, but has been controversial since the Deepwater Horizon
disaster in the Gulf of Mexico. In June 2010, Interior Secretary
Salazar issued a series of new, more rigorous, requirements for
drilling in the OCS.\13\ These new rules require energy companies to:
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\13\ http://www.doi.gov/news/pressreleases/Interior-Issues-
Directive-to-Guide-Implementation-of-Stronger-Safety-Requirements-for-
Offshore-Drilling.cfm
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Show certification by the operator's Chief Executive
Officer that they are conducting their operations in compliance
with all operating regulations and that they have tested their
drilling equipment, ensured that personnel are properly
trained, and reviewed their procedures to ensure the safety of
personnel and protection of the environment;
Provide certification from a Professional Engineer--
before beginning any new drilling operations using either a
surface or subsea blowout preventer (BOP) stack--of all well
casing and cement design requirements, including that there are
at least two independent tested barriers for the well, and
adhere to new casing installation procedures;
Provide independent third-party verification, before
drilling any new well, that the BOP will operate properly with
the drilling rig equipment and is compatible with the specific
well location, borehole design and drilling plan;
Provide independent third-party verification that
shows that the blind-shear rams installed on the surface or
subsea BOP stack are capable of shearing the drill pipe in the
hole under maximum anticipated surface pressures;
Adhere to new inspection and reporting requirements
for BOP and well control system configuration, BOP and well
control test results, BOP and loss of well control events, and
BOP and loss of well control system downtime;
Receive independent third-party verification, before
spudding a new well, of re-certification of BOP equipment used
on all floating drilling rigs to ensure that the devices will
operate as originally designed, and that any modifications or
upgrades conducted after delivery have not compromised the
design or operation of the BOP;
Have a secondary control system for subsea BOP stacks
with remote operated vehicle (ROV) intervention capabilities,
including the ability to close one set of blind-shear rams and
one set of pipe rams. The subsea BOP system must have an
emergency shut-in system in the event of lost power, as well as
a deadman system and an autoshear system;
Conduct ROV Hot Stab Function Testing of the ROV
Intervention Panel on subsurface BOP stacks; and
Provide documentation that the BOP has been
maintained according to the regulations.
At the end of September 2010, Secretary Salazar ordered that any
well drilled in deep water must comply with two new drilling and
workplace safety measures, which expanded on the earlier rules:\14\
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\14\ http://www.doi.gov/news/pressreleases/Salazar-Announces-
Regulations-to-Strengthen-Drilling-Safety-Reduce-Risk-of-Human-Error-
on-Offshore-Oil-and-Gas-Operations.cfm
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The Drilling Safety Rule, effective immediately upon
publication, makes mandatory several requirements for the
drilling process that were laid out in Secretary Salazar's May
27th Safety Report to President Obama. The regulation
prescribes proper cementing and casing practices and the
appropriate use of drilling fluids in order to maintain well
bore integrity, the first line of defense against a blowout.
The regulation also strengthens oversight of mechanisms
designed to shut off the flow of oil and gas, primarily the
Blowout Preventer (BOP) and its components, including Remotely
Operated Vehicles (ROVs), shear rams and pipe rams. Operators
must also secure independent and expert reviews of their well
design, construction and flow intervention mechanisms. . ..
The Workplace Safety Rule requires operators to have a Safety
and Environmental Management System (SEMS), which is a
comprehensive safety and environmental impact program designed
to reduce human and organizational errors as the root cause of
work-related accidents and offshore oil spills. The Workplace
Safety Rule makes mandatory American Petroleum Institute (API)
Recommended Practice 75, which was previously a voluntary
program to identify, address and manage safety hazards and
environmental impacts in their operations.
The oil and gas industry has argued that responsible developers can
address the problems associated with the Deepwater Horizon accident by
eliminating the mistakes that led to the blowout, so that mitigating an
uncontrolled blowout is not necessary. However, BOEMRE insisted that no
drilling permits would be issued unless the new requirements were met.
On February 28, 2011, Noble Energy received the first permit to drill
in deep water since the April 20, 2010, event after demonstrating that
they could meet the new standards set by BOEMRE.
Operation, Production, Shutdown and Reclamation \15\
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\15\ http://www.blm.gov/wo/st/en/prog/energy/oil_and_gas/
leasing_of_onshore/og_reclamation.html
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Only after the permit to drill has been obtained can the energy
company begin development and production. No ground is broken or
drilling started until all of the above requirements are met. Onshore
development generally requires some road building to gain access to the
optimal drill site on the lease. A well pad is excavated and graded,
along with mud pits and support buildings. Depending on the location
and the nature of the resource, pipelines must sometimes be constructed
to the well site for production. During the development and production
period, federal inspectors visit the drilling or production site
periodically to ensure that the terms of the drilling permit are in
compliance with applicable laws and regulations, and to ensure that the
operation is safe and minimally disruptive. Drilling normally lasts for
a few weeks or months, but production may continue for many years.
During the production period, federal inspectors generally inspect the
production site at least every three years to monitor surface
disturbances and any potential health, safety, or environmental
concerns. Violations may result in corrective measures, fines, or
halting of production in severe cases.
When production has ended, the site must be reclaimed according to
specific standards described in the Gold Book and in the Onshore Oil
and Gas Order No. 1 of 2007. A reclamation plan is included in the
original permitting documents, and that reclamation plan must be
executed after production stops. The goal of reclamation is ecosystem
restoration, including restoration of the natural vegetative community,
hydrology, and wildlife habitats. In addition to surface reclamation,
the well itself must be sealed and plugged so that no contamination can
flow into groundwater aquifers or to the surface. Federal inspectors
continue to inspect the site through the completion of the reclamation
process.
Offshore Drilling Moratoria and the Effects of the Deepwater Horizon
Disaster
For several decades, the only OCS areas open for oil and gas
exploration were areas in the central and western Gulf of Mexico, and
certain areas off the coasts of southern California and Alaska.
Currently, with some exceptions for marine sanctuaries and monuments,
no portion of the federal OCS has a permanent moratorium on oil and gas
leasing and development. While there are some areas under temporary
development bans, such as suspensions and moratoria directed by either
legislative and executive powers, most of the OCS is free of moratoria
restrictions and considered permissible for offshore leasing activity.
Aspects of moratorium policy (either establishing or lifting
temporary bans on oil and gas exploration and development) are derived
from legislative and executive powers to direct offshore leasing
activities. A shift in both legislative and executive moratoria policy
during the 111th Congress signaled an end to moratoria measures that
had banned development in some OCS areas since the early 1980s.
Legislative moratoria enacted annually by Congress for about 27 years
as part of annual Department of the Interior appropriations acts
expired on September 30, 2008. In areas where OCS leasing restrictions
were changed, some preliminary oil and gas leasing activity has
commenced, but no lease sales have been held.
Support for three national objectives coalesced in 2009, resulting
in the removal of most congressional and executive constraints on oil
and gas exploration and development: (1) promoting domestic energy
production to improve the nation's energy security, (2) enhancing
federal revenue, and (3) spurring innovation and diversification in
ocean energy technologies to help create new jobs. The shift in
moratorium policy along with two other developments--the start of
federal offshore renewable ocean energy projects (e.g., offshore wind
farms) and expanded oil and gas prospecting in deepwater areas--
increased the responsibilities of the federal offshore energy program.
Around the world, changing ocean energy policies are affecting how
nations govern offshore areas. Economic pressures and technological
advances are driving changes in moratorium policy as the global search
for energy reaches into deeper ocean waters. A number of countries are
revisiting policies about offshore areas, and some countries are making
claims to expand their reach for offshore resources. One venue for
claims of this nature is the United Nations Convention on the Law of
the Sea (UNCLOS). Although the United States has not ratified UNCLOS,
the State Department has taken measures to address the U.S. extended
continental shelf areas in a manner not inconsistent with the UNCLOS
process. These measures signal changes in U.S. policies about
moratorium areas.
In March 2010, President Obama expressed the intent of the
Administration to open selected OCS areas to leasing for oil and gas
production, including areas in the eastern Gulf of Mexico, off the
Atlantic coast, and in Alaska. Proponents for offshore oil and gas
development viewed the President's actions skeptically, since moratoria
had been lifted from all OCS areas, yet the Administration intended to
offer lease sales in only certain portions, and then only in 2012.
On April 20, 2010, the Deepwater Horizon rig, in the process of
drilling BP's Macondo well in 5,000 feet of water in the Gulf of
Mexico, exploded and sank, killing eleven men and resulting in
uncontrolled leakage of nearly 5 million barrels of oil and natural gas
into the Gulf of Mexico before the well was capped on September 17,
2010. Soon after the explosion and leak, President Obama imposed a six-
month ban on OCS drilling in water deeper than 500 feet so that an
investigation could determine the cause of the Deepwater Horizon
blowout and to ensure that necessary oversight and regulation
enforcement were in place. A month later, Judge Martin Feldman, a U.S.
District Court judge in Louisiana, responded to a lawsuit filed by a
coalition of offshore drilling equipment providers and struck down the
drilling ban, saying that the Administration had failed to justify the
need for such ``a blanket, generic, indeed punitive, moratorium'' on
deep-water oil and gas drilling.\16\ Judge Feldman also cited the
severe economic impact that a drilling ban would have on Gulf
communities, but environmental groups and supporters of the fishing
industry opposed the ruling. The Administration appealed the ruling,
but the 5th Circuit U.S. Court of Appeals rejected the appeal on July
8, 2010. Interior Secretary Ken Salazar reimposed the moratorium later
in July, citing more extensive justifications than used for the first
moratorium. The Administration finally lifted that moratorium
voluntarily in October, 2010. Opponents of the moratorium contend that
there continues to be a de facto moratorium in place, citing the lack
of drilling permits issued in the Gulf of Mexico.
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\16\ http://www.nytimes.com/2010/06/23/us/23drill.html
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On February 2, 2011, Judge Feldman ruled that the Obama
Administration acted in contempt by failing to resume issuing deepwater
permits after he struck down the Administration's ban on deepwater
drilling as being overly broad, followed by a failed appeal. On
February 17, 2011, he ordered the Department of the Interior to address
five pending drilling permits within 30 days. The Administration
appealed that order on March 2, 2011. On March 12, 2011, a drilling
permit was issued to BHP Billiton PLC, one of the five pending
applicants. As of March 14, 2011, three days from the 30-day deadline,
no additional permits had been issued. Thus, the tension continues
between the Administration's desire to implement drilling and safety
rules to ensure that there is no repeat of the Deepwater Horizon
accident, and the desire by the oil and gas industry, supported by
court actions, to resume the permitting of deepwater exploration and
development.
Other factors
In addition to the leasing, permitting, and production processes
conducted by federal agencies, a number of other issues may arise in
the oil and gas leasing process that delay or prevent oil and gas
development from taking place, or might account for the large number of
leases held in non-producing status. There could be a shortage of
drilling rigs or other equipment, a shortage of skilled labor, or
problems with financing. Legal challenges against the government or
against the energy company might delay or prevent development.
Typically, many leases are in the development cycle (e.g., conducting
environmental reviews, permitting, or exploring) but not producing
commercial quantities of oil at a particular time.
As described above, the lease and permit processes, as well as the
regulatory frameworks for both onshore and offshore exploration,
drilling, and production of oil and natural gas are evolving over time.
Some part of the planning, leasing, and permitting process is currently
changing in the three major federal leasing agencies: BLM, USFS, and
BOEMRE. In addition, the BOEMRE (formerly Minerals Management Service)
is undergoing an agency reorganization in the wake of the Deepwater
Horizon incident last year. Under the new organization, BOEMRE will be
comprised of three separate, independent entities to promote energy
development and to manage leasing, to regulate offshore drilling, and
to collect revenues owed to the federal government. Additional staff
and resources have been requested to increase the oversight of offshore
exploration and development, and some of the agency changes are
scheduled to be implemented within the next year. As the reorganization
and associated changes proceed, it will be incumbent upon the oil and
gas companies to remain abreast of each development and to comply with
each change in the planning, leasing, permitting, and enforcement
process.
Thank you for the opportunity to provide this information on behalf
of the Congressional Research Service. I will be glad to answer any
questions you may have.
The Chairman. Boy, I have to tell you that I am absolutely
impressed with these three witnesses that have hit it right on
the mark. We have to come up with a reward, I think, for that.
Mr. Holt. If the Chairman would yield, we should point out
that as these witnesses come in on time with their testimony,
we judge testimony on both content and quality, and on both
scores, they are doing well.
The Chairman. Well, I am glad that you said that, Mr. Holt,
because the next person to testify is the Ranking Member, who
was not here. We have been called to vote, but we have time,
and I want to give the courtesy to Mr. Markey to make his
opening statement.
Then we will break, and go to vote, and then come back. So,
Mr. Markey, follow Mr. Rush's lead.
STATEMENT OF HON. EDWARD J. MARKEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MASSACHUSETTS
Mr. Markey. Thank you, Mr. Chairman, and happy Saint
Patrick's Day to you, Mr. Chairman. The reference in the title
of this hearing to harnessing American resources is
appropriate, because we are in a horse race.
Rather than a blanket of roses at the finish line, the
winner gets much more valuable prizes; lower unemployment, and
lower energy prices for American families. There are two horses
in this race; the old horse is the one that has been running
flat out for decades, is ``Drill, Baby, Drill.'' That horse is
owned by a syndicate of the richest international oil companies
in the world, and OPEC.
The second horse, a much more recent entry in the race, is
clean energy. That horse is owned by the American people, in
partnership with researchers, investors, and companies
developing new technologies to produce energy from wind, solar,
geothermal, hydropower, biomass, and other renewable sources.
Now our Republican colleagues make plenty of claims about
this race, but they are handicapping is highly suspect. First,
they say that they want a fair race, and claim that they would
be happy to see both horses win.
This is their all of the above claim, but the truth is that
our Republican friends have taken a terrible risk. They have
bet it all on just one horse. They bet billions of dollars in
subsidies and tax breaks, not to mention betting our economy
and our future all on ``Drill, Baby, Drill.''
In this Committee alone, the scorecard on all of the above
stands at seven hearings, featuring ``Drill, Baby, Drill,'' and
zero on clean energy. The Republican majority also claims that
the Obama Administration is pulling back the reins on ``Drill,
Baby, Drill.''
The truth is that this Administration is riding that horse
as hard and as fast as ever. Republicans want to debate
permits, or acres, or 10 year projections, but let us just cut
to the chase.
The amount of oil and natural gas produced from our public
lands has gone up every year of the Obama Administration,
period. In fact, we have been riding this horse so long and so
hard that we have left every other country far behind.
Nobody has as much riding on ``Drill, Baby, Drill'' as we
do; and last, our Republican colleagues claim that ``Drill,
Baby, Drill'' can win this race. The truth is that despite the
long head start, and despite the uneven field, and despite all
the money that we have been riding on that horse, history has
proven that ``Drill, Baby, Drill'' will never get us to the
finish line.
That horse has given us everything it has, more barrels of
oil, and more cubic feet of natural gas, more acres under
lease, more permits to drill, and no matter what we do, no
matter how many subsidies or tax breaks we give, the price at
the pump remains beyond our control.
The harder we whip that horse the further away the finish
line seems. At some point, we have to face facts. The
Republican energy policy amounts to nothing more than beating a
dead horse.
So what might happen if we get serious, and we let clean
energy out of the gate? Well, the first thing you need to know
is that clean energy can catch up because it is incredibly
fast.
Just think about the speed of the arrival of the internet,
or the elapsed time between the rotary dial phone and the
iPhone, when this country puts its mind to something. The speed
of innovation will take your breathe away.
And unlike ``Drill, Baby, Drill,'' the longer we let clean
energy run the cheaper it gets. There is a Moore's Law for
solar that says that each time we double production, the cost
of solar panels drops 18 percent.
The investment that we make in this horse stands to be the
best that we have ever made. The most important clean energy
that can win, and the most important is that clean energy can
win this race.
While ``Drill, Baby, Drill'' runs in place, clean energy is
moving forward. This horse will create new jobs, American jobs,
developing American technology, and this horse can cut energy
prices by reducing our oil imports.
If we unleash clean energy, let her out of the starting
gate, we will find ourselves in the winners circle in no time
as a country looking over our shoulders at number two and
number three in the world.
That is our opportunity, and that is the conclusion of my
opening statement, with 17 seconds left to spare. I thank you,
Mr. Chairman.
The Chairman. You were up to that challenge that was
offered by Mr. Holt, and I thank the Ranking Member for that.
We have two votes. The Committee will stand in recess until
approximately 11 o'clock. Hopefully, we can do it before that,
but no later than 11 o'clock. The Committee stands in recess.
[Recess.]
The Chairman. The Committee will reconvene. Our next
witness is Dr. Foss, and I saw her just a moment ago. The
Committee will be in recess momentarily.
[Recess.]
The Chairman. We will continue with our panel, and I want
to thank all of you for bearing with us while we had votes on
the Floor. So, at this time, I would like to introduce Dr.
Foss, Chief Energy Economist at the University of Texas. Dr.
Foss, you are recognized.
STATEMENT OF DR. MICHELLE MICHOT FOSS, Ph.D., CHIEF ENERGY
ECONOMIST, CENTER FOR ENERGY ECONOMICS, BUREAU OF ECONOMIC
GEOLOGY, JACKSON SCHOOL OF GEOSCIENCES, UNIVERSITY OF TEXAS
Dr. Foss. Thank you, Mr. Chairman, and thanks to you and
Members of the Committee for once again inviting me to serve as
a witness. Hydrocarbons are exceptional commodities. They
improve living standards, and improve the quality of life.
They are challenging to develop. They are commodities and
so prices are variable. Prices are variable for many reasons,
including actions and events. We are in a time which events are
creating expectations about prices, and that leaves us with a
number of questions on what do we do about this, and how do we
manage it, and what kinds of things can we think about.
To me, one of the most important things is to ensure that
the domestic industry and production remain competitive, and
this is a broad charter for both the industry and government.
A good way to start is by understanding the industry
business cycles. I view, and many people like me tend to view
the industry cost structure on the basis of full, break even
costs, not just what it costs to sink a drill byte, and drill a
well, but to stay in business. All the cash costs that have to
be carried by companies in order to do what they do to hold
acreage and inventory, regardless of whether it is public or
private leases, to pay for geological and geophysical staffs,
engineering staffs, to explore, to do research, until you are
finally ready to begin to develop a drillable prospect.
Full break even finding and development costs are high, and
have been rising for a number of reasons. Part of it is because
of the kinds of resources. They are abundant. Unconventional
resources are everywhere, but there are expenses.
The reservoirs are complex, and so incremental costs of
extracting additional barrels, or cubic feet of gas from those
resources, can be expensive. As long as we have a high and
rising marginal cost curve, then we will have price
variability.
So how do we manage that high and rising cost curve, and
what are the kinds of things that we can do. One is to look at
where we can increase production volumes, because the more that
you can produce for a given dollar invested, the better off you
are going to be.
Natural gas offers one way to do that. We have an abundant
natural gas base. It also has a high cost structure at present,
but we can already see that there are some improvements being
made, in terms of bringing costs down.
We can understand that costs that companies face are
affected by many things, such as policies, regulations, and
other issues. We can understand better that companies need
access to resources in order to be able to maintain portfolios
of leaseholds that can be used to develop drillable prospects.
Replenishing production is an essential part of maintaining
competitiveness in the domestic business. Protecting private
property rights and ensuring access to private lands is just as
important as ensuring access to public lands.
Our shale gas plays have succeeded largely because of
private mineral ownership and the ability to negotiate access
with private mineral owners and develop resources that way.
But we have to look at public lands, especially in
locations like the Gulf of Mexico, and reach a point in which
we can feel comfortable that we can responsibly manage access
to those resources, and maintain our critical science and
technology base for offshore exploration, and continue to push
the oil production renaissance that we seem to be having in the
United States, in the Gulf of Mexico, and Balkan shales, and
other plays.
We can also debottleneck the industry. We have an
interesting situation in which our domestic crude is priced
lower than international crudes, and to a large extent it is
because of infrastructure.
So we need to continue to be able to expand oil and oil
product pipelines, not just within the United States, but
across our borders. We also need to understand the social
economic benefits that the industry provides, and these are
large and varied, and it includes jobs, not only directly in
the industry, but also indirectly through service companies and
local investments and procurement.
The industry pays taxes. It is actually one of the larger
tax paying entities. I wanted to just draw the Committee's
attention to a report in the Wall Street Journal that matched
our own research on this, to the degree to which the petroleum
industry pays, perhaps up to a third of effective taxes for the
United States, and much larger than internet based companies,
which is interesting to think about since I don't think that I
can put Facebook in my gasoline tank.
The final thing is to just understand better how energy
affects transportation systems, and the differences between
some of the clean energy options that we would like to pursue,
and energy density values in gasoline and diesel. Thank you.
[The prepared statement of Dr. Foss follows:]
Statement of Dr. Michelle Michot Foss, Chief Energy Economist and Head,
Center for Energy Economics, Bureau of Economic Geology, Jackson School
of Geosciences, The University of Texas
Mr. Chairman and members of the Committee on Natural Resources, I
am Michelle Michot Foss, Chief Energy Economist and Head of the Center
for Energy Economics, based in the Bureau of Economic Geology, Jackson
School of Geosciences at The University of Texas. I am pleased and
honored to be selected as a witness for the Committee.
Hydrocarbons are exceptional commodities, given the number and
variety of essential products manufactured from these raw materials
with relative ease. These essential resources improve living standards
by:
Constituting the major sources of energy fuels for
everything from heating to lighting;
Enabling local to global transportation systems; and
Providing molecular building blocks for an incredible
array of intermediate and finished products that we use in
everyday life and across all industrial and economic sectors.
By definition, a commodity is a good for which the price cannot be
controlled by either buyers or sellers although prices may be impacted
by actions and events. Because hydrocarbons are commodities, price is
uncertain. Price risk is faced by all producers, even including members
of the Organization of Petroleum Exporting Countries (OPEC), and all
customers. The strong pace of growth in demand for hydrocarbons,
especially from emerging markets, and challenges in finding and
delivering new sources of supply, largely the result of human
interventions, periodically combine to increase uncertainty about
forward prices. Geopolitical events, including major economic and
business cycles, work to exacerbate uncertainty. Fear about how
geopolitical events might unfold adds momentum to price movements. When
geopolitical events occur within the ``Petroleum Heartland'', the
breadbasket for hydrocarbons extraction that stretches across North
Africa and the Middle East into Central Asia and Russia, uncertainty
and fear can become accelerated.
For this hearing, I offer my views on the topics intended to be
covered--domestic resources, production and the economic impact of
rising gasoline prices--along with some thoughts about what can be
done.
What Can Be Done
Ensure that the domestic industry and production remain
competitive.
A good way to start is by gaining a better understanding of the
industry business cycle and the inherent link between full finding and
development costs and oil and gas prices. As prices fall, capital
expenditures (CAPEX) and drilling also drop off. At some point, lower
prices trigger demand growth. Rising demand relative to available
supplies and deliverability signals new CAPEX. As prices rise, CAPEX is
increasingly attracted to the higher marginal cost projects. During oil
and gas business cycles, as price falls below marginal cost incremental
sources of supply begin to drop out of the market and the next cycle is
generated.
Because of the inherent dynamics in these cycles, I view full
breakeven finding and development (FD) costs as the essential driver
for oil and gas prices. Full breakeven FD costs include both
``drillbit'' exploration and production costs and the cash operating
costs of oil and gas production. FD of incremental supplies sets the
marginal cost curve for the industry and provides the best clue to
customers about the direction of prices. We have been, and will remain,
in a rising FD cost environment, the consequence of many factors. One
is the worldwide shift toward unconventional oil and gas resources
involving more complex reservoirs and advanced drilling and production
technologies, with all of the attendant environment and safety
considerations. Another is increasing remoteness of ``frontier''
resources, presenting additional logistics management constraints for
both field operations and field-to-market linkages. A third, important,
factor is ``government gatekeeping'' with respect to resource access.
In the U.S. we have our own particular land management practices and
costs for securing mineral rights, whether in the private or public
domains. Many sovereign governments elsewhere are reticent to provide
clear, transparent, competitive rules for licensing exploration rights.
The end result is a ``cost push'' that comes both as a consequence of
timing (when new supplies will come online) and an uncertainty about
volumes. There are many more factors.
A conclusion is that as long as we have a high and rising marginal
cost curve relative to strong and rising demand worldwide, price risk
and uncertainty will remain substantial. Uncertainty about the future,
``forward expectations'', adds to variability.
The figures below illustrate the strong linkage between full
breakeven FD costs expressed in dollars per barrel of oil equivalent
(BOE), including both ``drillbit'' cost and cash costs associated with
oil and gas production. The first chart provides a longer term view,
using three-year averages. The second provides a shorter term
illustration using annual data. In either case, full FD cost accounts
for prevailing crude oil prices. The relatively small and periodic
deviations up or down between the price that might be implied from FD
costs and actual prices determined in the market reflect uncertainty
and shifting expectations, including the force of geopolitical events.
When or if CAPEX injections yield drilling and production
success--as in the case of the U.S. shale gas plays--increased
production volumes can result in prices falling below marginal costs.
Shale gas and liquefied natural gas (LNG) investments were made in
response to extraordinarily strong natural gas price signals. Given the
current premium of crude oil to natural gas prices (nearly 22 to 1 in
raw data, $/barrel and $/MMBtu or million British thermal units; nearly
4 to 1 in MMBtu equivalent terms) shale gas producers are in a flight
to oil and liquids to sustain or restore profitability. In a 2007 paper
for Oxford Institute for Energy Studies, I argued that U.S. natural gas
prices could occupy a range of $3 to $5 per MMBtu through 2015. The
preponderance of evidence always has been that the Lower 48 is a rich
natural gas province. The question was always when and how would
resources be converted to reserves and production, and with what cost
and price conditions. Substantial LNG import terminal investments add
to prodigious natural gas supply deliverability capacity for the U.S.,
a comparative advantage that requires careful thought and planning.
Full FD costs are a reflection of the CAPEX surge into new
projects, the more complex unconventional resource plays that are
attracting interest, and the interactions between price-driven
investment trends and component costs. Increased CAPEX places a
``call'' on materials, like steel and other metals, and services used
for oil and gas drilling. In turn, higher energy costs impact the cost
structure of materials and service providers. Labor also is affected--
the cost of skilled workers becomes more expensive. Interactions are
complex with leads and lags. Costs are ``sticky downward'' and can
quickly build up again--as they are doing now. Higher costs can
eventually be offset by higher production volumes, resulting in lower
unit (per barrel and per cubic foot) costs and prices. Indeed, the
impact of higher natural gas production volumes is already in evidence
in the three-year and annual full breakeven FD cost charts above. The
2009 $/BOE unit costs are substantially lower because of growth in oil
and gas production volumes, but particularly the latter.
Our abundant shale gas basins place the United States first among
oil and gas producing countries (top chart below). For illustration
purposes, I included the BOE equivalent of our shale gas resource
estimates. Even without the shale gas plays, the U.S. would be a
significant resource holder. We have a long history of successfully
replenishing reserves to replace production_a key component of industry
competitiveness that is absolutely essential for successful exploration
and production businesses as well as for future generations of
customers. The chart below also illustrates the impact of gatekeeping
for resource access. What makes the U.S. different, what sets us apart
from other natural resource rich nation states is our system of private
property rights for minerals. The shale gas and many of the shale oil
plays have been able to be launched largely because companies can
negotiate directly with private land and mineral owners. In every other
country, sovereign governments manage the subsoil as a patrimony for
their citizens. It is important to recognize in these turbulent times
that poor management of resource wealth is a consequence of faulty
underlying systems and regimes rather than the other way around.
Private property rights and ``rule of law'' are essential for economic
growth and development. These linkages are well understood and
documented in political economic literature. Protection of property
rights in both the private and public domains is critical to sustaining
domestic oil and gas industry and production competitiveness.
Domestic oil and natural gas reserves and production have grown
with new investments in key plays. Along with the shale gas basins, new
prospective areas for oil resource plays are under development. The
Bakken shale in the U.S. Midwest region is yielding substantial and
growing volumes of oil from favorable reservoir layers within the
shale. Oil and liquids are being targeted in formations like the Eagle
Ford in Texas that had originally been magnets for shale gas CAPEX.
Current thinking is that a number of locations around the Lower 48
could be prospective for significant new--if challenging to develop--
oil finds. A key question for domestic industry and production
competitiveness is forward strategy for the U.S. Gulf of Mexico (GOM).
To retain the huge science and technology edge associated with our
offshore industry, a workable and streamlined framework simply has to
be achieved in a timely fashion. Already, CAPEX and research and
development (R&D) spending is exiting the GOM for more attractive
locations abroad. Safety and security cannot be compromised, but
industry and government must move quickly to restore competitiveness.
U.S. crude oil stocks have reached recent highs because of both
production gains and slack demand. Domestic oil production gains in
plays like the Bakken and shipments of oil to the U.S. from Canada have
resulted in a price disparity not unlike the low price phenomenon for
natural gas at Henry Hub. However, U.S. consumers are not able to
benefit fully from lower U.S. crude oil prices. One of the main
locations for oil aggregation, Cushing, Oklahoma, in Petroleum
Administration Defense District (PADD) 2, is well above five-year norms
in inventories (see chart below). Because the marker crude for this
location, West Texas Intermediate (WTI, also the crude for the main
traded futures contract) is landlocked with insufficient pipeline
takeaway capacity, the ``spread'' between WTI and Brent (North Sea) has
widened to historic differentials. Refiners that have access to WTI are
benefitting from a lower cost domestic crude price than refiners that
only have access to imports. Consumers served by refiners with WTI
supplies are able to benefit. But the overall market is not impacted by
cheaper U.S. crude oil. This disparity points to a distinct need: as
new domestic and Canadian plays and projects yield increased production
and growing reserves, new infrastructure is needed to ensure
deliverability into the market. Already, major natural gas pipeline and
storage investments are underway to support the emerging shale gas
plays. The same need must be met for crude oil and petroleum product
shipments. ``Debottlenecking'' the oil and gas transportation and
storage system requires transparent, sensible, and timely certification
of facilities_in short, ``access'' for right of way to build
infrastructure is just as critical as access to oil and gas resources
in order to sustain domestic industry and production competitiveness.
Debottlenecking would have sustained and long term influence on the
energy marketplace. Communication on debottlenecking and meaningful
strategies for GOM production and other key issues would be much more
impactful than using the Strategic Petroleum Reserve (SPR).
Many socioeconomic benefits are derived from domestic
resource production and utilization.
Sustaining these socioeconomic benefits will require a competitive
tax and business environment. Total industry employment growth averaged
six percent per year from early 2000s until recently with recession and
soft natural gas prices. In many states with established oil and gas
production businesses, economic conditions have been somewhat better
than for the nation as a whole. Employment and other economic benefits
are derived not just from direct oil and gas industry activity but many
indirect and ancillary activities as well. After many years of slack
spending, R&D investments by industry (which provides nearly all R&D
investment in oil and gas) surged, a reflection of the deep technology
and human resource needs in the shale oil and gas plays, deepwater GOM
and other frontiers. R&D spending is a vital component of
competitiveness and generates a wealth of connected economic benefits.
Another major socioeconomic benefit derived from domestic
industry activity is tax payments. As shown in the first chart below
(for exploration and production only), the oil and gas industry incurs
both income and non-income tax expenses including Federal, State and
Local income tax payments; production taxes (severance taxes and
other); sales and property taxes; and payroll taxes. In addition,
beneficiaries of domestic industry payments for surface access and
mineral rights (royalties and bonuses) incur their own and separate tax
expenses. Companies that provide materials and services to the industry
contribute separate income, payroll and other non-income tax streams.
Finally, companies with foreign operations provide large and extensive
tax streams. Tax payments fluctuate with commodity prices and
profitability; tax payments for 2009 were lower than previous years.
When producers face operating losses, as many do now in the face of low
natural gas prices relative to full breakeven FD cost, tax payments are
nil. Importantly, the oil and gas industry is typically the highest
effective tax payer among U.S. corporate contributing roughly 33
percent of total U.S. federal tax take (and ignoring all other tax
expense streams).
Currently, consumer pocketbooks are benefitting significantly
from lower natural gas prices, which help to offset higher gasoline
costs. We learned during the 2002-2008 rise in oil prices that the most
heavily affected energy customers are those for whom energy costs are a
larger share of their disposable incomes. Consumer and household debt
are declining as Americans work to bolster their disposable incomes and
build post-recession resiliency. Competitive energy supplies and prices
help enormously in household budget management. Consequently, a
distinct and important benefit of domestic industry and production
activity is felt right at home and in the pocketbook of every energy
consumer and customer. The same process needs to happen for the U.S.
economy. Prevailing views are that U.S. sensitivity to higher oil and
petroleum fuels prices is a consequence of our own fiscal house not
being in order. To the extent that we continue to incur deficits in our
current (international trade) accounts and deficits and debt in our
national fiscal accounts, we are much more likely to suffer
consequences. Strong connections exist between oil prices, the relative
value of our dollar, inflation, interest rates and fiscal and monetary
policies associated with these measures. Competitiveness of the
domestic oil and gas industry is tied to overall health of the U.S.
pocketbook and economy. Likewise, competitive domestic industry and
production can make direct contributions toward improved economic and
fiscal health by making our energy system more resilient, reliable and
cost effective.
Gasoline is the highest energy density system--with
substantial consequences for prices and forward strategies.
Demand for crude oil is derived from our demand for the useful
products we make from crude--gasoline and other fuels and materials. At
a time when calls are increasing to mandate shifts away from gasoline
and oil-based fuels, we should be cautious about expected benefits and
unintended consequences. The chart below, provided by Toyota, offers a
vivid illustration of the challenges in diversifying transportation
fuels and systems as well as for meeting environment targets.
Lower energy density fuels and systems pose great hurdles for
commercialization. Not only do they yield less energy delivered for
``work'', they also require comparatively larger resource inputs.
Together, these constraints mean fewer environmental and economic
benefits than are achieved when higher energy density transport fuels
and systems are deployed. Lithium-ion battery designs and similar
approaches not only rank lowest in energy density, but also bear many
difficulties when it comes to securing the additional raw materials to
manufacture and replace batteries and other components. Plug in hybrid
and other electric vehicle concepts that would rely on renewable energy
systems are further complicated by the low energy density
characteristics of renewable energy technologies and resources.
Emerging research using life-cycle measurements and other full cost
analysis has introduced many questions into conventional thinking about
alternative energy designs.
A current argument is that abundant domestic natural gas supplies
should be utilized for vehicle transport (CNG or compressed natural gas
as shown in the Toyota chart above). The current steep discount for
natural gas relative to petroleum products has spurred both thinking
and action. Natural gas vehicles or NGVs face the low energy density
challenge for commercialization. More success can be gained with truck
fleets so long as engine performance is not compromised. An alternative
question also could be raised: should natural gas be used to
reinvigorate the U.S. industrial base? This debate is currently
underway in the National Petroleum Council's study on use of domestic
oil and gas resources to achieve low carbon objectives. A natural gas-
led industrial and manufacturing renaissance in the U.S. would create
enormous socioeconomic benefits as well as helping to ``right the
ship'' of the U.S. economy by increasing exports, boosting trade flows
and contributing to fiscal recovery. As with domestic oil and gas
industry competitiveness, a U.S. industrial renaissance would require
favorable business and economic conditions and sensible policy and
regulatory approaches for success.
Many other options exist to seize control of the future and
manage oil price risk and uncertainty.
The energy density challenge should send a strong message for R&D:
it would be much wiser to consolidate spending and invest in basic
materials science research rather than alternative technology
giveaways. The Federal system of energy R&D could be overhauled with
much more productive approaches. Pre-commercial and emerging
technologies that have benefitted from Federal seed funds could be
auctioned instead of supported with additional public financing. Market
tests of new technologies could happen more quickly this way. And while
the focus of this hearing and deliberations are on our domestic oil and
gas industry and production, it is important that we protect free trade
and encourage free trade in oil and gas and other critical raw material
commodities. As I stated earlier, bad political systems lead to bad
results from resource wealth. Resource rich nations need to produce and
sell and invest their returns wisely, preferably through private
capital, in economic development and diversification. Wealth from
resource sales may feed information technologies and democratization.
______
The Chairman. Thank you very much, Dr. Foss. Next, we will
go to Mr. Guy Caruso, Senior Advisor, Energy and National
Security Center for Strategic and International Studies. Mr.
Caruso, you are recognized for five minutes.
STATEMENT OF GUY F. CARUSO, SENIOR ADVISOR, ENERGY AND NATIONAL
SECURITY, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES
Mr. Caruso. Thank you, Mr. Chairman, and good morning all
Members of the Committee, and I thank you for this opportunity
to give my views on the global oil market and the implications
for United States energy policy.
As Dr. Newell mentioned, 2010 was a very strong year in
global oil markets. So we go into this period of now political
unrest in North Africa with a fairly strong market.
We saw prices break out of a range of $75 to $80 a barrel,
which they were in most of last year, to over $90 even before
the unrest began. We saw most forecasters expecting 2011 to be
a year in which prices would challenge or would reach the $90
to $100 range.
So this is a strong market we are in, and I think we now
have the situation in Libya, where about a million barrels a
day has been disrupted. Last year, OPEC already began
increasing its production to meet increased demand. Non-OPEC
supplies were increasing, and that is going to continue.
Most forecasters now believe that given the uncertainty
about Libya, and whether it will spread, are now looking to
maybe add $10 or $20 to that price. We have seen already
between $5 and $15, depending on your views, of a fear premium
that is in the oil market.
So I think that despite these demonstrations the most
important concern is will this spread to Algeria, to where
demonstrations have existed, and even to places like Saudi
Arabia, which so far has been spared any serious disruption.
We have the spare capacity that is sufficient to meet this
one million barrel a day or so decline in Libya. But if it
spread, we would most likely require some further action, and
as you know the President has said that his Administration is
prepared to use the SPR should that become necessarily.
And since the market is adequately supplied right now, I
think that is the proper course, but continue monitoring, and
continue working with our partners within the International
Energy Agency (IEA) and others in the oil producing community
is probably the right thing to be doing right now.
However, the SPR is a powerful tool should this disruption
increase, and it could be used to manage the expectations of
further risk which is out there, and should the disruption
expand, it may well be necessary in coordination with our
partners in the International Energy Agency to use the SPR.
OPEC countries have said that they are prepared to add
barrels to the market, and Saudi Arabia has already done that.
Over the longer term, of course, we have many of the issues
that have already been mentioned by the opening statements here
on both sides of the equation, reducing demand through
efficiency, and increasing supply.
And I think it is important that the United States energy
policy recognize the long-term nature of the investments on
both sides of the equation. Michelle outlined some of them on
the supply side, and on the demand side, there are a number of
things that I think we need to keep doing, especially improving
efficiency in automobiles through policies like the CAFE
standards and other incentives.
Certainly using market mechanisms to incorporate the
externalities of both security and environment into the price
that we pay, facilitating development of natural resources, and
that is an important work of this Committee.
And I think that the infrastructure needed to develop
things like Balkan that Brenda Pierce mentioned was such a
potentially large resource for domestic oil, and even gas. It
is important that those facilities be encouraged.
Things like imports from Canada should also be encouraged,
as well as continuing to improve on the amount of money spent
for R&D to lead to the technology and innovation that both of
your opening statements indicated would be required.
There are many other specifics, but I would like to leave
that for the Q&A, and once again, thank you for this
opportunity to be here today.
[The prepared statement of Mr. Caruso follows:]
Statement of Guy F. Caruso, Senior Advisor, Energy and National
Security,
Center for Strategic and International Studies
Mr Chairman, members of the committee, thank you for the
opportunity to present my views on the current global oil market
situation and the implications for U.S. energy and economic policy.
My current position is senior advisor to the Energy and National
Security program at the Center for Strategic and International Studies
(CSIS). CSIS is a bipartisan, nonprofit organization headquartered in
Washington, DC. CSIS does not take specific policy positions:
accordingly all views expressed in this testimony are my own.
The Global Oil Market Situation and Outlook
The global oil market strengthened considerably in the latter part
of 2010 as a result of the improving economic conditions in many
developed countries such as the United States and among European Union
members and strong economic growth in many emerging economies such as
China and India.
As a result world oil demand increased by 2.8 million barrels per
day in 2010 (mmb/d) bringing world oil demand to about 88 mmb/d. This
was the second largest year on year increase in the last 30 years.
Although the increase was from a recession induced lower demand in 2009
strong global demand placed upward pressure on crude oil and refined
product prices. Crude oil prices (WTI and Brent) were mostly in the
$75-85 per barrel range for much of 2010 until late 2010 and early 2011
when prices moved into the $90-100 per barrel range on the strength of
demand for gasoline and diesel oil. Gasoline prices in the U.S.
averaged $2.78/gallon in 2010 and had risen to $3.10/gallon in January
2011. The current average is more than $3.50/gallon.
Oil supplies have responded to higher prices. The Organization of
Petroleum Exporting Countries (OPEC) members led by increases in Saudi
Arabia ended 2010 at its highest output in two years. Non-OPEC
countries such as, the U.S., Canada, Russia, China and Brazil, also
increased production in 2010. It is important to note that other
liquids from oil sands, biofuels and natural gas made important
contributions to these supply increases.
Thus the political unrest in North Africa and the Middle East comes
at a time when the global oil market is adequately supplied with the
prospect of steady demand increases. Prior to the political turmoil in
the region the consensus among organizations and institutions which
project oil market supply, demand and price was for a moderate increase
in price to the $90-100 per barrel range for 2011. Increased
uncertainty has raised the consensus projection by about $10-20 per
barrel. As the March EIA short-term energy outlook indicates, there is
a moderate risk that prices will rise well above the consensus.
With the notable exception of Libya, demonstrations and civil
unrest have not significantly affected oil production or major transit
routes such as the Suez Canal.
Libyan oil exports are reported to have been substantially reduced
from their pre-disruption rate of about1.3 mmb/d. This represents about
2% of world oil production.
Global spare crude oil production capacity (as well as refining
capacity) and healthy worldwide inventories are more than adequate to
offset the loss of 1.3mmb/d. Saudi Arabia's spare capacity alone is
sufficient to offset the volumetric loss of Libyan oil. However Libya's
crude is of very high quality and replacement with Saudi crude would
come at increased refinery and logistical costs. Nevertheless the
combination of alternative crude oil supplies, product inventories and
excess refining capacity can make this replacement possible at some
loss of refinery efficiency.
The critical uncertainty for the global oil market is whether or
not supply disruptions will spread. Demonstrations in moderately sized
oil producing countries such as Algeria and Yemen seem to have
subsided. Markets react to uncertainty by bidding up prices and that
clearly has happened in the global oil market. The ``risk premium''
appears to be about $5-15 per barrel compared with pre-disruptions
expectations.
Oil is a truly fungible global commodity and electronic trading
means instantaneous reaction to events effecting supply and demand.
Therefore a disruption anywhere is a disruption everywhere transmitted
through the price mechanism. The U.S. imports very little Libyan oil
but the economic damage from higher prices is the same as in Italy
which imports a substantial amount of oil from Libya.
The most recent example of globalized energy markets are the tragic
events unfolding in Japan as we meet today. The severe damage to
Japan's nuclear capacity, oil refinery capacity and liquefied natural
gas receiving capacity has boosted prices for refined oil products and
natural gas. Market expectations are that Japan will require increased
imports of fuel oil and LNG in the coming months. Preliminary estimates
indicate potential increased demand of 100,000 to 200,000 b/d.
In the very short-term, the challenge to U.S. policymakers is to
mitigate the possible economic damage of higher energy prices and to be
prepared for the uncertainty of a potentially worse supply disruption.
In the medium to longer term, the challenges are broader and deeper as
we face a global energy system in major transition. Energy demand is
shifting away from the industrialized countries to emerging economies.
Major new supplies of oil will require massive investments increasingly
dominated by national oil companies which have different objectives and
ways of operating. Emerging new players are flexing their political and
economic muscle. In short, the above the ground risks to adequate,
affordable and timely oil supplies are increasing.
Implications for U.S. Energy and Economic Policy
In the short term, the main policy measure available to the U.S.
government is use of the Strategic Petroleum Reserve (SPR). The SPR
contains more than 720 million barrels of crude oil. Within two weeks
of a Presidential decision oil could be available to the market at a
maximum rate of more than 4 mmb/d.
President Obama and his advisors have indicated that they are
prepared to release oil from the SPR should that become necessary. The
current assessment from the administration is that the market is
adequately supplied and that they will be closely monitoring the
situation along with our partners in the International Energy Agency
and in key oil exporting countries.
I believe that is the correct course of action at this time.
The U.S. is a member of the International Energy Agency (IEA) along
with 28 other oil consuming countries. The IEA has a Coordinated Early
Response Mechanism (CERM) which could be activated quickly. IEA
countries, including the U.S., hold 1.6 billion barrels of government
controlled inventories with a drawdown capability of 8-10mmb/d. The IEA
system was used successfully after the Iraqi invasion of Kuwait and in
the aftermath of Hurricane Katrina.
The IEA governing board met in late February to assess the
developments in North Africa. The IEA Executive Director declared that
the system is ready to be activated immediately should that be
necessary.
Oil producers recognize that high and rising oil prices could
damage the fragile global economy and limit demand for their oil
exports in the medium and long term. Saudi Arabia has indicated a
willingness to increase production to insure that markets are
adequately supplied. Saudi Arabia is estimated to have 3 to 4 mmb/d of
spare capacity and to have already increased output to about 9 mmb/d.
In 2010 Saudi production was estimated at 8.1mmb/d.
In the medium and longer term, U.S. energy policy would benefit
from a comprehensive approach in order to cushion our economy from
disruptions and the longer term geopolitical risks in this precarious
energy landscape. The comprehensive approach requires a policy that
recognizes the long term nature of the transition from fossil fuels to
alternatives. A transformation is already underway, however, due to
financial and technology limitations, a large existing capital stock
that runs on fossil fuels and the lack of infrastructure to support a
new system, that transition will take at least several decades. In sum
there is no scalable alternative available today to replace our current
system.
In the meantime, our policies should be directed at promoting
efficiency (reducing demand) and increasing supply of current fuel
choices with effective environmental safeguards. Concurrently we need
to promote technological development and innovation through research
and development.
The following are some specific examples to facilitate reduced
demand and increased supply in the medium and long term:
Demand side examples:
Improved vehicle efficiency standards;
Incentives for highly efficient vehicles such as
hybrids (including plug-ins);
Incentives for natural gas fleet vehicles;
Market mechanisms which include externalities in the
cost of energy such as a carbon tax.
Supply side examples:
Facilitate development of domestic resources such as
shale gas and tight oil (Bakken) through infrastructure
expansion;
Accelerate approval of drilling permits in the Gulf
of Mexico with effective oversight;
Facilitate secure sources of energy imports from
Canada;
These are just a few of the many examples which can promote a more
energy efficiency economy, enhance secure energy supplies and increase
environmental sustainability for the long term.
Mr Chairman, members of the committee, this concludes my testimony.
Thank you.
______
The Chairman. Thank you very much, Mr. Caruso, and last, we
will go to Mr. Rusco, Director of Natural Resources and
Environment, for the Government Accountability Office. Mr.
Rusco, you are recognized for five minutes.
STATEMENT OF MR. FRANK RUSCO, DIRECTOR, NATURAL RESOURCES AND
ENVIRONMENT, GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Rusco. Thank you, Mr. Chairman, and Members of the
Committee. I am pleased to speak with you today about the
Department of the Interior's management of oil and gas produced
on Federal lands and waters, in the context of the economic
impact of these domestic resources.
The Department of the Interior manages the leasing of
Federal lands and waters for oil and gas exploration,
development, and production. These activities provide an
important domestic source of energy for the United States,
create jobs in the oil and gas industry, and raise revenues
that are shared between Federal, State, and tribal governments.
In general, oil and gas exploration and development
activity has been highly correlated with oil and gas prices.
Over the past decade leasing and drilling activity on Federal
lands and waters, and other lands, has generally increased.
However, during this same period, Interior has found it
difficult to strike the right balance between encouraging
domestic oil and gas production on one hand, and on the other
maintaining operational and environmental safety, and providing
reasonable assurance that the public's financial and other
interests are being protected.
I will focus my remaining remarks on how Interior can
improve its management practices, and implementation of laws
and regulations to provide reasonable assurance that the public
interest and the environment are protected, and that
development of Federal lands for oil and gas can continue in a
timely and efficient manner to contribute to the Nation's
economic growth and stability.
Interior has struggled to hire, train, and retain enough
people with the right skills to keep up with its regulatory
responsibilities. For example, in 2005, we reported that BLM
staff could not keep up with increased applications to drill.
The agency ended up pulling staff that were hired to do
National Environmental Protection Act reviews to instead
process applications to drill. In 2010, we found that BLM staff
were unable to keep up with an increased workload associated
with public protests of proposed leases, and that as a result
these lease approvals were late, which created uncertainty and
additional costs for oil and gas companies.
Improving Interior's human capital practices and workforce
planning could lead to better protection of the environment, as
well as more efficient and timely issuance of leases.
Interior does not have a centralized and coordinated
process for approving use of new technologies on Federal oil
and gas leases. At best this slows down the process for
approving new technologies that could improve oil and gas
production, and at worst could prevent good technologies from
being deployed, or allow inappropriate technologies to be used.
Further, Interior has not been consistent across field
offices in completing production verification inspections and
oversight, leading to uncertainty about whether the public is
getting its share of oil and gas revenue.
Creating more consistent practices and interpretations of
laws and regulations could benefit both the public and oil and
gas companies.
Revenue collection is a broader concern. In 2008, we
reported that Interior had not comprehensively evaluated its
revenue collection scheme in over 25 years, despite significant
changes in the industry.
The current revenue collection scheme is complex, including
payments from companies such as bonuses paid for the right to
develop a lease, royalties for any oil and gas found, corporate
profit and other taxes, and land rents, as well as subsidies
from the government to oil and gas companies, including royalty
relief, tax credits, and favorable depreciation schedules.
Interior is currently undertaking a comprehensive study of
this system, and we hope that there will be ways to simplify
and improve this complex scheme so that the public can have
confidence that it is receiving an appropriate share of
revenue, and that oil and gas companies continue to view the
United States as a desirable place to do business.
In conclusion, regulation and management of Federal oil and
gas exploration, development, and production, should have two
important goals. One is to protect the financial and other
interests of the public, and provide confidence that oil and
gas development is safe, and environmentally sound; and two, to
reduce uncertainty in any unnecessary regulatory burden on the
oil and gas industry.
Striking the appropriate balance between these two goals is
important so that the country can continue to enjoy the
economic and strategic benefits of domestic oil and gas
production. Thank you. I will be glad to answer any questions
that you may have.
[The prepared statement of Mr. Rusco follows:]
Statement of Frank Rusco, Director, Natural Resources and Environment,
United States Government Accountability Office
Chairman Hastings, Ranking Member Markey, and Members of the
Committee:
We appreciate the opportunity to participate in this hearing to
discuss domestic oil and gas production in light of rising gas prices
and the country's continued employment challenges. American families,
communities, and businesses all depend on reliable and affordable
energy for their health, safety, and livelihoods. Energy--including oil
and gas--is crucial to many aspects of peoples' daily lives, including
transportation, communication, food production, medical services, and
heating and air-conditioning. Since December 2010, oil prices have been
increasing, topping $100 per barrel in recent weeks. The most recent
spike in oil prices has been attributed to political unrest in the
Middle East--a major exporter of oil. In part because the United States
currently imports approximately 51 percent of its oil each year for
domestic consumption, many have called for increasing domestic
production of oil and gas, including from resources located on leased
federal lands and waters. Currently, oil produced from federal offshore
leases accounts for approximately 30 percent of all domestic
production, while oil produced from federal onshore leases accounts for
approximately 6 percent. Oil and gas produced from federal leases is
also an important source of revenue for the federal government. In
fiscal year 2009, the federal government collected more than $9 billion
in revenues from oil and gas produced from federal lands and waters,
purchase bids for new oil and gas leases, and annual rents on existing
leases. This makes revenues from federal oil and gas one of the largest
nontax sources of federal government funds.
The U.S. Department of the Interior plays an important role in
managing and providing oversight of federal oil and gas resources. The
explosion onboard the Deepwater Horizon drilling rig and subsequent
fire and catastrophic oil spill in the Gulf of Mexico in April 2010
further emphasized the importance of Interior's management of
permitting and inspection processes to ensure operational and
environmental safety. Under its current organizational structure,
Interior's bureaus are responsible for regulating the processes that
oil and gas companies must follow when leasing, drilling, and producing
oil and gas from federal leases. The bureaus are also responsible for
ensuring that companies comply with all applicable requirements.
Specifically, Interior's Bureau of Land Management (BLM) oversees
onshore federal oil and gas activities; the Bureau of Ocean Energy
Management, Regulation, and Enforcement (BOEMRE)--created in May 2010--
oversees offshore oil and gas activities; and the newly established
Office of Natural Resources Revenue (ONRR) is responsible for
collecting royalties on oil and gas produced from both onshore and
offshore federal leases. Prior to the creation of BOEMRE, the now-
abolished Minerals Management Service's (MMS) was charged with
administering offshore federal leases and managing the collection of
royalties for onshore and offshore leases; MMS's Offshore Energy and
Minerals Management (OEMM) oversaw offshore oil and gas activities,
while its Minerals Revenue Management (MRM) was responsible for royalty
collections from both onshore and offshore federal leases.
Interior's management of federal oil and gas activities is
critically important and has been a focus of a large body of our work
that has found numerous weaknesses and challenges that need to be
addressed. In response to our recommendations, Interior has taken steps
to address material weaknesses and modify its practices for managing
oil and gas resources, but as of December 2010, many recommendations
remained unimplemented. Accordingly, we designated Interior's
management of federal oil and gas resources as a high risk issue in
February 2011.\1\
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\1\ GAO, High-Risk Series: An Update, GAO-11-278 (Washington, D.C.:
February 2011).
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In this context, my testimony today discusses findings from our
past work on five broad areas: (1) the ongoing reorganization of
Interior's bureaus dealing with oil and gas functions, (2) the
challenges Interior faces balancing timely and efficient oil and gas
development with environmental stewardship responsibilities, (3)
Interior's management of human capital, (4) Interior's collection of
oil and gas revenues, and (5) Interior's role in the development of
existing leases. This statement is based on our extensive body of work
on Interior's oil and gas leasing and royalty collection programs
issued from September 2008 through February 2011. We conducted the
performance audit work that supports this statement in accordance with
generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to produce a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our statement today.
Additional information on our scope and methodology is available in
each issued product.
Potential Challenges with Reorganization of Oil and Gas Functions
Interior's ongoing reorganization of bureaus with oil and gas
functions will require time and resources, and undertaking such an
endeavor while continuing to meet ongoing responsibilities may pose new
challenges. Historically, BLM managed onshore federal oil and gas
activities, while MMS managed offshore activities and collected
royalties for all leases. In May 2010, the Secretary of the Interior
announced plans to reorganize MMS into three separate bureaus. The
Secretary stated that dividing MMS's responsibilities among separate
bureaus would help ensure that each of the three newly established
bureaus have a distinct and independent mission. Interior recently
began implementing this restructuring effort, transferring offshore
oversight responsibilities to the newly created BOEMRE and revenue
collection to ONRR. Interior plans to continue restructuring BOEMRE to
establish two additional separate bureaus--the Bureau of Ocean and
Energy Management, which will focus on leasing and environmental
reviews, and the Bureau of Safety and Environmental Enforcement, which
will focus on permitting and inspection functions.
While this reorganization may eventually lead to more effective
operations, we have reported that organizational transformations are
not simple endeavors and require the concentrated efforts of both
leaders and employees to realize intended synergies and accomplish new
organizational goals.\2\ In that report, we stated that for effective
organizational transformation, top leaders must balance continued
delivery of services with transformational activities. Given that, as
of December 2010, Interior had not implemented many recommendations we
made to address numerous weaknesses and challenges, we are concerned
about Interior's ability to undertake this reorganization while (1)
providing reasonable assurance that billions of dollars of revenues
owed to the public are being properly assessed and collected and (2)
maintaining focus on its oil and gas oversight responsibilities.
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\2\ GAO, Results-Oriented Cultures: Implementation Steps to Assist
Mergers and Organizational Transformations, GAO-03-669 (Washington,
D.C.: July 2, 2003).
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Challenges of Balancing Oil and Gas Development with Environmental
Stewardship
We have reported that Interior has experienced several challenges
in meeting its obligations to make federal oil and gas resources
available for leasing and development while simultaneously meeting its
responsibilities for managing public lands for other uses, including
wildlife habitat, recreation, and wilderness. In January 2010, we
reported that while BLM requires oil and gas operators to reclaim the
land they disturb and post a bond to help ensure they do so, not all
operators perform such reclamation.\3\ In general, the goal is to plug
the well and reclaim the site so that it matches the surrounding
natural environment to the extent possible, allowing the land to be
used for purposes other than oil and gas production, such as wildlife
habitat. If the bond is not sufficient to cover well plugging and
surface reclamation, and there are no responsible or liable parties,
the well is considered ``orphaned,'' and BLM uses federal dollars to
fund reclamation. For fiscal years 1988 through 2009, BLM spent about
$3.8 million to reclaim 295 orphaned wells, and BLM has identified
another 144 wells yet to be reclaimed.
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\3\ GAO, Oil and Gas Bonds: Bonding Requirements and BLM
Expenditures to Reclaim Orphaned Wells, GAO-10-245 (Washington, D.C.:
Jan. 27, 2010).
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In addition, in a July 2010 report on federal oil and gas lease
sale decisions in the Mountain West, we found that the extent to which
BLM tracked and made available to the public information related to
protests filed during the leasing process varied by state and was
generally limited in scope.\4\ We also found that stakeholders--
including environmental and hunting interests, and state and local
governments protesting BLM lease offerings--wanted additional time to
participate in the leasing process and more information from BLM about
its leasing decisions. Moreover, we found that BLM had been unable to
manage an increased workload associated with public protests and had
missed deadlines for issuing leases. In May 2010, the Secretary of the
Interior announced several departmentwide leasing reforms that are to
take place at BLM that may address these concerns, such as providing
additional public review and comment opportunity during the leasing
process.
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\4\ GAO, Onshore Oil and Gas: BLM's Management of Public Protests
to Its Lease Sales Needs Improvement, GAO-10-670 (Washington, D.C.:
July 30, 2010).
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Further, in March 2010, we found that Interior faced challenges in
ensuring consistent implementation of environmental requirements, both
within and across MMS's regional offices, leaving it vulnerable with
regard to litigation and allegations of scientific misconduct.\5\ We
recommended that Interior develop comprehensive environmental guidance
materials for MMS staff. Interior concurred with this recommendation
and is currently developing such guidance.
---------------------------------------------------------------------------
\5\ GAO, Offshore Oil and Gas Development: Additional Guidance
Would Help Strengthen the Minerals Management Service's Assessment of
Environmental Impacts in the North Aleutian Basin, GAO-10-276
(Washington, D.C.: Mar. 8, 2010).
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Finally, in September 2009, we reported that BLM's use of
categorical exclusions under Section 390 of the Energy Policy Act of
2005--which authorized BLM, for certain oil and gas activities, to
approve projects without preparing new environmental analyses that
would normally be required in accordance with the National
Environmental Policy Act--was frequently out of compliance with the law
and BLM's internal guidance.\6\ As a result, we recommended that BLM
take steps to improve the implementation of Section 390 categorical
exclusions through clarification of its guidance, standardizing
decision documents, and increasing oversight.
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\6\ GAO, Energy Policy Act of 2005: Greater Clarity Needed to
Address Concerns with Categorical Exclusions for Oil and Gas
Development under Section 390 of the Act, GAO-09-872 (Washington, D.C.:
Sept.16, 2009).
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Human Capital Challenges
We have reported that BLM and MMS have encountered persistent
problems in hiring, training, and retaining sufficient staff to meet
Interior's oversight and management responsibilities for oil and gas
operations on federal lands and waters. For example, in March 2010, we
reported that BLM and MMS experienced high turnover rates in key oil
and gas inspection and engineering positions responsible for production
verification activities.\7\ As a result, Interior faces challenges
meeting its responsibilities to oversee oil and gas development on
federal leases, potentially placing both the environment and royalties
at risk. We made a number of recommendations to address these issues.
While Interior's reorganization of MMS includes plans to hire
additional staff with expertise in oil and gas inspections and
engineering, these plans have not been fully implemented, and it
remains unclear whether Interior will be fully successful in hiring,
training, and retaining these additional staff. Moreover, the human
capital issues we identified with BLM's management of onshore oil and
gas continue, and these issues have not yet been addressed in
Interior's reorganization plans.
---------------------------------------------------------------------------
\7\ GAO, Oil and Gas Management: Interior's Oil and Gas Production
Verification Efforts Do Not Provide Reasonable Assurance of Accurate
Measurement of Production Volumes, GAO-10-313 (Washington, D.C.: Mar.
15, 2010).
---------------------------------------------------------------------------
Concerns over Revenue Collection
Federal oil and gas resources generate billions of dollars annually
in revenues that are shared among federal, state, and tribal
governments; however, we found Interior may not be properly assessing
and collecting these revenues. In September 2008, we reported that
Interior collected lower levels of revenues for oil and gas production
in the deep water of the U.S. Gulf of Mexico than all but 11 of 104 oil
and gas resource owners whose revenue collection systems were evaluated
in a comprehensive industry study--these resource owners included other
countries as well as some states.\8\ However, despite significant
changes in the oil and gas industry over the past several decades, we
found that Interior had not systematically re-examined how the U.S.
government is compensated for extraction of oil and gas for over 25
years. GAO recommended Interior conduct a comprehensive review of the
federal oil and gas system using an independent panel. After Interior
initially disagreed with our recommendations, we recommended 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. More recently, in response
to our report, Interior has commissioned a study that will include such
a reassessment, which, according to officials, the department expects
will be complete in 2011. The results of the study may reveal the
potential for greater revenues to the federal government.
---------------------------------------------------------------------------
\8\ 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).
---------------------------------------------------------------------------
We also reported in March 2010 that Interior was not taking the
steps needed to ensure that oil and gas produced from federal lands was
accurately measured.\9\ For example, we found that neither BLM nor MMS
had consistently met their agency goals for oil and gas production
verification inspections. Without such verification, Interior cannot
provide reasonable assurance that the public is collecting its share of
revenue from oil and gas development on federal lands and waters. As a
result of this work, we identified 19 recommendations for specific
improvements to oversight of production verification activities.
Interior generally agreed with our recommendations and has begun
implementing some of them.
---------------------------------------------------------------------------
\9\ GAO, Oil and Gas Management: Interior's Oil and Gas Production
Verification Efforts Do Not Provide Reasonable Assurance of Accurate
Measurement of Production Volumes, GAO-10-313 (Washington, D.C.: Mar.
15, 2010).
---------------------------------------------------------------------------
Additionally, we reported in October 2010 that Interior's data
likely underestimated the amount of natural gas produced on federal
leases, because some unquantified amount of gas is released directly to
the atmosphere (vented) or is burned (flared).\10\ This vented and
flared gas contributes to greenhouse gases and represents lost
royalties. We recommended that Interior improve its data and address
limitations in its regulations and guidance to reduce this lost gas.
Interior generally agreed with our recommendations and is taking
initial steps to implement these recommendations.
---------------------------------------------------------------------------
\10\ GAO, Federal Oil and Gas Leases: Opportunities Exist to
Capture Vented and Flared Natural Gas, Which Would Increase Royalty
Payments and Reduce Greenhouse Gases, GAO-11-34 (Washington, D.C.: Oct.
29, 2010).
---------------------------------------------------------------------------
Furthermore, we reported in July 2009 on numerous problems with
Interior's efforts to collect data on oil and gas produced on federal
lands, including missing data, errors in company-reported data on oil
and gas production, and sales data that did not reflect prevailing
market prices for oil and gas.\11\ As a result of Interior's lack of
consistent and reliable data on the production and sale of oil and gas
from federal lands, Interior could not provide reasonable assurance
that it was assessing and collecting the appropriate amount of
royalties on this production. We made a number of recommendations to
Interior to improve controls on the accuracy and reliability of royalty
data. Interior generally agreed with our recommendations and is working
to implement many of them, but these efforts are not complete, and it
is uncertain at this time if the efforts will fully address our
concerns.
---------------------------------------------------------------------------
\11\ GAO, Mineral Revenues: MMS Could Do More to Improve the
Accuracy of Key Data Used to Collect and Verify Oil and Gas Royalties,
GAO-09-549 (Washington, D.C.: July 15, 2009).
---------------------------------------------------------------------------
Development of Existing Leases
In October 2008, we reported that Interior could do more do
encourage the development of existing oil and gas leases.\12\ Our
review of Interior oil and gas leasing data from 1987 through 2006
found that the number of leases issued had generally increased toward
the end of this period, but that offshore and onshore leasing had
followed different historical patterns. Offshore leases issued peaked
in 1988 and in 1997, and generally rose from 1999 through 2006. Onshore
leases issued peaked in 1988, then rapidly declined until about 1992,
and remained at a consistently low level until about 2003, when they
began to increase moderately. We also analyzed 55,000 offshore and
onshore leases issued from 1987 through 1996 to determine how
development occurred on leases that had expired or been extended beyond
their primary terms. Our analysis identified three key findings. First,
a majority of leases expired without being drilled or reaching
production. Second, shorter leases were generally developed more
quickly than longer leases but not necessarily at comparable rates.
Third, a substantial percentage of leases were drilled after the
initial primary term following a lease extension or suspension.
---------------------------------------------------------------------------
\12\ GAO, Oil and Gas Leasing: Interior Could Do More to Encourage
Diligent Development, GAO-09-74 (Washington, D.C.: Oct. 3, 2008).
---------------------------------------------------------------------------
We also compared Interior's efforts to encourage development of
federal oil and gas leases to states' and private landowners' efforts.
We found that Interior does less to encourage development of federal
leases than some states and private landowners. Federal leases contain
one provision--increasing rental rates over time for offshore 5-year
leases and onshore leases--to encourage development. In addition to
using increasing rental rates, some states undertake additional efforts
to encourage lessees to develop oil and gas leases more quickly,
including shorter lease terms and graduated royalty rates--royalty
rates that rise over the life of the lease. In addition, compared to
limited federal efforts, some states do more to structure leases to
reflect the likelihood of oil and gas production, which may also
encourage faster development. Based on the limited information
available on private leases, private landowners also use tools similar
to states to encourage development.
In conclusion, as concerns rise over the recent increase in oil
prices and as demands are made for additional drilling on federal lands
and waters, it is important that Interior meet its current oversight
responsibilities. Interior is now in the midst of a major
reorganization, which makes balancing delivery of services with
transformational activities challenging for an organization. Managing
this change in a fiscally constrained environment only exacerbates the
challenge. If steps are not taken to improve Interior's oversight of
oil and gas leasing, we are concerned about the department's ability to
manage the nation's oil and gas resources, ensure the safe operation of
onshore and offshore leases, provide adequate environmental protection,
and provide reasonable assurance that the U.S. government is collecting
the revenue to which it is entitled.
Chairman Hastings, Ranking Member Markey, and Members of the
Committee, this concludes our prepared statement. We would be pleased
to answer any questions that you or other Members of the Committee may
have at this time.
Contact and Staff Acknowledgements
For further information on this statement, please contact Frank
Rusco at (202) 512-3841 or [email protected]. Contact points for our
Congressional Relations and Public Affairs offices may be found on the
last page of this statement. Other staff that made key contributions to
this testimony include, Jeffrey Barron, Glenn C. Fischer, Jon
Ludwigson, Alison O'Neil, Kiki Theodoropoulos, and Barbara Timmerman.
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if you wish to reproduce this material separately.
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______
Highlights of GAO-11-487T, a testimony before the
Committee on Natural Resources, House of Representatives
March 17, 2011
OIL AND GAS LEASING
Past Work Identifies Numerous Challenges with Interior's Oversight
Why GAO Did This Study
The Department of the Interior oversees oil and gas activities on
leased federal lands and waters. Revenue generated from federal oil and
gas production is one of the largest nontax sources of federal
government funds, accounting for about $9 billion in fiscal year 2009.
For onshore leases, Interior's Bureau of Land Management (BLM) has
oversight responsibilities. For offshore leases, the newly created
Bureau of Ocean Energy Management, Regulation, and Enforcement
(BOEMRE), has oversight responsibilities. Prior to BOEMRE, the Minerals
Management Service's (MMS) Offshore Energy and Minerals Management
Office oversaw offshore oil and gas activities, while MMS's Minerals
Revenue Management Office collected revenues from all oil and gas
produced on federal leases.
Over the past several years, GAO has issued numerous
recommendations to the Secretary of the Interior to improve the
agency's management of oil and gas resources. In 2011, GAO identified
Interior's management of oil and gas resources as a high risk issue.
GAO's work in this area identified challenges in five areas: (1)
reorganization, (2) balancing responsibilities, (3) human capital, (4)
revenue collection, and (5) development of existing leases.
What GAO Found
Reorganization: Interior's reorganization of activities previously
overseen by MMS will require time and resources and may pose new
challenges. Interior began a reorganization in May 2010 that will
divide MMS into three separate bureaus--one focusing on revenue
collection, another on leasing and environmental reviews, and yet
another on permitting and inspections. While this reorganization may
eventually lead to more effective operations, GAO has reported that
organizational transformations are not simple endeavors. GAO is
concerned with Interior's ability to undertake this reorganization
while meeting its revenue collection and oil and gas oversight
responsibilities.
Balancing Responsibilities: GAO has reported that Interior has
experienced several challenges with meeting its responsibilities for
providing for the development of oil and gas resources while managing
public lands for other uses, including wildlife habitat. In January
2010, GAO reported that, while BLM requires oil and gas operators to
reclaim the land they disturb and post a bond to help ensure they do
so, not all operators perform reclamation. For fiscal years 1988
through 2009, BLM spent about $3.8 million to reclaim 295 so-called
``orphaned'' wells--because reclamation had not been done, and other
resources, including the bond, were insufficient to pay for it.
Human Capital: GAO has reported that BLM and MMS have encountered
persistent problems in hiring, training, and retaining sufficient staff
to meet their oversight and management responsibilities for oil and gas
operations. For example, in March 2010, GAO reported that BLM and MMS
experienced high turnover rates in key oil and gas inspection and
engineering positions responsible for production verification
activities. As a result, Interior faces challenges meeting its
responsibilities to oversee oil and gas development on federal leases,
potentially placing both the environment and royalties at risk.
Revenue Collection: While federal oil and gas resources generate
billions of dollars in annual revenues, past GAO work has found that
Interior may not be properly assessing and collecting these revenues.
In September 2008, GAO reported that Interior collected lower levels of
revenues for oil and gas production in the deep water of the U.S. Gulf
of Mexico than all but 11 of 104 oil and gas resource owners whose
revenue collection systems were evaluated in a comprehensive industry
study. Nonetheless, Interior has not completed a comprehensive
assessment of its revenue collection policies and processes in over 25
years. Additionally, in March 2010, GAO reported that Interior was not
consistently completing inspections to verify volumes of oil and gas
produced from federal leases.
Development of Existing Leases: In October 2008, GAO reported that
Interior could do more to encourage the development of existing oil and
gas leases. Federal leases contain one provision--increasing rental
rates over time for offshore 5-year leases and onshore leases--to
encourage development. In addition to escalating rental rates, states
undertake additional efforts to encourage lessees to develop oil and
gas leases more quickly, including shorter lease terms and graduated
royalty rates.
______
The Chairman. Thank you, Mr. Rusco, and I again--and I said
this earlier, I really do thank the panel for their adherence
to the time. That is very, very helpful, and as I mentioned,
your full statement will appear in the record.
We will begin questioning, and I will start, and Ms.
Pierce, if I could start with you. There is always a lot of
discussion about reserves that we have. I remember discussions
going way back, and it seems like when the exploration happens,
or however it is, the reserves get larger.
I am saying that very broadly, but where on Federal lands
or waters from your research that currently are not open for
development are the largest reserves, and if you could point
out or identify two or three of those?
Ms. Pierce. So, you probably well know that there is a
difference between resources and reserves. Reserves are the
economic portion of the resource endowment, and reserves, which
is what USGS does, is technically recoverable.
Some of the largest producers are open and are producing
offshore in the Gulf of Mexico, but there are clearly areas
offshore. And I don't want to avoid your question, but I want
to do it justice.
And so I would actually prefer to defer it, do the
research, and look at our resource numbers, and look at what is
off-limits, and provide that answer to you in writing.
The Chairman. That would be fine. We want to get the
accurate information, and so that is good.
Ms. Pierce. Thank you.
The Chairman. Well, I was going to ask Dr. Whitney, but you
pointed out, Ms. Pierce, the difference between resources and
reserves, and I noticed in Dr. Whitney's report that they
talked about that.
Could you go more in-depth as to the explanation between
reserves and resources?
Dr. Whitney. Sure. Reserves are amounts of oil or gas that
have been proven to exist through drilling. Companies use
reserves as sort of an inventory that they will produce at some
point in the future.
As those reserves are produced, they add new reserves,
either through reserve growth in an existing field, or through
development of new fields. For that reason reserve values,
reserve numbers, tend not to vary wildly.
They may creep up and down, but over time they don't change
very much because these are amounts of oil that companies keep
in reserve for production. The undiscovered resources are
geological estimates in areas that either have not been
drilled, or include some fields, but extend beyond those
fields.
Those geological estimates are based on several geologic
factors within a base or within a region, such as the existence
of a source rock that is rich in carbon. The base must have
experienced thermal history sufficient to generate oil or gas,
and there must be the existence or potential existence of
reservoirs and traps.
So there is a comparison made between undiscovered
resources in basins, and the resources that have been produced
in other basins. So, there is an estimate that is derived from
a statistical treatment of the parameters in the basin,
compared to known production in other basins.
So the undiscovered technically recoverable resources are a
geologic estimate, and by the way that because they are
technically recoverable, that number also changes as technology
evolves.
The Chairman. Is it fair to say with that comparison then
that just in general the resources, if one could quantify that
as much larger than the reserves, because you know pretty much
what the reserves are?
Dr. Whitney. That is right, and the reserves typically are
composed of volumes of oil that are moved from the undiscovered
category to reserves, and then to production.
The Chairman. I guess that is why in hearings in the past
when people are talking about--I mean, I am going back 30 or 40
years--known reserves, and I think that was the term used, it
always seemed to exceed because the resources were tapped.
Therefore, the resources kept coming on line as you
characterized it as inventory.
Dr. Whitney. Yes.
The Chairman. So that is interesting. I appreciate that. My
time is going to expire before I can get another question in,
and so I yield to the Ranking Member, Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman. My Republican
colleagues like to say that we are not doing enough drilling
here in the United States, and a lot of the numbers that have
been tossed around by our witnesses today can confuse a very
fundamental point that I believe that our country must
comprehend.
We have two percent of the world's proven oil reserves. We
produce 11 percent of the world's oil on a yearly basis, and we
consume 25 percent of the world's oil on a yearly basis. Two
percent of the reserves, and 11 percent of the world's oil, we
produce, and 25 percent of the world's oil, we consume.
Now, I put together a graphic to help us, and to tie these
numbers together and to help us to understand what they mean.
So, this is an illustration of our burn rate, or the rate at
which our country is producing its reserves, and it compares
our burn rate to that of the other top 15 oil producing
countries in the world.
And what do we learn? Well, no other nation on earth is
matching the burn rate of the United States, in terms of
consuming their own reserves. We consume more than any other
nation.
We are burning through our savings in other words, our
reserves, faster than any other country on the planet. And as
you can see down here in Iraq, and Kuwait, and Venezuela, and
United Arab Emirates, Iran, they have very low burn rates.
So in the long run this is a chart which obviously is going
to cause our country great problems. I guess the first question
that I would ask to you, Mr. Caruso, is this burn rate for our
country of our reserves sustainable over the long term; yes, or
no?
Mr. Caruso. Ultimately, we will reach the peaking point,
and we did reach that in 1972, in terms of domestic reserves.
How long can it go? It can be a very long tail, but clearly we
will be based on anybody's forecasts, it means that we will be
importing a significant amount of oil for as long out as we can
see.
Mr. Markey. Mr. Rusco, do you agree? Is this sustainable
over the long term, Mr. Rusco?
Mr. Caruso. No. I mean, unless we discover some new
reserves or develop more reserves, it can be sustained, but at
a declining--most likely at a declining rate.
Mr. Markey. And do you agree, Mr. Rusco?
Mr. Rusco. Yes, essentially inevitably at any rate of
production, we will eventually reach a peak that will be
followed by a decline. We have, as Guy said, reached a peak,
but there may be a very long tail. There are a lot of
hydrocarbons out there, and we don't know how fast we will be
able to produce them.
Mr. Markey. And in which countries on this chart that are
the oil producing countries and the United States in the world,
which of these countries benefits in the long run most from the
fast burn rate of the United States, in terms of its oil
reserves? Mr. Caruso.
Mr. Caruso. Well, the OPEC member countries are the ones
that have been most determined to manage the price. They aren't
always successful, but clearly I would say in general OPEC
countries are benefiting.
Mr. Markey. And do you agree with that, Mr. Rusco?
Mr. Rusco. I guess I would say that oil being a global
commodity, in some sense, it really does not matter where the
oil is produced. The price is determined by supply and demand
globally, and the benefits and costs of that accrue globally.
Mr. Markey. But in this context the faster we burn down our
reserves is the more power in the marketplace, those that have
massive reserves for the balance of the century will have in
terms of influencing the price in the market, since they work
as a cartel. Would you not agree with that, Mr. Rusco?
Mr. Rusco. I do agree that at times OPEC has been very
successful in managing the price, and it appears that is a
long-term strategy.
Mr. Markey. Thank you, Mr. Chairman.
The Chairman. The time for the gentleman has expired. The
Chair recognizes the gentleman from Louisiana, Mr. Fleming.
Mr. Fleming. Thank you, Mr. Chairman. Let me say first of
all that I want to compliment this panel, because this is some
of the most cogent informative stuff that we have had in a long
time here.
You know, we are approaching, in some cases, more than $4 a
gallon for gasoline, and just as the law of gravity, as
everything must come down, the same applies to pricing for
commodities. It is all about supply and demand.
Now, we do see some spikes at times when there are
disruptions, or even economic issues that may come up, but in
the long term, we know that the real price, and the underlying
pricing trends are all about supply and demand.
And what is interesting is, and back to this two horse
analogy, where you have alternative energy racing with fossil
fuels, or hydrocarbons, what we really have seen, particularly
in the last five years, is an explosion of discoveries of
supplies that we didn't know that we had.
And then also new technologies that we can exploit to get
to those that we haven't been able to before. A great example
is the Haynesville shale in my own district that we didn't even
know existed five years ago.
And now with hydrofracking technology and horizontal
drilling, we have such an abundance that we have trouble
getting it out of the ground because it is so cheap. We heard
testimony yesterday that the per gallon equivalent of natural
gas is like a buck eighty.
So it is clear that right now that in that two horse race
the hydrocarbon, with the exploitation of new technologies and
new findings, is winning this race. But let me turn to this.
Federal Reserve Chairman Ben Bernanke testified on March 1
before the Senate Committee on Banking, Housing, and Urban
Affairs, noting that sustained prices, sustained rises in the
price of oil or other commodities would represent a threat both
to economic growth and to overall price stability.
Now we hear the Obama Administration would rather release
oil from the strategic petroleum reserve, when in fact we have
as I understand it now 1.3 trillion barrels of oil equivalent
in the ground just here in the United States, which is the
largest in the world.
So despite some of the things that you are hearing here
today, information that is coming from your agency is telling
us that we have a lot of stuff that we can use for many years.
And that is the whole problem with alternative sources of
energy, is that it is still not competitive in the marketplace.
Why? Because overall we still have a very abundant supply of
energy ahead of us.
But what is interesting is that in 2008, Energy Secretary
Chu told the Wall Street Journal that energy prices were the
linchpin to an energy overhaul. Somehow we have to figure out
how to boost the price of gasoline to the levels of Europe.
So we actually have people in Washington here who are
working to get that price up, when the rest of America is going
to the pump and seeing a $50 fill-up in their car jump to $75,
and that is crunching the family budget.
So I would just like to have some responses from some of
the other panel members today just real quickly how you may
respond, and we will start maybe to the far left over there, to
my left, and your response to some of these comments and
statements that we have heard today.
Mr. Newell. In terms of what? What specific aspect would
you like me to respond to?
Mr. Fleming. Well, I think you are hearing different
versions of what is our ability to be energy independent in
this country using hydrocarbons, realizing that we have gone
from 30 percent dependency overseas to now 60 percent, and we
are shutting off ANWR, and we are shutting off offshore
drilling.
We have hydrofracking under attack, which would severely
constrict our flow of natural gas. What in your opinion is the
future of hydrocarbons if we are allowed to exploit those, and
how would it affect prices?
Mr. Newell. Well, currently coal, natural gas, and
petroleum, provide the vast majority of United States energy
supply, over 80 percent. Our projections over the next 25
years, which would assume the continuance of current laws and
regulations, would see a modest decline in the fossil fuel
share as other sources of energy, renewable energy in
particular, increase.
But at least an outlook for there to be a significant
change from the current share of fossil fuels and the energy
system, and something would need to change in terms of current
policy, or technological breakthroughs, or other market trends
that we are not currently foreseeing.
The Chairman. The time for the gentleman has expired. The
gentleman from New Jersey, Mr. Holt, is recognized.
Mr. Holt. Thank you, and I thank the witnesses. Members of
Congress always like to think that we can turn short-term news
stories into immediate political benefit, and this is no less
true with short-term news about gasoline prices.
And I guess I would try to draw our attention to other
longer term implications of the news today, which is that
uprisings in the Middle East show how perilous our dependence
on petroleum is, and the nuclear melting in Japan shows how
perilous our dependence on nuclear power is.
And they really underscore, I think, our failure to have a
broad based energy portfolio, and our failure to have a
rational look at our energy usage. Mr. Rusco, I think you said
that prices are determined by supply and demand globally, and
in fact several of you have said that sort of thing.
Let me ask, I guess, first, Mr. Newell, what is the scale--
and let us put it in perspective here--of possible short-term
energy production? I mean, suppose there were a lot more leases
for offshore drilling released in the last couple of years.
Suppose there were much more drilling on public lands, or
even large increases in the drilling on private lands. What is
the scale of the increase in production that we might achieve,
compared to what OPEC can do by turning the valves up and down
in the short term?
Mr. Newell. Well, there is a considerable lag between
increased access to resources, and then exploration and
development, and then ultimate production of those resources.
So there is an important issue with return to time scale,
which I think you mentioned. In the short run, to respond to
immediate impacts in crude oil supply, one really needs to look
at the availability of spare production capacity in OPEC, which
is where that currently lies.
In terms of non-OPEC countries, they tend to produce
available capacity at actual production. So certainly in the
short term that is where the available spare capacity is. In
the longer term the areas----
Mr. Holt. I am sorry, but I am actually talking about short
term.
Mr. Newell. You are talking about short term?
Mr. Holt. In other words, just to make sure that we are
clear on this, OPEC can affect the price of a barrel of oil
rather quickly, compared to anything that we could do by
production in the United States. Am I stating that correctly?
Mr. Newell. I would say that is correct. All of the spare
production capacity that is available is in OPEC countries. The
vast majority of that is in Saudi Arabia.
Mr. Holt. OK. Well, there are actually so many things to
cover, but let me just pursue this point a little bit longer.
Mr. Markey pointed out that over the longer term this will be
more and more true will it not, because if the United States is
burning its oil reserves faster than any other nation, and it
is largely OPEC countries that are burning through their
reserves at a much, much slower rate than we are, that means
that they will have more and more leverage than we will in
future years if we have two percent of the reserves, and 11
percent of the production now, and 25 percent of the
consumption. Am I describing that accurately, Mr. Newell?
Mr. Newell. OPEC countries currently provide about 40
percent of global oil liquid supply, and non-OPEC countries
about 60 percent. We, and I think most other analysts that I
have seen, expect that the OPEC share will tend to increase
over time because the vast majority of reserves of oil are
located in OPEC countries.
Mr. Holt. And because we are burning our reserves
considerably faster than they are, and so we will have a
smaller and smaller share, even if some of these larger,
possibly economically recoverable by some stretch of the
imagination, are out there; is that correct?
The Chairman. The time for the gentleman has expired, and
if you would respond back in writing, I am sure that Mr. Holt
would be appreciative of that. The gentleman from Florida, Mr.
Southerland, is recognized.
Mr. Southerland. Thank you, Mr. Chairman. I wanted to ask,
and I know that all of you have probably read the report that
was delivered by the commission that the President put together
regarding the disaster in the Gulf.
And I am just curious, because you seem to be very astute
in understanding this issue as good as any panel that we have
seen come before us. I am just curious. I have asked members of
the Administration this question, and I am just curious as to
your answer.
In light of the President's statement that he believes high
oil prices are acceptable, and he made that statement on August
20th of 2008, that it is a necessary occurrence to push us in a
direction to make us explore other energy sources.
And it seems that with the Department of the Interior's
issuing of 720 violations to BP, and which was bothersome to
me, in not rescinding the Jones Act in light of that disaster
to help contain the oil that was spilled into the Gulf.
I am just curious, and this is a simple yes or no, and I am
going to run down the line here. Mr. Rusco, does the government
bear any responsibility, any, for the oil disaster in the Gulf?
Mr. Rusco. The commission said----
Mr. Southerland. I am not really interested in the
commission. They have already been here. I am really interested
in what you think.
Mr. Rusco. Yes, they----
Mr. Southerland. Is that a yes?
Mr. Rusco. Yes.
Mr. Caruso. Yes.
Dr. Foss. Yes.
Dr. Whitney. Yes.
Mr. Southerland. OK.
Ms. Pierce. Probably.
Mr. Southerland. No, you are on the panel. It is just you
and me right here talking. Forget all these other people. It is
just you and me. Give me your opinion, Ms. Pierce.
Ms. Pierce. It is difficult.
Mr. Southerland. Well, I understand it is difficult, and
that is why I asked it, but it really is not that difficult.
720 violations cited, and refusal to----
Ms. Pierce. I think----
Mr. Southerland. And it is my time, that is right, and so I
am asking the question; yes or no?
Ms. Pierce. I don't know.
Mr. Southerland. You don't know? So the 720 violations, the
refusal to contain the accident and rescind the Jones Act, in
light of what we have seen, and the underwriting of oil
exploration in countries like Brazil by this Administration,
and you are telling me that the government bore no
responsibility?
And Mr. Salazar is an amazing man. He had 70,000 employees
at his disposal, with a $12 billion budget, and he can focus
like a laser beam as he stated last week in testimony here. Do
they bear any responsibility? I mean, one percent, five
percent?
Ms. Pierce. Well, clearly the Department of the Interior--
--
Mr. Southerland. OK. And that is where that well was?
Ms. Pierce. Yes.
Mr. Southerland. Thank you. Mr. Newell.
Mr. Newell. Congressman, respectfully, I have not evaluated
the issue, and so I am going to decline to answer.
Mr. Southerland. Really? You have read the report?
The Chairman. Will the gentleman yield?
Mr. Southerland. Yes, I would.
The Chairman. It is very difficult sometimes when you call
up members of the Administration, albeit different agencies, to
respond on those questions in deference to my friend, and I
know very well how focused he has been on that answer. But I
just wanted to make that observation.
Mr. Southerland. Let me ask with my remaining time a
question to Mr. Newell. Do you believe that with the decline of
over 250,000 barrels per day, do you believe that this will
cause job producing oil companies to remove their rigs from the
Gulf, and move those to other countries around the world?
Mr. Newell. So I think you are referring to in our short-
term energy outlook, we are forecasting a decline of about
250,000 barrels per day relative to last year in offshore Gulf
of Mexico, oil production, which is maybe roughly half of that
that one could attribute to the well blowout moratorium and
subsequent regulatory situation.
The other half is due to--approximately half, is due to
natural decline because we had been on an upswing in offshore
production. In terms of job losses, there are certainly job
losses associated with the decline in production there.
And in terms of rigs and their specific location, early on
there actually had not been much movement of rigs. To be
honest, I have not recently tracked exactly where those rigs
are, and so I could not comment specifically on that.
Mr. Southerland. But the ones that are missing are not in
the Gulf, and so they are somewhere. They are somewhere. We
know they are somewhere. They are not where we would really
need them to be though. We know that, correct? I mean, there
are rigs that are moving.
Mr. Newell. It is true that at some point in time rigs will
move on early on. The last time that I looked closely at it,
they had not because they were waiting in anticipation that
drilling would resume.
And so at the point in time that I last looked at it, there
had not been significant movement, but that was a while ago,
and so I just can't comment on exactly what the situation is
today.
Mr. Southerland. Thank you, Mr. Chair.
The Chairman. The gentleman's time has expired. The
gentlelady from Hawaii, Ms. Hanabusa.
Ms. Hanabusa. Thank you. Than you, Mr. Chairman. Let us
begin with Mr. Newell. Mr. Newell, in your statement, on page
two, you said that what you are about to discuss in your report
did not take not take into effect what happened in Japan.
Japan would definitely have an impact on what you were
looking at as a short-term energy outlook. Can you tell me if
you were to calculate that into your statement here how it
would have an impact?
Mr. Newell. Sure. The short-term production, and
particularly price outlook that is reflected in the testimony
is from our short-term energy outlook, which came out a couple
of weeks ago.
And since then we have seen significant fluctuations in oil
and gasoline prices. In terms of specifically Japan, and in
terms of an immediate response, we had actually seen a decline
in oil prices, which I think most of us would have associated
to a concern that there would actually be a decline in the
economic activity, and an immediate decline in the requirements
for fuel.
But also just a broader sense that there was a hit to
Japan's economy, and which has global implications. As of
yesterday the price of oil was down significantly. Today, it is
back up again.
So in terms of how this all shakes out, there are really a
number of competing things that are going on right now in
global oil markets. A principal one is the unrest in the Middle
East and North Africa.
Japan was weighing on that yesterday, but today it seems
like the resurgence is probably more associated with again
turning to unrest in the Middle East and North Africa. So the
sense in which we will have to reflect the effect of Japan, I
think that will we will see over the next several weeks how
that unfolds.
Ms. Hanabusa. Thank you, and my next question is for Mr.
Caruso. Mr. Caruso, in some reports that you have been quoted
in, you are speaking about the release of the oil from the
Strategic Petroleum Reserve.
And for all of us the main question is how does that then
translate to the consumer? What does the consumer, or can the
consumer expect some kind of relief if we were to go to the
releasing of oil from the SPR? Could you comment on that?
Mr. Caruso. I think it obviously depends on the amount and
the duration of the release, but we saw both during the Iraq
invasion of Kuwait, and the post-Katrina releases that were
Presidential draw downs of the SPR. That did have an impact on
lowering the price of oil from where it was before the release
and after.
So it really depends on specific circumstances, and a
significant release for a long, or relatively long duration,
which in my view would be 30 days or more, could have an impact
on the price, depending on whether or not OPEC countries might
respond by reducing their production.
So it is a lot more contingent on the global, and what
happens elsewhere, but the specific answer is that it could
have an important effect, depending on the volume and duration.
Ms. Hanabusa. Is there anything else that could have an
impact like that in the short term? Is that our best tool to
reduce the price for the consumer right now that you can think
of?
Mr. Caruso. I think that particularly if it is done in
cooperation and coordination with our International Energy
Agency partners is the most important short-term crisis
management tool that we have in our arsenal.
Ms. Hanabusa. Thank you. My next question is for Director
Rusco. It seems to me that you are talking about two different
things in your report. One is the revenue, or the Interior's
failure, I guess, for lack of a better description, for really
monitoring the revenue source, and the second is the permits,
and what is going on.
Can you tell me if in fact the permitting system, or the
leasing system, by Interior has really resulted with the loss
of the revenue?
Mr. Rusco. Well, that is very complicated, but we do think
that the efficiency of the management of permitting leaves a
lot to be desired, and could be done in a more efficient way if
Interior could do better workforce planning, and better
management of its human capital assets so that it had the right
number of people to respond to changes in either applications
to drill, or nominations for lands to be leased.
But also to respond to public protests of those leases, and
it has not responded to those kinds of changes very effectively
in the past. So there have been delays. The delays on leases
associated with the protests have been matters of months
though, and not years or anything like that.
The Chairman. The time for the gentlelady has expired. The
gentleman from Colorado, Mr. Tipton.
Mr. Tipton. Thank you, Mr. Chairman. I appreciate the panel
taking the time to be able to be here today, and I would like
to start with Mr. Newell first. I came out of the District of
Colorado to where we have a tremendous amount of energy
reserves that are accessible really for our Nation.
Do you know how many oil and gas leases are currently
backlogged in the State of Colorado?
Mr. Newell. I do not. That would be in the Department of
the Interior, I believe.
Mr. Tipton. OK. It would fall under that? In terms of some
of the backlogs, Mr. Rusco, when you are talking about being
able to create some efficiencies in the permitting process, do
you have some good ideas that we can pass on to the Secretary
of the Interior?
Mr. Rusco. Well, we have recommended that Interior look at
trying to rationalize the implementation of laws and regs
across its many field offices in the Bureau of Land Management.
So what we see is an inconsistency in the application of
laws and regulations, and we feel that coordinating and
providing better guidance across all the field offices would
make it easier and more efficient, both from the perspective of
companies applying, but also in terms of protecting the
environment, and protecting safety, and also collecting the
right amount of revenues.
Mr. Tipton. Ms. Pierce, could you give us an idea when we
are looking at oil shale, how many potential barrels of oil are
captured in oil shale?
Ms. Pierce. Oh, there is a tremendous amount of potential
barrels.
Mr. Tipton. Could you give us an idea? How many barrels?
Ms. Pierce. Well, we just recently did a reevaluation of
that, and I don't have the numbers at my fingertips, but there
are billions of in-place resources. We did not do a technically
recoverable resource estimate, because there is not one
technology yet that is proven, but there is a lot of potential
oil.
Mr. Tipton. So with an investment in technologies to be
able to liberate this energy, America can have a bright future
in terms of energy development in this country?
Ms. Pierce. Possibly.
Mr. Tipton. Is that possibly the case?
Ms. Pierce. There is a lot to be done, but possibly.
Mr. Tipton. Great. Mr. Caruso, you had made the comment
that we had reached our peak, I believe it was, in 1972, around
1972, concerning domestic reserves, and I just happened to read
some body language, and I saw Dr. Foss shake her head. Would
you care to comment on that, Dr. Foss?
Dr. Foss. I have no idea what the peak might be, and I do
not think that anyone does, and I really think that people
cannot claim to know that. The earth is a huge place
geologically. We have abundant resources that we have not even
begun to really explore, or learn how to utilize.
So I think that what we are faced with are periodic
constraints and timing. How do you mobilize investment and
direct that into new plays, and new prospective areas, new
technologies, and every time that we do that, we replenish our
production.
And I wanted to put that word on the table from the
previous discussion, replenishment. That is what we do in this
country. So it is unfair to look at burn rates and things like
that without understanding that what we are very, very, very,
very good at is moving from that resource category to reserve
category, to production, in a very efficient way.
And it is a powerful process that has to be better
understood, and shepherded the right way, and managed the right
way by industry and government. Now, I don't see any reason to
think about peaks or other constraints.
I think the constraints have more to do with how we feel
about our resources that are available, and the various options
that we have for developing them.
Mr. Tipton. Good. Ms. Pierce, we have had a lot of comment,
and you cannot ever take the politics out of anything, but in
regards to United States energy production under the Obama
Administration, but can you give me an idea in regards to our
onshore leases that began producing after 2008, how many of
these were due to leases that were approved by the previous
Administration?
Ms. Pierce. I really cannot answer that, because that is
not USGS, but we would have been happy to work with the Bureau
of Land Management to get you that answer.
Mr. Tipton. Great. Just by way of comment, we hear that we
have two percent of the world's oil reserves in this country,
and that we consume--we have that burn rate of around 25
percent.
There was some who believe, and I happen to be one, that we
benefit the world. We happen to be one of the highest
productive people in the world that reach out, and when we are
talking about Japan, the United States naval ships, and the
resources that we are able to bring to bear to be able to help
people when they are need, and the technology, which
unfortunately never comes in our intellectual capital into our
trade calculations, in terms of our exports as well.
There is a lot of opportunity for this country to be able
to develop our resources right here at home, and to switch in
terms of how we are using some of those resources. The T. Boone
Pickens Plan, when it comes to being able to drive our vehicles
as well, that those opportunities are certainly going to be
there, and thank you, Mr. Chairman, for your time.
The Chairman. The time of the gentleman has expired. The
Chair recognizes the gentleman from Michigan, Mr. Kildee.
Mr. Kildee. Thank you, Mr. Chairman. First, just one point
in response to a statement made by my friend, Mr. Southerland.
A point of clarification there. There are actually more rigs in
the Gulf of Mexico now than there were before the BP spill.
There are now 125 rigs in the Gulf, compared to 122 one
year ago. I just wanted to put that on the record. But I have a
question of Mr. Newell. Speculation is often pointed to as a
cause of rising or unstable oil prices.
To help prevent harmful speculation in last year's Wall
Street reform legislation, included provisions to regulate
these kinds of trades through the Commodity Futures Trading
Commission, the CFTC.
However, spending bill H.R. 1 would cut the funding for
CFTC by $56.8 million, almost a third of the agency's entire
budget. This is despite the chairman of CFTC recently
testifying before the Senate Agricultural Committee that the
CFTC already does not have enough funding to properly enforce
these provisions under the Wall Street Reform Bill.
Can you speak to the role of speculation in the price of
oil, and the difficulties of addressing this problem when H.R.
1 would reduce the budget of the agency in charge of cracking
down on speculation by almost a third?
What I am really asking you is your position on the role of
speculation and whether we should be cutting the money used to
scrutinize and enforce that speculation?
Mr. Newell. Well, to the first part of your question.
Speculation clearly has a role in oil and other commodity
markets, and because commodities, and in particular oil, but
others as well, are storable, there is always going to be an
anticipation or expectations about what the price of that might
be in the future.
And therefore there will be actors in the market making or
basically voicing their opinions through the marketplace about
how they think those prices will change over time. In terms of
the role of different regulatory agencies, the agency that I
head is not a regulatory agency, but the role of regulatory
agencies like the Commodity Futures Trading Commission, is to
oversee transparent and efficient markets.
The proposals that they are developing relate to position
limits in energy commodity markets. I mean, the intent of those
is to prevent excess concentration of any particular actor in
those markets, and therefore, from a market efficiency point of
view, the role of that is to prevent any undue influence on
market prices.
But I would defer in terms of expressing a further opinion
on the role of that regulation.
Mr. Kildee. Well, Congress last year felt that speculation
did play a role, and therefore passed legislation, which is a
law of this Nation, to try to scrutinize and regulate that
speculation.
And I guess we want to know whether we should be--if that
legislation made sense in the first place, we would be cutting
the budget of the agency that is to look at that speculation.
It is not a huge budget in itself, 56.8 million, but yet they
want to cut that by one-third. Do you think that is a prudent
thing to do?
Mr. Newell. I think I will decline. The budgetary
decisions, I think, are pretty loaded with policy implication,
and so I am going to decline to express a policy opinion on
that.
Mr. Kildee. Well, I would invite anyone else. Does anyone
want to comment on that? I don't see anyone jumping in. All
right. I will try to find the answer from someone else. Thank
you very much.
The Chairman. Does the gentleman yield back?
Mr. Kildee. I yield back.
The Chairman. The gentleman yields back his time. The Chair
recognizes the gentleman from Pennsylvania, Mr. Thompson.
Mr. Thompson. Thank you, Mr. Chairman. Thanks for calling
this hearing. It is very timely with gas hitting $3, an average
of $3.54 a gallon today. I come from a district that we have
been--I guess we started this whole situation with the drilling
of oil at a Drake oil well, and within walking distance of my
district office in Titusville.
And I take exception with one of the comments made by one
of my colleagues earlier about big oil. I have to tell you that
there are families of independent drillers, small businesses,
they have been drilling oil for generations, for 151 years.
So this is not a big oil, and it is not an issue with me.
This is about small businesses, and jobs, and energy security.
Just one quick note. I thought that it was interesting that the
chart that was shown in terms of burning through the reserves,
that the country with the next, or the closest burn rate to
what was portrayed as the United States was Norway.
The United States, with over 303 million Americans in
population, and Norway, 4 million. So, size probably does have
a bearing on how much we use. One quick question that should be
very easy, and I will just open this to the panel, is there any
renewable fuel which will take the place of oil in the next
decade, we will say?
We can go yes or no based on your professional experience.
Let us just go right down the row if we could.
Mr. Newell. So, in terms of--the main fuel that would
replace oil over our projections, which go out to 2035, is
biofuels, principally in the form so far of corn based ethanol.
Mr. Thompson. So, 2035. I will take that as a no since I
said a decade. I have a number of questions, and if we could
just get a response.
Mr. Newell. No, we don't see petroleum being placed in the
next decade.
Mr. Thompson. Thank you.
Ms. Pierce. No.
Dr. Whitney. No.
Dr. Foss. No.
Mr. Caruso. Not in this century.
Mr. Thompson. Not in this century. There you go. Raise the
stakes.
Mr. Rusco. I defer to the EIA on that.
Mr. Thompson. OK. All right. Very good. I appreciate it.
One or two more questions. Now, Mr. Rusco, this is a real basic
question, but I think it is important for our people to
understand.
Can you tell us who owns the oil and natural gas on and
offshore, which are on Federal lands?
Mr. Rusco. Who owns the gas on Federal lands?
Mr. Thompson. On and off Federal lands.
Mr. Rusco. The public.
Mr. Thompson. The public. Absolutely. The United States
taxpayers. Mr. Newell, you state on page six that our
recoverable crude oil resources are estimated to be 219 billion
barrels.
Certainly based on that, and I am sure that you would
agree, that is owned by the American taxpayers. I guess not all
of it is on Federal lands. How much would you estimate to be
owned by the American taxpayers?
Mr. Newell. I don't have with me an exact figure for that.
The 219 billion of technically recoverable resources refers to
all of it, and so some of that would be under private lands.
Offshore, in the Federal offshore lower 48, is about 64
billion barrels, which is Federally owned in effect by the
public. But there is more than that.
Mr. Thompson. And based on previous testimony that I heard
earlier, I actually have confidence for the oil, the resources
that are privately owned, and it is the issue that we have run
up against is the ones that the taxpayers own that we have not
done a good job of production.
Of that 219--well, let me move on. Some of the math, I
tried to do some basic math, and not a real strong suit of
mine, but I calculated approximately 814,000 square miles of
the lower 48 offshore miles have been placed off-limits by the
President. There are no lease bids offered.
We are not talking about the Gulf of Mexico, OK, where the
most two recent leases were leased. It was the remaining part.
So, 814,000 square miles off-lease, that is nearly 521 million
acres, or five times the size of California.
Mr. Newell or Ms. Pierce, can you tell us how much oil and
natural gas are contained in those 521 million acres? And as
part of your answer would you tell us when the last modern
seismograph inventory was taken of our offshore oil and gas?
Mr. Newell. I will defer to Brenda on the second part. In
terms of the major part, in terms of areas that are currently
under Congressional moratorium actually would be the central
and eastern Gulf of Mexico, which I believe is six-point-
something billion barrels.
That is the most promising area in terms of in terms of the
Gulf of Mexico, and also in terms of what is available on both
the Pacific and Atlantic coasts really is in the Gulf of
Mexico, where the vast majority of that production is already
occurring.
So it would be the central part, and then the eastern part,
which is under Congressional moratorium to 2022.
Ms. Pierce. In terms of the seismic, I would have to look
up some of the numbers. Some is quite recent, and some is quite
dated, several decades old. It depends on where you are in the
Outer Continental Shelf.
Mr. Thompson. Thank you, Mr. Chairman.
The Chairman. The time for the gentleman has expired. The
gentleman from Oregon, Mr. DeFazio.
Mr. DeFazio. Thank you, Mr. Chairman. Mr. Newell, on page
seven, in the middle of your testimony, you say that given the
increasing importance of OPEC supply in the global oil supply
demand balance, another key issue is how OPEC production would
respond to any increase in non-OPEC supply, i.e., our
production, potentially offsetting any direct price effect.
I mean, we hear this all the time. It is a world market.
And for years, starting with the Bush Administration, not with
the Clinton Administration, but the Bush Administration, and
not the Obama Administration, I have asked that we file a
complaint against OPEC for illegal commodity manipulation under
the WTO.
I am told, well, it is not covered. Well, the only
exemption is for conservation purposes, and OPEC never pretends
to be conserving their oil. They are setting the market by
ramping their production up and down.
They have ramped up because of Libya, and they will ramp
down. They have a price target. So if we produce some
additional oil is that likely to change, unless we sue OPEC,
and go through a WTO process, and break the cartel?
I mean, they could easily offset additional production here
by dropping their production there.
Mr. Newell. I think that is correct.
Mr. DeFazio. OK. Thank you. Then, second, and I would
engage anybody on the panel who wants to join me in pushing
this issue. I had legislation on it that I have written, and
like they say, bipartisan problem.
The Bush Administration, the Clinton Administration, and
now the Obama Administration, the Special Trade Representative
will not take on OPEC. I guess we are scared of them for some
reason.
Second, Mr. Newell, the Enron loophole or commodity
speculation. I mean, you spoke as though we had set a very
stringent new limits on the markets for players in the market.
As I understand the Financial Services Reform, it exempted
people who were not end-users from this, particularly hedge
funds and others, and even the other regulations for pension
funds and folks like that, have not been promulgated yet.
So we don't have very significant restrictions yet on
people accumulating large numbers of contracts do we?
Mr. Newell. I do not have an opinion on the relative
stringency of the CFTC regulations, whether it is too much or
too little. I just don't have an opinion.
Mr. DeFazio. Right. OK. But the point is that you are
saying that there is little or no effect by speculators. There
are other experts out saying that there is a dramatic effect by
speculators on the market, because right now there is not an
oil shortage, but we have seen prices run up very dramatically.
So if there is not a shortage, and we are just talking
about supply and demand among end-users, why would the price
run up so much if there is a balance between supply and demand?
I think there is only one other. It has got to be problems
with speculators, right?
Mr. Newell. I think there has been a number of factors over
the last several months that have driven oil prices higher.
There has been a rebound in the global economy. I know that it
is sometimes hard to appreciate it here, because the United
States still has a high unemployment rate.
But there has been significant rebound on global economic
growth. This has led to a significant resurgence in global oil
demand. So this had brought prices back up into the $75 to $85
per barrel range.
Then in the last quarter of last year, there was an
unusually high demand for winter heating fuel, which led to a
further increase in prices, and then on top of that, we have
had the recent unrest in the Middle East and North Africa,
which as unsettled the market, and has taken at least a million
barrels per day off the market.
And it has unsettled the market due to the centrality of
the----
Mr. DeFazio. But I thought the Saudis had agreed to
increase production to offset that?
Mr. Newell. And they have.
Mr. DeFazio. So I guess the question is where is all that
money going? I know where some of it is going. Exxon's profits
last quarter of last year was the largest quarterly profit for
any earthly entity in the history of the world, $9.25 billion,
up 53 percent in one year.
Is that supply and demand, 53 percent, for someone who has
a substantial stranglehold on the market? I mean, they made a
53 percent in one year increase in a quarterly profit?
I mean, that is just supply and demand; no speculation
involved, no manipulation involved, nothing. United States
consumers should just say, oh, that is the way it is. Is there
not anything that we can do about this?
I mean, we can sit here and pretend that if we let out some
more leases that somehow this is going to help. We have already
discussed that, because OPEC will just drop the price. You
know, they want to keep a price target, and they can keep it.
We will not take them on at the WTO. All right. So that is
a problem. We have ExxonMobil with operating with such market
clout that they can drive the market, too, and gouge our
consumers, and increase their profits 53 percent in one year?
That is extraordinary.
I mean, do you have any suggestions on how we can deal with
some of this? I mean, we have long-term issues about supply,
but we have short-term issues about people being screwed at the
pump right now by big oil and OPEC, and we are not doing
anything about it.
Mr. Bishop [presiding]. Your time has expired. The
gentleman from Georgia, Dr. Broun is recognized.
Mr. Broun. Thank you, Mr. Chairman. I believe very firmly
that if a nation cannot feed itself, cannot clothe itself, and
is not energy independent, it is not a secure nation.
And we are not a secure nation, because we are not energy
independent. The Department of Energy was founded during the
Carter Administration as we all know to make us energy
independent. It has been a dismal failure in that charge.
According to the AAA the average price nationwide for
regular gasoline is about $3.55 a gallon. This is the highest
price ever in the month of March, and is over 40 cents higher
than just a month ago.
These skyrocketing gas prices, and a risky dependence on
fuel supplied by volatile foreign nations such as Libya,
highlight our need for an American energy policy that
emphasizes production and decreases our reliance upon foreign
oil.
The United States is the only nation on earth that forbids
development of its own god given natural resources. We have
been blessed by our creator with abundant natural resources,
and we should not be hesitant to tap into them, especially at a
time when energy costs are so high.
However, since taking office, the Obama Administration has
done everything in its power to lock up our energy resources
even more with de facto moratoriums. Production in the Gulf of
Mexico along has declined by 300,000 barrels of oil per day
just due to the Obama Administration's actions.
Energy is the live blood of the American economy. Our
Nation's economic prosperity is closely tied to the
availability of reliable and affordable sources of energy
unfortunately.
United States energy production has grown by only about 13
percent, while energy consumption has grown by 30 percent since
1973. At a time when nine percent of our citizens are
unemployed, and in my district, we have some counties that have
17 percent unemployment, and food prices are going higher, with
a still struggling economy, we must do everything in our power
to allow for a responsible use of our known American supplies
of energy.
Now, Dr. Foss, it has been proposed by the Obama
Administration of the possibility of tapping into our Strategic
Petroleum Reserves. Does this make sense at all, or should we
develop the known resources that we have here in the United
States?
Dr. Foss. I think the psychology in the marketplace would
be much more significantly impacted by decisions that affect us
longer term rather than now. I don't think that--and this is my
own opinion. I don't think that an SPR release right now would
matter much because I don't think we have an inventory problem.
We have a fear problem.
We have a concern about the future. We have expectations
about the future. Uncertainty about how events will unfold in a
critical producing region, and uncertainty about policies here,
and investment actions here.
And I think that symbolic steps, meaningful steps, that
indicate that we are willing to make sure that we have a robust
industry here, would have a lot more, or much more impact on
traders, and trader psychology, and market psychology, than
using the SPR.
Mr. Broun. Thank you, Dr. Foss. I think that tapping into
the Strategic Petroleum Reserves is not sound policy, and I
think it is wrong to even consider doing so. There are other
things that we can do.
I think the first time a drill hits the ground and starts
drilling in ANWR, you will see oil prices come down worldwide.
But what can we do, Dr. Foss, here in the United States to
lower gasoline prices?
Dr. Foss. Well, I think that some good points came up in
the panel today, both on the supply side, ensuring that the
moving portfolio of resource to reserve production conversion
is able to function the right way.
So that means looking at how the industry operates, and
ensuring that appropriate regulatory and policy oversight is
there, but that it is done the right way. It is streamlined,
and it is transparent. Everybody can understand it; the public,
industry, and the government agencies that are involved.
The industry has to be able to maintain portfolios of
drillable prospects, and I think that people have to understand
what that entails in terms of both public and private mineral
leasing, access to resources, and then the investment cycles
that are needed.
And then on the demand side, I think that some key points
were made. Considering how valuable hydrocarbons are because of
their energy content, we should use them wisely, and I think by
now that we have reams of research that show how much we can
gain by effecting things like combustion engine performance,
and vehicle technology that allow us to get basically more bang
for the buck for every gallon of gasoline that we use, and I
think that is what we ought to focus on.
Mr. Broun. Thank you. Dr. Foss, my time has expired.
Mr. Bishop. Thank you very much. I now recognize the
gentleman from Louisiana. You do not have a witness here that
speaks the same language like you did yesterday, but you are
still recognized for five minutes.
Mr. Landry. That is right. I am going to try real hard. I
have a lot to ask, and I don't know if I will get it all in. I
never have enough time over here. I want to just make one quick
comment, that I am certainty glad that mankind did not
calculate the perils, or the perilous circumstances of sea
voyage about 400 years ago so that they could find this great
country.
I guess that is why my colleagues on the other side of the
aisle are so mad. They did not do their calculations, and I
guess if they would have, they would not have come over here,
and then they could have been born in Europe.
But it is just common sense over here. I wanted to ask, and
I do not know if they asked you this, Mr. Newell. I had to step
out a couple of different times. But last week the President
had a press conference.
He made some statements, and did the White House call you
and ask you to give them any statistics on that?
Mr. Newell. I am sorry, but what specific statistics are
you referring to?
Mr. Landry. Well, he had a press conference where he talked
about production increases, and how he was doing such a
fabulous job of increasing oil production in this country. I
was just wondering were you in that meeting? Did they brief
you, and call you, and ask you to send them some statistics?
Mr. Newell. So, if----
Mr. Landry. That is a yes or a no. I mean, did they call
you last week to ask you to send them some data?
Mr. Newell. There is data in that fact sheet that comes
from EIA, yes.
Mr. Landry. That was sent specifically to the White House
on a request last week?
Mr. Newell. I was not involved in providing them data. It
is very routine for EIA to be provided data.
Mr. Landry. Well, do you know if you sent them this data
that says that in the first quarter of 2011 that your agency
said that production per day in the Gulf would decrease from
1.59 million barrels to 1.4 million barrels a day?
Mr. Newell. Are you asking me if the numbers are in our
short-term energy outlook?
Mr. Landry. No, no, no, no. I know that is your numbers.
Did you send that to the President? Did you send that to the
Administration, because he never mentioned that in his press
conference. He just said that production was the highest. He is
a fellow who gave us our law.
Did you send that to the White House? I am trying to figure
out if he got these statistics. Did you or did you not send
these statistics to the White House, and if they asked you last
week for some statistics, and was this statistic in there?
Mr. Newell. My recollection of what is in the fact sheet
was kind of history, historical, as opposed to our forecast.
Mr. Landry. Well, do you not think that--well, you do not
just send him facts, but you evidently tried to influence
policy by doing forecasts, or you would not have run these
numbers.
I mean, do you not think that it was your responsibility to
send it to the President, and say, boss, I think you are fixing
to make a big misstatement?
Mr. Newell. We certainly do not do our forecasts to
influence policy. Quite to the contrary, we do our forecasts in
order to inform people about the current state of affairs, and
the likely state of affairs in the future, given what we see in
the market, and regulatory outlook.
Mr. Landry. OK. That did not answer the question, but do
you or do you not agree that under the current policy that
production in the Gulf of Mexico will continue to decline?
Mr. Newell. There is----
Mr. Landry. No, no, just yes or no. I mean, it is pretty
simple. I don't need an explanation. Is the number going down
or is it going up?
Mr. Newell. Over the next two years, which is where our
short-term outlook goes, there is a decline in the Gulf of
Mexico, in terms of offshore oil production.
Mr. Landry. OK. So the Gulf of Mexico production factors
into the entire domestic production, correct?
Mr. Newell. That is correct.
Mr. Landry. So that means that if that goes down, then
domestic production goes down; is that correct?
Mr. Newell. Other things being equal, that will tend to
lower the rate of change of domestic production, yes.
Mr. Landry. All other things being equal, like what?
Mr. Newell. Well, there could be offsetting effects,
because there is----
Mr. Landry. Such as?
Mr. Newell. Well, there has been increased production of
liquids rich, natural gas shale plays. There has been increased
production on the Balkan in the lower----
Mr. Landry. Really? Well, I am glad that you brought that
point up, because you see, he is taking credit for increased
production, but yet there is one project in the Gulf, one deep
water project, which started at least under Reagan.
And another lease block was under Bush, or Clinton, and
then I think they started drilling in Bush II in 1999, and the
platform was set in 2005, 250,000 barrels a day. 250,000
barrels a day. Do you think that there is anything onshore with
one well that can produce that much oil onshore?
Mr. Newell. I did----
Mr. Landry. No, no, that is a yes or no. I mean, it is
pretty easy. I mean, you know the facts. You know where all the
oil is in the country. Do you think that there is a project
onshore where we can get 250,000 barrels a day out of a well?
Mr. Newell. No.
Mr. Landry. Thank you. I yield.
The Chairman [presiding]. Mr. Johnson of Ohio is
recognized.
Mr. Johnson. Thank you, Mr. Chairman, and I thank the panel
for being here with us today. Not too long ago, we had an
opportunity to question Secretary Salazar in a hearing here.
And it became very clear through several of the questions,
and the Secretary made a comment that oil prices are determined
on an international market, and therefore, America has no
influence, little to no influence on the price of oil.
Thereby, little control over the price of gas at the pumps.
Do you agree with Secretary Salazar, Dr. Foss, when he said
that the United States cannot impact the price of oil, and
therefore, the price of gas at the pumps?
Dr. Foss. I disagree.
Mr. Johnson. And would you explain why you disagree?
Dr. Foss. We are both a large producer, the largest
producer, and a large consumer, and I still think we are the
largest consumer. We have not been passed up yet. That gives
us, I think, market clout that we don't use fully to our
advantage.
And I think that there are a lot of ways of exercising that
that came up this morning, I think, through international
relationships, through our own actions, and our own country,
and through our industry's activities, and how we signal to the
world our intentions going forward. All of those things.
How we manage our energy consumption, and things that we do
to put in place to use our energy resources wisely. I think
that all of that has impact.
Mr. Johnson. Well, it encourages me that you think so,
because I certainly think so as well, and as I commented to
Secretary Salazar, it greatly concerns me that our leaders in
the Administration, and in the cabinet, seem to feel that their
hands are tied behind their back.
And that is just further indication to me as I mentioned
then that we have a failed energy policy here in America, and
that should be alarming to the American taxpayers. It is
certainly alarming to me.
Another question. He brought forth a budget, and one of his
justifications for his increase in the budget was so that they
could put in a robust permitting approval process in place.
Now, I don't have these numbers exactly right, but you will
get the intent of my meaning. Three years ago, or two years
ago, 300 and some permits approved. A year ago, a hundred-and-
some permits approved. This year, 30 something permits
approved, and we are on a steady downhill curve.
Why do you think it is that the Department of the Interior
needs more money in 2012 to go back to producing and
authorizing permits at a level for which they were doing it for
less money three years ago? Does my question make sense?
We were authorizing 300 plus permits just a couple of years
ago. We are down to the thirties. In the deep water area, we
are down to almost none, one or two. but yet, they want more
money to put a robust permitting process in place.
They were doing it for a lot less three years ago. Why do
you think they need the additional money, and an increase in
budget, Dr. Foss, to put a permitting process in place? Help me
out.
Dr. Foss. Sure. Thanks for clarifying that you were
directing the question to me.
Mr. Johnson. I am sorry.
Dr. Foss. That is all right. I think that there is a
certain amount of public funding that probably needs to be
used--I am not a budget expert. There are other people who are
Federal budget experts, and I am not--to ensure that the
permitting process happens the way that it should.
But around the commission report, and around other
discussions, there are also additional avenues of making sure
that Federal areas are managed and administered in a way that
does not put as much pressure on the Federal budget, as perhaps
some might think.
And that includes a range of things, such as how the
agencies function themselves, and getting industry to
participate the right way. There are lots of options.
Mr. Johnson. OK. I just want to wrap up with one final
question, a sort of yes or no one, as well. Do you agree that
we have a flawed permitting process?
Dr. Foss. I think we have implementation problems, and so
if that would----
Mr. Johnson. Are we producing the number of permits that we
should be producing to tap into America's resources?
Dr. Foss. I think we need to think about how to implement a
permitting process, and----
Mr. Johnson. That is a yes or no question.
Dr. Foss. Yes.
Mr. Johnson. OK. Thank you. I yield back, Mr. Chairman.
The Chairman. Thank you, sir. I recognize the gentleman
from California, Mr. Denham.
Mr. Denham. Thank you, Mr. Chairman. I actually had a
number of questions on permitting today, which I will submit
and look for an answer in writing, because I think that the
most pressing issue right now actually has to do with burn
rates.
I am surprised to see Mr. Markey's graph there, and I would
agree that the burn rate, that we do not want to put ourselves
where we are in jeopardy because we are burning through all of
our natural resources.
But I think his chart suggests that Norway, if you believe
that Norway and Mexico are larger than the United States, that
would actually be a factor, or if we only had two percent of
the world's oil reserves.
So that is actually what I wanted to ask a number of
questions on, and first of all, Dr. Whitney, specifically, let
me start with the President's statement last week, which was
that even if we tapped every single resource available to us,
we can't escape the fact, according to the President, we only
control two percent of the world's oil, but we consume over a
quarter of the world's oil.
Now, some people are talking about control, versus actually
what are actual reserves. So I wanted to just clarify. The CRS
did come out with a report, and the two percent figure is 19
billion barrels of oil, correct?
Dr. Whitney. I believe 21 or 22 billion barrels.
Mr. Denham. And the number I show here from the CRS report
is actually 145.5 billion barrels?
Dr. Whitney. Again, that number has been updated. I don't
know what the latest number is, but it is near that, yes.
Mr. Denham. OK. Well, that is a big difference. We are
saying two percent is less than 20 billion, but we actually
believe that there are over 145 billion, that obviously would
affect our burn rate.
Dr. Whitney. This is the difference in terminology between
reserves and undiscovered resources. The President was
referring to reserves only, which would be 21 billion barrels
of United States reserves, compared to total world reserves,
and I don't have that number in front of me.
Mr. Denham. OK. And how about total recoverable energy
reserves? The CRS report combining, that is obviously oil,
natural gas, coal, 1.3 trillion?
Dr. Whitney. Yes, and the overwhelming majority of that
number is coal if you will notice, which if the discussion
today is about gasoline prices, that volume of coal has very
little to do with this discussion.
Mr. Denham. Very little, but if you understand all of our
energy reserves, we can obviously balance those different
reserves, and make sure that we are self-sufficient.
I mean, that is the biggest issue if you are talking about
burn rate. We want to be self sufficient and not in danger of
world markets.
Dr. Whitney. Right, and there are other issues that we can
address. For example, the consumption of oil is tied to our
transportation system. So if the transportation system in the
future is converted to an electric system, or more reliance on
electricity, then natural gas, coal, and nuclear, are fuels for
generating electricity, and that could help move us away from
consumption of oil.
Mr. Denham. Thank you. And Mr. Markey's chart showed how we
compare to the rest of the world. 1.3 trillion. How does that
compare us to the rest of the world?
Dr. Whitney. Well, it is the largest number in the world,
but I want to caveat that very carefully, because as I put in
the report, there are some caveats and disclaimers. Within the
United States, we have very good numbers for approved reserves
and for technically recoverable resources thanks to USGS and
EIA.
Once you get outside the United States that data is much,
much harder to gather.
Mr. Denham. How do we define recoverable?
Dr. Whitney. Recoverable is defined by what current
technology is.
Mr. Denham. Well, is Tranquillon Ridge considered
recoverable?
Dr. Whitney. Pardon me?
Mr. Denham. Tranquillon Ridge in California, is that
considered recoverable?
Dr. Whitney. I am not familiar with that field.
Mr. Denham. Mr. Newell, Tranquillon Ridge, I am sure that
you are aware of that. I mean, it is the biggest project in
California, one of our largest States.
Mr. Newell. Yes, assuming that existing technology can get
that resource at some price, then yes, that would be
technically recoverable.
Mr. Denham. Are we assuming that we don't have the
technology? I mean, that is a different debate. I would hope,
and I would assume that we have the technology, since most
other countries have the technology.
Mr. Newell. I was agreeing. That is a technically
recoverable resource as long as you have the technology would
be in that, and so, yes, that would be included.
Mr. Denham. So that would be included in the 19.1 billion
barrels, the two percent that the President is referring to?
Mr. Newell. I am not sure, because that is proven reserves,
and so I don't know specifically whether those have been proven
reserves booked by a company, which has an additional set of
requirements for it to be considered proven reserves. I just
don't know.
Mr. Denham. What I am trying to get down to, and again I
have a number of permitting questions, but what I am trying to
understand is when you say that Mr. Markey shows us a chart
that says two percent, and throws off these burn rate numbers,
and the President talks about two percent, are we talking about
oil that we know of, oil that is permitted and we are pulling
out of the ground, or somewhere there in between?
Mr. Newell. The reserve number, or the two percent number
is specifically referring to a reserve number, which is proven
reserves. Technically recoverable resources is a much bigger
number.
The Chairman. The time for the gentleman has expired.
Mr. Denham. Thank you, Mr. Chairman.
The Chairman. The gentleman from South Carolina, Mr.
Duncan.
Mr. Duncan of South Carolina. Thank you, Mr. Chairman, and
American energy independence, that is what we are talking
about. In 2007 and 2008, I served under the previous
Administration, Department of the Interior, MMS, five-year
planning, OCS, five-year planning subcommittee, which dealt
with oil and natural gas leases on the Outer Continental Shelf,
and talked about the next five-year plan, and where those
leases would be.
And I was amazed during that process how convoluted it
really was, because we are very limited on what we could talk
about. We were limited to a certain grid section in the western
GOM, and one small spot off the coast of Alaska, and they were
both in ultra-deep water.
In 2005, I went out, and probably in 2006, I went out to
Louisiana, and it was post-Katrina, and we flew out to a deep
water production platform and a deep water drilling platform.
The platform that I went to was the Devils Tower. It was a
spar platform floating in 5,600 feet of water. We also went to
a drilling platform, which was a pontoon drilling platform for
natural gas about four miles away, and so I have seen it for
myself.
And Congressman Landry has been very clear about the impact
of the de facto moratorium on the Gulf Coast states. The fact
that it is not just the energy companies, or the petroleum
companies that are drilling. It has a trickle down effect all
the way to the smallest welder.
It is a trickle down effect to the states that are hit by
this recession that are losing the royalty revenues. That is a
dummy whammy to an already impacted economy that was impacted
not only by the spill, which was unfortunate.
But my understanding from talking with folks is that the
companies that do exploration and drilling have met every
requirement of this Administration that was put out there in
order to get back to work, and in order for the permits to be
issued.
But yet to this day, we only see that two permits have been
issued. The American people want to see us deal with American
energy independence. They understand that it is a national
security issue.
Let me be clear. I am for all resources that we have in
this country to meet our energy needs. I am very pro nuclear
energy. I am pro on drilling, OCS, and here on the mainline.
We have had, thanks to the direction of our Chairman, we
have had the head of BLM in the Committee, and we have talked
about the Wildlands Act, and the fact that Secretary Salazar
signed a Secretarial order in December to basically accelerate
the designation of wilderness areas.
Basically, usurping the power of this Congress, which has
the only statutory authority to designate wilderness areas, and
usurping that authority. So, now we are seeing that Federal
lands are being taken off the table for energy exploration and
energy production, to meet our energy needs in this country. I
think that is abysmal.
This Administration spoke just recently about--and I
applaud them for this--on the necessity of increasing domestic
production, but actions speak louder than words. So I ask this
Administration to accelerate the permitting process, and let us
get the people back in the Gulf of Mexico that have leases.
Let us extend the current leases that are expiring, because
those folks stepped up to the plate, and they bought the rights
to explore for energy sources, and produce energy sources on
those leases.
Having been on that five-year planning subcommittee, I know
the process that it takes to recommend to the OCS Committee the
next five-year plan of where those leases should be. It is a
long process.
And if we started today--and we are five, six, seven years
out for the next lease sale. So we have had leases expiring,
and we don't have another lease sale. In fact, I don't know
when that is going to happen.
ANWR should be back on the table, Mr. Chairman. It is the
size of the great state that I come from, and that is South
Carolina, but if we talk about the impacted area in ANWR, we
are talking about a size about the size of the Columbia Airport
in Columbia, South Carolina, or maybe the size of the City of
Charleston.
If I stuck a postage stamp on that wall, that is what we
are talking about. Folks, it is time for us to be serious about
energy production, and meeting the needs of this country with
American resources for American energy production.
That is deep water, that is onshore, that is offshore,
fracking, hydraulic fracturing. James Lankford from Oklahoma
mentioned yesterday that they have been fracking in Oklahoma
for 50 years with not an incident.
He said come drink our water. Come drink our water. We are
proud of it. We have the ability to do that, Mr. Chairman. Let
us not remove this Federal land from access, for exploration.
See what is out there, and then we can produce it.
In Georgetown, I saw a sign for $4.69 a gallon. I think
that is probably the highest in the Nation, but still it is
alarming, $4.69. $3.85 is alarming. I know what $4.85 a gallon,
diesel fuel, meant to my small business in 2008, and I know
what the rising costs of fuel means to large and small business
in this country, and it is time for us to be serious for that.
Thank you, Mr. Chairman.
The Chairman. The time of the gentleman has expired. The
gentleman from Florida, Mr. Rivera.
Mr. Rivera. Thank you very much, Mr. Chairman. I want to
give you an indication of perhaps what is going on with some of
the residents in my State, in the State of Florida, where on
average the price of a gallon of gasoline in Florida is
currently about $3.56, which is higher than the national
average.
Just a month ago, just one month ago, the average in
Florida was $3.13, and at this time, just one year ago in my
State, the average was $2.82. So this is a 74 cent, or 26
percent increase over the past year in my State's fuel costs.
Initially, I thought to ask the panel whether they were
aware if in certain States like Florida what the average
household income was, and whether that household income in
States like Florida was keeping pace with the rise in fuel
prices.
And that, of course was going to be a rhetorical question.
I presume that while you may not know the exact amount, you
would probably all know the answer is absolutely not, that
household incomes have not kept pace.
So the fact of the matter is that according to the latest
American Community Survey put out by the United States Census
Bureau, the average median income in my state in Florida has
been declining.
People's incomes are going down. So Florida families and
across the Nation, they are having a harder and harder time
paying their bills, and having a harder and harder time
providing for their families.
And this Administration's policies, or perhaps some would
say the lack thereof in certain areas, are making it even more
difficult to provide for their families, and the economic
resources are diminishing rapidly.
With political unrest in the Middle East and North Africa,
the summer travel season picking up in the coming months, and
the additional rise in fuel costs that accompany it, Americans,
I believe, are anxiously awaiting for the Administration's
plan, for the plan to increase our fuel supply, and try to
suppress price spikes, or foreign supply disruptions.
Whatever the cause is, the American people need to see the
way out. What is the plan? So I would like to ask a question of
Mr. Newell, if you would. According to your agency, production
in the Gulf has declined by nearly 300,000 barrels a day since
last April.
There have been project declines of 250,000 barrels a day,
or will be for the next two years, continuing declines. Have
you calculated how much in revenue via royalties the Federal
Government and the producing Gulf States have lost?
Mr. Newell. We have not done that calculation. That would
be the kind of calculation that the Department of the Interior
would do. We have not done that.
Mr. Rivera. Well, then let me ask perhaps Dr. Foss, if you
would, this year, or the President's Fiscal Year 2012 budget,
proposed budget, includes over $60 billion in new taxes and new
fees for American energy production.
If you couple that with the lag in getting permits approved
in the Gulf, which we have been discussing during this hearing,
can you tell us what you believe this will do to fuel prices,
and whether these actions will encourage or discourage
companies to invest in American energy production?
Dr. Foss. Anything that affects the cost of doing business,
that full, break even finding and development costs that I
mentioned in my testimony, will make the resources that are
recovered more expensive.
And the only way to offset that is to streamline other
things. For example, the cost of obtaining permits, or the cost
of dealing with regulatory oversight, or other actions, and
increased production volumes so that the costs can be spread
over more barrels or more cubic feet of gas.
Mr. Rivera. Would anyone else like to elaborate? Perhaps
Mr. Caruso.
Mr. Caruso. No, I think that in that budget what is likely
to have a significant effect is the increased costs by reducing
or eliminating the intangibles, and the ability to expense
intangible drilling costs.
I am told from the smaller independent oil and gas
producers that that is going to have a significant negative
effect on their ability to drill as much as their expectations
were. So I think that will in the lower term reduce United
States production.
Mr. Rivera. Thank you, and thank you, Mr. Chairman.
The Chairman. The time of the gentleman has expired. The
gentleman from Utah, Mr. Bishop.
Mr. Bishop. Thank you, Mr. Chairman. I appreciate the panel
staying this lone. I think that I have outlasted everybody else
here. Ms. Pierce, I appreciate the conversation that you had
with Mr. Tipton of Colorado about oil shale.
And I appreciate you saying that there were hundreds or
billions, or billions is what I think you said, billions of
barrels. Actually, if the Energy Department, your department,
believes that there are 800 billion barrels that could be
recovered, that is much bigger than what Saudi Arabia has in
proven reserves, and it would create 100,000 jobs, and about $2
billion in royalties, which the State's share would do a great
job in funding our State's education system.
As we can tell when the Secretary of the Interior pulled,
violating this process, 77 oil leases from there, it had a
direct impact on the funding of education in my State as well.
So, I appreciate that comment.
I do want to ask Dr. Foss, if I could, with some questions,
dealing with what we have talked about so far, because it is
very clear that when gas prices go up, and heating prices go
up, that becomes part of the collateral damage oftentimes of
Administration decisions, especially lately.
So I want to follow up on what Mr. Rivera was talking
about. In your opinion which Americans are really the most
impacted by rising gasoline prices?
Dr. Foss. The Americans that spend the most money on
gasoline relative to their disposal household incomes. So
people who have a larger share of their household budget having
to go for gasoline.
Mr. Bishop. So that becomes the lower economic strata of
our society then. I am assuming that is correct?
Dr. Foss. Yes.
Mr. Bishop. Yes. So it would be safe to say that these
Americans would be the ones who stand to benefit the most from
an increase in American made oil and natural gas production?
These would be the ones that we would be helping the most, I am
assuming?
Dr. Foss. Yes, that is correct.
Mr. Bishop. We currently lease, and let me just stick with
you, Dr. Foss, if I may. We currently lease less than four
percent of the 2.5 billion acres of the Federal mineral estate.
If we were to allow access to more of that Federal mineral
estate, is it not logical that we could increase our domestic
reserve base?
Dr. Foss. Yes, we would.
Mr. Bishop. You have to talk longer than that. I am used to
bigger answers. But thank you for the direction there. What
advantages does the United States have compared to other
countries, or maybe hindrances do we have to other countries,
that we might in Congress address that would encourage more
domestic development?
Dr. Foss. Well, I think the one that we just talked about,
which is budgets, and taxes, and there are two things to think
about there. One is the direct effect on the producers
themselves, the producing community itself.
So the tax structures they face, and the cost structures
they face. But then the other one is the health of the overall
economy, because just like any other industry, any other
business, companies will do better if the overall United States
economy and budget are in better shape.
Mr. Bishop. OK. I appreciate that. Let me ask just one last
one of you then. We heard yesterday a great deal of comparisons
between the United States and other countries that I think were
somewhat skewed in the response of doing that.
But how does the domestic oil and gas industry compare
here, compare to the industry in other countries, in terms of
science or technological development?
Dr. Foss. It is enormously different. For one thing, we
have thousands and thousands of producers of all sizes and
shapes, and specialties, anywhere from 9,000 to 10,000, I
think, is still the rough estimate of the total number of
active producers in the United States, large and small.
They are motivated to deploy and develop the best
technologies that they can, and they try to do that, and they
do that freely and in an open market, and through competitive
industry activity.
And they have access to private owned minerals and not just
the public owned minerals. We are the only country that is
organized that way.
Mr. Bishop. I appreciate that very much. I also appreciate
the fact that we have talked a lot about offshore development,
but I come from an inland state that has a great deal of
potential development if it were allowed to be there.
And if somebody who is on a school teacher's retirement,
the future of my retirement is based on the ability of the
economy of my State to fund that, as well as my kids' education
system.
So I am very sensitive when we make arbitrary decisions by
this Administration that takes that potential development off
the table, when we could be benefiting from that table. Mr.
Chairman, if I have a few minutes left, could I yield to the
gentleman from Louisiana, or if I have a few seconds left?
The Chairman. The gentleman has 19 seconds left.
Mr. Fleming. I would like to just for the record talk about
the rig count real quickly. The rigs that are out there that
they are claiming are in the Gulf of Mexico, those rigs may not
be drilling; is that correct? So it does not do us any good to
count a rig that is not drilling.
Mr. Newell. That is correct. Rigs could be there and not
drilling. I guess it speaks to the longer term issue of how
fast it could recover.
The Chairman. The time of the gentleman has expired. If
there is a desire for a second round, and so I will certainly
recognize the gentleman. The gentleman from Utah's time has
expired.
There is a desire for a second round, and I just have one
question, and I will go to Mr. Holt, and then finish up with
Mr. Landry. Dr. Foss, there had been records that have been
sent--and you alluded to this in your opening statement,
between the price differential of the world crude and West
Texas, and the suggestion is that it is because this has been
the rise or the impact of North Dakota.
And I understand that new production probably would have an
impact on world prices, but isn't this difference in price an
indication that more domestic production could provide a price
break for American consumers in that regard, as well as the
national security aspect that I have been talking about for
some time, Dr. Foss?
Dr. Foss. Yes.
The Chairman. Boy, that is very definitive. Do you want to
elaborate for just a moment? That is the only question I have,
and so I am not going to ask another one. Explain briefly if
you will.
Dr. Foss. Well, if I understand what you are asking, which
is the impact of our crude production in our own markets?
The Chairman. Right, exactly.
Dr. Foss. Of course it has a huge impact, and I mentioned
an idea, a suggestion, which we need to think about, which is
debottlenecking to make sure that we can benefit from it.
And we have had this problem before, and we have it on the
natural gas side periodically. We have new areas of production
that grow and start flourishing. We have pipeline bottlenecks
and storage bottlenecks, and we can't really get it out into
the market.
So we have an accumulation of inventory in one part of the
country right now, and it is contributing to this disparity
between our domestic price signal and the internationally
traded crude.
So to the extent that that provides an indication to
investors that perhaps there is money to be made by building
additional oil pipeline storage terminals and other capacity,
they will get there as long as they can get it permitted, and
enter the market in a way that they feel will work timing wise.
The Chairman. And all of that would be based on the
assumption that it would be less than the world market prices,
and therefore, benefiting American consumers; is that correct?
Dr. Foss. Well, they would take advantage of arbitrage to
make the investment work.
The Chairman. Right.
Dr. Foss. So when a disparity in a price signal like this,
a low price in a producing area, relative to higher prices in
markets, that allows you to actually finance the
infrastructure.
The Chairman. Right.
Dr. Foss. It is that basis differential as we call it that
allows people to move forward with projects like new pipeline
capacity, and other debottlenecking strategies which benefits
consumers.
The Chairman. And which goes back to your original answer,
short answer, yes. Yes, it helps benefits the American
consumer. I will yield back my time and recognize the gentleman
from New Jersey, Mr. Holt.
Mr. Holt. I thank the Chair, and I thank him for his
courtesy in allowing further questioning. Several of our
colleagues raised the point of the cost of gasoline at the pump
today, $3.50 and more, compared to months ago, or a year ago.
But I think it has come out quite clearly in the testimony
today that oil prices are much more a function of what OPEC
does than a function of the rate of issuing oil drilling
permits.
And gasoline prices are even less correlated with that.
Gasoline price fluctuations are much more a function of
speculation, and even what I would call gouging. Wishing, and
hoping, and dreaming will not change reality.
When we talk about reserves, I mean, that is reality. It is
resources that can be estimated with reasonable certainty to
exist and be recoverable under reasonable economic conditions.
I think we have to face the fact that we must have a
broader balance of an energy portfolio. Simplistic solutions
will not do. ``Drill, Baby, Drill'' is simplistic. It does not
capture what we have.
We do not dominate the production of oil in the world. We
never will again dominate the world oil production. The burn
rate actually has some meaning. We can quibble about exactly
where we are relative to Norway and others, but what it means
is that our leverage in oil prices will be less, and less, and
less, and it is already not great.
So my question has to do with oil reserves, and not coal by
the way. In talking about how many barrels equivalent we have
of coal is not really relevant here today.
In trying to explain that the burn rate does not mean
anything, Dr. Foss says, well, but we are continuing to expand
our knowledge of our reserves. My question is when was the last
time that more oil was discovered than was actually produced?
In other words, when did this view of reserves around the
world stop keeping up with our use of oil? Do you know what
year that was, Dr. Foss?
Dr. Foss. We always have more reserves than we have
production. We produce from reserves.
Mr. Holt. Let me pretend that we are playing Jeopardy here.
The last year that more oil was discovered than was actually
produced, what is 1984, more than a quarter of a century ago?
You know, we can hope, and dream, and wish, but we have to
face facts. We cannot look for simplistic solutions. We have to
have a broader energy portfolio, and of course oil is important
to Louisiana. Of course oil is important to Texas. Of course
oil is important to all of our country for all sorts of
reasons.
But we cannot change reality and we have to face facts. As
Mr. Markey said earlier on, we have ridden this horse, and we
have ridden this horse, and the legs are giving out. I yield
back my time. Thank you.
The Chairman. The gentleman yields back his time. I will
recognize Mr. Landry to close. Mr. Landry.
Mr. Landry. I think we have a few more horses than oil. We
have natural gas, which I would think is a pretty solid horse,
Dr. Foss? We should put her in the gate. Coal. We have a lot of
coal, and we can put coal in the gate.
And nuclear certainly does a good job here in this country
if we could get back to building refineries. And I am confused.
I know that it is hard to sit right there, and there is a lot
of confusion on the other side of the aisle because they talk
about OPEC having a stranglehold, and then another Member comes
up and says that Exxon has a stranglehold.
That is kind of confusing to me as to who exactly has the
stranglehold. How long--anyone of you all, but how long do you
think that the trade of speculation has been around in this
world? Come on. You are all smarter than me. Somebody knows.
Maybe you want to guess. A hundred years, two hundred years?
Dr. Foss. Centuries.
Mr. Landry. Centuries. So speculation of commodities has
been around for centuries, and we have been able to grow this
country. This country has been able to grow and prosper all the
way through all of those evil speculators for centuries, and
centuries ago.
They did not hang them back then or anything. Do you know
if they did or not? Was there any punishment for speculation?
Dr. Foss. I don't believe so.
Mr. Landry. All right. What bothers me is that we always
want everybody else to increase their production capacity for
our gain, and we don't want to take responsibility for what we
could do ourselves.
The interim safety rule issued by the Interior Department
on October 14th of 2010 said that there is sufficient spare
capacity in OPEC to offset the decreases in the Gulf of
Mexico's deep water production.
Do you all believe that is true? I mean, if that is the
case, then prices should not be continuing to go up. Well, let
me ask you this question. Are any of you at all familiar with
water cut?
Are any of you familiar with the Middle East reserves out
there? Does anyone want to comment? Look, I am going to give
you all the floor. I have some time here. Mr. Caruso.
Mr. Caruso. I am not sure what the question is.
Mr. Landry. Well, if you are familiar with the problems,
because in the Middle East, we always want to turn to the
Middle East. But isn't it true that the Middle East really has
a problem with its spare capacity?
Every time the United States asks the Middle East, or Saudi
Arabia in particular, to increase its spare capacity, does that
not put pressure on Saudi's reserves, such that it actually
damages the reserves, rather than allowing for the longevity of
those reserves?
Mr. Caruso. My experience is that they manage their
reserves pretty efficiently. I do not have any evidence that
they are damaging their reserves.
T1Mr. Landry. Dr. Foss.
Dr. Foss. I think, and I think that many other people would
agree, including all of our colleagues at EIA, one of the more
difficult estimates to put together is that estimate of spare
capacity among the OPEC producing countries.
And I think that that is actually one of the things that
contributes a great deal of uncertainty in the oil markets
themselves.
Mr. Landry. And what potential does the United States have
to create spare capacity here at home domestically?
Dr. Foss. We have a great deal of capacity to do that,
because again, it is about portfolios. It is the portfolios of
opportunities that are available to companies, on both public
and private lands.
And to the extent that those portfolios of opportunities
are robust, that is our spare capacity.
The Chairman. Will the gentleman yield?
Mr. Landry. Yes.
The Chairman. On the issue of speculation, I don't know if
the gentleman does grocery shopping in his family or not, but I
would guess that your wife from time to time will buy two at
the price of one. Would you consider that speculating?
Mr. Landry. No, that is more shopping.
The Chairman. Right. But it makes the point. I would guess
that your wife is making that purchase because she is
speculating that the next time that she would buy that product
that the price would go up. So she is speculating on keeping it
down.
I mean, when one talks about speculation, if you put it
into terms like that, we do that every day in our lives. You
buy a jumbo instead of the other. Why? Because you are
speculating that that price is different, a differential. So
apparently you do not doing the shopping?
Mr. Landry. No, but she does. She does smart shopping.
The Chairman. OK. That is good.
Mr. Landry. She buys two for one.
The Chairman. The time of the gentleman has expired. The
gentleman from California is recognized, and I give the
courtesy to him. We said that we were going to close with Mr.
Landry, but certainly if the gentleman wants to have time, he
is certainly recognized.
Mr. Costa. Thank you very much, Mr. Chairman, and I do
appreciate that. I know that it has been a long hearing, but it
has been an important hearing, and I thank you for putting it
together.
I have been on this Committee for six years, and we have
obviously had this discussion and debate throughout those six
years. And I find it interesting that we all use the same
facts, more or less, but obviously using those facts to come to
different conclusions.
And it is interesting that we come to different conclusions
even though we want in essence the same goals, and the same
goals that we want are a cleaner, more reliable, sources--and I
say sources--of energy for our Nation that will be economically
viable, and that will reduce over the years our dependency on
foreign sources of energy. We want the same goals.
And it seems what is lacking to me is how we can agree on a
bipartisan fashion on how we obtain that goal, and it is not
that we are lacking for plans. Since 1973, I remember clearly
when President Nixon, and we have experienced the first energy
gas lines, where people had even and odd days to get your gas,
and announced a plan then that would--it was called energy
independence.
I am not so sure that we ever truly are going to be
independent, but certainly everybody believes that we ought to
reduce our dependency on foreign sources. At that time, we were
importing 30 percent of our energy as foreign sources.
And since that time every President, and numerous
Congresses, have all had energy proposals, and plans in some
fashion, have been implemented. And, of course, we have gone
from 30 percent of our energy sources being imported to now
almost 60 percent or more of our energy sources.
So you have to sit back for a moment and say since we want
the same goals, and we all have had a lot of plans out there,
what has been lacking, and I will tell you what I think has
been lacking is an ability for any Congress, or any
Administration, to reach a consensus on a short-term, interim,
and long-term energy policy, that in fact will fulfill those
goals of dealing with the new technologies, reducing our
dependency on foreign sources of energy, and sticking with the
plan.
We cannot stick with any plan. I mean, our plans, they are
the plan du jour, the plan for the day. I mean, we have a plan
for this year, two years, three years. We change it and energy
prices go up, and we make certain that alternatives are more
economically viable, and energy prices go down, and it makes
less energy alternatives viable.
And we have this kind of circular browbeating of one
another that at the end of the day does not help the American
public, nor a long-term energy plan.
Mr. Caruso, what do you think in using all of the energy
tools in our energy tool box, because I don't think there is a
silver bullet out there. I think that we have to use all of
them. I have always maintained that for the six years that I
have been there.
How do we do a transition and adopt a plan in the near term
with more reliance clearly on our fossil fuels, and the interim
as we transition to a longer term policy, and I define longer
term 20 years and out, to reach the sort of near term and long-
term goals that are country needs to, I think, achieve, and we
ought to be focusing on a bipartisan basis?
I mean, when do we do an inventory of what our current
energy needs are, and what they are going to be in the mid-
term, and the longer term, and how do we use the different
energy tools in the energy tool box to transition?
Mr. Caruso. I think you are absolutely right about the time
frame. We need to be thinking decades long transition. Fossil
fuels are going to be with us for a long time to come, and the
alternatives for a variety of reasons--technology, economics,
scalability--are going to take a long time to develop.
But that does not mean that we should not start as you are
alluding to, and on that side the focus should be on
technological development and innovation through research and
development. I mean, that is the long term.
Mr. Costa. But on the short-term part of that, conversation
is low hanging fruit. I mean, in California, on renewables, we
are 20 percent, and trying to get to 30 percent by the year
2020.
Mr. Caruso. In the short term, as I mentioned in my opening
statement, vehicle efficiency, improvements in efficiency in
homes, and use of coal generated electric, there are a lot of
things that could be done to reduce demand.
So I think we need to do it all, and not think it is going
to happen overnight. So I think that there has been unrealistic
expectations created by all of us, including us energy experts.
Mr. Costa. Thank you, Mr. Chairman, for the time, and
allowing us to sum things up so to speak, and I look forward to
working with you on these important issues.
The Chairman. I thank the gentleman very much, and I want
to thank this panel It has been over three hours since we
convened this, and I especially appreciate the brevity, and in
fact we have been kicking around some ideas here of what we are
going to call it.
It could be as time goes by award, and the once upon a time
award, or the good time award. I mean, whatever it is, I will
say that this panel here today on St. Patrick's day is the
recipient of that award. So thank you very much, and the
Committee will stand adjourned.
[Whereupon, at 1:09 p.m., the Committee was adjourned.]
[Additional material submitted for the record follows:]
[The prepared statement of Mr. Markey follows:]
Statement of The Honorable Edward J. Markey, Ranking Member,
Committee on Natural Resources
The reference in the title of this hearing to ``Harnessing American
Resources'' is appropriate because we are in a horse race, Mr.
Chairman. But rather than a blanket of roses at the finish line, the
winner gets much more valuable prizes: lower unemployment and lower
energy prices for American families.
There are two horses in this race. The old horse, the one that has
been running flat out for decades, is Drill-Baby-Drill. That horse is
owned by a syndicate of the richest, international oil companies in the
world and OPEC.
The second horse, a much more recent entry in the race, is Clean
Energy. That horse is owned by the American people, in partnership with
researchers, investors, and companies developing new technologies to
produce energy from wind, solar, geothermal, hydro-power, biomass and
other renewable sources.
Now, our Republican colleagues make plenty of claims about this
race but their handicapping is highly suspect.
First, they say they want a fair race and claim they would be happy
to see both horses win. This is their ``All of the Above'' claim.
But the truth is our Republican friends have taken a terrible risk;
they have bet it all on just one horse.
They have bet billions of dollars in subsidies and tax breaks--not
to mention betting our economy and our future--all on Drill-Baby-Drill.
In this committee alone, the scorecard on ``All of the Above''
stands at seven hearings featuring Drill-Baby-Drill and zero on clean
energy.
The Republican Majority also claims that the Obama Administration
is pulling back the reins on Drill-Baby-Drill. The truth is, this
Administration is riding that horse as hard and as fast as ever.
Republicans want to debate permits or acres or ten-year projections
but let's just cut to the chase: the amount of oil and natural gas
produced from our public lands has gone up every year of the Obama
Administration. Period.
In fact, we have been riding this horse so long and so hard that we
have left every other country far behind. Nobody has as much riding on
Drill-Baby-Drill as we do.
And lastly, our Republican colleagues claim that Drill-Baby-Drill
can win this race. The truth is, Mr. Chairman, that despite the long
head start, and despite the uneven field, and despite all the money we
have riding on that horse, history has proven that Drill-Baby-Drill
will never get us to the finish line.
That horse has given us everything it has--more barrels of oil,
more cubic feet of natural gas, more acres under lease more permits to
drill--and no matter what we do--no matter how many subsidies or tax
breaks we give--the price at the pump remains beyond our control.
The harder we whip that horse, the farther away the finish line
seems.
At some point we have to face facts: the Republican energy policy
amounts to nothing more than beating a dead horse.
So what might happen if we got serious and let Clean Energy out of
the gate?
Well the first thing you need to know is that Clean Energy can
catch up because it is incredibly fast. Just think about the speed of
the arrival of the internet or the elapsed time between the rotary dial
phone and the iPhone--when this country puts its mind to something, the
speed of innovation will take your breath away.
And unlike Drill-Baby-Drill, the longer we let Clean Energy run,
the cheaper it gets. There is a Moore's Law for solar that says each
time we double production, the cost of a solar panel drops 18%. The
investment we make in this horse stands to be the best bet we have ever
made.
And most important, Clean Energy can win this race, Mr. Chairman.
While Drill-Baby-Drill runs in place, clean energy is moving forward.
This horse will create new jobs--American jobs developing American
technology. And this horse can cut energy prices by reducing our oil
imports.
If we unleash Clean Energy--let her out of the starting gate--we
will find ourselves in the Winner's Circle in no time.