[Senate Hearing 109-381]
[From the U.S. Government Publishing Office]
S. Hrg. 109-381
OFFSHORE OIL AND GAS LEASING IN 181 AREA
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HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
ON
S. 2253
TO REQUIRE THE SECRETARY OF THE INTERIOR TO OFFER CERTAIN AREAS OF THE
181 AREA OF THE GULF OF MEXICO FOR OIL AND GAS LEASING
__________
FEBRUARY 16, 2006
Printed for the use of the
Committee on Energy and Natural Resources
______
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska RON WYDEN, Oregon
RICHARD M. BURR, North Carolina, TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri DIANNE FEINSTEIN, California
CONRAD BURNS, Montana MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia KEN SALAZAR, Colorado
GORDON SMITH, Oregon ROBERT MENENDEZ, New Jersey
JIM BUNNING, Kentucky
Alex Flint, Staff Director
Judith K. Pensabene, Chief Counsel
Bob Simon, Democratic Staff Director
Sam Fowler, Democratic Chief Counsel
Frank Macchiarola, Counsel
Patty Beneke, Democratic Senior Counsel
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 5
Burton, R.M. ``Johnnie'', Director, Minerals Management Service,
Department of the Interior..................................... 5
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 1
Gravitz, Michael, Oceans Advocate, U.S. Public Interest Research
Group, Washington, DC.......................................... 33
Landrieu, Hon. Mary L., U.S. Senator from Louisiana.............. 1
Martinez, Hon. Mel, U.S. Senator from Florida.................... 15
Menendez, Hon. Robert, U.S. Senator from New Jersey.............. 23
Nelson, Hon. Bill, U.S. Senator from Florida..................... 12
Parker, Timothy S., Senior Vice President, Exploration and
Production, Dominion Exploration and Production, Houston, TX... 41
Skains, Thomas E., Chairman, President and CEO, Piedmont Natural
Gas Company, Charlotte, NC..................................... 46
Talent, Hon. James M., U.S. Senator from Missouri................ 21
Thomas, Hon. Craig, U.S. Senator from Wyoming.................... 2
Wilson, Stephen R., Chairman, CEO and President, CF Industries
Holdings, Inc., Long Grove, IL................................. 26
APPENDIXES
Appendix I
Responses to additional questions................................ 61
Appendix II
Additional material submitted for the record..................... 73
OIL AND GAS LEASING IN 181 AREA
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THURSDAY, FEBRUARY 16, 2006
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:05 a.m., in
room SD-366, Dirksen Senate Office Building, Hon. Pete
Domenici, chairman, presiding.
OPENING STATEMENT OF HON. PETE V. DOMENICI,
U.S. SENATOR FROM NEW MEXICO
The Chairman. The hearing will please come to order. First,
let me thank the Senators and witnesses for coming. We'll try
to be as expeditious as we can today and as orderly as we can.
However, our schedules are clearly at the disposal of the
Senate and in other committees and infringe and request and
insist that some of us go elsewhere for hearings from time to
time, but we're going to have to leave shortly after 10:30 a.m.
for a vote, and we intend to return and complete this. Now,
having said that, we want to hear from the witnesses mostly,
but we need to lay some background before I do that and then
yield to Senator Bingaman. And I want to ask Senator Thomas if
he would care to comment on our witness, who is from his state
and whom he knows well, and perhaps he would like to comment
about her or say something either for or against her, whichever
you like.
[The prepared statement of Senator Landrieu follows:]
Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator From
Louisiana
The legislation we are considering today seeks to accomplish an
important goal: provide a new supply of oil and natural gas. It should
come as no surprise to anyone in this room that I strongly believe any
legislation that opens new portions of the Outer Continental Shelf
(OCS) to production should also compensate coastal producing states for
the impact to their environments and address the pressing national need
to protect our coastline, restore our wetlands and strengthen levee and
flood protection for our people living in these coastal areas.
Today, oil and gas production on the OCS contributes about 30
percent of this country's oil production and 21 percent of its natural
gas production. It is estimated that 60 percent of the oil and natural
gas in the United States that will be produced in the future will come
from the OCS. Within the next five years, offshore production will
likely account for more than 40 percent of oil and 26 percent of
natural gas production. In fact, since the energy frontier of the OCS
was officially opened to significant oil and gas production in the
1950s, no single region has contributed as much to our nation's energy
production.
This is not just a coastal state issue. It is truly a national
issue. So is the protection of our coast, which stands at the nexus of
America's future national security, energy independence, environmental
health and economic well being.
About 95 percent of today's OCS production occurs in the central
and western Gulf of Mexico off the coastlines of four states: Texas;
Louisiana; Mississippi and Alabama. Without the ports, fabrication
facilities and tens of thousands of miles of pipelines located in our
states, it would be literally impossible to access these vital mineral
assets at all.
Thanks to the leadership of both the Chairman and Ranking Member of
this Committee, the recently enacted Energy Policy Act of 2005 set an
important policy precedent--one that is entirely logical and fair--by
providing a significant stream of coastal impact assistance funding to
coastal producing states. But it was only a start.
Both the Chairman and Ranking Member as well as a number other
members of the Committee have been to the coast of Louisiana. You know
that it is a working coast. It is America's energy coast. It is a coast
that is vanishing. And that puts America at risk.
Prior to Hurricanes Katrina and Rita, Louisiana was losing more
than 24 square miles of our coastal land each year. Katrina and Rita
have spotlighted and accelerated the loss.
The erosion of Louisiana's coast is a national problem. Our coastal
wetlands and barrier islands are the first line of defense for
protecting the offshore and onshore energy infrastructure in the Gulf
of Mexico against the combined wind and water forces of a hurricane. In
fact, a recent report by Louisiana State University found that every
2.7 miles of healthy marsh can reduce storm surge by as much as a foot.
As a result of coastal erosion, many pipelines that were once well
protected are now exposed and subject to open sea conditions.
In the aftermath of the hurricanes, I believe our nation better
understands the importance of offshore oil and gas production to the
nation's energy supply. We saw what happened to pump prices in the
weeks after Katrina. These storms demonstrated the extent to which we
depend on the central and western portions of the Gulf for our nation's
economic well being. The wisdom of the Energy Bill provision should be
clear to everyone. The need to do more is not only fair but clearly
apparent.
While I continue to be a strong advocate for expanding exploration
and production access on the OCS, I cannot support legislation that
does not compensate the coastal producing states for the crucial
platform they provide for this development.
I look forward to working with Senator Domenici and Bingaman and
other Members of this committee to provide coastal producing states
with the long term funding necessary to ensure that our coasts are
protected and that the people who live along it are made secure and
safe. That way, America's working coast will continue to serve as this
nation's energy hub for many years to come.
I ask the Chairman and Ranking Member and the rest of this
Committee to work with us to bring together mutually important goals of
protecting our nation's consumers and moving toward energy independence
for our country as we also secure our coastline and make it safe for
Americans who live in these coastal areas.
Thank you, Mr. Chairman.
STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR
FROM WYOMING
Senator Thomas. Well, I'll try and limit my comments. I
just wanted to welcome Director Burton here. She, of course, is
from Wyoming, and she and I served in the Wyoming legislature
together as a matter of fact. And I just wanted to tell you
that here's a person with a lot of background in this area, and
we really welcome her here. And by the way, Mr. Chairman, if I
may ask you now, I have a statement from the Independent
Petroleum Association* I'd like to put in the record. Thank you
very much, sir.
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* The statement can be found in the appendix.
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The Chairman. You're welcome. In today's hearing, we're
going to discuss S. 2253, a bill that would direct the
Secretary of the Interior to offer areas within the 181 Area
for oil and gas leasing. Yesterday is the first congressional
testimony since assuming the position of the Federal Reserve
Board, since that new Chairman took that position. Chairman
Bernanke stated that, and I quote, ``While the U.S. economy
performed impressively in 2005, rising energy costs present an
economic risk.'' The Chairman further stated, and I quote
again, ``The possibility of significant further increases in
energy prices represents an additional risk to the economy.
Besides affecting inflation, such increases might hurt consumer
confidence and thereby reduce spending on non-energy goods and
services.''
I think we should all view this as a very serious warning
from the new Chairman of our Nation's monetary policy about the
future and as it pertains to this hearing, as it pertains to
the supply of natural gas for the United States. We will likely
hear these same warnings today from the agricultural community
as we have in the past, from the chemical industry
manufacturers, the paper industry, residential consumers and
scores of other Americans and representatives of almost every
sector of America.
Now, when we mention these businesses, we are not talking
about some corporate structure. We're talking about thousands
upon thousands of jobs. We're talking about the future of these
businesses in a global economy. Are they still going to be
here? Are they going to leave? Are they going to close up? And
we are led to believe, with some degree of certainty, that if
the price of natural gas continues to escalate, as it has in
the past 24 months after an extremely high level that has come
down some after Katrina, but if it continues, we are led to
believe that the United States of America will, indeed, have
some very significant problems, and our consumers will suffer
immeasurably. On February 15, 2000, the price of natural gas
closed at $2.61 per million Btu. At the close yesterday, the
price of natural gas was $7.32. It has been much higher, as I
indicated, and there are many who think it will go much higher
than the $7.32.
Over 6 years, that means America's natural gas bill, the
bill that everybody has paid, all of those I mentioned plus all
the individuals, it will have risen from $50 billion to $200
billion. That's $150 billion less that the American people have
to spend. And in another way of looking at it, it's at least
that, some portion of that, that American businesses had to
pay, that they weren't paying 6 years ago, to produce products
sold here and elsewhere. This is as if it were a big, giant tax
upon the consumer and the American industry.
Last week, across the world, in the midst of a frigid
Russian winter, the price of natural gas was about $1.25 per
million Btu. And in Oman, where the government of the Sultanate
had entered into a joint venture in a petrochemical plant with
an American chemical company, the price was approximately $1.
So, in today's global market, our failure to act is setting us
up to get left far behind, as I see it.
So, what will history say when we are presented with all
this testimony from all of these sources in our own country,
including the Chairman of the Nation's central bank and all the
others that I have mentioned? What will they say about us with
all this evidence? How will they judge our action if we have
before us a situation like we do here today and fail to act?
What will we tell the people back home? Who bears the burden of
having acted, and who bears the burden of these bills that
they're receiving? What I will say to them is that we're going
to try today to do something to alleviate that problem.
I'm going to try my best with S. 2253--the Domenici-
Bingaman-Talent-Dorgan bill. I'm sure that other members came
on afterwards, but that's how it's introduced. This is a
bipartisan bill. We intend to keep it bipartisan. We intend to
take it to the floor, if we can get it out of this committee,
and ask that the Senate of the United States consider what I
have just said. If our bill passes, let me state what will
happen.
First, we are told that this is the single most important
thing that Congress can do to bring a substantial supply of
natural gas to market. I repeat, we are told, and you will hear
that this is the single most significant thing we can do to
bring supply to market. We are told that this impact should be
on the price of the commodity in the market in the near term.
Some will say this is going to happen years from now. We are
told that is not the case because it is so certain and so apt
to occur.
While it is likely that this production can be brought on
within 2 years, it is also likely that, as I have indicated, it
would send a very positive ripple through the marketplace. The
message will be that we are serious. The message will be that
we want to do something for Americans, the American people. And
we have to ask ourselves, are we doing any harm to any part of
America or to any peoples of America?
Opponents say they have concerns about the Florida coast. I
can assure you the sponsors of this measure have concerns. I
can assure you that there is no member of this Senate committee
that does not have concerns. But as I have said in the past, it
is obvious that we would not try to do anything to hurt the
State of Florida. But I don't think President Clinton,
Secretary Babbitt and Governor Chiles would have done anything
to hurt Florida either. They negotiated drilling in an agreed-
upon territory that is larger than the area in our bill, closer
to the Florida coast in the area covered under the Domenici-
Bingaman bill. And they negotiated, believe it or not, in a
price environment, Senator Bingaman, when gas was $2.50, when
oil was $20 dollars a barrel. Our 181 bill provides the
Secretary shall not offer leases within 100 miles of the
Florida coast. The State of Delaware is 100 miles long and 30
miles wide. There is nothing minimal about 100 miles as
provided in this bill.
Also, we protect the prerogative of our Nation's military
to conduct activities on the eastern Gulf of Mexico. Pursuant
to a letter written by Secretary of Defense Rumsfeld in
November 2005, we have stated in this bill that there shall be
no leasing in that area within 181 unless the Secretary of
Defense agrees in writing that it will not interfere with
military activities that might be needed. This is clear in the
bill, and we are serious about it because it has been raised by
many, including your distinguished Senator Martinez.
Today, we have a broad range of witnesses. They are going
to testify about the state of energy costs in our country.
They're going to indicate what they believe this bill will do.
And we will have witnesses who oppose it for various reasons,
some pertaining to the appropriate interests of the State of
Florida and other interests. We will listen to them carefully,
and we will proceed with dispatch, for there is no reason to be
considering this unless it is with a sense of urgency. If there
is no urgency, we can wait as we have waited in the past.
That's the best I can do to explain why I'm interested as
chairman of this committee. And with that, I will yield to my
good friend Senator Bingaman.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Well, thank you very much, Mr. Chairman,
for having the hearing, and I welcome the chance to work with
you on a bipartisan basis on this legislation. I do think it's
very important. You've done a very good job of summarizing the
provisions in the legislation. The one thing I would add is
that the amount of the resource that we're talking about here
makes it worth the effort. We're talking about six trillion
cubic feet of natural gas in this area. We're talking about a
billion barrels of oil. Clearly, it is in our Nation's interest
to make this available for leasing. That was the consensus back
in 1997 when President Clinton and Secretary Babbitt and
Governor Chiles agreed to go ahead with this area, and I
believe it should be the consensus today.
Obviously, as you point out, the price of gas and oil was
much less then. The extent of our energy challenge, as we saw
it, was much less then than it is today. And I would say doing
this legislation and putting a reasonably short timeframe on
the requirement that this lease sale be conducted, I think is
good policy as well. It's my view that applicable environmental
laws can be complied with in the year that we are contemplating
in this legislation, and that the Department can go ahead with
the leasing in that year as we propose in the legislation. So,
I hope we can get good support to do this from the
administration, from others in the Senate, and from the entire
Congress. Again, I compliment you for taking the initiative to
move this legislation ahead.
The Chairman. Thank you, Senator. Now, having made our
opening statements, I'm going to proceed to call on a witness.
And Senators, please understand I'm going to keep this hearing
open for any of you to get back after meetings and get your
questions and your thoughts on the record.
Secretary Burton, would you please proceed with your
testimony. Whatever you have prepared will be made a part of
the record, so if you'll be as brief as you can, please.
STATEMENT OF R.M. ``JOHNNIE'' BURTON, DIRECTOR,
MINERALS MANAGEMENT SERVICE, DEPARTMENT OF THE
INTERIOR
Ms. Burton. Thank you very much, Mr. Chairman and members
of the committee. I appreciate the opportunity to appear here
today and to discuss the area of the Gulf of Mexico that we
commonly refer to as Sale 181 Area.
Mr. Chairman, S. 2253, the legislation that you, along with
Senators Bingaman, Talent and Dorgan introduced last week,
calls for the expansion of the leasing non-moratoria area
within the Gulf of Mexico. This closely resembles the
Department of the Interior's draft-proposed program, which was
released on February 8. The bipartisan support for some degree
of increased exploration demonstrates the importance of this
area.
Mr. Chairman, your bill, S. 2253, would provide additional
access to part of the area known as Sale 181. The
administration's draft proposal for the next 5-year oil and gas
leasing program for 2007 to 2012 also attempts to provide
additional access, although the area targeted in our draft-
proposed program is smaller than the one you propose in S.
2253.
As the Nation's offshore energy and mineral resource
management agency, the MMS has a focused and well balanced
ocean mandate to balance the benefits derived from exploration
and development of oil, gas, marine minerals and renewable
energy resources with environmental protection and safety. It
is important to note, for the record, that offshore island gas
production is safe, and it has a very good record of safety.
Advances in technology and science, combined with effective
regulations, make it possible to control the risks associated
with producing oil and gas on the Outer Continental Shelf. In
addition, the National Academy of Science has reported that
only 2 percent of the oil in the U.S. oceans is related to oil
and gas production, while 3 percent is associated with marine
transportation, and 63 percent is associated with natural
seepage on the floor of the ocean.
The Sale 181 Area is a gas-prone area, and natural gas
production in the offshore represents one of the most
environmentally sound energy developments this country could
propose. The Sale 181 Area, the Idaho-shaped area, if you look
at your map, which kind of reminds you of the State of Idaho,
was first identified and proposed for leasing in a 5-year oil
and gas leasing program of 1997 to 2002.
In 1997, changes to the moratoria language in the
appropriation bill and a new presidential withdrawal until 2012
included the entire eastern gulf planning area with the
exception of the Sale 181 Area, and it allowed that sale to
proceed.
Today, access to this area is not prohibited by any
congressional moratorium, and it is not prohibited by any
presidential withdrawal. During 2001, after some discussion
with the Governor of Florida and some more public input,
Secretary Norton made the decision to modify the 181 Area that
would be offered in a December 2001 sale and would be available
for leasing during the 2002 to 2007 5-year leasing plan. This
modification reduced the acreage available for leasing in the
Sale 181 Area from 5.9 million to 1.5 million acres and removed
all acreage within 100 miles of Florida from consideration for
leasing through mid-2007.
There have been three sales held in the modified Sale 181
Area--in December 2001, December 2003 and March 2005. From
these three sales, 119 leases were awarded, and we collected
$355 million in bonus bids.
There have been a total of 26 exploration wells drilled on
the leases in this new area, and the area that was modified is
the one that appears in blue on your map. It's a rectangle. The
modified area that was leased in December 2001 is that blue
rectangle that you see on the map.
The Chairman. Right.
Ms. Burton. This has had--since the time it was leased, it
has had 26 exploration wells drilled, and the first discovery
on those leases was announced in 2003, and there were seven
additional discoveries subsequently announced. They were all
predominantly natural gas. The drilling and seismic exploration
that has occurred within the modified Sale 181 Area, which is
that blue rectangle, and the adjacent central gulf have
confirmed geologic models, which indicate that highly
prospective exploration plays are likely to extend in the
expanded area included in your bill as well as in the
Department's proposed program. That would be the kind of
yellowish-green area and then the crosshatch area that you see
on the map. The draft----
The Chairman. Ma'am, could you just look at that for us for
a minute? And you might not know this, but would you take the--
where the line of the blue intersects the yellow, that little
corner, are you there?
Ms. Burton. The line of the blue intersects.
The Chairman. Blue and the green come together, right, that
corner? What I want to establish, and you tell me if this is
right----
Ms. Burton. Okay.
TheChairman [continuing]. The land you just described, that
is already leased, upon which we have found natural gas, is 100
miles from this coast of Florida; is that correct?
Ms. Burton. It is 100 miles from the coast of Alabama and
the coast of Florida, the panhandle close to Florida, and it's
over 250 miles from the western coast of Florida.
The Chairman. Yes, but the argument is being made that we
are too close on ours because we're 100.
Ms. Burton. You are 100 miles.
The Chairman. I'm suggesting there already are leases that
have been established that are 100 miles from the coast of
Florida.
Ms. Burton. That is correct, sir.
The Chairman. Okay, thank you. Now proceed.
Ms. Burton. The draft-proposed program that we released on
February 8 is in response to over 11,000 comments that we
received on the request for comments issued last August. Of
those 11,000 comments, nearly 9,000 were in favor of expanding
drilling in the Gulf of Mexico wherever possible.
The draft-proposed plan that we just released has a 60-day
comment period, and we look forward to receiving another round
of comments. The draft-proposed program is the second step in a
five-step process, and this program will become effective July
1, 2007. The draft-proposed program includes consideration of
leasing in an expanded area of the original Sale 181 that's now
located within the central gulf, but we don't have the right
map there, so I can't talk to that. I will maybe answer
questions later.
Mr. Chairman, your bill, S. 2253, is a legislation that
requires that the Secretary of the Interior offer a larger
portion of Sale 181 for oil and gas leasing within 1 year of
enactment, and the part that you see on your map, that is a
very light green, is the part that would be expanded and newly
offered under your bill. The part that is crosshatched is on
the east side of the Military Mission Line, and the part that
is solid light green--greenish-yellow is on the west side and
is not under moratorium, not under presidential withdrawal, so
it is available for leasing.
This proposal, your proposal, Mr. Chairman, would make 3.6
million acres available for lease while maintaining the 100-
mile buffer zone along the Florida coast. Leasing in the area
east of the Military Mission Line, an area of approximately
725,000 acres, would be subject to approval by the Secretary of
Defense.
The work MMS must conduct for this to go on sale must be in
compliance with the National Environmental Policy Act, the
Marine Mammal Protection Act, the Endangered Species Act and
the Coastal Zone Management Act, and it's very similar for your
bill, as well as the proposed program that the Department has
just released.
Mr. Chairman, we really look forward to working with you
and your staff on this legislation. And when your bill is
enacted, we know we will have 1 year to put the sale up. That
will be a lot of work to be done in that 1 year. The
administration and the Department of the Interior are committed
to ensuring that the Outer Continental Shelf remains a solid
contributor to the Nation's energy needs. The relative
contribution from Federal offshore areas will increase in the
upcoming years due to activity in the deep water areas of the
western and central Gulf of Mexico.
Mr. Chairman, this will conclude my statement. Allow me to
express my sincere appreciation for the continued support and
interest of this committee for MMS's programs. It would be my
pleasure to answer questions if you and your members have any.
[The prepared statement of Ms. Burton follows:]
Prepared Statement of R.M. ``Johnnie'' Burton, Director, Minerals
Management Service, Department of the Interior
Mr. Chairman and Members of the Committee, I appreciate the
opportunity to appear here today to discuss the area of the Federal
Outer Continental Shelf (OCS) in the Gulf of Mexico commonly referred
to as the ``Sale 181 area''. We appreciate the Committee's efforts to
address our nation's domestic energy needs. S. 2253, calling for the
expansion of leasing within the Gulf of Mexico of non moratoria areas
closely resembles the draft 5-year proposed program released by the
Department on February 8, 2006.
The OCS Lands Act directs the Secretary of the Interior to make
resources available to meet the nation's energy needs. The accompanying
congressional declaration of policy states, ``The OCS is a vital
national resource reserve held by the Federal Government for the
public, which should be made available for expeditious and orderly
development.'' The Administration has directed the Minerals Management
Service (MMS) to meet this charge through specific policy initiatives
provided in the President's National Energy Policy. This direction is
all the more critical in the face of higher oil and natural gas prices
and their impacts to our economy.
As the Nation's offshore energy and mineral resource management
agency, the MMS has a focused and well established ocean mandate--to
balance the benefits derived from exploration and development of oil,
gas, marine minerals and renewable energy resources with environmental
protection and safety.
The environmental record of the OCS program is outstanding. There
has not been a significant platform spill in the last 35 years. The
Sale 181 area is a gas prone area and natural gas production offshore
represents one of the most environmentally sound energy developments
this country could propose.
The oil and gas produced from the OCS plays a major role in
supplying our daily energy needs, accounting for 30% of domestic oil
production and 21% of domestic natural gas production. The Gulf of
Mexico is the most prolific producing offshore region, providing 27% of
the oil and 20% of the natural gas produced domestically. The share of
Gulf of Mexico production is expected to rise within the next several
years to about 23% of natural gas and 40% of oil domestic production.
SALE 181 AREA
In 1999, MMS put out a call for information and notice of intent to
prepare an environmental impact statement for a proposed Federal oil
and gas lease sale in the area now referred to as the original Sale 181
area. This area, original Sale 181, included an area offshore of
Alabama beginning 15 miles south of the Alabama coast and an area
offshore of Florida more than 100 miles from the Florida coast. It
included 1,033 lease tracts covering 5.9 million acres.
In 2001, the Secretary of the Interior spent a great amount of time
speaking with officials and citizens of the affected states around the
original Sale 181 area. Based on those discussions, a decision was made
to modify the 181 area that would be offered in the December 2001,
lease sale and that would become available for leasing during the 5-
Year Oil and Gas Leasing Program for 2002-2007. This modification
reduced the acreage available for leasing in the Sale 181 area from 5.9
million acres to 1.5 million acres. At the time, the Department
projected the adjusted area contained an estimated 1.25 trillion cubic
feet of natural gas and 185 million barrels of oil.
There have been three sales held in the modified Sale 181 area. The
first, Sale 181, held in December 2001; Sale 189 in December 2003; and
Sale 197 in March 2005. The results of Sales were as follows:
Sale 181: 95 leases were awarded, with total high bids of
$340,474,113.
Sale 189: 14 leases were awarded, with total high bids of
$8,376,765.
Sale 197: 10 leases were awarded, with total high bids of
$6,595,753.
There have been a total of 26 exploration wells drilled on the
leases in this area. The first discovery on leases issued in these
recent sales was announced in 2003 with seven additional discoveries
subsequently announced. These discoveries are predominately natural
gas.
Five independent exploration and production companies and a mid-
stream energy company have come together to facilitate the development
of multiple ultra-deepwater natural gas discoveries located in the
Central and Eastern Gulf of Mexico, including all of the 7 discoveries
mentioned above. The fields' water depths range from 7,800 to 9,000
feet. The production from these discoveries will be tied-back to a
central platform, Independence Hub, which will be located on unleased
Mississippi Canyon Block 920 in the Central Gulf. First production is
expected in 2007.
5-YEAR PROGRAM FOR 2007-2012
In August 2005, the Department began the process of developing the
next 5-Year Oil and Gas Leasing Program 2007-2012 by requesting
comments on all OCS areas, including the Sale 181 area. On February 8,
2006, the Department announced its draft proposed program for the 5-
year OCS Oil and Gas Leasing Program 2007-2012. This was the second
step in a 5-step process which affords substantial opportunity or
public comment. Under the draft proposal, the MMS would plan on
conducting a lease sale in a larger part of the original Sale 181 area
in the fall of 2007.
On January 3, 2006, the Department published in the Federal
Register revised administrative lines that differentiate Federal waters
of the Eastern, Central and Western Gulf of Mexico. These liens were
drawn on the principle of equidistance. It is now clear which area of
Federal waters is off the coast of each state. These lines are purely
administrative with no legal effect on civil or criminal jurisdiction.
We published the lines because the OCS is more and more subject to
multiple-use activities, and it became timely to delineate zones of
interest of coastal states in Federal waters.
The draft proposal includes consideration of leasing in an expanded
area within the original Sale 181 area. The expanded area is
approximately 2 million acres now located within the Central Gulf
Planning Area under the new administrative lines. This area is in
addition to the 1.5 million acres within the original Sale 181 area
already offered for leasing under the current 2002-2007 5-year program.
MMS estimates that most of the prospective tracts in this area
would be leased out within 5 years, under annual sales, and that the
first production would occur within 5 years of the first sale.
The Sale 181 area, which we believe has a huge potential for
natural gas and oil resources, is not under Congressional moratorium or
Presidential withdrawal. Nevertheless, in accordance with the
Secretary's commitment, the draft does not propose any leasing within
100 miles of the coast of Florida, including that portion of the Sale
181 area which is now in the Central Gulf Planning Area. No lease sale
is proposed in the Eastern Gulf Planning Area. This respects the
commitment made by the Secretary, which was reiterated in the August
2005 Request for Information, that the Secretary ``had no intention of
offering for leasing areas in the Eastern Gulf of Mexico Planning Area
within 100 miles of the coast of the State of Florida.''
In addition, the area proposed for leasing is west of the Military
Mission Line (86 degrees, 41 minutes West longitude) and would not
interfere with military readiness or training. We work extensively with
the Department of Defense on all oil and gas leasing on the OCS and
envision this relationship to continue with future leasing decisions.
The draft proposed program would continue to schedule annual area-
wide lease sales in the Central and Western Gulf Planning Areas, as has
ben the customary practice.
The area south of the original Sale 181 area that is west of the
new administrative line has been included for analysis. This area is
currently under both Presidential withdrawal and Congressional
moratorium; both of these would need to be removed before this area
could be offered for lease. It is estimated that there could be 700
million barrels of oil and 3.68 trillion cubic feet of natural gas in
this area. This area warrants further analysis and consideration in
order to inform future decisions as to whether or not to include the
area in the final program. Therefore, the draft proposed program notes
that subsequent annual Central Gulf sales may consider the area to the
south. No sale will be held unless the moratorium is discontinued by
Congress and the Presidential withdrawal is modified. In addition,
pursuant to Section 18 of the OCS Lands Act, no sale will be proposed
until all affected states have the opportunity to comment.
2006 RESOURCE ASSESSMENT
Concurrent with the draft proposed program, MMS released two
documents: (1) Assessment of Undiscovered Technically Recoverable Oil
and Gas Resources of the Nation's Outer Continental Shelf, 2006; and
(2) the Report to Congress: Comprehensive Inventory of U.S. OCS Oil and
Natural Gas Resources, which was sent to Congress. These documents
report MMS's new estimates for the total endowment of technically
recoverable oil and gas resources for the entire OCS, including areas
under Congressional moratoria or Presidential withdrawal. In the draft
proposed program for 2007-2012, numbers were predicated on the 2003
estimates. These numbers will be updated in the proposed program that
will be released in the summer of 2006.
MMS periodically updates its resource assessments to include any
new data and information, incorporate advances in exploration and
development technologies, and use new assessment methods. MMS did not
directly acquire or contract for the acquisition of new seismic data or
the drilling of wells. All of the data used was commercial data or
published scientific research.
The Department has completed eight comprehensive resource
assessments since 1976. During this timeframe, the magnitude of
resources believed to be technically recoverable continued to grow with
each assessment in those areas with leasing activity.
ESTIMATES FOR THE SALE 181 AREA
MMS has examined the resource potential of the Sale 181 area under
the 2003 interim update. Based on those assessments, we have estimated
that the portion of the Sale 181 area east of the area currently
available for lease has a potential of 930 million barrels of oil and
6.03 trillion cubic feet of gas. This is the area proposed in S. 2253.
By contrast, the new area included in the Draft Proposed Program for
2007-2012 is estimated to contain 530 million barrels of oil and 3.42
trillion cubic feet of gas.
S. 2253
Mr. Chairman, I will now turn to S. 2253, the legislation that you,
along with Senators Bingaman, Talent and Dorgan, introduced last week.
The legislation would require the Secretary of the Interior to offer a
large portion of the Sale 181 area for oil and gas leasing within one
year of enactment. We support the goals of the legislation and we
appreciate your efforts to make additional energy resources available
for our nation. This proposal would make 3.6 million acres available
for lease while maintaining a 100 mile buffer zone along the Florida
coast. Leasing in the area east of the Military Mission Line, an area
of approximately 725,000 acres, would be subject to the agreement and
approval of the Secretary of Defense.
The work MMS must conduct to comply with the National Environmental
Policy Act, Marine Mammal Protection Act, Endangered Species Act, and
Coastal Zone Management Act is very similar for the sale included in
its draft proposed oil and gas leasing program as for the lease sale
called for in S. 2253. Mr. Chairman, we look forward to working with
you and your staff on this legislation.
CONCLUSION
This Administration and the Department of the Interior remain
committed to ensuring that the OCS remains a solid contributor to the
nation's energy needs. The relative contribution from federal offshore
areas will increase in the upcoming years due to activity in the deep
water areas of the Western and Central Gulf of Mexico.
Mr. Chairman, this concludes my statement. Please allow me to
express my sincere appreciation for the continued support and interest
of this committee for MMS's programs. It would be my pleasure to answer
any questions you or other members of the Committee may have at this
time.
The Chairman. Thank you very much.
Senator Bingaman.
Senator Bingaman. Thank you very much for your testimony.
Let me just ask about the timeframe, first of all, because as I
understand, the draft proposal that you folks have issued is
for the next 5 years. And that's the normal way that MMS has
gone about this, they prepare a plan and say over the next 5
years, these areas will be made available for leasing. Am I
right about that?
Ms. Burton. Right now, Mr. Chairman, we are proposing--this
is a draft proposal. And in this draft proposal, which will
start July 1, 2007 to 2012, we are proposing to maybe have some
lease sale. And the reason I say maybe is because until the
plan is final, we don't know exactly what will stay in it. But
at this point, yes, sir, we are proposing to open part of this
area.
Senator Bingaman. And you say in your testimony that MMS
would plan on conducting a lease sale in a larger part of the
original Sale 181 Area in the fall of 2007?
Ms. Burton. Yes, sir, that is our plan today. We have begun
the environmental work, just begun, so that gives us 18 months
to complete the proper environmental work.
Senator Bingaman. If you're thinking about an 18-month
period, 18 months from today, you would have the environmental
work done, and you'd be ready to go with a lease sale. What
we're proposing is that a lease sale occur within a year of the
time that this law becomes effective. There's not too great a
difference there, assuming that it takes a few months before we
get this legislation passed, if we were able to. I mean,
knowing the way this place works, if we can get this passed in
the next 4 or 5 months, we'll be doing very well, and then
we're very close to the same timeframe that you're looking at.
Ms. Burton. That is correct, sir.
Senator Bingaman. Okay. Let me ask about this gas-only
leasing suggestion that continues to be discussed a little bit.
Is that workable? Does it make sense to be thinking of gas-only
leasing provisions?
Ms. Burton. Mr. Chairman, if we are really looking for
natural gas, it appears to make sense. However, practically, I
think it will be difficult to implement. We will, obviously, do
it if that would be the law of the land, if you will. But when
we asked for comments on our proposal last summer, we asked
that very question, and we received quite a few comments on it,
and they were all negative, meaning that the only folks that
will use that are the folks that invest in drilling. So, it's
the industry, and industry comments were not very positive for
gas only.
Senator Bingaman. Let me ask about this provision we've got
in here that says the Secretary of Defense must agree with what
is happening, what the Secretary of the Interior intends to do
before the Secretary can go ahead, with regard to any area east
of that Military Mission Line, I guess it is called. I
understand that, in the past, MMS has worked with the
Department of Defense to ensure that activities that occur east
of that Military Mission Line don't adversely affect or impact
on Military activities. Could you describe what agreements
you've had or how that's worked in the past?
Ms. Burton. Mr. Chairman, we have had, and we continue to
have, consultation with the Department of Defense. In fact, for
this draft-proposed plan, I personally participated in about
three different meetings at the Pentagon. So, we do consult. We
work together. We have an MOU. And in the past, when there have
been blocks of--lease blocks that were very close to that
Military Mission Line or beyond it, we have put stipulations on
that the Defense Department agreed to. Maybe there would be no
surface occupancy. Maybe all completions on all structures are
required to be on the sea floor, nothing on the surface. Maybe
there are some months within the year that we can't be there.
And so, once we agree to a set of mitigation with the
Department of Defense, then those go into the terms of our
lease, so when the lessees get their lease, they know exactly
what they can and cannot do.
Senator Bingaman. Very good. Well, let me ask one other
question about the timeframe. If, in fact, leasing occurs in
the fall of 2007, either because of your plan going forward or
because we're able to pass this legislation, how long do you
expect it would take before actual production would occur in
the new area leased?
Ms. Burton. This, Mr. Chairman, is a difficult question for
us to answer because, obviously, we're not in control of this,
but experience tells us that we could expect wells to be
drilled within a couple of years after the lease, after the
sale occurs. Now, production is something else. They drill
wells, they proof their field, then they have to build the
facilities to transport the product. Presently, there is a
facility that's being built and developed that would sit
immediately west of that blue area. And several of the fields,
the fields that have been discovered, will tie up to that
central platform. This is--we assume that might also take some
of the production from the new area that you're proposing to
open. So, it depends on how long it will take. But if that
platform, that Independence Hub, is already built, then
potentially, production could occur within 3 to 4 years.
Senator Bingaman. Thank you very much, Mr. Chairman.
The Chairman. Thank you, Senator.
Senator Bingaman. Mr. Chairman, may I also put in the
record a written statement that Senator Bill Nelson asked be
included?
The Chairman. Yes, indeed.
[The prepared statement of Senator Nelson follows:]
Prepared Statement of Hon. Bill Nelson, U.S. Senator From Florida
Mr. Chairman, Sen. Bingaman, members of the Committee, thank you
for the opportunity to submit a statement for the record on the bill to
open up all of Lease Sale 181 to leasing.
As you are considering this legislation today, I encourage you to
take a moment to walk in another person's shoes--the shoes of myself
and my colleague Sen. Martinez.
Tourism is an essential component of Florida's economy--just as
cattle is to the economies of New Mexico, Wyoming, and Montana; just as
horses are to the economy of Kentucky; and just as seafood is to
Alaska. For the good of your state and the health of your economy, I'm
confident that each of you would fiercely defend these industries--and
rightly so.
And this is exactly why Sen. Martinez and I introduced our bill a
few weeks ago--to protect our state's most vibrant industry and
irreplaceable natural resources.
This bill protects Florida's tourism-dependent economy while
providing a commonsense approach to the issue of oil drilling in the
Gulf of Mexico. We are offering 740,000 acres of new leasing in
exchange for a permanent no-drilling zone extending 260 miles off Tampa
Bay and 150 miles off Pensacola and Florida's East Coast.
For many Floridians, this issue boils down to just one thing--an
oil spill would simply devastate Florida's delicate ecosystem and
number-one industry. Who would travel to our state to see birds covered
in black oil, dead fish and other marine life washing ashore, 800-
square mile oil slicks and miles of blackened beaches?
Even a small spill can have damaging, long-term effects, killing
plants, corals, fish, birds and mammals. Exploratory drilling,
development and production interfere with migratory routes of animals
such as tuna, billfishes and jacks. The increased activity of industry
vessels will harm dolphins, whales, sea turtles and other animals,
including some listed as endangered species. And, we still don't know
how discharged contaminants will affect eggs, young animals and marine
life populations. Our legislation will protect Florida from all this.
But the permanent protection created by this bill would protect
more than just Florida's economy--it also would safeguard the nation's
military readiness. The military's testing and training range in the
Eastern Gulf of Mexico is key to national defense--a role that
Secretary of Defense Rumsfeld confirmed late last year. Specifically,
he said ``in those areas east of the Military Mission Line, drilling
structures and associated development would be incompatible with
military activities, such as missile flights, low-flying drone
aircraft, weapons testing, and training.''
Our bill accommodates these needs by protecting all waters east of
the military mission line from leasing.
The plan Sen. Martinez and I introduced will satisfy the needs of
all parties involved by opening 740,000 new acres of leasing while
still protecting military training needs and our unique environment. I
hope you will consider supporting this bill--and ultimately protecting
Florida's economic resources just as you would protect your own state's
resources.
I look forward to working with the Chairman and the Ranking Member
on this very important matter.
Senator Bingaman. Thank you.
The Chairman. I think what we're going to do right now is
we're going to go backward and let Senator Landrieu speak next
before the vote.
Senator Martinez. That's fine.
The Chairman. And you will be first when we return.
Senator Martinez. Thank you.
Senator Landrieu. Thank you, Mr. Chairman. Madam Director,
could you, just for the record, state, of all the 50 States,
which of the States are currently allowing production off the
coast?
Ms. Burton. I believe you are looking at Alaska,
California, Texas, Louisiana, Mississippi, and Alabama.
Senator Landrieu. And of those States, which are the ones
that do not have moratoria?
Ms. Burton. Texas, Louisiana, Mississippi, Alabama and
Alaska. Alaska has a little area, but not very much.
Senator Landrieu. So, there are only five of the 50 States
that are allowing the Nation to try to access some additional
revenues to keep the energy security of this Nation intact.
Would you say that those States----
The Chairman. Senator, to correct you, there are not 50
States--sorry, 50 coastal states. Did you say 5 of the 50?
Senator Landrieu. I'm sorry, five of the coastal States.
Thank you, five of the coastal States. Thank you, Mr. Chairman.
Would you say that it's useful or essential for the cooperation
of these States for these minerals to even be extracted? Is it
useful to have the help of these States, or is it essential to
have their help?
Ms. Burton. Mr. Chairman, I would say it's both.
Senator Landrieu. Okay, can you talk a bit about the
essential aspect of it? What is essential about these States to
allow you to access minerals?
Ms. Burton. Mr. Chairman, there are several provisions in
the statutes that give the State a fairly big voice in whether
or not production will occur off their coast. The first thing
that comes to mind, obviously, is the Coastal Management Zone
Act. So, it is essential that the State recognizes that what we
plan offshore is consistent with their plan. From that
standpoint, it is essential.
Senator Landrieu. Well, let me ask this. Could you lay
pipelines without the permission of the States of Louisiana,
Texas, Alabama or Mississippi?
Ms. Burton. Mr. Chairman, laying pipelines is outside of my
realm of expertise, so I will refrain from answering that, but
it seems intuitively that you would have to lay them somewhere.
Senator Landrieu. Okay. It would not come as any surprise
to the members of this committee, Mr. Chairman, that I feel
strongly, and Louisiana feels strongly, that any legislation
that would open up portions of the Outer Continental Shelf
would fairly and responsibly compensate the States that have
allowed coastal drilling to proceed all these many years.
And for the record, I checked this morning. The total
income, just income to the Federal Treasury, exceeds $154
billion since drilling occurred, to the Federal Treasury. So,
that would be a major contribution, not the least of which are
the millions of jobs produced, the economic security of the
Nation and the energy produced itself, but just a revenue
benefit.
The coastal environment of Louisiana, as Ms. Burton knows,
includes 19 parishes, 2.5 million people, nine ports, hundreds
of miles of levees, numerous refineries, more than 9,000 miles
of pipeline, tons of shrimp and fish and a population that has
proudly supported the industry all of these years.
So, it comes as some consideration or some concern to us
that we would be yet suggesting additional drilling off the
coast of Louisiana and Mississippi and Alabama, primarily,
without some consideration to the contributions that these
States are making.
I will have more questions as we go on, but I do just want
to use this short time that I have to say for the record that
this is not just a coastal issue for Louisiana, for Mississippi
and Texas. It's a national security issue. It's an issue of
fairness. It's an issue of justice, particularly because the
interior States, since 1927, have been enjoying a significant
portion of the taxes generated, including the chairman and the
ranking member's State of New Mexico, which they are well
aware, the State of Wyoming, and the State of Utah keeps about
50 percent of their revenues.
Particularly in post-Katrina, I would say, Mr. Chairman,
it's become clear to the people of the gulf coast that this is
a tremendous resource right off of our coast that could be used
to protect us, to secure this coast, not only for ourselves,
but for future generations.
So, as we consider the ways to move forward in trying to
negotiate with the great State of Florida about what is
important to them and about the other producing States and
about supplying the oil and gas necessary for this Nation to
remain strong, I hope that we will consider that, as we move
forward. And I'll submit some additional questions to the
record.
The Chairman. Thank you very much. What we're going to do
now, because we've got ourselves in a situation where there's
only about two and a half minutes to vote--let me just say,
Senator, I understand everything you've said. I concur
wholeheartedly.
And you know that I have been one who, for the first time,
departed from the status quo and put in the energy bill $1
billion in money mandated to go to your State and others, over
half to yours, recognizing that there were, indeed, coastal
impacts that had not heretofore been adequately compensated. I
remain committed to that.
The difficulty is what is it, what can it be used for, how
do we do that with reference to the entire country as we
proceed forward. And you know what I was trying to do here. I
was trying to do something quickly for the consumer, trying to
not jeopardize what you are seeking in the future. I'm hopeful
we can do that, and I'm very appreciative that you will
maintain your protective interest and yet try to work with us,
as I understand that's what you had told us heretofore, and I
assume that's correct.
Senator Landrieu. And I thank you, Mr. Chairman, because
without your leadership and the help of the ranking member, we
would not have gotten a precedent-setting $1 billion. The
Energy Committee compensates, begins to compensate, but it's
only a start, so we look forward to working with you as this
progresses.
The Chairman. And we're going to recess for about 15
minutes, after which time Senator Martinez will have his time
to inquire and say what he'd like. And we'll extend yours to
twice the amount, Senator, for your patience.
Senator Martinez. Thank you, sir.
[Recess]
The Chairman. Sorry for the delay, but we'll give you all a
little time to sit down. If any more of you want to come in,
please get seated. All right.
Senator Martinez.
STATEMENT OF HON. MEL MARTINEZ, U.S. SENATOR
FROM FLORIDA
Senator Martinez. Thank you, Mr. Chairman, and let me thank
you and the ranking member for your courtesy to me and for
holding this hearing today on this very, very important issue.
There's no doubt that the needs of our Nation, as it relates to
natural resources, as it relates to how we fuel our homes and
businesses, is of dire importance. In addition to that, I know
that there are business implications, as it relates to gas
exploration, and the price of gas is, indeed, important. And
when we talk about it and you mention about this being a
historical calling and a historical time, I'm reminded of what
the folks back home will say to me if I don't act as they would
expect me to act as their Senator from the State of Florida.
You know, Mr. Chairman, as we talk about the importance of
the price of gas, as it relates to businesses, as it relates to
fertilizers, those are really economic questions that we ask,
and the State of Florida also has some economic concerns that
are important to our State.
See, our economy, while it does have a very strong
fertilizer industry, it also has an awful lot of our economy
that depends on tourism, It depends on the natural beauty of
our State and the things that it brings to acquire--or for
others to want to come and visit our State. The jobs of many
depend on the tourism industry. That's what I hear from
chambers of commerce across our State that protect our coast,
protect our beach, protect our way of life. The environment is
very, very fragile in the State of Florida. We're a State
that--many parts of our State are coastal. Many other parts of
our State are in wetlands. And all of this is a very, very
fragile ecosystem and one that we value greatly. It is part of
our heritage. Just like I know, when I visited your State, Mr.
Chairman, there's so much about the desert that is of beauty
and that is of nature and the same as with our beaches, the
same as with our wetlands, the same as with our natural
resources in the State of Florida we value greatly.
So, that's why we're so concerned and we're so preoccupied
about what happens in the Gulf of Mexico. Mr. Chairman, I
understand, from what you have suggested today in your plan as
well as the Department of the Interior's new 5-year proposal,
that there is a need for us to address this issue. There is a
need for us to not just say no, not just to say we can't do it,
and we won't cooperate, and we won't help. But it is important
that we recognize that we want to do this with certain
protections to the State of Florida. When we look at your
proposal, we have decided that it was necessary for us to also
have an alternative proposal.
Senator Nelson and I, in a bipartisan way, have worked
together to put together a plan that also opens up the eastern
Gulf of Mexico to drilling, that also opens up areas of 181.
And if you could, please, put the chart up. And in this
proposal that we have, it takes into account the important
considerations of our State, while at the same time, keeping a
150-mile buffer around the State of Florida. As we look south
of----
The Chairman. What is the buffer line, how many miles?
Senator Martinez. Mr. Chairman, it's a 150-mile line coming
south of Pensacola.
The Chairman. All right.
Senator Martinez. It also is 240 or some odd miles west of
Tampa Bay, a little less critical difference there from your
proposal. But, Mr. Chairman, what it does is--if you look at
it, there is an area there that is bound by some lines, and if
you see next to the blue area and come immediately to the east
of that, that is 744,000 acres that it opens up.
Now then, there's a red line there, which is where we would
stop at this point, but we would allow a 25-mile buffer to the
military so that the Department of Defense, in cooperation with
the Department of the Interior, could determine if they needed
any additional space to complete their military mission. If
they were not to need that area, that would also open up
576,000 acres to drilling.
But, Mr. Chairman, in addition to that, there's an area to
the south, and it's a vast area to the south, and that area
would open up immediately another four million acres to
drilling in addition to, as you look to the right, that 25-mile
buffer pursued down south would also open up an additional one
million acres.
Altogether, Mr. Chairman, what we proposed would open 6.3
million acres to new drilling, to new exploration in an area
that has heretofore been foreclosed. But what it does--what it
doesn't do is it doesn't encroach on Florida in a way that we
would consider harmful. It does give us a 150-mile buffer south
of Pensacola. When you point out that the blue area is already
open, the fact of the matter is that that area is in the
Alabama line, it's not under the Florida line, while it still
is contiguous to the State of Florida. We shouldn't repeat that
mistake. We shouldn't repeat that encroachment, and we should
provide Florida the 150-mile buffer that we believe is
important.
Well, Mr. Chairman, I think, and if I could have just
another couple of moments to----
The Chairman. Senator, could I just ask you a question on
that statement?
Senator Martinez. Yes, sir.
The Chairman. You said that that's within the waters of
Alabama.
Senator Martinez. Well, the blue area, I believe it's----
The Chairman. Yes, I understand. But the truth of the
matter is if you drill on it, you still measure the distance to
Florida; right?
Senator Martinez. Mr. Chairman, you're absolutely right.
The distance to Florida is the same.
The Chairman. The same, a hundred miles.
Senator Martinez. But how we got there is because of the
moratoria and, you know, the State of Alabama having a
different opinion about the use of their coast. But yes, that's
correct.
The Chairman. Thank you.
Senator Martinez. One question I would ask--and then I'll
direct myself to questions, but if I could just have another
moment or two to summarize our position as to how do we get to
this problem. Well, you know, we're driven by the price of
natural gas when it was $2.20, so it didn't seem to be too much
of a problem. Just a few months ago, it was $11.50, and now,
all of a sudden, it's $7 and something, so the fluctuations on
the price of gas should not drive us to do what we otherwise do
not feel is wise environmental policy, as wise policy for the
State of Florida.
But in addition to that, Mr. Chairman, I think it's
important that we also realize how we got to this position and
how we got to this point. And in fact, it is, I believe as much
as anything, because we have had a very misguided policy to
generate power with gas. And this misguided policy to generate
power with gas, which Secretary Bodman just last week referred
to here as washing dishes with good scotch, because it's such
an inefficient source of fuel for generation, for power
generation, that we shouldn't perpetuate that, and in fact, we
should be looking for alternatives of how we generate power as
we go into the future. We shouldn't just drill more, satisfy
the immediate need, but not think about--thinking into the
future about how we generate power. We need to diversify our
power sources. We need to look to clean coal technologies, we
need to look to safe nuclear technology, so that we can
generate power in a different way and not just simply drill and
drill and drill some more.
There are two other issues I want to point out, Mr.
Chairman. One is the fact that this bill today takes care of
the moment. The 5-year plan with the Department of the
Interior, which is a little less ambitious than your bill, also
only takes care of the moment. Where is Florida going to be in
2 years from now if we pursue and continue to pursue unwise
generating policies, unwise policies based on the artificially
cheap price of gas, and continue to drive the price of gas even
higher? Will we then just keep moving east? Will we then just
keep moving north? Will we then just continue to threaten
Florida's coast? At some point, we've got to deal with this on
a permanent basis, and that's what Senator Nelson and I are
trying to do through our bill is to say these are the lines,
beyond these lines, Florida will not be threatened, Florida
will have permanent protection.
So, what I would suggest is that we also need to consider
making something that is permanent, accepting what we are
compromising to give, yet making some permanent lines so that
the people of Florida can rely on the safety and assurance to
know that we're going no further.
In addition to that, Mr. Chairman, I believe that it's also
important to those States that have been providing us with so
much of the resources that we need, and that Florida needs,
with the revenue that they should have as we open these new
areas to drilling, these new areas to exploration, that by my
proposal would open 6.3 million acres to exploration that are
heretofore closed. That's a very significant amount of acreage
that the States that have permitted within their boundaries to
be utilized for drilling in the past, and they should also be
able to receive the benefit therefore.
And I believe also, as we look at the problems of the gulf
coast, that that should be a revenue source that they should
utilize to protect their coastline, for beach renourishment and
other estuaries that are so important to the people of
Louisiana, Alabama, Mississippi, and frankly, Florida as well.
So, thank you for your indulgence, Mr. Chairman, and I'll
just proceed to ask a couple of questions of Ms. Burton.
The Chairman. Go ahead.
Senator Martinez. Thank you. Ms. Burton, I wanted to ask
you about that area just south of Area 181 and ask if it has
been a part of any studies or any analysis of what it could
yield in terms of oil and gas production.
Ms. Burton. Mr. Chairman, this area is actually included in
our proposed plan. We would like to keep it so we can study it
precisely. I don't know that I have exact numbers for you, and
I hesitate to give you a number that may not be verified, so I
will tell you that I do not know exactly the resources in that
area, but I do believe that we feel there are resources there,
and we are proposing to look further at this area.
Senator Martinez. There's no reason to think it'd be
dramatically different than the area immediately to the north
of it?
Ms. Burton. I don't know where the geology goes. We'd have
to ask the scientists to look at the trends and to find out
whether this is as good or better, maybe, or not as good. We
don't know that, but we do know that this area is under both
moratorium and presidential withdrawal. So, in our plan, we
keep it in play, if you will, but we know nothing will happen
there unless Congress decides to lift the moratorium and the
President decides to modify his withdrawal.
Senator Martinez. If that Martinez-Nelson bill were to
pass, that would be then available and open. And by our
estimation, that's an additional five million acres that would
be open to exploration. Under the current bill, S. 2253, the
Secretary of the Interior is directed to conduct a sale within
1 year of enactment. And under his currently written form, will
the Department of the Interior be able to lease sale without
addressing NEPA requirements? And frankly, I didn't see any
reference to the NEPA requirements in the bill.
Ms. Burton. Mr. Chairman, I think that the bill anticipates
that we will do our work, the work we normally do, which is all
the NEPA work, the ESA work, the MMPA work, et cetera. And we
are beginning to do that. As I mentioned earlier, we have, in
our plan, 18 months to do it. Under the chairman's bill, we'd
have 1 year from enactment. But depending on when enactment
occurs, it might be very similar to ours, so we think we will
have time to do the work. It'll be very tight.
Senator Martinez. If I could just have the other chart with
the Department of the Interior lines. In your proposal, you
stay to the west of the Military Mission Line as well.
Ms. Burton. Mr. Chairman, by quite a bit. And this map is
not correct. I'm not sure how we ended up here, but it does not
have the line, the planning line, that actually stops where we
proposed development, which is an oblique line, so we don't
have the full area.
Senator Martinez. You're right. I think it's this map I
have here in my hand. Is it?
Ms. Burton. Yes.
Senator Martinez. I think it's the same, actually. It's
just that it--it's over there.
Ms. Burton. You do not see the line where we stop.
Senator Martinez. It's just a soft--it's a soft color that
doesn't highlight it, but it sits there. So, basically, you
stay fairly to the west of the Military Line?
Ms. Burton. That is correct.
Senator Martinez. And frankly, it's fairly close to the
proposal that Senator Nelson and I are making, except that the
northern part of the Lease Area 181, where you only come down
100 miles south of Pensacola, we would come down 150 miles
south of Pensacola. What I'm trying to point out is that we're
not dramatically different than the lines you have drawn in the
areas that we have proposed for leasing.
Ms. Burton. I believe it's about half.
Senator Martinez. Okay.
Ms. Burton. You are offering about half the area that we
are offering.
Senator Martinez. But if you were to take into account the
area immediately to the--in the 25-mile buffer area, between
the Military Line and the other line, I think that would open
an additional 576,000.
Ms. Burton. Altogether, sir, we are opening or proposing to
open two million acres in that Sale 181 Area.
Senator Martinez. So, we open about 1.2 million acres or
something like that.
Mr. Chairman, that's all the questions. Thank you very
much.
The Chairman. Thank you very much. Senator, I want to say
to you I understand the very difficult position that you are
in, and I want to tell you that it's been my responsibility to
look at this from one direction and from one vantage point, and
it's with great respect that I understand your vantage point. I
don't know where the two vantage points will meet, if ever, but
we have to proceed, and you will proceed, and we'll do our best
to do it in a proper, amicable and, nonetheless, objective
manner, and we'll work together on whatever we can.
Senator Martinez. I appreciate that greatly, Mr. Chairman.
And one of the things that I hope you can see from the proposed
map that we have put there today is that we're not shrinking
from opening up substantial areas of the gulf. It's a big
opening, a big change from where we've been.
The Chairman. And I don't choose today, so everyone will
know, because I'm not going to go through details of the
Martinez-Nelson bill and ask questions about does this do this,
does this do that. Let me just suggest that it is not as--it is
complicated in that some of the areas that look like they're
going to be opened are not, they're just not subject to any
moratorium. And I don't want to go through all of that. Just
suffice it to say the following: The Martinez proposal would
open 700,000 acres, the Domenici-Bingaman would open 2.9
million, and with the military, it'd be 3.6 million. The
original Clinton-Chiles proposal was 5.9 million.
Now, I only state that because I do believe that if we're
looking at production of natural gas, acreage is relevant, and
the smaller, presumably the less, although not absolutely
necessarily the larger, the more. And the question, then, would
be damage to--possible damage to Florida.
My last observation is that this water belongs to the
United States of America. Now, we want to give States a lot of
rights, but we don't speak of somewhere out in the Pacific
Ocean, it being 200 or 300 miles out there. It's water
belonging to the States that are closest to it, right? I mean,
it's the ocean, or it's the sea. Nonetheless, the issue, to me,
is the risk involved and the needs of the country. And I don't
hear a lot of people talking about the risk objectively. I hear
them talking about the risk, which seems to me to be scary.
Well, risks always have fear, but the question is are they
real? And that's the issue here.
Last comment, so we'll have it in the record. I've checked
again today. I guess we had as bad a wind as we're going to
have for a while when we had Katrina hitting those offshore
rigs that you and I went to see. Now, they got busted, didn't
they? But my understanding, Senator Landrieu, is they did not
have any significant leaks.
Senator Landrieu. It was very minimal.
The Chairman. So, I just think we not only had a new
technological era go out there and make the drilling, but we've
had a--we didn't have to test it in a laboratory. I mean, it
was tested in the most monstrous real laboratory for stability
that we're probably going to see.
Now, having said that, my list would say that the next
Senator would be--come back to our side, to Senator Talent.
Senator Talent. Thank you, Mr. Chairman. Did you want to go
to me from Senator Martinez?
The Chairman. Yes, and then we'll go there.
Senator Talent. You're the chairman.
The Chairman. What I want to do is brief these questions
because we have three more witnesses, okay? So, let's go ahead.
STATEMENT OF HON. JIM TALENT, U.S. SENATOR
FROM MISSOURI
Senator Talent. All right, I'll be brief. Maybe I'll just
make a statement, maybe one question, Mr. Chairman. You know
how strongly supportive I am of both the bills that you have
sponsored, and it's just so very clear to me that we're in a
situation where we have to get energy of all kinds. Now, I was,
along with Senator Dorgan and Senator Johnson, a leader in the
struggle for the renewable fuel standard. And I think the
future is not necessarily in these traditional forms of energy,
but we have to have natural gas. We have to have oil.
We've lost three million manufacturing jobs in the country
in the last 5 years that are traceable, at least in part, to
natural gas prices. That's three million manufacturing jobs.
We're not going to get a lot of those back, and they're gone
for good. My State's an agriculture and manufacturing State.
It's ironic how often we wring our hands about what's
happenings to jobs, and they're going overseas, and then we
turn around, and we won't do the obvious things that are going
to keep jobs here.
We have over 400 million or trillion cubic feet of natural
gas offshore, and I think we all resolve that we're going to go
after that and get it. And then the question is how do we do it
in a way that strikes the right balance? And I do appreciate
the Senator from Florida's contribution to that. There are
things we can do to make this easier for everybody, drawing it
carefully, using the highest standards of technology.
Compensating the states, which Senator Landrieu has talked so
much about, I mean, that to me is a great compromise. Well, go
ahead and get the oil and the natural gas and the States that
are potentially adversely affected or have concerns, we can
compensate, allow States to opt out of the moratorium. Senator
Warner's very interested in that, I know.
Mr. Chairman, you're right. There isn't any absolute safe
course, but I'll say this: Not getting the energy isn't safe
either. A lot of the environmental concerns that we have to
deal with in the country come down to funding. I mean, we have
big clean water issues in Missouri. We can resolve those. We
have to have the money. And if we have the money, we have to
have the economic growth, and you have to have energy to do
that. It comes down to that. So, I'm very supportive of your
efforts and grateful to Senator Martinez and Senator Nelson for
their contribution.
[The prepared statement of Senator Talent follows:]
Prepared Statement of Hon. James M. Talent, U.S. Senator From Missouri
Our nation is a leader in industrial and economic growth, based on
a foundation of plentiful and affordable energy. Until recently, we
rarely gave any thought to turning up the heat or leaving the lights
on, trusting that the world will provide cheap energy. That paradigm is
no more.
In his State of the Union address, President Bush declared the need
to increase our energy independence. I agree--we must develop
technologies to reduce our dependence on Middle Eastern oil. Low-cost,
reliable energy is the key to prosperity and national security, and
that key cannot be left in the sands of the Middle East.
Natural gas prices set record highs this winter, exceeding $15 per
thousand cubic feet (Mcf). Natural gas still costs two to three times
traditional levels, due in part to increasing world demands for energy.
And there is more at stake than high utility bills. Employers such
as Missouri farmers and manufacturers are big users of natural gas as
feedstock for fertilizer and chemical products. The Industrial Energy
Consumers of America reported that ``since 2001, natural gas prices
have significantly contributed to the loss of 3.0 million manufacturing
jobs and the shifting of future investment overseas.'' We can't
continue to export jobs and manufacturing capability overseas simply
because our energy costs are too high, and they are: in Europe, natural
gas sells for $7.00 per thousand cubic feet and in China, less than
$5.00.
The Renewable Fuels Standard that I added to last year's energy
bill was an important first step towards lessening our dependence on
the Middle East. President Bush's proposal builds on that foundation
through expanding source materials for biofuels. However biofuels,
while a long-term solution, won't do much to cut your heating bill or
save a manufacturing job this year. We must do more than lower the
thermostat. We need to responsibly produce our own clean burning
natural gas.
Natural gas prices are excessive because our rapidly growing demand
is outstripping our flat production. Demand is expected to grow by over
30%; however, the Energy Information Administration reports that the
U.S. natural gas drilling rig count has doubled since 1998, but
production has declined by 1.5%. This shows that we're getting all we
can out of the available fields, and it is not enough.
This shortfall of supply isn't because we don't have the reserves--
Minerals Management Service estimates that we have 621.1 trillion cubic
feet (Tcf) of remaining undiscovered, technically recoverable gas,
419.9 Tcf of which is in Federal offshore waters. That's enough natural
gas to heat 60 million homes for 121 years. Unfortunately, much of this
is located in offshore areas which Congress or the President has banned
access.
The ban was imposed in part due to safety concerns that no longer
appear valid. Interior Secretary Gail Norton recently testified that,
``Hurricanes Katrina and Rita confirmed that our offshore oil and gas
industry produces environmentally safe energy for America. Even in the
face of two back-to-back major hurricanes, all subsurface safety valves
held on the OCS and there was no significant spill from production.''
Moreover, Americans don't need any legislative action to encourage
them to conserve energy--their monthly utility bill does that for them
already. However, my fellow legislators and I do have a responsibility
to wisely manage this nation's natural resources--your resources. With
energy prices at record levels, the best use of our nation's resources
is to carefully and responsibly produce the abundant energy which lies
within our borders.
A first step is S. 2253, the bill I co-sponsored with Sens.
Domenici, Bingaman and Dorgan, that opens the untapped portion of just
one small, unexplored area 100 miles offshore in the Gulf of Mexico.
Lease Sale Area 181, as it is known, has enough natural gas to heat 6
million homes for 15 years. It's plenty to lower natural gas prices
while we pursue renewable fuels to power the future.
A next step would be to allow States to opt out of the moratoria to
allow exploration for natural gas off of their own shores. I have co-
sponsored a bill with Sens. Pryor and Warner to open up more of the OCS
to natural gas exploration by providing an incentive for States to take
advantage of the resources that lie off of their coasts. It also
provides additional revenues to areas where drilling is already
allowed.
Senator Talent. I hope we can get this resolved. I'll just
ask the witness one question. My observation, over the years,
is that we estimate how much gas, natural gas, is in a
particular area. And if anything, don't those estimations tend
to turn out to be kind of conservative because we find with
technology, this is just historically, don't we usually--aren't
we usually able to get more than we think we can get initially?
There may be more than we think offshore. If you could just
answer that question, then I'll yield back.
Ms. Burton. Mr. Chairman, historically, that is correct. We
try to be very conservative in our estimates. We do estimates
based on what data we have, which in some areas is very sparse
data, and the geophysicists and geologists or scientists who
make the estimate try to stay on the conservative side. What
has happened, historically, is once an area is opened and
developed, we find out there's a lot more. Deepwater Gulf of
Mexico did not hold any interest for anybody until about 12-15
years ago when the technology started allowing deeper and
deeper drilling. And now, the deep Gulf of Mexico is producing
67 percent of the oil produced in the gulf. It's been really a
phenomenal story. So, we learn as we go. And usually, we were
on the conservative side, and we find more than what we thought
was there.
Senator Talent. Well, I thank you, Mr. Chairman. Secretary
Babbitt did say using natural gas for all this is like washing
dishes with scotch. And if we're going to do that, we sure
ought to use every effort to get as much scotch as we can. I
guess that's what we're talking about. I'm happy to--you know,
this is water, not gin; right, Secretary Burton? All right.
Thank you, Mr. Chairman.
The Chairman. Now we're going to the new Senator from New
Jersey.
STATEMENT OF HON. ROBERT MENENDEZ, U.S. SENATOR
FROM NEW JERSEY
Senator Menendez. Thank you, Mr. Chairman. Mr. Chairman, I
know that the focus of your hearing is Lease Sale 181, but I
have another primary focus. And since we have the Director
here, I want to focus on that. And my primary concern is
drilling, potential drilling activities on the Outer
Continental Shelf, and protecting the shoreline of New Jersey.
And I'm extremely troubled and disappointed by the 5-year plan
issued by the Minerals Management Service, which, amongst other
things, included a plan to start drilling off the coast of
Virginia. Now, Madam Director, that is, for those of us in New
Jersey, let me say--well, it's Virginia, but it's quite simply
unacceptable to the people of New Jersey and certainly to me,
and that's why Senator Lautenberg and I are introducing
legislation that seeks a permanent ban on oil and gas leasing
off the coast of New Jersey as well as the entire mid-Atlantic
and north Atlantic planning areas.
I heard Senator Talent speak about our economy. Well, in
New Jersey, I can't overemphasize how important our economy is
as it relates to our beaches. The economy of New Jersey is
fueled by the second largest industry in the State, which is
tourism. It's a $22 billion industry in New Jersey. It's
responsible for over 430,000 jobs. That's 10 percent of all of
the jobs that exist in the State of New Jersey. And the vast
majority of those are clustered around the shore.
Now, our beaches are just too precious to play Russian
roulette with. And a plan to drill as close as 75 miles off the
coast of New Jersey is, in my mind, irresponsible, ill-
conceived, and I personally will seek to fight it every way I
know how.
Now, Madam Director, I was amused to see in your 5-year
plan that you divide the ocean into neat little boxes. And if
we could segregate it that way, it might be great, where one
box belongs to Virginia, another one belongs to Maryland,
another one to Delaware and so on, but, for example, an oil
spill will not respect those boundaries. And 75 miles is more
than close enough to affect our shores, but what is also
frightening to me is the prospect of a domino effect. I've
heard that one of the advantages to Lease Sale 181 is that the
infrastructure's already there. We have the pipelines. We have
the platforms. We could have this up and running in no time.
But once the infrastructure's up in Virginia, how long before
the next price spike puts pressure to open the waters off of
Maryland, then Delaware and then New Jersey?
It seems to me that that is a dangerous domino effect. And
it is a toehold on the entire Atlantic seaboard, which, in my
mind, is a great risk.
Let me ask you two questions, Madam Director. In that
proposed 5-year plan, you correctly point out that the State of
New Jersey, and nearly it's entire congressional delegation on
both sides of the aisle, support the continuation of the
moratorium in the mid-Atlantic. But then in referring to New
Jersey and Connecticut, you go on to say, and I quote,
``However, these two States are no longer adjacent to this
planning area.'' So, am I to understand that because of the
administrative slicing-up of the ocean as you've had it
performed by your agency, New Jersey's objections are not going
to be seriously taken?
Ms. Burton. Mr. Chairman, first, if I may, Mr. Chairman,
mention that the only reason Virginia is still in the plan is
because the State of Virginia is interested in commenting
further, and unless we keep them in the plan, there is no
dialog. So, we keep them for dialog. We cannot allow drilling
off Virginia unless Congress lifts the moratorium and the
President modifies his withdrawal. So, this is probably not a
very feasible thought at this point. But in order to keep
public comments coming, we have to keep it in the plan. So,
that's why Virginia is there. Their legislature had taken----
Senator Menendez. My question is, are the concerns of the
State of New Jersey going to be as dismissive as your comment
appears to be?
Ms. Burton. If the impact of any activity affects States
around the area of where we are, we will consult with the
States. But we have to delineate which areas are offshore, any
State, and so that's why we draw a line. We also have a limited
staff, and we have to delineate what area part of our staff is
responsible for. This is what those administrative lines do for
us. But we will consult with the State if there is any reason
to think that there's any impact that will happen in one State
because of activity in another State.
Senator Menendez. The tidal flows here flow northward, so
the mirrored position of your lines does not respect the
potential consequences to a State like the State of New Jersey,
and I hope you'll review that. And last, in an interview you
gave last September, you said that, quote, ``you're not sure
how successful gas drilling only would be;'' is that still the
way that you feel?
Ms. Burton. The reason I said that, Mr. Chairman, is
because we asked that question in our public document that
asked for comments. And the vast majority of those comments
were negative, folks thought that gas only was not terribly
practical. It sounds like a very good idea, but what do you do
when you drill and you find oil instead of gas? You really
never know what you're going to find until you drill.
Senator Menendez. And it's unlikely you're going to plug up
the hole just because you found oil and not gas. Well, in the
case of the whole Atlantic region, we would produce, based upon
your own tables of endowment of technically recoverable oil and
gas on the Outer Continental Shelf for the year 2006, less than
half a year of oil and about 1 year or so of natural gas. The
potential risk to that economy, just in one State--and I'm sure
there are others who feel similarly in that respect--in my
mind, could never be met by 1 year's supply of natural gas and
half a year's supply of oil. Thank you, Mr. Chairman.
The Chairman. Senator, could I just clarify, 1 year's
supply for America? Is that what you're saying?
Senator Menendez. Yes, Mr. Chairman.
The Chairman. For the whole of it, with everything we use
in the country, we'd get 1 year's supply of natural gas and
oil?
Senator Menendez. And half a year supply of oil. But if we
were to multiply the economic consequence----
The Chairman. I understand.
Senator Menendez [continuing]. Just in one State and by all
those other States, I would say that the offset would be rather
dramatic.
The Chairman. That's your position, and that's, obviously,
to be considered. I will now give the floor to Senator
Alexander.
Senator Alexander. I'm going to pass, Mr. Chairman, so we
can move on.
The Chairman. Thank you, Senator, I think. Could I say
today, and as to the past, your performances here have been
excellent. I commend you. I hope that what I see here is the
way your Department is being run, and I believe so. You have
some very difficult confrontations that you have, not the
subject matter of this hearing. We may have to get you up here
and talk about those with reference to royalties due or
royalties not due in the past. We could have taken all day on
that, but I hope you're working on that issue.
Ms. Burton. Mr. Chairman, we are working on it, and I will
be pleased to come and tell you what we've done and what we
found out.
The Chairman. Thank you very much.
Ms. Burton. Thank you very much.
Senator Landrieu. Mr. Chairman, may I just submit these two
documents for the record before the next panel? One is a letter
from Senator Lott and myself regarding the current issues
discussed this morning, and one is a reiteration, a copy of a
letter sent by our Governor on the same subject. Thank you.*
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* The letters can be found in the appendix.
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The Chairman. They'll be made a part of the record. You're
excused.
Senator Martinez. Mr. Chairman, one more thing I'd like to
make part of the record as well, if I may, would be the
proposed map that we discussed during the course of my
testimony.**
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** The map has been retained in committee files.
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The Chairman. And that'll be made a part of the record, and
the staff will make sure we have sufficient time to put in the
attending documents. Now, with that, we're going to call the
other witnesses in all together, chairman, president and CEO of
Piedmont Natural Gas, Thomas Skains, Charlotte, North Carolina;
Timothy Parker, senior vice president of exploration and
production for Dominion, Houston, Texas; Michael Gravitz,
oceans advocate, U.S. Public Interest Research Group, from DC;
and Stephen Wilson, chairman and CEO of CF Industries Holdings,
Long Grove, Illinois. Gentlemen, thank you for your patience.
Let's proceed. Mr. Wilson, would you proceed, please? Tell us
your name, what you do, just for the record.
Mr. Wilson. I'm Steve Wilson, chairman and CEO of CF
Industries Holdings, Inc., located in Long Grove, Illinois.
The Chairman. And what does that company do?
Mr. Wilson. We're in the fertilizer business, and I'll
describe our operations in the course of my oral statement.
The Chairman. Proceed.
STATEMENT OF STEPHEN R. WILSON, CHAIRMAN AND CEO,
CF INDUSTRIES HOLDINGS, INC., LONG GROVE, IL
Mr. Wilson. Thank you, Mr. Chairman, Senators, for this
opportunity to highlight the serious gas price challenge facing
the U.S. fertilizer industry.
The Chairman. Thank you.
Mr. Wilson. I'm here today on behalf of my company and the
Fertilizer Institute. CF is also a member of the Agriculture
Energy Alliance, a broad-based coalition of 100 farm
organizations and agribusinesses severely impacted by high
natural gas prices. As you know, we supported the committee's
work on the Energy Policy Act of 2005.
Today, we commend your recognition of the need to take
direct positive action to increase U.S. natural gas supplies.
Authorizing exploration and drilling in the Sale Area 181 is an
essential commitment our Nation must make. The sooner this bill
becomes law, and the sooner the Interior Department implements
it, the sooner we will see a positive impact on production
costs of fertilizer, on prices paid by U.S. farmers and on the
Nation's food security. If this action is not taken, the U.S.
fertilizer industry and other major U.S. manufacturing sectors
will shrink further. We will continue to lose these industries
and their high-paying jobs to countries where energy policy is
not in production as well as consumption. CF Industries
manufactures fertilizer products at major facilities in
Louisiana and Florida. We have worked in partnership with these
great States for over 37 years, and we want to continue
operating there. We provide over 1,100 jobs at these locations
to people dedicated to providing U.S. farmers with the
fertilizers they need when they need them. We operate terminals
and warehouses in 15 States and a nitrogen fertilizer complex
in Alberta. We provide a quarter of the nitrogen fertilizer
used in the United States, a third of the nitrogen used in the
Midwest and 20 percent of the phosphate fertilizers applied in
the Midwest.
To help you understand the importance of these fertilizers
to farmers and consumers, 40 percent of U.S. crop production
depends on the application of these products. And without
nitrogen fertilizers, corn yields would drop an estimated 40
percent. If high natural gas prices continue, we risk putting
even more of our food security in the hands of fertilizer
producers in places like Saudi Arabia, Russia, Venezuela and
Ukraine. Natural gas is a primary feedstock used to make
ammonia, which is itself a nitrogen fertilizer and the building
block of all that are nitrogen fertilizers. To be clear about
this, natural gas is the key raw material, not just the energy
source. Natural gas is to ammonia what flour is to bread.
Today, 93 percent of the cash cost of making ammonia is the
cost of the natural gas. Since the year 2000, we've seen gas
prices rise from about $2.50 per MMBtu in the gulf to recent
levels between $8 and $15. Each $1 increase adds about $33
dollars in cost to a ton of ammonia. So, it's no surprise that
U.S. ammonia production has fallen from about 18 million tons
in 2004 to 12 million--in the 1990's, excuse me, to 12 million
tons in 2004, to an annualized rate during the second half of
last year of less than 10 million tons.
While U.S. production has declined, imports have risen by
80 percent since 2002, in many cases, coming from unstable
offshore regions. Without question, American farmers have been
hurt severely by increasing fertilizer prices. The Agriculture
Department reports that the average spring price of ammonia to
U.S. farmers almost doubled since 2002 to $416 per ton in 2005.
Average prices this spring may be higher. In response to
previous natural gas price increases, CF has invested over $125
million in efficiency improvements in Louisiana and Florida. We
are strong advocates of energy conservation, and we practice it
every day. We are participating in a new DOE-Save Energy Now
program to be sure we haven't missed anything. Despite these
steps and the fact that our nitrogen facilities are first-
class, globally-competitive assets, we cannot conserve our way
out of this situation. It is the price of natural gas, not the
lack of technology, that has created this serious situation. CF
spent about a billion dollars in the 1990's improving and
expanding our operations. Unfortunately, like other U.S.
energy-intensive manufacturers, we must now look offshore for
future projects.
I'd like to conclude with this observation: It is
irrational to continue to increase demand for natural gas while
restricting access to supply. The free market will solve this
problem if government allows it to do so. We strongly support
your decision to face this issue directly. This Nation cannot
continue to use ever-greater amounts of natural gas without
seeking new supply.
Mr. Chairman, the action that you and your co-sponsors are
proposing is absolutely critical. It will make a statement that
the market needs to hear, that the United States will support
the production of more natural gas, which we all know remains
an abundant national resource. I would be happy to answer any
questions you have about our industry and this issue, and we
look forward to working with you.
[The prepared statement of Mr. Wilson follows:]
Prepared Statement of Stephen R. Wilson, Chairman and CEO,
CF Industries Holdings, Inc.
CF Industries is pleased to have the opportunity to discuss the
urgent situation facing the U.S. fertilizer industry. The volatility
and level of U.S. natural gas prices, virtually unprecedented in the
history of our country, resulted in the permanent closure of almost 40%
of U.S. nitrogen fertilizer capacity between 1999 and 2005. In the
current environment this situation threatens an efficient U.S. industry
and the thousands of workers who support it.
It is important to state up front that, while my comments focus on
the fertilizer industry, they actually address a broader issue--food
security. An estimated 40 percent of U.S. crop production is directly
attributed to the use of commercial fertilizers. Consequently, if high
natural gas prices continue to result in the outsourcing of the U.S.
fertilizer industry, we as a country are basically putting our food
security in the hands of major fertilizer export countries such as
Saudi Arabia, Russia, the Ukraine and Venezuela.
CF also is appearing today on behalf of the Fertilizer Institute
(TFI). TFI represents fertilizer from the plants where it is produced
to the plants where it is used--and all points in between. Producers,
retailers, trading firms and equipment manufacturers, which comprise
TFI's membership, are served by a full-time Washington, D.C., staff in
various legislative, educational and technical areas as well as with
information and public outreach programs. Both CF Industries and TFI
are also members of the Agriculture Energy Alliance, a broad-based
coalition of 100 farm organizations and agribusinesses severely impact
by high natural gas prices. The following summarizes the key points in
this statement:
1. Natural gas is the raw material used in the production of
nitrogen fertilizer, accounting for over 93 percent of the
total cash cost of production.
2. High and volatile natural gas prices have a serious impact
on the nitrogen fertilizer industry.
3. American fertilizer manufacturing creates high paying
jobs.
4. Loss of this strategic U.S. industry leaves American
farmers vulnerable.
5. Energy conservation and fuel efficiency are priorities at
CF Industries manufacturing facilities.
6. The Energy Policy Act of 2005 was helpful, but new natural
gas supply is needed.
7. Congress needs to continue to change energy policy to
increase supply and decrease demand for natural gas. Opening up
Sale 181 area for production is a direct, positive action to
increase the nation's domestic natural gas supply.
BACKGROUND
CF Industries Holdings, Inc., headquartered in Long Grove,
Illinois, is the holding company for the operations of CF Industries,
Inc. We are a major producer and distributor of nitrogen and phosphate
fertilizer products. We operate world-scale nitrogen fertilizer plants
in Donaldsonville, Louisiana and Medicine Hat, Alberta, Canada; conduct
phosphate mining and manufacturing operations in Central Florida; and
distribute fertilizer products through a system of terminals,
warehouses, and associated transportation equipment located primarily
in the midwestern United States. We were an agricultural cooperative
for 59 years until we became a New York Stock Exchange listed public
company last August.
In Louisiana, we employ approximately 450 full-time and contract
workers. The facility contributes $48 million a year in wages and $12
million in sales and property taxes to the local community. The Company
as well as the employees of this facility have been an integral part of
the surrounding communities since 1966. During a normal production
year, the facility converts approximately 78 million MMBtu of natural
gas into 2.27 million tons of ammonia, 1.75 million tons of granular
urea, and 2.35 million tons of UAN solutions. At capacity, the Complex
has a daily requirement of over 200,000 MMBtu of natural gas as a
feedstock and fuel, which at $8 per MMBtu represents a daily natural
gas bill of $1.6 million. CF accounts for almost one-fourth of the
nitrogen fertilizers applied in the United States and nearly one-third
of the nitrogen fertilizers applied in the primary growing areas of the
Midwest.
We also mine and manufacture phosphate fertilizers in Hardee County
and Plant City, Florida and operate a distribution facility at the Port
of Tampa. The Company has had operations in Florida since 1969. At
Hardee, we employ approximately 200 full-time and contract workers.
This facility accounts for $18 million per year in wages and $8 million
in severance, sales and property taxes. During a normal production
year, the mine produces over 3.6 million tons of phosphate rock. At
Plant City, we currently employ approximately 500 full-time and
contract workers. This facility accounts for $46 million a year in
wages and $2 million in sales and property taxes. During a normal
production year, the facility produces 2.5 million tons of sulfuric
acid, 1.0 million tons of phosphoric acid, and 2.0 million tons of
diammonium phosphate (DAP) and monoammonium phosphate (MAP). The
Complex consumes over 400 thousand tons of ammonia annually. In Tampa,
CF currently employs 35 full-time and contract workers. This facility
accounts for $3 million a year in wages and $0.7 million in wharfage
and property taxes. During calendar year 2005, the facility handled
over 1.1 million tons of dry fertilizer product and 600 thousand tons
of ammonia. We account for 14% of the phosphate fertilizer applied in
the U.S. and approximately 20 percent of the phosphate applied in the
Midwest. Additionally, we are an exporter of phosphate fertilizer
products.
NATURAL GAS IS THE RAW MATERIAL USED IN
THE PRODUCTION OF NITROGEN FERTILIZER
My purposes today are first to discuss the serious impact that the
unprecedented high level and volatility of natural gas prices has had
and is having on both the fertilizer industry and the American farmer,
and second to discuss steps that Congress can take to alleviate the
current situation. While I will address the latter in more detail later
in my testimony, let me simply state that, as a country, we need to do
everything possible to expand our supply of natural gas as quickly as
possible.
To fully understand why high and volatile natural gas prices create
such fundamental difficulties for the nitrogen fertilizer industry, a
basic understanding of our products and manufacturing process is
necessary.
Natural gas is the primary feedstock in the production of virtually
all commercial nitrogen fertilizers manufactured in the United States
(Figure 1).* It is important to be very clear about this: natural gas
is not simply an energy source for us; it is the raw material from
which nitrogen fertilizers are made. This distinguishes our industry
from most other large consumers of natural gas in the United States.
For example, the steel industry uses natural gas as a heat source, but
can shift to other energy sources such as fuel oil.
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* Figures 1-8 have been retained in committee files.
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Our production process involves a catalytic reaction between
elemental nitrogen derived from the air and hydrogen derived from
natural gas. The primary product from this reaction is anhydrous
ammonia (NH3). Anhydrous ammonia is used directly as a
commercial fertilizer or as the basic building block for producing
virtually all other forms of nitrogen fertilizers such as urea,
ammonium nitrate and nitrogen solutions, as well as in the production
of DAP and MAP. Natural gas is also used as an energy source to
generate heat when upgrading anhydrous ammonia to urea.
Natural Gas (CH4) + Air (N2) = Anhydrous
Ammonia (NH3)
Because natural gas is the source of the hydrogen used in producing
nitrogen fertilizers, it is by far the primary cost component. Today,
in the case of ammonia, natural gas accounts for 93 percent of the
total cash cost of production (Figure 2).
HIGH AND VOLATILE NATURAL GAS PRICES HAVE A SERIOUS IMPACT ON
THE NITROGEN FERTILIZER INDUSTRY
Given this heavy reliance on natural gas, high and volatile natural
gas prices have a serious impact on the domestic fertilizer industry.
As you are well aware, natural gas prices began to increase from
historical levels during calendar year 2000. Although prices moderated
in 2001, they have been climbing ever since and in recent months spiked
to over $15 per MMBtu (Figure 3). To put this into perspective, the
average natural gas price during all of the 1990s was just over $2.00
per MMBtu. This climb in natural gas prices has forced U.S. fertilizer
production costs to unprecedented levels. For example, ammonia cash
production costs have jumped from a historical average of approximately
$100 per ton to an average over the last six months of just under $400
per ton and a high in December of $495 per ton.
Not surprisingly, over this period of high prices and intense
volatility, the industry began to shut down production in response
(Figure 4). Nearly 40 percent of the industry's nitrogen capacity
permanently closed between 1999 and the current run-up in natural gas
prices in 2005. Most of the remaining facilities have had to run at
less than full capacity in recent months. During the last half of
calendar year 2005, U.S. ammonia production totaled 4.9 million tons
compared to 6.0 million tons for the same period in 2004 and average
July-December production volume during the 1990s of 8.7 million tons.
While U.S. production was already at low levels, the situation was
exacerbated by Hurricanes Katrina and Rita. Immediately after Rita hit
the Gulf coast, natural gas prices spiked to over $15 per MMBtu. The
spike in gas prices combined with shortages of natural gas resulted in
U.S. nitrogen fertilizer production dropping to its lowest level in
over 30 years (Figure 5).
The sharp rise in natural gas prices and the resulting curtailment
of U.S. fertilizer production also has had a dramatic impact on
fertilizer prices throughout the marketing chain and, in particular, at
the farm level. According to U.S. Department of Agriculture data, the
U.S. average spring price to farmers for ammonia climbed from $250 per
ton in 2002, to approximately $375 per ton in 2003 and 2004, to $416
per ton in 2005. Similarly, urea prices from 2002 to 2005 climbed from
$191 per ton to $332 per ton and UAN solutions prices from $148 per ton
to $243 per ton. Although farm-level data is not yet available for
2006, average prices this spring will likely be even higher (Figure 6).
While natural gas prices have had a dramatic impact on nitrogen
fertilizer cost, they have also had a significant impact on the cost of
phosphate fertilizers, DAP and MAP, that we produce in Central Florida.
DAP and MAP are produced using ammonia and contain 18 percent and 11
percent nitrogen, respectively. As a result of the sharp increase in
ammonia cost, the cost of producing DAP and MAP and the cost of these
products at the farm level have also risen significantly. For example,
DAP production cost has increased from approximately $125 per ton in
2002 to just under $200 per ton in December 2005. Similarly, farm level
prices for DAP during the spring season have jumped from $227 per ton
in 2002 to $303 per ton in the spring of 2005.
AMERICAN FERTILIZER MANUFACTURING CREATES HIGH PAVING JOBS
Clearly, a scenario of sustained high natural gas prices could lead
to more U.S. fertilizer plant closures and abandonment of
infrastructure in rural communities. This would result in the further
loss of high-paying, stable jobs in host communities. For example, the
chemical industry in Louisiana (which depends heavily on natural gas)
provides nearly 30,000 jobs at an average annual salary of nearly
$55,000 and creates an additional 6.8 jobs for every direct job in the
chemical industry. These companies also bring $800 million to the state
treasury and local governments through household earnings generated
directly and indirectly by the chemical industry.
In Florida, over 6,000 employees are directly employed by the
phosphate industry, with an average total compensation of $72,000. The
industry also supports an additional 5 jobs for each phosphate job. The
Port of Tampa attributed more than 41,000 jobs and $5.9 billion in
total economic benefits to phosphate and related chemical industries in
2001. The industry also paid over $85 million in severance, property,
sales and other taxes and fees in 2003.
LOSS OF THIS STRATEGIC INDUSTRY LEAVES AMERICAN FARMERS VULNERABLE
However, the most significant impact would be on the American
farmer. The continued loss of production from the domestic nitrogen
industry would force farmers to rely on a highly uncertain and highly
volatile world market with no assurance that they will be able to
obtain enough product to meet their full demand. This is particularly
important when considering the importance of nitrogen to farmers. For
example, according to the University of Illinois, 30-50 percent of corn
yields can be directly attributed to nitrogen fertilizer.
Since the 1940s, farm demand for nitrogen fertilizers has always
been supported by a large, efficient domestic fertilizer industry. For
example, during the 1990s approximately 70-75% of the nitrogen
fertilizers consumed by American farmers was supplied by domestic
production. Since most of the nitrogen fertilizer in the U.S. is
consumed within very short time frames in the fall and spring
application seasons, an extensive distribution and storage
infrastructure has developed to move product from the manufacturing
plants to the major fertilizer consuming regions in order to bridge
this seasonal gap. This system of production facilities and downstream
infrastructure was designed specifically to ensure that American
farmers would have adequate supplies of fertilizers at the right time
and at the right place.
On the other hand, offshore supply was largely constructed to
compete opportunistically in the world market. In other words, offshore
exporters have little, if any, commitment or infrastructure to serve
the U.S. market and generally sell wherever they can get the highest
price netted back to these plants. That means that supply can and would
be shifted from U.S. customers to other global customers based on
relative price movement.
Imports also are subject to changes in world economic conditions,
fluctuating exchange rates and political and/or policy changes in other
countries. This point is particularly important when looking at the
list of major nitrogen fertilizer exporting countries. These include
Russia, Ukraine, Saudi Arabia, Qatar, Kuwait, Oman, the United Arab
Emirates, Indonesia and Venezuela.
Higher import volume does not mean lower price. This can be
demonstrated by looking at import volumes versus product prices. Since
1999 when U.S. natural gas prices first began to escalate, nitrogen
imports have almost doubled from 6.3 million tons to a record volume
last year of 11.3 million tons, with imports now accounting for just
over half of the U.S. total nitrogen supply (Figure 7). During this
same time period, average farm level prices have not gone down but have
escalated at a record pace. Ammonia, urea and UAN solutions prices have
climbed by 89 percent, 87 percent and 83 percent, respectively, since
1999 (Figure 8). This has forced a typical farmer's total fertilizer
bill to increase by more than 50 percent during the same time period.
ENERGY CONSERVATION, FUEL EFFICIENCY AND OTHER INVESTMENTS ARE TOP
PRIORITIES AT CF INDUSTRIES MANUFACTURING FACILITIES
Our company has focused for many years on improving the conversion
of natural gas into fertilizer and on energy efficiency in general. We
have a very strong economic interest in doing so. CF has completed
several energy efficiency projects and continues to look for
opportunities to conserve energy at all of our facilities.
The preponderance of natural gas we purchase is used as a chemical
feedstock, rather than as an ``energy'' source at our Donaldsonville,
Louisiana Nitrogen Complex. Our production process uses that feedstock
gas as efficiently as possible. Each of our four Donaldsonville ammonia
plants was designed to produce 1,000 short tons per day of anhydrous
ammonia at an average energy consumption of 37.8 MMBtu per ton. As a
result of investing over $100 million in efficiency improvement and
debottlenecking projects in Louisiana, production capacity has been
increased by 62% above the original design, while energy consumption
has decreased by 13% per ton. We are investigating additional energy
improvement projects that could reduce energy consumption by another 6%
per ton from current levels.
Despite these steps and the fact that our nitrogen facilities are
first class globally competitive assets, we cannot conserve our way out
of this situation. It is the price of natural gas, not the lack of
technology, that has created this serious situation. CF spent about $1
billion in the
1990's improving and expanding our operations. Unfortunately, like
other U.S. energy-intensive manufacturers, we must now look offshore
for future projects.
In Florida the company spent $28 million on efficiency
improvements. At our Plant City Complex, CF installed a cogeneration
unit to generate electricity from waste heat (steam). The unit
eliminated a monthly power bill of approximately $1.5 million at
today's energy costs and converted the facility into a net exporter of
electricity. CF also installed air preheaters to utilize high pressure
steam to heat dryer air and eliminate the use of natural gas to heat
air, resulting in a savings of $2 million per year at today's natural
gas cost. Heat exchangers were installed at Plant City to utilize waste
heat (hot water) from scrubbing systems to vaporize ammonia in lieu of
steam. The savings when converted to electricity are worth
approximately $1 million per year at today's energy costs.
CF Industries recently was selected to participate in April 2006 in
the Department of Energy's ``Save Energy Now'' program in which DOE
sends experts to the nation's most energy-intensive manufacturing
facilities to conduct energy savings assessments. The purpose of the
assessments is to identify immediate opportunities to save energy and
money, primarily by focusing on steam and process heating systems.
THE ENERGY POLICY ACT OF 2005 WAS HELPFUL BUT NEW NATURAL GAS SUPPLY IS
NEEDED
H.R. 6, the Energy Policy Act of 2005, was an important first step
in moving our country towards a comprehensive energy policy. The energy
bill facilitates the diversification of energy sources used to generate
electricity, including encouraging development of alternative energy
sources, and promotes the efficient use of energy in our homes,
businesses and government facilities. These provisions should alleviate
some of the demand pressure on natural gas.
The energy bill also has specific provisions to increase natural
gas supplies including:
creating incentives for natural gas production from
deepwater wells and from ultra-deep wells in shallow water;
allowing for more expedited leasing and permitting of
production from federal lands and
improved management of federal oil and gas leasing programs
by all federal agencies;
clarifying liquefied natural gas (LNG) terminal siting and
safety responsibilities among federal and state agencies; and
facilitating the expansion of natural gas delivery
infrastructure.
Despite these initiatives, high natural gas prices remain the most
serious threat to the fertilizer sector and to farmers in general,
since the energy shocks of the 1970s. We need an increase in supply and
a resulting reduction in price to ensure an adequate and stable
domestic supply of nitrogen fertilizer for our farmers into the future.
congress should continue to change energy policy to increase supply and
DECREASE DEMAND FOR NATURAL GAS
So what can Congress do now? Put simply, Congress should continue
the good work begun in the Energy Policy Act of 2005 and take further
measures to reduce gas demand and increase gas supply. With regard to
the issue of demand, Congress should continue to encourage the electric
power industry to explore and invest in alternative technologies for
power generation, including ``clean coal'' and next-generation nuclear
plants. These technologies offer the best hope for limiting the
increasing natural gas demand of the electric power sector.
With regard to the issue of supply, Congress should also take
action to open up the Sale 181 area. This would be a direct, positive
action to increase the nation's domestic natural gas supply to help
relieve the high prices now pressuring American consumers. Allowing
exploration and development in the Sale 181 area is an essential
commitment that our nation must make.
Back when the full Sale 181 area was analyzed in the 1990's, it was
determined that it had the potential to produce 7.8 TCF of natural gas
and 1.9 billion barrels of oil. However, these numbers may be much
higher today. They are based on the 1995 resource estimates and oil and
gas prices that were much lower than today, and they did not include
the data now available from the leasing that has gone on in a quarter
of the original area. These natural gas resources belong to all
Americans and should be developed for the benefit of the entire nation.
Responsible development of natural gas resources represents the most
significant policy option before Congress to address current and future
natural gas needs in this country. We believe that opening the Sale 181
area would send a strong signal to natural gas markets and could
increase the elasticity in North American natural gas markets.
CONCLUSION
For those of us in the fertilizer industry, ``the future is now.''
We encourage this Committee, the Congress, and the Administration to
continue to look aggressively for ways to expedite those projects that
will increase natural gas supplies and help get supplies to the
fertilizer industry in the near term.
CF Industries supports the expedited opening of the Sale 181 area.
We believe that access to these reserves can be of substantial benefit
in meeting the nation's energy needs without compromising other
legitimate interests, including environmental protection. The Sale 181
area should be opened to environmentally responsible production.
Congress also should continue its efforts to support the
construction of new LNG terminal facilities and the proposed Alaska
Natural Gas Pipeline.
In summary, it is imperative that adequate supplies of natural gas
be developed for the benefit of the American farmer given that almost
one-third of U.S. crop production is derived from nitrogen fertilizer.
Thank you for the opportunity to discuss these issues with you
today. We look forward to working with you over the next few months,
and I would be pleased to answer any questions you may have on the
fertilizer industry and natural gas pricing issues.
The Chairman. Thank you.
Mr. Wilson. The quantities are quite large. There is a
chart in our written testimony that shows the quantities, and
the quantities lost in production are indicated in that chart
on that side.
The Chairman. Thank you.
Mr. Gravitz.
STATEMENT OF MICHAEL GRAVITZ, OCEANS ADVOCATE,
U.S. PUBLIC INTEREST RESEARCH GROUP
Mr. Gravitz. Thank you, sir. Thank you. Good morning, Mr.
Chairman and other Senators. My name is Michael Gravitz, and
I'm the oceans advocate from U.S. Public Research Group. We are
the national program and lobbying arm for the 30 State PIRGs. I
appreciate the opportunity, obviously, to testify before you
today and to be available to answer any questions that you
might have. U.S. PIRG opposes this bill for a number of
important reasons. We believe that the drilling program
outlined in your proposal constitutes a measurable hazard to
the marine environment of the eastern Gulf of Mexico and to
nearby coastal resources like beaches and environmentally
sensitive areas and species.
In other words, the drilling program proposed here today
will lead to a certain amount of environmental damage. You
don't have to take my word for it. The MMS has studied, as part
of its proposals to Lease Area 181, what would happen if oil is
released, either from a pipeline or a tanker or a barge or a
platform in the Lease Sale Area 181. It's called an oil-spill
risk analysis. What they did in the study was to model a
hypothetical oil spill, where it would go over a 3-day, 10-day
or 30-day period if it came from any one of 600 different
points of release within Lease Sale Area 181, and using real
wind and current data over a 9-year period. In other words,
real data about really how the winds blow and how the currents
go. The model projected where oil would go in the gulf and what
coastal resources it would touch.
And their conclusion, and I quote from the report, is this:
``Spills from all the launch areas have an average probability
of contacting the shoreline in the study area of 31 to 59
percent within 30 days of occurrence. With increased travel
time, the complex patterns of wind and ocean currents produce
eddy-like motions of the oil spills and multiple opportunities
for a spill to make contact with any given environmental
resource or shoreline segment.''
We believe that this MMS report really underestimates the
true probability of oil striking a coastal resource because the
MMS report assumed that only about 240 or 250 million barrels
of oil would be produced from Lease Sale Area 181, when in
fact, from just this smaller area, we've been told that about a
billion barrels of oil will be produced. So, we think,
actually, this report probably underestimates, significantly,
the occurrence of an oil spill striking the shoreline. And the
shore that it's most likely to strike is the California
panhandle right at the border or between Alabama and Florida.
Also it could strike places like Mobile Bay and the State
offshore waters of Florida. There is a table in my testimony
that gives you more details about this.
Our conclusion is that there is a plausible likelihood of
an oil spill, a significant oil spill, above 1,000 barrels,
reaching coastal resources as a result of this drilling
program. And it really will be your decision as to whether this
will happen or not. Turning to the second issue, the--yes, sir?
The Chairman. Could I make sure that I got your word,
plausible? What was the word, plausible?
Mr. Gravitz. Yes.
The Chairman. What's followed after the word plausible?
Mr. Gravitz. I'm sorry. I said I believe that it is very
plausible that, if oil is developed in this area of Lease Sale
181, that there will be some oil released from a tanker, a
barge, a platform or a pipeline striking some of these areas
that we've mentioned. It's not my thinking.
The Chairman. Oh, I understand, but the word's plausible,
and it's 1,000 barrels is the--is plausible.
Mr. Gravitz. One thousand barrels or over, sir.
The Chairman. Okay.
Mr. Gravitz. It's a very interesting report, and I
recommend that your staff look at it carefully.
The Chairman. We will examine it.
Mr. Gravitz. If I may go on, we believe that the natural
gas estimated to be recoverable in this area will do nothing--
little or nothing to help us deal with the high energy prices
that we have today. It won't solve the problem of high natural
gas prices in the short run, 1 to 3 years, because the gas
can't be drilled that quickly. And we don't believe it can
reduce prices over the long-term, say 5 to 25 years, because
there isn't enough gas in this area to really change the price
of natural gas on the open market. If we assume a 20-year
lifetime for the field, six TCFs in the field, that's about 0.3
TCF of production of natural gas per year, and that's about
1\1/2\ percent of what our Nation consumes.
Again, there's a wonderful study done by the Energy
Information Administration that says what would happen if all
of the offshore areas of the lower 48 States were opened up.
And essentially, what it concludes is that the price of natural
gas on the market would go down by four cents per 1,000 cubic
feet. If you translate that into today's prices for natural
gas, you'd expect a small downward bump in price of about seven
to ten cents per 1,000 cubic feet. There is an effect, it's not
a particularly large effect, it's not a substantial effect, and
it's not a very quick effect, and frankly, we believe that that
level of downward price revision is really well within the
``noise'' that you would expect to see within the normal
marketplace.
The Chairman. What study is that?
Mr. Gravitz. It was done by the Energy Information
Administration in 2001, and it utilized the National Energy
Modeling System. I'd be glad to provide that information to
the----
The Chairman. We're going to have the man that runs that up
here to testify tomorrow. We'll ask him about it. Thank you.
Mr. Gravitz. With the other time that I have available, I
wanted to make the point that the vast majority, 80 percent, of
the Nation's undiscovered technically recoverable OCS gas is
located in areas that really are already open to drilling,
according to the Department of the Interior's 2006 report to
Congress. There are about 86 TCF of undiscovered--in other
words UTRR--gas resources in the areas under moratorium, in
contrast to almost 500 TCF of reserves or reserve appreciation
and UTRR in the total OCS.
So, in other words, only 20 percent of the gas that we know
is out there is off limits to exploration. And I think that,
reasonably, you've got to ask this question, is 20 percent of
the gas that we know we have too high a price to pay for
preserving some wonderful and very important natural resources
off of our coasts. I would propose that the answer to that
question is no, it's not too high a price to pay. That's a
decision, obviously, that members of this committee will have
to make.
But really, in essence, it comes down to this: When do you
stop, where do you draw the line, and what is the price that
you are willing to pay to protect what we consider to be very
important natural resources? The natural resources that we're
talking about are things off the coast of Florida. They are
beaches. They are turtles, whooping cranes, bald eagles, brown
pelicans and manatees.
Finally, U.S. PIRG firmly believes that the focus of energy
development efforts should be on conservation savings and the
development of alternative sources of clean energy, not
drilling for new sources of energy. We could save as much oil
as estimated to be available in this area, 930 million barrels,
in less than 2 years of U.S. consumption simply by requiring
automakers to close the light truck loophole. That is, making--
asking that SUVs and minivans and pickups meet the same gas
mileage standards as cars. So, we strongly support efforts to
pass legislation which saves energy and encourages the switch
to cleaner sources of energy. In essence, we propose that you
would replace the energy that you would derive from this area
by saving energy, conserving energy and moving to alternative
sources. That's the end of my testimony. Thank you.
[The prepared statement of Mr. Gravitz follows:]
Prepared Statement of Michael Gravitz, Oceans Advocate, U.S. Public
Interest Research Group
Good morning Senators and staff. My name is Michael Gravitz and I
am the Oceans Advocate for the U.S. Public Interest Research Group, the
national program and lobby office of the State PIRG's. I appreciate the
opportunity to appear before you today to testify on this bill and to
answer any questions you may have for me. With your permission I would
like my printed testimony to be entered into the record as I will
considerably shorten my remarks. I have been asked to confine my
remarks to a review of S. 2253, a bill ``To require the Secretary of
Interior to offer the 181 Area of the Gulf of Mexico of oil and gas
leasing'' and I will attempt to do so, though there are a number of
other bills and Administration plans that include some of the same
areas covered in this bill. So it seems proper to briefly refer to some
of those proposals as well.
UNDERSTANDING OF THE AREA COVERED BY S. 2253 AND TIMING OF LEASE SALE
I am not aware of any official map, acreage delineation, or
official estimate of energy resources that was released concurrent to
the introduction of this bill. Newspaper sources and committee staff
have stated that the area covers approximately 3.6 million acres and
contains an estimated 6 TCF of natural gas and 930 million barrels of
oil. From the bill, the areas boundaries are: the Military Mission line
to the east, to the north a line at least 100 miles south of the coast
of Florida's panhandle, to the west the western edge of Lease Sale 181,
and to the south the southern boundary of Lease Sale 181.
According to the proposed bill, the area would be offered by lease
`as soon as practicable, but not later than I year, after enactment . .
.'. Let's assume leasing is completed by early 2007, one year from now.
The interval between leasing and production can vary widely for a
number of reasons, and U.S. PIRG has not studied this issue. But we
believe, based on the most optimistic industry practices, that
geophysical exploration might begin in 2007 or 2008, exploratory
drilling by 2009 or 2010, and production could begin a year thereafter
in 2011 or 2012. Therefore at the earliest, we believe there would be a
five or six years interval until we saw the first production from this
area. This would be a very optimistic timeframe.
OVERVIEW
U.S. PIRG opposes this bill for a number of important reasons:
A drilling program of this size constitutes a measurable
hazard to the marine environment of the eastern Gulf of Mexico
and to nearby coastal resources like beaches and
environmentally sensitive areas and species. In other words,
the drilling program proposed will lead to a certain amount of
environmental damage detailed below.
The natural gas and oil (6 TCF and 930 million barrels
respectively) estimated to be recoverable in this area will do
little or nothing to help us deal with high energy prices. It
won't solve the problem of high natural gas prices in the short
run (1-3 years) because the gas can't be drilled that quickly,
and can't reduce prices significantly over the longer term (say
5-25 years) because there isn't enough gas there compared to
either annual U.S. production or consumption. Assuming a 20
year life for production of natural gas, the area would yield
approximately 0.3 TCF on average per year which is
approximately 1.5% of the total natural gas that the 2006
Annual Energy Outlook projects to be produced from all sources
(both OCS and land) in 2015. I have used 2015 because it will
take about 7 or 8 years after leasing for this field to be
really brought on line.
In economic terms, over the 20-40 year life of the field that
would be developed in Lease Area 181, the annual amount of gas
or oil produced would not meaningfully shift the supply curve
down and to the right on a typical price/quantity supply chart.
Let's say, for the purposes of this discussion, that the
price of natural gas were extremely responsive to even small
changes in supply like this, that is very price elastic with
respect to supply. Let's say, again for the purposes of this
discussion, that a 1.5% increase in supply could result in a 3%
decline in price. This cu would be a price elasticity of 2.0.
With natural gas at approximately $8.00 per thousand cubic
feet, this would mean a decline of $0.24 per thousand cubic
feet, surely not the major price relief that is claimed for
this bill.
A Department of Energy, Energy Information Administration
study done in 2001 (U.S. Natural Gas Markets: Mid-Term
Prospects for Natural Gas Supply, SR/OIAF/2001-06) compared the
price of natural gas with the OCS moratoria areas kept out of
production and the price of natural gas with all of the
moratoria areas opened for drilling in the 2007-2012 MMS 5 Year
Plan. For the study, this meant that 58 TCF of gas was added to
the existing 175 TCF of undiscovered technically recoverable
resources thought to exist in the lower 48 states at the time,
an increase in available gas of 33% and almost 10 times the
amount of gas that is thought to exist in the Domenici-Bingaman
area.
With all of its supply and demand information, DOE's National
Energy Model Modeling System (NEMS) predicted that the price of
natural gas would be $3.26 per thousand cubic feet in 2020
without the gas under moratorium and $3.22 per thousand, or
four (4) cents less with access to the additional gas in
moratoria areas. This is a predicted price drop of a 1.2% from
the addition of 10 times more gas reserves than would be freed
up under this bill. Now clearly the model didn't get the price
of natural gas correct for 2006 let alone 2020 as natural gas
is now approximately $8.00 per thousand cubic feet. But if the
price of gas is $8.00 then the savings from having all of the
lower 48 States OCS opened up is a decrease of around ten (10)
cents per thousand cubic feet. Not nothing. But also not
terribly significant either.
This is hardly major or even significant price relief. The
effect is of such a magnitude that it would probably be drowned
out by marketplace `noise' or normal fluctuations or by
catastrophic events we have no control over like the impact of
a hurricane Katrina. Catastrophic events that effect production
or distribution assets clearly have the ability to move prices
much more than a mere addition of 5 TCF of technically
recoverable resources.
For the oil resources estimated to be in the area, 930
million barrels is approximately 47 days worth of current U.S.
consumption at our daily usage of approximately 20 million
barrels per day. Of course, when the field comes on line,
consumption may be higher and the actual benefit to the U.S. a
briefer period of time.
The vast majority--80%--of the nation's undiscovered
technically recoverable OCS gas is located in areas that are
already open to drilling, according to the Department of
Interior's 2006 Report to Congress: Comprehensive Inventory of
U.S. OCS Oil and Natural Gas Resources. There are estimated to
be 86 TCF of Undiscovered Technically Recoverable Resources
(UTRR Mean Estimate) in all OCS areas withdrawn from leasing
compared to 479 TCF of Reserves, Reserve Appreciation and UTRR
in the total OCS of the U.S. Therefore, all the potential gas
placed off limits to drilling at present constitutes less than
20% of the gas thought to exist in the OCS.
The area covered in this bill will not contribute
appreciably to the supply of natural gas available for
production in the Gulf. According to reports, the field may
have 6 TCF in it; approximately 2% of the total natural gas
(290 TCF of natural gas in the entire Gulf OCS are categorized
as reserves, reserve appreciation, and undiscovered technically
recoverable) thought to remain in the entire Gulf.
U.S. PIRG firmly believes that the focus of energy
development efforts should be on conservation savings and
alternative sources of clean energy, not drilling for new
sources. We could save this much oil (930 million barrels) in
less than two years simply by requiring auto makers to close
the light truck loophole--that is, make SUV's, minivans and
pickups meet the same gas mileage standards as cars. We support
efforts to pass legislation which saves energy and encourages
the switch to cleaner sources of energy.
To summarize these main objections, U.S. PIRG believes that
drilling in this large an area of 181 is likely to damage the marine
environment of the Gulf and coastal beaches which the local tourist
economy depends on. The program will fail to have an appreciable impact
on oil or natural gas prices in the short or long term. Moreover, the
proposed drilling is bad energy policy because it does nothing to
either save energy or produce new clean energy such as would come from
wind, solar or biomass sources. Even the President has admitted that
the U.S. is addicted to oil. Drilling for more oil only feeds the habit
and does nothing to help solve the underlying problem.
ENVIRONMENTAL PROBLEMS
Environmental problems which come with oil and gas drilling fall
into three categories:
One-time problems related to exploration and drilling.
Chronic problems related to oil spills from production and
accidents
Catastrophic problems related to extreme weather events such
as the hurricanes Katrina and Rita that pummeled the Gulf last
summer
One-time problems
In order to explore for offshore energy, companies employ
seismographic techniques that use high energy sound to penetrate the
earth's layers. These surveys can damage local fish populations and the
hearing and navigation of large marine mammals. Some of these large
marine mammals like sea turtles and whales do live and travel through
the eastern Gulf.
Drilling platforms each produce an average of 180,000 gallons of
drilling mud and cuttings for every well drilled. Most of this waste is
dumped back into the ocean even though it contains toxic metals
including mercury and lead. Significant concentrations of these metals
can be found around drilling platforms in the central and western Gulf
and have been shown to bioaccumulate their way up into the food chain
into fish. Because oil rigs tend to attract populations of fish and
because the pollution is concentrated around rigs, the problem is
exacerbated.
Drilling produces a lot of air pollution from the equipment that
drives the rig. Each rig produces 50 tons of nitrogen oxides, 13 tons
of carbon monoxide, 6 tons of sulfur dioxide, and five tons of volatile
organic hydrocarbons during the exploration phase. Put lots of rigs
together and you get quite a lot of air pollution coming from one area.
Construction of oil and gas pipelines to bring the materials back
to shore requires seafloor disturbance which suspends sediments and can
create mounds on the seafloor which interfere with commercial fishing.
Nearshore habitat can be destroyed or damaged wherever pipelines come
on land. Many experts think that bringing gas and oil pipelines onshore
through coastal wetlands has been one of the prime reasons for the
rapid erosion and loss of protective wetland areas in Louisiana. These
areas protect the shoreline and neighboring communities from the damage
of extreme storm events.
Onshore oil and gas processing facilities can contribute to air and
water pollution and industrialize the shoreline. If oil and gas from
this lease sale move back to the Louisiana shore through existing
pipelines some of these problems could be avoided. But then, of course,
you are typically using increasingly aged pipelines as you get closer
and closer to shore where the pipelines were built first.
Chronic problems
Chronic problems result from oil spills from production platforms,
pipelines and other transport back to shore by barge or tanker. In
addition, active wells often release `produced water' back into the
environment. These produced waters coming from deep below the seabed
can contain heavy metals and in the Gulf sometimes contain elevated
levels of radium compounds which are released into the environment.
Over time the oil and gas industry have improved technology,
vigilance, and understanding of how to prevent spills by leaps and
bounds. However, spills still occur every year in the Western and
Central Gulf. Interestingly, spills are 7 to 10 times more likely to
come from pipelines than platforms and about 5 times more likely to
come from tankers or barge transportation than platforms.
Unfortunately, pipelines which are the most difficult element in the
entire chain of production to monitor and correct are also the most
likely source of spills according to this information which summarizes
spill data over 15 years. And as more new fields are opened farther and
farther offshore which connect to old pipelines closer to shore, one
might expect the older inshore pipelines to be a larger source of the
problem. Obviously leaks and spills closer to shore are more harmful to
coastal resources than ones farther out.
------------------------------------------------------------------------
No. of No. of
spills spills
equal/more equal/more
than 1,000 than
Spill Source barrels 10,000
spills/ spills/
billion billion
barrels barrels
------------------------------------------------------------------------
OCS Platforms................................... 0.13 0.05
OCS Pipelines................................... 1.38 0.34
OCS Tankers..................................... 0.72 0.25
------------------------------------------------------------------------
Source: Oil Spill Risk Analysis: Gulf of Mexico Outer Continental Shelf
Lease Sales, Eastern Planning Area, 2003-2007 and Gulfwide OCS
Program, 2003-2042, OCS Report MMS 2002-069, Department of Interior,
Minerals Management Service, Environmental Division, page 11
That said, anyone who claims that spills no longer occur because
the industry is so sophisticated and the regulators so vigilant has not
been looking at the newspapers or MMS, Coast Guard, or the National
Response Center reporting web site. There are plenty of reports of
spills in the Gulf to choose from, including spills that occurred as a
result of Hurricane Katrina in the Gulf, not just oil washed out into
the Gulf from the shore.
OIL-SPILL RISK ANALYSIS FOR LEASE SALE 181
Extensive data on the probability of spills and the likelihood of a
spill reaching important environmental resources comes from the Oil-
Spill Risk Analysis: Gulf of Mexico Outer Continental Shelf (OCS) in
Support of the Environmental Impact Statement (EIS) for Proposed Lease
Sale 181, Department of Interior, Minerals Management Service,
Environmental Division, OCS Report MMS 2001-007. This report modeled
where a hypothetical oil spill would go over a 3, 10, or 30 day period
if it were released from any one of more than 600 different launch
points within lease sale 181. Using real wind and current data from a 9
year period, the model calculated where the oil would go and whether it
would touch either a coastal segment of land in LA, MS, AL, or FL or
contaminate a number of highly important environmental resources like
Big Bend Seagrass area of the coast of Florida or the Florida Gulf
Island National Seashore.
We believe that the report actually underestimates the probability
of spills and coastal pollution since it used a high estimate of 240
million barrels of oil from the entire Lease Sale 181, and we are now
told that the smaller Domenici-Bingaman area will probably produce
almost 4 times more oil, 930 million barrels. Since the number and
probability of spills is directly proportional to the amount of oil
produced, the estimates of damage coming from the report are therefore
unrealistically low.
Nonetheless, the report concludes, ``Spills from all the launch
areas have an average probability of contacting the shoreline in the
study area of 31 to 59 percent within 30 days of occurrence. With
increased travel time, the complex patterns of wind and ocean currents
produce eddy-like motions of the oil spills and multiple opportunities
for a spill to make contact with any given environmental resource or
shoreline segment''. pg. 8.
Data shown below come directly from the report cited. We show the
`maximum conditional probabilities' because the maximum is based on
production of 240 million barrels rather than the lower value of 30
million barrels also used for projections in the report. Obviously, the
conditional probabilities of a spill contacting land would be even
higher if they had used the new projection of 930 million barrels of
oil. The table shows only land segments or resources where the
probability of being hit by oil is above 10%.
MAXIMUM PROBABILITIES (EXPRESSED AS A PERCENT CHANCE) THAT AN OIL SPILL
WILL CONTACT AN ENVIRONMENTAL RESOURCE OR LAND SEGMENT WITHIN 3, 10, OR
30 DAYS FOR TOTAL SALE AREA
------------------------------------------------------------------------
Area or environmental resource 3 days 10 days 30 days
------------------------------------------------------------------------
U.S. Shoreline...................... 28 53 63
Alabama State Offshore Waters....... 26 29 29
Flower Garden Banks................. 3 11 13
Eastern LA State Waters............. 5 19 22
Mobile Bay.......................... 12 13 13
Florida Panhandle State Offshore 18 25 27
Waters.............................
Land Segment 24 (Alabama-Florida 18 21 21
border)............................
------------------------------------------------------------------------
Source: the Oil-Spill Risk Analysis: Gulf of Mexico Outer Continental
Shelf (OCS) in Support of the Environmental Impact Statement (EIS) for
Proposed Lease Sale 181, Department of Interior, Minerals Management
Service, Environmental Division, OCS Report MMS 2001-007, Table 4A,
pg. 24. NB: Only resources or segments with a 10% chance or higher of
having oil spill contact are listed here.
Our conclusion based on this MMS report which we now believe
substantially underestimates the likelihood of an oil spill reaching
coastal resources is that there will be oil spills of significant size
(above 1,000 barrels) and that some of those spills will strike the
coasts.
Catastrophic Events
When hurricanes strike the Gulf Coast they can generate wind in
excess of 125 mph. Last summer's hurricanes Ivan, Katrina, and Rita
were a testament to the awesome power that these storms have to damage
or destroy offshore and onshore oil and gas facilities. The Incident
Summary from NOAA's Office of Response and Restoration estimates an
actual release of 7 million gallons of oil into the Gulf from at least
44 sites on land. By comparison, the Exxon Valdez oil spill, the
largest one in U.S. history, dumped about 11 million gallons of oil
into the Prince William Sound of Alaska.
In 2005, the National Response Center which is supposed to receive
reports from all Federal agencies about oil and hazardous material
spills reported 1,896 incidents from pipelines and 1,395 incidents from
platforms.
According to the Mobile Register in a September 21, 2005 story
titled, ``Offshore Rigs Not Built to Handle Strongest Storms'' which
based on information from Federal reports, there were at least 64
spills associated with Gulf platforms following Katrina. Katrina
destroyed 46 platforms and significantly damaged another 16, according
to the American Petroleum Institute.
Some drilling rigs and platforms sank and disappeared, others
became unanchored and floated way only to crash into bridges or the
shore. Apparently, according to the Mobile Register article, most
drilling rigs and production platforms are not designed to withstand
the force of Category 5 hurricanes like Katrina that generate 100+ plus
waves and 140 mph winds. Despite assurances to Congress, apparently the
standards for oil rigs and platforms only mandate a design that would
resist hurricanes between a Category 2 and 3 in strength. No wonder so
many assets were damaged, blown away, or entirely lost.
A few specifics from a Bradenton Herald article of December 21,
2005 entitled ``Hurricanes Wreak Environmental Disaster, Raising
Concerns of Oil's Future''. It reported that a Transocean drilling rig
drifted for 80 miles before it was captured; another rig beached on
Dauphin Island. The Mars platform, which is twice as tall as the Empire
State Building, weighs 70 million pounds, and gathers oil from 16 wells
was crippled by Katrina. During hurricane Ivan in 2004, a Taylor Energy
platform sank and spilled 17,000 gallons of oil 19 miles off the LA
coast.
Since November there have been at least three ship collisions
between floating or submerged oil rig/platform debris in the Gulf. On
November 11, 2005, one sunken platform ripped a 35 foot long hole in
the hull of a double hulled tanker in the Gulf in November which
released an estimated 1-3 million gallons of heavy fuel oil. This is
one of the largest spills ever in the Gulf.
While seabed safety valves typically stop undersea wells from
leaking if the platform above is damaged, this can't be easily done for
pipelines. When large storms hit, the underwater pipelines can be torn
apart or damaged so that they leak. Many of the huge oil slicks on the
Gulf after the recent hurricanes may come from pipeline leaks.
Attached to the back of this testimony are pictures taken from
radar satellites of the Gulf of Mexico shortly after Katrina hit on
September 2 and following days. The material was collected and
interpreted by and organization called SkyTruth. The pictures can be
found at www.skytruth.com. What they show is extensive oil slicks which
appear to emanate from oil platforms, pipelines and shore facilities.
The oil slicks covered over 500 square miles or over 300,000 acres of
the Gulf on September 2nd which was three or four days after the
hurricane struck.*
---------------------------------------------------------------------------
* The pictures have been retained in committee files.
---------------------------------------------------------------------------
WHAT'S AT STAKE ON THE FLORIDA COAST
What's at stake on the Florida Coast if oil from spills or storm
related accidents hit the shore is clear. The western coast of Florida
has an immense tourist economy based, in large part, on having clean
beaches and a clean Gulf of Mexico to boat and fish in. The whole state
had an estimated $550 billion gross state product in 2003 that is
heavily dependent on tourism. In fact, approximately 60 million
tourists visit Florida each year. Because visitors pay so much in sales
and use taxes, the state has been able to avoid an income tax. Coastal
property values, coastal tourism, and the multiplier effects of those
expenditures are a huge part of Florida's economy.
According to the American Sportfishing Association, sportfishing
generated $7.5 billion dollars of activity in Florida in 2001, much of
which occurred in saltwater. Commercial fishery landings in 2001 were
worth almost $120 million.
The eastern Gulf coastal waters are also home to a number of
important environmentally sensitive areas like the Big Bend Seagrass
Area and Tortugas Ecological Reserve. These reserves and coastal
shoreline host a number of environmentally sensitive species such as:
Sea Turtles
Whooping Cranes
Bald Eagles
Brown Pelicans
Manatees
Important beach areas include the: Florida Panhandle, the Big Bend
area, Southwest Florida, and Ten Thousand Islands. Al these could be
effected by a large oil spill in the eastern Gulf with the beaches of
the Florida Panhandle most at risk.
ALTERNATIVES TO DRILLING IN LEASE SALE 181
If this country were to adopt quite straightforward energy
conservation policies and techniques like improving the fuel economy of
cars and trucks, providing incentives for better energy saving
appliances and lighting, etc.; and if the country was exploiting even
modest amounts of clean, alternative energy like wind and solar power,
then drilling in environmentally sensitive places like the eastern Gulf
of Mexico for the last drops of oil wouldn't be necessary. But we waste
so much energy today. We believe the government and Congress should
invest their effort and our dollars in energy conservation programs and
clean energy rather than in drilling debates.
There is some good news on this because some states have been quite
busy on the renewable portfolio issue. By 2017, the renewable portfolio
standards already enacted by the states will produce as much renewable
power as would be produced by gas fired powerplants using 0.6 TCF of
gas per year. That's twice as much gas annually than the amount that
the Domenici-Bingaman bill would produce from 181. It's indicative of
what states and the federal government could do on conservation and
renewable energy to replace production of gas and oil from places like
181.
CONCLUSION
U.S. PIRG and Florida PIRG both strongly oppose this energy bill.
We feel that the natural gas to be found there will make, at best, a
very marginal difference in the supply or price of gas in the future.
The natural gas would not be available any time soon to address more
immediate concerns about home heating costs, the price of nitrogen
fertilizer, or feedstocks for chemical plants. No one can lease,
explore, drill, and produce product quickly enough to address these
real concerns in the short term. We suggest that a better way to
address these concerns more quickly than by drilling in 181, would for
this committee to look at a much larger emphasis on energy conservation
and use of renewable energy supplies.
We do not believe that Florida's beaches, coastal environment and
marine resources should be sacrificed to lower the price of natural gas
by pennies five to ten years from now.
The Chairman. Thank you. I know that we're going to get a
chance to inquire, so I just want to make an observation. By my
failure to ask and silence, I don't want the record to think
that I agree to the series of questions and answers that you
made, because I don't agree with your hypothesis. If it was as
you say, the answers might be your way. But if it is not as you
say, the answers might be another way. So, these percentages
you talk about, I'm not sure that I agree with. So, I just want
to make sure that--and I think I could put people up here
saying there are different ones, but I thank you for your
testimony.
Mr. Gravitz. Thank you, sir.
The Chairman. Mr. Parker.
STATEMENT OF TIMOTHY PARKER, SENIOR VICE PRESIDENT, DOMINION
EXPLORATION & PRODUCTION, INC., HOUSTON, TX
Mr. Parker. Thank you, Mr. Chairman. It's my honor to be
here today. My name is Tim Parker. I'm senior vice president of
exploration and production for Dominion E&P. Dominion is one of
the largest independents in the United States and is
aggressively engaged in the search for new natural gas and oil
supplies for our Nation.
Today, I am speaking on behalf of Dominion, but also for
the Domestic Petroleum Council, the Independent Petroleum
Association of America, the American Petroleum Institute, the
National Ocean Industries Association, the Natural Gas Supply
Association, the U.S. Oil and Gas Association, the National
Petrochemical & Refiners Association and the International
Association of Drilling Contractors.
There are three key points to my testimony today. First,
additional leasing in the area as directed by S. 2253 is a
crucial part of an overall program that we believe must be
carried out to increase natural gas supplies for our Nation.
Even the prospect of such supplies can have a positive and
calming effect on the natural gas market. In my opinion, there
is no single better place to grow production in the short- and
mid-term timeframe than the eastern gulf. And because of our
recent experience in the area, we have a good deal of
confidence in the resource estimates. Conservative estimates of
how much natural gas may be found in the area are in the range
of 5 TCF. And if my past experience is a guide, actual
production could end up being much more than that.
Second, the area included for leasing can be developed with
high technology such as that already being applied in the
adjacent leased area of the original Sale 181, bringing timely
supplies to consumers. Today's offshore technology allows us to
produce more energy with fewer facilities and less impact, even
visual impact, than ever before. The graphic on the stand to
the left--your right, excuse me, shows the Independence Hub
project, which Ms. Burton previously mentioned, and which
Dominion and its partners are in the process of developing. We
will bring that project online in 2007. The graphic shows that
overlaying on the area of Washington, DC. This facility will be
capable of producing one billion cubic feet of gas per day,
enough to serve almost three and a half million homes.
And as you can see, the wells connected to the floating
platform by subsea flow and control lines would reach as far
north as Columbia, Maryland, and as far south as
Mechanicsville, Maryland. The Independence Hub sets many new
records for offshore production, including the world's deepest
floating production system, the world's deepest pipeline and
the world's largest integrated subsea system, shown on the
graphic to your left. Initially, production from 15 wells will
flow to the platform from nine different fields. Total cost of
this project, including wells drilled in the subsea connection
system, will exceed $2 billion. I should point out, however,
that I consider the proposed 181 Area to be a relatively low-
risk resource. To date, the success rate in the adjacent area,
using the exact same 3-D technology that we've used in the
original 181 Area, has yielded a wildcat success rate of about
50 percent, which is far better than the traditional one in
eight kind of success rates that have been achieved
historically.
Third point, the offshore technology applied by U.S.
companies today worldwide has demonstrated a record of
environmental compatibility that was displayed most vividly by
there not having been a single significant offshore exploration
and production facility oil spill caused by the otherwise
devastating hurricanes Katrina and Rita. This was despite the
fact that the storms moved through a core area of offshore
operations, delivering sustained winds of more than 170 miles
per hour and towering waves. The latest technology and sound
management practices have made the U.S. offshore industry the
envy of the world. Our environmental record truly is superb.
Within that framework, let me note two facts.
First, we expect this to be a gas-prone area. A non-
associated natural gas production, such as we would expect in
the area, would have no potential for crude oil-related
incidents. Second, there has not been a single incident
involving a significant oil spill from a U.S. exploration and
production platform in more than 25 years, since 1980, in fact.
In conclusion, opening up the remainder of the 181 Area,
while critically important, is only one part of the long-term
natural gas supply solution.
Other necessary actions, some of which are underway and
others of which need more prompt attention, include finishing
the restoration of production shut down by last year's
hurricanes in the Gulf of Mexico, improving processes and
adequately funding permitting for Federal onshore natural gas
exploration and production, opening other promising areas on
the OCS, construction of the pipeline from Alaska, and
constructing additional LNG infrastructure.
I commend the sponsors of S. 2253 and urge the committee to
move it and other supply legislation swiftly through the
legislative process. Delay in dealing with this problem has
already cost consumers billions of dollars over the past
several years, but the good news is that we think that this is
a solvable problem. Today's hearing is a start, and I'll pledge
our industry's and my company's support to the effort. Thank
you very much, Mr. Chairman.
[The prepared statement of Mr. Parker follows:]
Prepared Statement of Timothy Parker, Senior Vice President, Dominion
Exploration & Production, Inc., on Behalf of Domestic Petroleum
Council, Independent Petroleum Association of America, American
Petroleum Institute, National Ocean Industries Association, Natural Gas
Supply Association, U.S. Oil and Gas Association, National
Petrochemical & Refiners Association, and International Association of
Drilling Contractors
Mr. Chairman and members of the Committee, my name is Tim Parker
and I am Senior Vice President of Dominion Exploration and Production,
Inc.
Dominion is one of the largest U.S. independents that are among the
most active in the search for, and development and production of, new
natural gas and oil supplies for our nation.
Today I am speaking on behalf of Dominion, but also for the
Domestic Petroleum Council, the Independent Petroleum Association of
America, the American Petroleum Institute, the National Ocean
Industries Association, the Natural Gas Supply Association, the U.S.
Oil and Gas Association, the National Petrochemical & Refiners
Association and the International Association of Drilling Contractors.
Dominion's experience includes an important project in the area
adjacent to that contemplated to be leased by the provisions of S.
2253. In an area leased under the original 181 sale, Dominion and its
partners will bring on-line in 2007 the Independence Hub project, a
production platform in 8,000 feet of water capable of processing up to
1 billion cubic feet of gas per day--enough to serve almost three and a
half million homes. So, as you see, we believe we have a unique ability
to address today's subject. I will focus more on Independence Hub later
in my testimony.
The key points of my testimony today are:
Additional leasing in the original Sale 181 area as directed
by S. 2253 is a crucial part of the overall program that we
believe must be carried out to increase natural gas supplies
for our nation. Even the prospect of such supplies can have a
positive and calming effect on the natural gas market.
The area included for leasing holds very significant
additional natural gas resource potential that industry can
develop with high technology such as that already being applied
in the adjacent leased area of the original Sale 181--bringing
timely supplies to consumers.
The offshore technology applied by U.S. companies today
worldwide has demonstrated record of environmental
compatibility that was demonstrated most vividly by there not
having been a single significant offshore exploration and
production facility oil spill caused by the otherwise
devastating hurricanes Katrina and Rita.
THE RESOURCE
Almost everyone agrees that the 181 area in the Gulf is the best
single prospect we have in the U.S. for significant new near-term
exploration and production. The Minerals Management Service estimated,
at the time, that the original Sale 181 had the potential to produce
7.8 TCF of gas and 1.9 million barrels of oil.
However, when the size of the sale was reduced from approximately
5.9 million acres to 1.5 million acres, much of that resource was
placed off limits. Conservative estimates of how much natural gas may
be found in the area withdrawn are in the range of 5 TCF and, if past
experience is a guide, actual production could end up being much more
than that.
It must also be pointed out that the proposed 181 area is
considered a relatively low-risk resource. To date, the success rate in
the adjacent area, using the same 3D seismic technology as would be
applied to the proposed area, is over 50%, far greater than traditional
wildcat exploration.
A footnote with respect to the resource potential in the area
contemplated for leasing in S. 2253: It may be much bigger that we can
even imagine today.
As many of you know, in the parts of the Gulf of Mexico where we
have been allowed to buy leases and explore, we have produced three
times as much gas as we once thought was there. And the current
resource estimate, according to the MMS, is that there is nearly five
times as much remaining to be found. The more we explore, the more we
know.
In addition, there are significant additional potential resources
outside the area contemplated for leasing by S. 2253 that could be
developed safely and that we ignore to our consumers' disadvantage. To
the north, for example, in what is called the ``stovepipe'' area of the
original Sale 181 area, there is natural gas potential that is close to
existing transportation infrastructure--and still further from the
Florida coast than other existing production. Surely there must be a
way to reasonably consider how those resources might be added to our
national energy portfolio
THE ROLE OF TECHNOLOGY
Today's offshore technology allows us to produce more energy with
fewer facilities and less impact--even visual--than ever before. This
graphic shows the Independence Hub project I mentioned earlier,
overlain on a map of the Washington, DC area. As you can see, the wells
connected to the floating platform by subsea flow and control lines
would reach as far north as Columbia, MD and as far South as
Mechanicsville, MD.
Independence Hub sets many new records for offshore production
including the world's deepest floating production system, the world's
deepest pipeline, and the world's largest integrated subsea sytem--
shown here.
Initially, production from 15 wells will flow to the platform. This
cutting edge technology doesn't come cheap, however. Total cost of this
project, including wells drilled and the subsea connection system will
exceed $2 billion.
ENVIRONMENTAL PROTECTION
The outstanding environmental record of U.S. companies operating
offshore around the world is well recognized as . . . technologies are
allowing the offshore industry to venture into deeper waters than ever
before, while protecting marine life and subsea habitats . . .\1\--even
in the most challenging areas such as the Arctic and North Sea and in
otherwise catastrophic weather.
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\1\Clinton Administration DOE report: Environmental Benefits of
Advanced Oil and Gas Exploration and Production Technology, 1999.
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Off the part of our coast in which exploration and production is
allowed, the safety of our operations was recently demonstrated in the
most severe hurricane situations. Though many of the exploration and
production facilities in the Gulf of Mexico were severely damaged or
destroyed, the high-tech safety and environmental protection equipment
and processes worked.
Here's a brief look at why we can be proud of our environmental
record.
Careful scientific environmental study and operational planning
always precede such activity. For example, our offshore geophysical
companies, which conduct seismic work that allows us to ``see''
geologic structures beneath the seabed, have many procedures and
practices designed to avoid harm to marine mammals, including:
Monitoring for the presence of animals of concern
Shutdown or no start-up when they are too close
Slow, gradual ramp-up of operations just in case
According to the International Association of Geophysical
Contractors, citing numerous government and private studies, no
physical harm to whales or dolphins has ever been shown as a result of
industry seismic operations.
During exploration, jack-up or semi-submersible rigs and drill
ships have multiple systems and physical barriers to ensure that no
spill occurs. Most important, along with multiple, redundant remote
control systems, are ``blowout preventers'' which for deepwater wells
are installed on the well at the seabed and are capable of immediate
closure in the event of any emergency.
Once a field has been discovered and is in the development or
production stage, completed wells flow through permanent ``Christmas
tree'' systems--increasingly on the seabed for subsea developments as
opposed to on a surface facility--of multiple valves to control oil and
gas flow. These may be operated from tens or even a hundred miles away
with multiple, redundant communications systems.
Finally, a ``downhole safety valve'' is installed in the well
itself below the seabed to provide an added protection barrier in the
event of some catastrophic event's damaging the Christmas tree.
To summarize, the latest technology and sound management practices
have made the U.S. offshore industry the envy of the world. Its
environmental record is superb:
Non-associated natural gas production such as we would
expect in the Sale 181 lease area has no potential for crude
oil-related incidents.
There has not been an incident involving a significant oil
spill from a U.S. exploration and production platform in 25
years (since 1980).
The last such U.S. incident in which oil reached shore occurred in
1969 (in Santa Barbara Channel)--and we can find no documented evidence
of oil from an exploration and production facility incident in U.S.
waters having reached shore from more than about 12 miles away.
Today's modern technology includes such environmental
protections as automatic subsea well shut-in devices, including
sub-seabed safety valves.
Facility and stand-by cooperative spill containment and
cleanup technology provide multiple environmental protection
layers.
As mentioned earlier, the industry's performance during last
summer's hurricanes, which moved through a core area of offshore
operations, is instructive. Despite sustained winds reaching 170 miles
per hour and towering waves and the resulting destruction of numerous
platforms and rigs, there was no significant spill from production
wells.
Because today's weather forecasting capabilities provide ample
lead-time as storms approach, operators are able to follow routine
shutdown and evacuation procedures. In the case of the Katrina and Rita
hurricanes, 100% of oil production was shut-in ahead of time and 94%
and 85% of natural gas production was shut-in as the respective storms
hit.
CONCLUSION
Opening up the remainder of the 181 area, while critically
important, is but one part of the long-term natural gas supply
solution.
Other necessary actions--some of which are underway and others of
which need more prompt attention--include finishing the restoration of
production shut down by last year's hurricanes in the Gulf of Mexico,
improving processes and adequately funding permitting for federal
onshore natural gas exploration and production, opening other promising
areas on the OCS, construction of the pipeline from Alaska, and
constructing additional LNG infrastructure.
I commend the sponsors of the bill and urge the Committee to move
it and other supply legislation as swiftly through the legislative
process as possible. Delay in dealing with this problem has cost
consumers billions of dollars in recent years. Had the original 181
Sale gone through as planned, we would likely today have two or three
more Independence Hub type projects preparing to deliver much needed
energy to American consumers.
Thank you.
The Chairman. Thank you. I wish we had time. We may at
another time. I don't mean--not necessarily imposing on you,
but it is kind of important that sometime more people
understand how the technology has changed.
Mr. Parker. Yes.
The Chairman. And when you look at the early stages of
development off Louisiana, off Alabama, and it looks like we
just went out there and just built some big rigs like we have
over there in the Permian Basin and in Texas and New Mexico.
Mr. Parker. Yes.
The Chairman. I don't know how many. They have to have a
hundred of them out there. You just see them all over the
place.
Mr. Parker. Right.
The Chairman. What you're talking about here, if I read
that drawing there--you are using that as an example?
Mr. Parker. Yes, indeed.
The Chairman. So, the little red block is the footprint?
Mr. Parker. That's correct.
The Chairman. So, when we're in ANWR, and we say a
footprint of so many thousand--so many hundreds of acres,
that's the footprint that would be put out there by the
platform?
Mr. Parker. Correct, over a distance of 55 miles from
furthest north to furthest south. So, it's a huge area that
we're draining with this one facility.
The Chairman. Okay, so that one footprint drains all--takes
all those outliers that, indeed, are red areas, smaller,
those--each of those are wells at the end of that?
Mr. Parker. Correct.
The Chairman. And that is all--automatically come back to
the delivery point?
Mr. Parker. Correct.
The Chairman. And it goes out from there to pipelines?
Mr. Parker. Correct.
The Chairman. Now, how many of these big ones, the most
modern technology, how many do we have offshore? I don't
imagine we have hundreds of them. It must just be scores of
them, right?
Mr. Parker. No, sir, it's--I don't have the exact number,
but it's certainly less than 20.
The Chairman. All this production that we're talking about
from these new footprints out there comes from that small
number?
Mr. Parker. Yes, sir.
The Chairman. What do you think might--maybe I shouldn't
ask because you don't know, but if this were open, what's your
guess if the risk was--came up on the high side and it came
good, how many of these do you think would be out there? Let's
strike the question. I think we should get some authentic
answers.
Mr. Parker. Okay.
The Chairman. We'll try to do that and get it in the record
and ask a number of companies.
Mr. Parker. Okay. If I can ever be of help, I'll be happy
to come back.
The Chairman. All right. Now, we're going to go to you, Mr.
Skains. Please tell us who you are and why you're here.
STATEMENT OF THOMAS SKAINS, CHAIRMAN, PRESIDENT AND CEO,
PIEDMONT NATURAL GAS COMPANY, CHARLOTTE, NC, ON BEHALF OF THE
AMERICAN GAS ASSOCIATION
Mr. Skains. Good morning, Mr. Chairman and members of the
committee. My name is Tom Skains, and I'm chairman, president
and CEO of Piedmont Natural Gas headquartered in Charlotte,
North Carolina. Piedmont provides natural gas distribution
service to nearly one million residential, commercial and
industrial customers and municipalities in North Carolina, the
upstate of South Carolina and the Nashville, Tennessee,
metropolitan area.
I am here today on behalf of the American Gas Association.
AGA represents 197 local energy utilities that deliver gas to
over 56 million homes, businesses and factories throughout the
country. I should note that local gas utilities are on a
regulated rate of return for the gas delivery service we
provide. By law, we do not profit from higher natural gas
commodity prices. In fact, it hurts our business. We want what
our customers want, adequate supplies at affordable prices. I
thank you for the opportunity to discuss the critical natural
gas supply issue with you today. It is crucial that Congress
act decisively and swiftly to increase the supply of natural
gas in the United States.
Natural gas production has not kept pace with demand for 5
years now. And as a result, natural gas prices have risen
dramatically, as I know you know. In fact, the average
residential customers are paying roughly twice as much for gas
today as they did in 1999. The EIA predicted last fall that
prices this winter would be almost 50 percent higher than last
winter. That forecast may have held true had winter
temperatures to date not been 14 percent warmer than normal,
including the warmest January on record. Even so, EIA is still
forecasting a 24 percent increase in residential heating bills
this winter. These high prices strain the budgets of all
homeowners, and even worse, many low-income households must
choose between heat and other life necessities.
There are State and Federal programs such as LIHEAP to
assist the most needy, but LIHEAP is not adequately funded and
only provides assistance to about 15 percent of those who are
eligible, and it does not provide assistance to the average
working family. The strain of high prices is no less painful to
large business customers.
In the chemical industry, for example, we are told that
more than 100,000 jobs have been lost since 2000. Plants are
shutting down, and jobs are being lost permanently. We must
make industrial production attractive once again in this
country. The natural gas market was very stable in the 1980's
and 1990's. Prices tended to fluctuate around $2. Just within
the past year, we saw $6 gas prices in June jump to $9 in
August, largely as the result of hot weather that pushed more
gas into electric generation. Prices spiked to $14 as a result
of the hurricane disruptions in the Gulf of Mexico in
September. They fell to about $11 in the early winter, but a
cold snap in December shot them back up to $15. Today, they're
back in the $7 range due to the warm weather in January.
My point from all of this is that natural gas prices today
respond immediately and dramatically to marginal changes in
supply and demand, including weather. There is no longer any
slack in the system. The industry is running at full throttle,
and therefore, a sudden change in supply and demand at the
margin can mean a dramatic change in price. I urge you to act
here and now to begin to rectify the supply and demand
imbalance. Opening Lease Area 181 is an important step in the
right direction.
In my view, there is absolutely no question that we must do
this. Natural gas is produced in a safe, efficient and
environmentally responsible fashion. We're talking about
natural gas activity 100 miles or more offshore. It will not be
seen, heard nor smelled, no tankers, no barges, no spills. I
live in a coastal State, and I appreciate the need to protect
our beaches, but I know in this instance, this is no threat.
Let me also say that energy efficiency and conservation must
continue to play a key role in easing the price pressure in
natural gas markets.
We advocate and pursue these measures as a part of the
solution. Natural gas customers throughout the country have
been lowering their thermostats, tightening their homes, and
installing more efficient gas appliances in response to higher
energy costs.
In fact, the average residential natural gas household
today uses roughly 25 percent less gas than in 1980, but energy
efficiency alone is not the answer. Prices will only come down
when we increase the supply of natural gas in the marketplace
to meet the growing demand for our product. There are a number
of steps that must be taken in order to bring the natural gas
market back into balance. And I understand that Congress does
not have full control over all of these, but I urge you, on
behalf of the natural gas consumers across the Nation, to act
aggressively on all issues that could increase our gas
supplies. We must unlock more domestic sources of natural gas,
both onshore and offshore. We must begin construction of a
natural gas pipeline from Alaska. We can't afford to wait
another 30 years. We must build new LNG-receiving terminals,
and not just in the gulf coast. Hurricanes Katrina and Rita
taught us important lessons about the need for geographical
diversity for our Nation's natural gas supply.
Further, given our supply constraints, it's not wise or
efficient to continue to rely on natural gas to provide 90
percent or more of our new electric generation capacity. The
mix of fuels used to generate electricity must be diversified,
including increased use of solar and wind technologies, the use
of clean coal and coal-gasification technologies and the use of
nuclear power. The Lease 181 matter before you today is not a
total solution. There is no single solution, but it is a
meaningful start. I urge you not to be swayed by people who
tell you that this is not enough gas to make a difference. That
is not true. Five trillion cubic feet of natural gas could meet
the needs of roughly five million households for 15 years. I
would prefer that you act today comprehensively on all of the
solutions available to this Nation to solve our energy
problems. But if you cannot, I urge you to act decisively on
the Lease 181 issue before you. Thank you, and I'll be happy to
respond to any questions you may have.
[The prepared statement of Mr. Skains follows:]
Prepared Statement of Thomas Skains, Chairman, President and CEO,
Piedmont Natural Gas Company, Charlotte, NC, on Behalf of the American
Gas Association
EXECUTIVE SUMMARY
AGA supports opening Lease Area 181. AGA also supports
unlocking other domestic sources of natural gas, both onshore
and offshore. Developing the Lease 181 Area is the next
excellent opportunity to increase natural gas production from a
producing area where infrastructure exists to move the gas to
market. Trillions of cubic feet of natural gas are likely to be
developed from the area. Pipeline infrastructure that moves gas
to market is nearby and can be expanded to serve the gas
gathering needs of successful producers. Individual well
productivity is expected to be high and thus the impact of
developing this gas resource to consumers would be immediate.
Natural gas utilities, as is the case with our customers, do
not benefit from higher natural gas prices. We make our money
on the delivery, not the production, of natural gas, which is
regulated by each state we serve. We support legislation and
regulations to increase the supply of natural gas in order to
moderate its price to consumers.
The average residential gas customer is paying roughly twice
as much for natural gas today as he or she did in 1999. For
larger customers, the strain of higher gas prices has resulted
in job losses and plant closures.
Natural gas markets have been extremely tight for the past
five years, with supply unable to keep pace with rising demand
and prices reflecting the market situation. New supply
initiatives are crucial to correcting this imbalance, as are
demand side actions. Put in other terms, it is not good public
policy to let weather dictate who heats their home, which plant
operates or shuts down or who keeps or looses their job.
Natural gas demand is projected to increase by 37 percent
over the next 15 years.
Domestic natural gas production accounts for over 80 percent
of the natural gas supplied to consumers in the United States.
Sustaining or growing gas production is a crucial part of
meeting consumer home heating, commercial or other needs at
reasonable costs. Opening Lease Area 181 is a step in the right
direction.
New sources of gas supply must also be made available to
natural gas consumers. Supplies of liquefied natural gas and
pipeline gas from Alaska must be aggressively pursued.
Even with natural gas imports from our North American
neighbor, Canada, and even with increases in liquefied natural
gas imports from other parts of the world, domestic production
remains the preeminent source of natural gas to consumers and
cannot be ignored.
Public policy makers must consider both energy and
environmental goals when developing regulations that impact
natural gas resource development. That is, environmental goals
must be achieved in concert with the pursuit of a greater
diversity in natural gas supply sources.
Given that natural gas supplies are constrained, it is not
wise to continue to rely on natural gas to provide 90 percent
or more of our new electricity generation capacity. AGA
supports efforts to diversify the electricity generation fuel
mix.
INTRODUCTION
Thank you for the opportunity to testify before the subcommittee.
My name is Tom Skains and I am the chairman, president and CEO of
Piedmont Natural Gas located in Charlotte, North Carolina. Piedmont
provides natural gas service to nearly 1 million households, commercial
and industrial customers and municipalities in North Carolina, South
Carolina and Tennessee.
I am testifying today on behalf of the American Gas Association,
which represents 197 local energy utility companies that deliver
natural gas to more than 56 million homes, businesses and industries
throughout the United States. Natural gas meets one-fourth of the
United States' energy needs and it is the fastest growing major energy
source. As a result, adequate supplies of competitively priced natural
gas are of critical importance to AGA and its member companies.
Similarly, ample supplies of reasonably priced natural gas are of
critical importance to the millions of consumers that AGA members
serve. AGA speaks for those consumers as well as its member companies.
The natural gas industry is at a critical crossroads. Natural gas
prices were relatively low and very stable for most of the 1980s and
1990s. Wholesale natural gas prices during this period tended to
fluctuate around $2 per million Btus (MMBtu). Today, however, natural
gas markets are supply constrained and even small changes in weather,
economic activity or world energy trends result in significant
wholesale natural gas price fluctuations. Today our industry no longer
enjoys prodigious supply; rather, it walks a supply tightrope, bringing
with it unpleasant and undesirable economic and political
consequences--most importantly high prices and higher price volatility.
Both consequences strain natural gas customers--residential,
commercial, industrial and electricity generators.
As this committee well knows, energy is the lifeblood of our
economy. Millions of Americans rely upon natural gas to heat their
homes, and high prices are a serious drain on their pocketbooks. High,
volatile natural gas prices also put America at a competitive
disadvantage, cause plant closings, and idle workers. Directly or
indirectly, natural gas is critical to every American.
The consensus of forecasters is that natural gas demand will
increase steadily over the next two decades. This demand growth will be
driven by the electricity generation market, as natural gas has been
the fuel of choice for over 90 percent of the new generation units
constructed over roughly the past decade. In part, the dominance of
natural gas in this market is attributable to environmental regulations
that promote the clean-burning characteristics of natural gas. The
overall growth in gas usage will occur because natural gas is the most
environmentally friendly fossil fuel and is an economic, reliable, and
homegrown source of energy. It is in the national interest that natural
gas be available to serve the demands of the market. The federal
government must address these issues and take prompt and appropriate
steps to ensure that the nation has adequate supplies of natural gas at
reasonable prices.
NEW NATURAL GAS RESOURCES FROM LEASE AREA 181
Drilling for natural gas is expensive and time consuming. The
process of discovery, reserves development and flowing gas to consumers
can take years to complete, particularly in rank wildcat areas.
However, when new gas resources are located near existing production,
often the lead times for new supplies can be reduced. Such would be the
case with new gas discoveries in Lease Area 181.
Developing the Lease 181 Area is the next excellent opportunity to
increase natural gas production from a producing area where adjacent
infrastructure exists to move the gas to market. The volume of
potential gas supplies estimated is significant. Trillions of cubic
feet of natural gas may be available for development from the area.
Pipeline infrastructure that moves gas to market is adjacent and is
currently serving other central Gulf of Mexico production and can be
expanded to serve the gas gathering needs of successful producers in
Lease Area 181. Individual well productivity is expected to be high and
thus the impact of developing this gas resource to consumers would be
immediate.
Despite the hardships imposed by high natural gas prices, there was
a buy-back of federal leases where discoveries had already been made in
the Destin Dome area (offshore Florida) of the eastern Gulf of Mexico.
We do not understand or agree with that decision. To deny leasing in
the 181 Area, which is further from the coast than the Destin Dome (100
miles minimum), would be even more difficult to justify to natural gas
consumers. With that said, the following information addresses in more
detail current conditions in U.S. natural gas markets.
NATURAL GAS MARKET CONDITIONS
Stability in the natural gas marketplace is crucial to all of
America for a number of reasons. It is imperative that the natural gas
industry and the government work together to take significant action in
the very near term to ensure the continued economic growth,
environmental protection, and national security of our nation. The
tumultuous events in energy markets over the last several years serve
to underscore the importance of adequate and reliable supplies of
reasonably priced natural gas to consumers, to the economy, and to
national security.
There has been a crescendo of public policy discussion with regard
to natural gas markets since the ``Perfect Storm'' winter of 2000-2001,
when tight supplies of natural gas collided with record cold weather to
yield record natural gas home-heating bills. The vulnerability of the
natural gas market to weather was demonstrated again in the summer of
2005 when weather that was 18 percent warmer than normal pushed more
gas into electricity generators to meet air conditioning demand, and
yet again in September when multiple hurricanes in the Gulf of Mexico
eliminated nearly 25 percent of our total gas supply for a brief
period, with lingering impacts even today. The hot summer pushed
natural gas prices upward from the $6.00 per MMBtu level to nearly
$10.00, the hurricanes resulted in prices that fluctuated between
$12.00 and $14.00 per MMBtu, and a brief cold snap in December produced
a price spike to roughly $15.00 per MMBtu. Only a substantially warmer
than normal 2005-2006 winter heating season has dampened the impact of
these price increases to consumers. Clearly, natural gas markets are
higher and more volatile than at any point in history. Moreover, there
is no sign that this market volatility will abate in the near future.
It is harmful to individual families and to the entire U.S. economy
for natural gas prices to remain both high and volatile. Unless we make
the proper public policy choices--and quickly--we will face many more
difficult years with regard to natural gas prices. Of course, when
families pay hundreds of dollars more to heat their homes, they have
hundreds of dollars less to spend on other things. Many families are
forced to make difficult decisions between paying the gas bill, paying
for medicines or paying the rent. There are, of course, state and
federal programs such as LIHEAP to assist the most needy. But LIHEAP
only provides assistance to about 15 percent of those who are eligible,
and it does not provide assistance to the average working family. These
price increases have affected all families--those on fixed incomes, the
working poor, lower-income groups, those living day to day, and those
living comfortably. We support the full funding of LIHEAP at the $5.1
billion level that is authorized in the Energy Policy Act. In addition,
the Energy Policy Act contains a provision to establish a new and
innovative program that would allow the Department of Interior to
provide royalty gas at a discount to low-income consumers. While the
Department of Interior has expressed interest in establishing such a
program, it has determined the EPACT language does not grant clear
authority to proceed. We urge the committee to clarify this language.
The impact of unstable natural gas markets on U.S. businesses is
equally disturbing. Since natural gas prices began rising in 2000, an
estimated 78,000 jobs have been lost in the U.S. chemical industry,
which is the nation's largest industrial consumer of natural gas, both
for the generation of electricity at manufacturing plants and as a raw
material for making medicine, plastics, fertilizer and other products
used each day. Similarly, fertilizer plants, where natural gas can
represent 80 percent of the cost structure, have closed one facility
after another. Glass manufacturers, which also use large amounts of
natural gas, have reported earnings falling by 50 percent as a result
of natural gas prices. In our industrial and commercial sector,
competitiveness in world markets and jobs at home are on the line.
NATURAL GAS DEMAND GROWTH
In a study prepared for the American Gas Foundation in February of
2005, natural gas demand is projected to increase by 37 percent between
2003 and 2020 under a ``most likely'' energy scenario. Although higher
natural gas prices may moderate some of this projected demand growth,
including the growth in demand for gas-fired electricity generation, we
believe the fundamentals of this document remain sound and the basic
tenets are unchanged.
NATURAL GAS SUPPLY
For the past five years, natural gas production has operated full-
tilt to meet consumer demand. The ``surplus deliverability'' or ``gas
bubble'' of the late 1980s and 1990s is simply gone, as illustrated in
the graphic below* that compare actual natural gas production with
production capability (prepared by Energy and Environmental Analysis).
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* All graphics have been retained in committee files.
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Production facilities are operating at full capacity. No longer can
new demand be met by simply opening the valve a few turns. The valves
have been, and presently are, wide open.
America has a large and diverse natural gas resource; producing it,
however, can be a challenge. Providing the natural gas that the economy
requires will necessitate: (1) providing, in some cases, incentives to
bring the plentiful reserves of North American natural gas to
production and, hence, to market; (2) making available for exploration
and production the lands particularly federal lands--where natural gas
is already known to exist so gas can be produced on an economic and
timely basis; (3) ensuring that the new infrastructure that will be
needed to serve the market is in place in a timely and economic
fashion.
If we are to continue to meet the energy demands of America and its
citizens, and if we are to meet the demands that will they make upon us
in the next two decades, we must change course. It will not be enough
to make a slight adjustment or to wait three or four more years to make
necessary policy changes. Rather, we must change course entirely, and
we must do it in the very near future. Lead times are long in our
business, and meeting demand years down the road requires that we begin
work today.
We have several reasonable and practical options. It is clear that
continuing to do what we have been doing is simply not enough. In the
longer term we have a number of options:
First, and most importantly, we must work to sustain and increase
natural gas production by looking to new frontiers within the United
States. Further growth in production from this resource base is
jeopardized by limitations currently placed on access to it. For
example, most of the gas resource base off the East and West Coasts of
the U.S. and the Eastern Gulf of Mexico is currently closed to any
exploration and production activity. Moreover, access to large portions
of the Rocky Mountains is severely restricted. The potential for
increased production of natural gas is severely constrained as long as
these restrictions remain in place.
The graphic below shows how important sustaining domestic natural
gas production is to supplying consumers with the natural gas they
require. Even with natural gas imports from our North American
neighbor, Canada, and even with increases in liquefied natural gas
imports from other parts of the world, domestic production remains the
preeminent source of natural gas to consumers and can not be ignored.
To be direct, America is not running out of natural gas and it is
not running out of places to look for natural gas. America is running
out of places where we are allowed to look for gas. The truth that must
be confronted now is that, as a matter of policy, this country has
chosen not to develop much of its natural gas resource base. We doubt
that that many of the millions of American households that depend on
natural gas for heat are aware that this choice has been made on their
behalf.
It is imperative that energy needs be balanced with environmental
impacts and that this evaluation be complete and up-to-date. There is
no doubt that growing usage of natural gas harmonizes both objectives.
Finding and producing natural gas is accomplished today through
sophisticated technologies and methodologies that are cleaner, more
efficient, and much more environmentally sound.
Second, we need to increase our focus on non-traditional sources,
such as liquefied natural gas (LNG). Reliance upon LNG has been modest
to date, but it is clear that increases will be necessary to meet
growing market demand. Today, roughly 97 percent of U.S. gas supply
comes from traditional land-based and offshore supply areas in North
America. Despite this fact, during the next two decades, non-
traditional supply sources such as LNG will likely account for a
significantly larger share of the supply mix. LNG has become
increasingly economic. It is a commonly used worldwide technology that
allows natural gas produced in one part of the world to be liquefied
through a chilling process, transported via tanker, and then re-
gasified and injected into the pipeline system of the receiving
country. Although LNG currently supplies less than 3 percent of the gas
consumed in the U.S., it represents 100 percent of the gas consumed in
Japan.
LNG has proven to be safe, economical and consistent with
environmental quality. Due to constraints on other forms of gas supply
and increasingly favorable LNG economics, LNG is likely to be a more
significant contributor to U.S. gas markets in the future. It will
certainly not be as large a contributor as imported oil (nearly 60
percent of U.S. oil consumption), but it could account for 15-20
percent of domestic gas consumption 15-20 years from now if pursued
aggressively and if impediments are reduced.
It is unlikely that LNG can solve the entirety of our problem. A
score of new LNG import terminals have been proposed, some with
capacities in excess of 2.5 billion cubic feet per day. However, given
the intense ``not on our beach'' opposition to siting new LNG
terminals, a major supply impact from LNG may be a tall order indeed.
Third, we must tap the huge potential of Alaska. Alaska is
estimated to contain more than 250 trillion cubic feet of natural gas--
enough by itself to satisfy U.S. gas demand for more than a decade.
Authorizations were granted 25 years ago to move gas from the North
Slope to the Lower-48, yet no gas is flowing today nor is any
transportation system under construction. Indeed, every day the North
Slope produces approximately 8 billion cubic feet of natural gas that
is re-injected because it has no way to market. Alaskan gas has the
potential to be the single largest source of price and price volatility
relief for U.S. gas consumers. Deliveries from the North Slope would
not only put downward pressure on gas prices, but they would also spur
the development of other gas sources in the state as well as in
northern Canada.
Fourth, we can look to our neighbors to the north. Canadian gas
supply has grown dramatically over the last decade in terms of the
portion of the U.S. market that it has captured. At present, Canada
supplies approximately 14 percent of the United States' needs. We
should continue to rely upon Canadian gas, but it may not be realistic
to expect the U.S. market share for Canadian gas to continue to grow as
it has in the past or to rely upon Canadian new frontier gas to meet
the bulk of the increased demand that lies ahead for the United States.
The pipelines under consideration today from the Prudhoe Bay area
of Alaska and the Mackenzie Delta area of Canada are at least 5-10
years from reality. They are certainly facilities that will be
necessary to broaden our national gas supply portfolio. We must
recognize, however, that together they might eventually deliver up to 8
billion cubic feet per day to the lower 48 States. That is less than 10
percent of the natural gas envisioned for the 2025 market.
There is much talk today of the need for LNG, Alaskan gas, and
Canadian gas. There is no question that we need to pursue those
supplies to meet both our current and future needs. Nonetheless, it is
equally clear that, in order to meet the needs of the continental
United States, we will need to continue to look to the lower-48 states.
Thank you for this opportunity to present our views.
The Chairman. Thank you very much. Thank you very much, Mr.
Skains. Now, I want to make one clarification, then I'm going
to turn the meeting over to Senator Burr, and he and Senator
Landrieu can keep the meeting open until--how about making it
12:30 p.m., 20 minutes; is that fair enough? Then, would you
close the meeting at that point? Or if you finish sooner, close
it then. Mr. Parker, as senior vice president of Dominion, you
were here also, as I gather, on behalf of the Domestic
Petroleum Council?
Mr. Parker. Correct.
The Chairman. Independent Petroleum Association?
Mr. Parker. Correct.
The Chairman. National Ocean Industries Association?
Mr. Parker. Yes, sir.
The Chairman. Natural Gas and U.S. Oil and Gas Association?
Mr. Parker. Yes, sir.
The Chairman. And National Petrochemical Refiners?
Mr. Parker. Yes, sir.
The Chairman. And International Association of Drilling
Contractors?
Mr. Parker. Yes.
The Chairman. Now, you made a statement on their behalf,
not just your own.
Mr. Parker. Correct.
The Chairman. It was your opinion, based upon your
knowledge of the market, that the opening of this 181, while
we'd like to do a lot more, but opening it as described in
Domenici--Bingaman would have an impact on the market, that it
could stabilize the market and/or have a positive effect in
other ways? I'm paraphrasing, but would you tell us that, and
would you say, for the record, is that what all these entities
believe?
Mr. Parker. They do, indeed, believe that. And to state it,
we believe that to have the prospect of a relatively high-rate
set of accumulations that we could bring to the market in the
near term, just that by itself will help to mitigate natural
gas prices.
The Chairman. Is this a substantial accumulation? You just
used those words?
Mr. Parker. We think that there's an excellent chance that
there is. As Ms. Burton said earlier, you never know until you
drill.
The Chairman. Right.
Mr. Parker. But we think there's an excellent opportunity
here. We really do.
The Chairman. Okay, then let's make it even more specific.
If, in fact, the prospects that have been indicated, five
trillion cubic feet are going to be made available, if that is
the fact, would that be a substantial accommodation, as
described by you, a substantial accumulation that's ready, that
could have an effect?
Mr. Parker. I believe so, yes.
The Chairman. Okay, I want to state that for the record
because I tell you, it's a pretty big amount. People don't
think so, but, you know, that's ten million United States
houses for 5 or 6 years.
Mr. Parker. Yes, sir.
The Chairman. And it's the only way I can do it so people
would see. I would think if the industry says that's going to
be there, that's pretty good--pretty healthy. I want to close
by saying as chairman of this committee, I'm fully aware that
this is just a beginning. The whole offshore has to be looked
at. Some States are looking at it with more willingness to say
maybe we should get in, or maybe we should indicate our
interest. Some are still saying, no, no, never. But Senator
Bingaman and I thought early this year, since it's not going to
be a very easy year, you know, we're not going to get through
this year with five pieces of energy legislation, that we ought
to take this leasehold and get it if we could. So, everybody
should understand that's what we're about. We'll make some
people, besides Florida, unhappy because they want to do more.
And I'm willing to talk to them about how we can do that. I
know we have to look at offshore impacts, but the problem is
that immediately sets up all kinds of who's for what, who's
against what, but almost everybody in that team is for this.
So, what we're going to try to do is put that kind of thing
together where we get this and move ahead. And everybody should
also know we're not opposed to what the administration's doing.
In fact, I want to say today I compliment them. I guess I would
say I wish they would have started 2 years ago, but I don't run
the show over there. I try to run this committee as best I can,
but maybe we made it move a little bit, Senator. I don't know.
What do you think?
Senator Landrieu. We're making progress, Mr. Chairman.
The Chairman. Okay. All right.
Senator Landrieu. Thank you.
The Chairman. Thanks, Senator Burr.
Senator Burr [presiding]. The chair would recognize Senator
Landrieu.
Senator Landrieu. Thank you. And I thank you, Mr. Chairman,
for getting us started on this important debate, for keeping us
focused on this important debate, because you've been at it for
a while. I do have a couple of questions for Mr. Skains--well,
actually, I'm going to start with Dominion, Mr. Parker.
In your testimony, you eluded to the safety record of the
industry in the gulf coast, and I'd like you to take a moment
to just elaborate a bit on the outcome of Katrina and Rita,
which were two extremely powerful storms, as you know, that hit
both the southeastern part of our State and Mississippi as
well, and then Rita, which hit the southwest, which hit us
pretty directly and also Texas, and just by a short distance
failed to hit Houston or Beaumont directly. These were, in our
minds, two of the worst storms that have ever hit the country.
What was the outcome in the Gulf of Mexico in terms of spills?
Now, I know that some of the infrastructure was out, some of
our ports were temporarily shut down, our facilities, but was
there any major environmental damage that your company was
aware of? And I'd like the others to comment, if you want to.
But, Mr. Parker, let's start with you.
Mr. Parker. No, from both, for our company and for the
industry as a whole. From E&P production facilities, which I
would differentiate from transportation and delivery facilities
and so forth, there were no significant spills whatsoever. It's
something that we're quite proud of, in fact. If you look at
the nature and the magnitude of the storms, as you point out,
they were huge storms. There were no significant spills. There
was some damage, obviously. In fact, we're still not all the
way back up to full production. But the environmental
safeguards that we put in place worked, and they demonstrably
worked under truly extraordinary conditions.
Senator Landrieu. So, that is for the exploration and
production facilities----
Mr. Parker. Yes, ma'am.
Senator Landrieu [continuing]. For your company and others?
Does anybody else--Mr. Gravitz, do you want to add anything?
Mr. Gravitz. Certainly, Senator, it is true that the
safest--the least likely place for oil spills to happen in this
sort of industry is from platforms themselves, although there
were some platforms--there's a picture at the back end of my
testimony, which shows that there were some platforms that were
leaking in the aftermath of Katrina. And I would urge you to go
to a website, www.skytruth.com, which has radar images from
space, which pretty clearly shows leakages from both platforms
and pipelines in the aftermath of Katrina.
It was a huge storm, and everybody understands that. So, in
fact, the weakest link, you know, in this whole industry are
pipelines and barges and tankers. They are roughly five to ten
more times likely to produce oil spills than from platforms
themselves. It is true, and we applaud the efforts of the
industry. They've gotten huge, tremendous improvements in terms
of safety over the last 10 or 15 years.
However, if you do look at the record, and MMS has looked
at the record of spills, et cetera, they've developed some
pretty good statistical information about the likelihood. And
for every billion barrels of oil you produce, you're going to
have a spill of one kind or another, and that may be from a
pipeline, it may be from a tanker, and to a much lesser degree,
as I indicated, it will come from a platform.
So, there were, and there are, a bunch of newspaper reports
that I can forward to this committee or your office which
document some of the spills that occurred. During Katrina,
there was a fairly significant spill. We can argue about what
the term significant means, but I won't do that. There was a
fairly significant spill due to Hurricane Ivan, which I believe
was in the year 2004 or 2001, from one of the platforms. So,
every time one of these storms hits, there are some--there is
some damage to pipelines and platforms that results in the
release of oil. Thank you.
Senator Landrieu. Because I would like to get that clear on
the record. I think it's very important, as we move forward, to
stop sort of dancing around this issue and just understand that
they are risk-associated, and it's a matter of measuring those
risks against the benefits of energy production. And for this
country to be more responsible in that debate, instead of both
sides digging in and claiming that there are either no spills,
or there are too many spills, exactly what it is, exactly what
the costs were so that we can move forward in a rational and
reasonable way. But the bottom line is that from production,
from exploration and production platforms, it was minimal.
What you're testifying to is the pipelines and the barges.
There were some difficulties, which we will get clarified for
the record, but having said that and agreeing to that, it would
seem to me that another good use of the funds being generated,
the taxes being paid, would be to mitigate against this, which
we're basically not doing in a direct way now because the taxes
being paid are going into the general fund for all sorts of
purposes, not the least of which is related to what we have
just discussed, which brings me to Mr. Skains. Has the American
Gas Association taken a position on revenue sharing for the
coastal States? And if so, what is it? And if not, why not?
Mr. Skains. Thank you for the question, Senator. The
American Gas Association is supportive of whatever legislation
could effectively unlock and open up more natural gas supplies
to this Nation to relieve the burden and the suffering that
energy consumers are experiencing today with the high level of
energy prices being paid. We're supportive of the Lease 181
issue before you today. We're also supportive, conceptually, of
the SEACOR or the Ocean State Options Act proposals, which
provide incentives for States to weigh in and support
reasonable and environmentally responsible natural gas
development and production. So, the short answer is we're
supportive of all of the above, anything that could increase
natural gas supply, the domestic supplies that are abundant in
this Nation that are off limits today and get those gas
supplies to market to relieve the price burden that our
consumers are experiencing.
Senator Landrieu. One more: Do you agree that there have
been some--although there have been many positive impacts of
this industry, obviously--jobs and economic benefits to the
region and the Nation, do you agree that there are some
negative environmental impacts associated with pipeline
construction and barges, et cetera, and that could be more
evidence to undergird the need for revenue sharing?
Mr. Skains. Well, Senator, I agree with your statement
before. This is all a question of balancing competing
interests. With any infrastructure, there's some level of
impact. The question is, what is that level of impact versus
the benefits that would be derived? And you're right, that's
what needs to be weighed. And in this case, we think that the
net benefits are in favor of opening up this lease for
development and production. But every infrastructure in any
industry is going to create some level of impact. The question
is measurement, and what are the costs and benefits.
Senator Landrieu. And I don't know, Mr. Wilson. Did you
have anything you'd want to add? I know you're not directly in
the oil and gas business, but you're in the downline.
Mr. Wilson. We're consumers of gas. I would just add, with
respect to your question on royalties, that as a corporate
citizen of Louisiana, I would be generally supportive of
sharing that would help the State. But as an issue that we're
dealing with, we are focused on the supply end. We haven't
taken a position on royalties. That's not really our expertise,
and I would defer to the other panelists in that regard.
Senator Landrieu. Okay. Mr. Parker?
Mr. Parker. Well, we, in general, are entirely supportive.
We think that it makes excellent sense that the States that are
impacted would receive a share of the revenue. The only place
where we would quibble at all is the current discussion where
there is consideration that leasing plans might be delayed or
deferred, and we would obviously be opposed to that. The system
that has emerged under the MMS over the past 30 years has been
demonstrated to be an excellent system in terms of getting
product to market, and we would be reluctant to see anything
defer that. Within that framework, however, we fully and
entirely support a revenue-sharing provision.
Senator Landrieu. Now, it's important--and this is my last
question--that that will continue fairly smoothly, or has in
the past, but considering the great needs of the gulf coast and
the dramatic footage of Katrina and Rita and the erosion that's
taking place off of America's wetlands, that smooth process may
find a few bumps if we don't, you know, pay a little bit more
attention to this impact assistance. Thank you.
Senator Burr. I thank the Senator from Louisiana, one of
the most knowledgeable individuals here on this issue, and my
questions will be brief. I'll try to keep this in the area that
the chairman has focused on, and that's the 181 Lease. Mr.
Gravitz, I've got to ask you, is there any exploration on land
or offshore of oil and gas that U.S. PIRG would ever be
supportive of?
Mr. Gravitz. Senator, Florida PIRG, one of our members, is
on record extensively as supporting the Martinez-Nelson bill
for a variety of reasons that I think makes a great deal of
sense. You should understand that we have other coastal States
whose PIRG organization----
Senator Burr. But as a national organization?
Mr. Gravitz. U.S. PIRG does not have a position.
Senator Burr. And has U.S. PIRG ever supported oil or gas
exploration on land or offshore?
Mr. Gravitz. Not to my knowledge, but I'll have to
consult----
Senator Burr. If, as Senator Landrieu has suggested, there
might be some royalty received to the States, or we took some
small piece of the Federal royalty and devoted it to a coastal
management fund to address issues like beach renourishment,
dunes renourishment, intercoastal waterway maintenance, levee
construction, things that are inherent to the coastlines that
we represent, would U.S. PIRG be supportive of the creation of
that trust with royalty money off of exploration?
Mr. Gravitz. Well, Senator, we answer to a board of
directors, but I suspect that we would be, because it seems a
simple matter of equity that States that bear the burden and
the environmental damage that this industry sometimes imposes
on coastal areas, that they be compensated and that we try to
rebuild wetlands that are damaged and try to rebuild beaches
that get swept away. So, yes, sure, I think that makes a lot of
sense.
Senator Burr. I appreciate that answer, because I think it
is important to understand that we can find the balance. In
fact, it's beneficial that when we take something, we also
bring with it some assurance of the protection and the
stewardship of it, of another--for not just our generation, but
for others.
Mr. Skains, thank you for coming from North Carolina. I
heard your answer to Senator Landrieu. I began to wonder
whether you might be running for office as diplomatically as
you answered that. We like to hear people say anything we'd
like to do up here.
Mr. Skains. I'm here to support you, Senator.
Senator Burr. Let me say I didn't appreciate the price
increase that you took this year, the rate increase. And I
commend you and Piedmont Natural Gas for when you saw natural
gas prices stabilize and fall, you immediately went to the
North Carolina Utility Commission, and you sought a rate
reduction at a time where we're pointing a lot of fingers at
individuals that gouge. I want it on the record that I'm not
sure that Piedmont Natural Gas could have responded any quicker
in a very uncertain market, and for that reason, in my
statement that I wrote a check to you this month, I noticed
that it was also reflective of a rate reduction, so I commend
you for that.
Let me ask you and Mr. Parker this, specifically. I think
both of you have addressed conservation and the fact that
though we all want to have policies and encourage conservation
at the highest level in this country, that by itself, we don't
get there. If we have good participation with conservation, if
we get LNG terminals that are not just on the coast, but
they're located throughout the country, and we have a free flow
of liquefied natural gas, and you allow the economy to grow at
that 3.3 percent pace that the President's--that OMB projects
today, and hopefully that we can continue into the future, am I
hearing you that that is not enough to meet the needs of the
United States in the future? Without additional exploration is
my point.
Mr. Skains. Yes, sir, thank you. Thank you for that
question. In our view, conservation is just one piece, one
small piece of the puzzle here. Our energy challenges in this
Nation are multi-faceted. It's going to take a multi-faceted
approach to solve them. It's going to involve increasing our
domestic energy production. It's going to involve importing
energy in the form of LNG. From abroad, it's going to involve
bringing that available, already proven natural gas from Alaska
down into the lower 48. It's going to involve conservation and
efficiency approaches by consumers. And it's going to involve
diversification by our electric utility businesses away from
natural gas to support their growth into other sources of
energy. It's going to take a multi-faceted approach. I don't
think any one of these single solutions alone can meet our
challenges. It's more complex, and it's going to take, again, a
multi-faceted approach.
Senator Burr. Well, I think you stated very clearly for the
committee that this is not--since you're regulated by a utility
commission, the ebb and flow of this price is not beneficial to
you as a company. You're 100 percent respondent to your
customers. Without additional domestic exploration,
specifically for natural gas, you can't provide your customers
the security of knowing that there is, one, an ample supply,
and two, a stable price. Is that an accurate statement?
Mr. Skains. That's an accurate statement, Senator.
Senator Burr. Mr. Parker, did you want to add something?
Mr. Parker. Well, I think he's hit all of the important
points. We face a real energy challenge in the United States,
and it is going to take everything. It is going to take
conservation. It is going to take LNG. It's going to take a
pipeline from Alaska, ultimately, for us to meet our needs. But
it's also going to take U.S. domestic exploration and
production to meet our needs. And that's something that we feel
very strongly about, that we will be challenged to meet the
needs of the Nation even with complete access.
Senator Burr. Mr. Gravitz, I can't pass on the opportunity
to have you here because I'm not sure when we might have you
back.
Mr. Gravitz. I'd love to come back anytime you want me to.
Senator Burr. Are you supportive of the President's goal of
becoming 75 percent less reliant on Middle East oil by 2025?
Mr. Gravitz. I'm not sure we've discussed that particular
proposal amongst our energy staff, but we're supportive of any
proposal that makes us less reliant on oil and natural gas and
more reliant on saving energy and more reliant on clean
alternative energy sources.
Senator Burr. One of the universal agreements, I think, as
far as a step as to how we get there, is that a much larger
piece of our generation portfolio for energy in this country
must be nuclear. It certainly meets the clean. It meets the
less reliant on Middle East. It meets the movement away from
carbon-based products. Is U.S. PIRG supportive of that move
toward additional nuclear generation in this country?
Mr. Gravitz. No, I believe U.S. PIRG historically has
opposed relicensing existing nuclear power plants and the
building of new nuclear power plants.
Senator Burr. Okay.
Mr. Gravitz. I believe that's a long-held position----
Senator Burr. I thought it was.
Mr. Gravitz [continuing]. For reasons that have to do with
the entire nuclear fuel cycle and some of the hazards that get
generated.
Senator Burr. I appreciate that answer. Once again, on
behalf of the committee, let me thank all of our witnesses.
This hearing's adjourned.
[Whereupon, at 12:30 p.m., the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Department of the Interior,
Office of Congressional and Legislative Affairs,
Washington, DC, April 11, 2006.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman. Enclosed are responses prepared by the Minerals
Management Service to questions submitted following the February 16,
2006, hearing regarding S. 2253, ``Oil and Gas Leasing in Area 181 of
the Gulf of Mexico).
Thank you for the opportunity to provide this material to the
Committee.
Sincerely,
Jane M. Lyder,
Legislative Counsel.
[Enclosure.]
Responses of R.M. ``Johnnie'' Burton to Questions
From Senator Domenici
Question 1. Please comment specifically on the estimated timeline
for bringing S. 2253 leases to production from the date of enactment of
this Act to the date of bringing the gas to market?
Answer. S. 2253 requires that a lease sale be held within one year
of the date of enactment. We estimate that the first wells would be
drilled within two years after the lease sale and estimate that
potential production could begin within three to four years after the
first commercial discovery.
Question 2a. Please compare, with your most recent estimates, the
estimated resource base for the area covered by S. 2253 with the area
covered under the 5-year plan.
Answer. Our resource estimates for the area covered by S. 2253,
based on our 2003 interim update, are 930 million barrels of oil and
6.03 trillion cubic feet of natural gas. Our estimates for the area
proposed for consideration in the draft proposed 5-year plan for 2007-
2012, are 530 million barrels of oil and 3.42 trillion cubic feet of
natural gas. Based on these estimates, the area covered by S. 2253
could make an additional 400 million barrels of oil and 2.61 trillion
cubic feet of gas available.
The most recent 2006 resource assessment for the Gulf of Mexico has
not yet been broken down to this level of detail. The resource numbers
are not expected to change dramatically from the 2003 update numbers.
We will have an update based on our 2006 assessment this fall.
Question 2b. Do you have an estimate for how many homes over what
period of time could be heated and cooled by this amount of natural
gas?
Answer. The estimate of 6.03 trillion cubic feet of natural gas
would meet the total energy needs for approximately 6 million homes for
30 years using current technological parameters (consumption rates and
efficiency standards).
Question 3a. Please comment on the estimates at the time that the
currently leased portions of 181 were included in the 1997 5-year plan.
Please comment on whether those estimates on that same area have
changed today?
Answer. In 2001, Secretary announced the modified area for leasing
in the Sale 181 area. The decision modified the 1997-2002 five-year
plan sale area from 5.9 million acres to 1.5 million acres. The
Department estimated the modified area contained 1.25 trillion cubic
feet of gas and 185 million barrels of oil. Based on MMS's 2003 interim
assessment, estimates for the modified area are 4.46 trillion cubic
feet of gas and 800 million barrels of oil. The most recent resource
estimate for the Gulf of Mexico has not yet been broken down to this
level of detail. The resource numbers are not expected to change
dramatically from the 2003 update numbers.
Question 3b. Also, please comment on how much, if any, oil and gas
has been produced from that area? How much money has the federal
government received from leasing in that area?
Answer. From the modified sale 181 area 57,000 barrels of oil and
46 billion cubic feet of gas have been produced. There have been 7
additional discoveries in the modified sale 181 area, and production
from them is expected to commence in 2007. Nine lease sales were held
prior to the modified Sale 181 in December 2001. There have been 3
sales held in the modified area. Sale 181, held December 2001; Sale
189, held December 2003; and Sale 197, held March 2005. Under these
three sales, 119 leases were awarded; $355.5 million was paid in bonus
bids, and $26.8 million has been paid in rentals and royalty.
Question 4a. Are there currently any leases east of the Military
Mission Line? If so, who holds these leases?
Answer. Yes, there are 126 existing leases east of the Military
Mission Line.
Current Holders of Leases east of Military
Mission Line
Amoco
Anadarko Petroleum Corp.
Apache Corp.
BP Exploration Inc.
Chevron Conoco Inc. ConocoPhillips
Kerr-McGee Corp.
Mobil Oil
Murphy Exploration & Production Company
U.S.A.
Union Oil
Question 4b. If so, can you comment on what the Defense
Department's position has been on these leases? Do you have a
Memorandum of Understanding with the Defense Department on production
in the Gulf? Please comment.
Answer. The Department of Defense (DOD) and DOI signed a Memorandum
of Agreement (MOA) on July 20, 1983. Several sales were held in the
Eastern Gulf of Mexico (EGOM) prior to the MOA, including Sale 5
(1959), Sale 32 (1973), Sale 65 (1978) and Sale 69 (1983). In
accordance with the MOA, DOI and DOD work closely to minimize potential
conflicts between oil and gas exploration and production and military
activities in the EGOM. Final Notices of Sale announce stipulations and
identify the blocks to which stipulations will be attached, and what
actions must be taken (or not taken) in accordance with the
stipulations. In general, there are certain times when activities can
or cannot occur and/or places where permanent structures must be
subsea.
Question 5. Can you comment on the Cuban government's offshore
operations? How close to the Florida's coast are they producing or
issuing leases?
Answer. Repsol, the largest Spanish oil company, proposed drilling
two wells off Cuba. One of the wells is about 100 nautical miles
southwest of Key West and the other well is about 75 nautical miles
south of Key West. The latter location was drilled in June 2004 (the
first deep water well off Cuba). The latest information that MMS has,
indicates Repsol is still planning to drill the other location in 2006.
An Oil and Gas Journal article in 2000 included a map showing the
deep water blocks off northern Cuba in addition to well locations in
the blocks northwest of Cuba. These are shallow wells drilled in the
1970's and 1980's by the Deep Sea Drilling Project funded by the
National Science Foundation to help unravel the geologic history of the
Gulf of Mexico. Another well drilled by Repsol is about 55 nautical
miles south of the Florida Keys.
Question 6. Please comment on MMS's view on revenue sharing on OCS
production.
Answer. The Statement of Administration Policy on H.R. 6--The
Energy Policy Act of 2005, states. ``We oppose the significant new
funding authorizations and diversion of OCS revenues contained in the
Coastal State impact assistance provision in section 371. The
Administration welcomes the opportunity to discuss further with the
Senate means to provide greater access to oil and natural gas resources
on the OCS in cooperation with States who support such development.''
Question 7. In your testimony you give a brief history of the 181
Area. Can you share any thoughts you might have on why the State of
Florida did not challenge the Department of the Interior's inclusion of
181 in the 1997-2002 5-Year Plan?
Answer. In February 1995, Governor Lawton Chiles responded to the
request for comments on the preparation of a 5-year leasing program for
1997-2002 by stating that he would oppose oil and gas leasing within
100 miles of Florida. Later that year, in August, MMS issued a draft
proposed program with a lease sale area the Eastern Gulf of Mexico Sale
181, encompassing 671 blocks located off Alabama and more than 100
miles off Florida. This configuration was based mainly on consideration
of Alabama's general support for leasing off its coast, Florida's 100-
mile buffer policy, and resource potential. Governor Chiles commented
that the draft proposed program configuration for Sale 181 was
acceptable since it excluded blocks within 100 miles of Florida.
In February 1996, MMS issued a proposed program with the same Sale
181 configuration but included an option to expand the area by adding
384 blocks in deeper waters more than 100 miles off Florida. Both
Governor Chiles and Governor Fob James from Alabama indicated support
for the expanded Sale 181 area. The proposed final program, issued in
August 1996, included the Sale 181 area revised to add the 384 deep
water blocks and to exclude the 22 blocks within 15 miles of Baldwin
County, Alabama. In October 1996, Governor Chiles agreed as the sale
was not within 100 miles of Florida, and in November, the 5-year
program for 1997-2002 was approved with the Sale 181 area consisting of
1033 blocks located more than 15 miles off Alabama and more than 100
miles off Florida.
Question 8a. What steps have you taken since the recent news
reports concerning the royalties due to the federal government on oil
and gas leases, to ensure that the government is receiving its
appropriate share?
Answer. There has been recent media interest concerning natural gas
royalty collections from Federal leases and the relationship of royalty
incentives for deep water production in the Gulf of Mexico to current
high energy prices. In the January 23, 2006, article titled, ``As
Profits Soar, Companies Pay U.S. Less for Gas Rights,'' the New York
Times made a faulty assumption leading to the erroneous conclusion that
royalties had been underpaid by $700 million in Fiscal Year 2005. MMS
developed a PowerPoint presentation, which addresses the issues raised
in the recent news articles, and briefed the staff of the Senate
Committee on Energy and Natural Resources. The main conclusions of the
presentation are:
Royalty values paid to the Minerals Management Service are
consistent with market prices for natural gas;
The decline in natural gas royalty revenues is in part the
result of changes in the natural gas production profile from
federal leases;
Royalty valuation regulations since 2000 have clarified the
rules and increased royalty collections; and
MMS maintains an aggressive and comprehensive audit program.
The Government Accountability Office (GAO), which was asked to
review our findings, generally agrees with our assessment.
With respect to deep water royalty relief, it is important to
emphasize the following:
Royalty incentives were established in the Deep Water
Royalty Relief Act of 1995 to encourage development of new
supplies of energy;
The purpose of this incentive was to promote investment in a
particularly high-cost, high-risk area;
Since the enactment of the incentive, the deep waters of the
Gulf of Mexico have become one of the most important sources of
domestic oil and gas production; and
Once the royalty relief established by the Act became
discretionary in 2001, we reduced the amount of royalty relief
allowed on new leases.
The Administration contested a lawsuit, eventually won by lessees,
which increased the magnitude of royalty relief on leases issued
between 1996 and 2000 and resulted in significantly more royalty relief
provided to companies. However, we have ensured that price thresholds
limiting royalty relief when oil and gas prices are high have been
included in all newly issued deep water leases.
MMS will continue to aggressively pursue its mission by
safeguarding public resources and to assure a fair return on America's
natural resources to the American taxpayer.
Question 8b. What steps were you taking before the stories (and
after) to ensure that company lessees are in full compliance with all
applicable royalty laws?
Answer. MMS maintains a strong and comprehensive audit program
strengthened by the combined efforts of professional auditors in MMS
and State and Tribal governments. Since 1982, the combined efforts of
these auditors have resulted in the collection of more than $3 billion
in additional royalties.
We implemented new aggressive compliance goals by establishing a
three year compliance cycle compared to a previous compliance cycle of
six years or more. We increased the percentage of revenues being review
and/or audited within this shortened cycle from 10 percent in FY 2003
to 71 percent in FY 2005.
MMS has fully implemented the recommendations of an Inspector
General's 2003 review of the royalty audit program. In 2005, an
independent certified public accounting firm conducted a peer review of
our royalty audit program and gave it a clean bill of health.
Question 9. Do the January 2005 administrative lines drawn by the
Department of the Interior and published in the Federal Register,
affect the application of the Coastal Zone Management Act in any way?
Please explain.
Answer. The new administrative boundaries announced in the Federal
Register Notice are intended to be MMS planning tools to facilitate
communication about multiple offshore uses in light of the Energy
Policy Act of 2005. For Coastal Zone Management Act (CZMA) purposes, a
state is affected if actual or potential impacts of the proposed
activity on the state can be reasonably foreseen. The Director of MMS
makes the final determination for determining reasonably foreseeable
coastal effects for OCS Lease Sales. The new administrative boundaries
do not preclude any State from making a request to be an affected State
under Outer Continental Shelf Lands Act or CZMA for OCS permits and
plans.
Question 10. Please comment on the impact of Hurricanes Katrina and
Rita on OCS production; on damage to infrastructure (platforms,
pipelines etc.); and please comment on the number of significant spill
in the aftermath of the hurricanes.
Answer. During the hurricanes approximately 100 percent of
production was shut-in. Six months after Katrina, approximately 76
percent of the oil production and 84 percent of the gas production has
been restored. One hundred thirteen structures were destroyed, but they
account for less than 2 percent of the Gulf's production. Damage has
been found on an estimated 360 pipelines and that number is anticipated
to increase as more underwater inspections are completed. In addition a
total of 52 platforms were also damaged. No impacts from spills have
been reported from OCS facilities.
Responses of R.M. ``Johnnie'' Burton to Questions
From Senator Talent
Question 1. How much additional natural gas is available in areas
that are currently under some kind of exploration moratoria?
Answer. Based on the MMS. 2006 Inventory Report to Congress, 85.79
trillion cubic feet of gas are estimated to be in areas that are
currently either under moratoria and/or Presidential withdrawal.
Question 2. Typically, as natural gas reserves are developed, what
have we seen as far as the accuracy of initial reserve estimates? It is
my understanding that, over time, technology allows us to economically
produce much more than we initially thought we could.
Answer. There are many factors that come into play. It generally is
true, however, that as technology improves the ability to drill more
economically and to tap deeper or more difficult resources increases
resulting in the rise of the resource estimate. As exploration and
development activity take place in a new area, new information and
technology may raise or lower initial estimates for oil and gas
resources.
Question 3. What is the track record with respect to spills in the
Gulf of Mexico? Do you expect that the additional production from the
Lease 181 area will represent a threat to the Florida coastline,
particularly with respect to natural gas production?
Answer. The OCS has a very admirable track record. Regulations have
been developed that require a variety of safety devices and measures.
Over the past three decades, MMS has established an enviable
environmental and safety record. We have seen the oil-spill rate
continue to drop from 19,600 barrels spilled per billion barrels
produced from 1971 to 1980, to 14,200 barrels spilled per billion
barrels produced from 1981 to 1990, to 6,500 barrels spilled per
billion barrels produced from 1991 to 2000. This has been a 67 percent
decrease over this 30 year period. The OCS activities have proven to be
one of the safest ways to provide for our nation's energy needs. As
reported by the National Academy of Sciences, over 150 times more oil
enters the North American oceans from natural seeps than from OCS oil
and gas activities.
Recent discoveries in the Sale 181 area have been mostly gas.
However, based on the amount of oil that may be produced from the new
area being considered in the draft proposed program and the track
record of the offshore industry it is very unlikely that a large spill
(>1,000 barrels) would occur. The most recent oil spill modeling in
this vicinity (done for the Gulf-Wide 2003-2007 Multi-Sale EIS) for a
large spill found that there is only a one percent probability that a
spill would occur and, assuming no response is conducted within 30
days, reach Florida State water (approximately 10 miles offshore).
Responses of R.M. ``Johnnie'' Burton to Questions
From Senator Bingaman
Question 1. What are your current resource estimates for the area
from the original Lease Sale 181 area that is required to be offered
for leasing under S. 2253? What is the acreage of this area?
Answer. S. 2253 would make 3.6 million acres available for lease
while maintaining a 100 mile buffer zone along the Florida coast.
Leasing in the area east of the Military Mission Line, an area of
approximately 725,000 acres, would be subject to the agreement and
approval of the Secretary of Defense. MMS resource estimates for the
area covered by S. 2253, based on our 2003 interim update are 6.03
trillion cubic feet of natural gas and 930 million barrels of oil.
Question 2. What are your current resource estimates for the area
from the original Lease Sale 181 area that would be offered for lease
under the draft proposed 5-year plan? What is the acreage of this area?
Answer. The draft proposed 5-year plan includes consideration of
leasing in an expanded area within the original Sale 181 area. The
expanded area is approximately 2 million acres. This area is in
addition to the 1.5 million acres within the original Sale 181 area
already offered for leasing under the current 2002-2007 5-year program.
MMS estimates for the area identified in the draft proposed plan are
3.42 trillion cubic feet of natural gas and 530 million barrels of oil.
Question 3. What are your resource estimates for the area from the
original Lease Sale 181 area that could be offered for lease under S.
2239 (Martinez-Nelson)? What is the acreage of this area?
Answer. The most recent 2006 resource estimate for the Gulf of
Mexico has not yet been broken down to this level of detail. The area
we believe would be available for new leasing under S. 2239 is
estimated to be approximately 800,000 acres.
Question 4. What analysis has the Department undertaken with
respect to the environmental impacts of producing in the area to be
offered for lease under S. 2253?
Answer. MMS is currently working on an Environmental Impact
Statement (EIS) for the next 5-Year Program and on a Gulf of Mexico
multi-sale EIS that will include most of the area that is considered in
S. 2253. If this bill is passed we will need to review what is included
in this EIS to determine if it needs to be expanded to address the
additional area.
Question 5. Please describe the existing oil and gas infrastructure
in the vicinity of the area to be offered under S. 2253.
Answer. The area to be offered under S. 2253 is immediately to the
east of the modified Sale 181 area. Twelve wells have been drilled in
the vicinity of S. 2253 area with seven discoveries. Development of
this area is planned through a centralized production unit called
Independence Hub. Construction is planned to begin later this year with
production commencing in 2007.
______
American Gas Association,
Washington, DC, March 7, 2006.
Hon. Pete Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Re: Mr. Thomas Skains' follow up responses--2/16/06 testimony
Dear Chairman Domenici: In response to the inquiries from you and
Senator Jim Talent, we are pleased to provide these answers. Mr. Thomas
Skains' response is attached to this letter. If you have any further
questions concerning the testimony given on Thursday, February 16,
2006, please contact me at 202-824-7220.
Sincerely,
Charles H. Fritts,
Vice President, Government Relations.
[Enclosure.]
Responses of Thomas Skains to Questions From Senator Domenici
Question 1. What do you estimate the impact of opening lease sale
181 will be on residential consumer gas bills?
Answer. Given the dynamic nature of natural gas markets, it is
difficult, if not impossible, to predict precisely the impact of
opening Lease Area 181 upon residential gas bills. We do not know how
much gas will be produced from that area or when it will be produced.
Nor do we know what other factors will be at work in the market when
production is finally realized. For example, the impact of opening
Lease Area 181 upon residential bills will turn upon factors such as
what other sources of gas will come on line at that time, the weather
(which is a principal driver of demand), and environmental laws and
regulations that affect the volume of gas consumed by electricity
generators.
We do, however, know two things. First, opening Lease Area 181 will
bring a significant amount of new gas to the market, and prices will
necessarily be lower than they would be otherwise. Second, because
supply and demand are now in such a tight balance (as they have been
for the past five years), even small changes to the supply-demand
balance have large impacts on price. For example, a warm summer in 2005
(17 percent warmer than normal) caused more gas to be used in
electricity generation to meet air conditioning demand, with the result
that gas prices at the end of the summer were 50 percent higher than at
the beginning of the summer. Conversely, gas prices have been dropped
by half since December, 2005, largely as a result of a very mild
January. These dramatic price movements were the result of market
changes of only a few billion cubic feet (Bcf) per day in a total
national market of 60 Bcf per day. Ten years ago a daily change of
several Bcf per day (whether up or down) had little impact on prices
because there was slack in the gas production and delivery system.
Today, the system is operating at full throttle, and there is no slack.
Consequently, even small changes have a large impact upon price.
In sum, any appreciable change in gas supply or demand can result
in significant price movement, and production from Lease Area 181 would
be appreciable.
Question 2a. Please describe, in simple terms, over a three or
five-year period (or similar time period)--what has been the typical
change to an average middle class consumer's gas bill?
Answer. The impact of higher natural gas prices on residential
consumer bills has been dramatic over the past several years. Based on
data from the Energy Information Administration, the average winter
heating bill (Oct.-March) was $471 in the winter of 1999-2000. That
bill is expected to reach $920 this winter, an increase of 95 percent.
Further, had this winter not been the warmest January on record but
instead had been a ``normal'' winter, the EIA estimates that the
average U.S. heating bill would have increased roughly 50 percent just
from last winter to this winter. The increase in bills since 1999-2000
has been similar in all parts of the country--up 76 percent in the
Northeast, 116 percent in the Midwest, 96 percent in the South and 93
percent in the West.
Question 2b. What has been the change over this past year in the
region that you operate in? Do you know what the average change in the
Southeast has been?
Answer. The unprecedented increase in wholesale natural gas prices
this year has had a significant and adverse impact on the winter
heating bills of our customers and mirrors the national picture. Within
the market areas served by Piedmont Natural Gas (North Carolina,
upstate South Carolina and the Metropolitan Nashville area in
Tennessee), the average residential bill for the current winter has
increased anywhere from 35% to 50% when compared to last winter's
(2004/2005) heating bill.
During the winter of 2004/2005, the average 5-month winter bill for
a residential customer on our system ranged from $500 to $800. Based
upon actual weather for the first three months of the current winter
(2005/2006) and assuming normal weather patterns for the remainder of
the winter period, the average 5-month winter bill for a residential
customer will increase to a range of $700 to $1,100.
Question 3a. Explain the role that your company has (and company's
that fit your profile) in purchasing gas for consumers?
Answer. Piedmont Natural Gas is a natural gas utility. Our
principal function is to transport and distribute natural gas from
interstate pipelines or storage facilities to natural gas consumers--
primarily residential, commercial and industrial consumers as well as
electricity generators. In some cases, natural gas utilities purchase
gas on behalf of their customers and deliver it to them. In other
cases, the customer purchases natural gas directly from a gas producer
or marketing company, and we simply deliver the gas to them. In either
case, natural gas utilities, similar to FedEx or UPS, are compensated
only for the delivery of the product--natural gas. The regulated cost-
based delivery charge is overseen and approved by a state public
utility commission. We flow through our gas costs to consumers on a
dollar for dollar basis without mark-up and, therefore, do not benefit
at all from a higher cost of the natural gas commodity. Rather, higher
natural gas costs flow back in their entirety to natural gas producers
or marketing companies that aggregate gas supplies--we merely serve as
their collection agent.
Question 3b. Have you benefited from either this rise in price or
the volatility in price over the last few years?
Answer. In fact, higher prices have a number of negative
consequences for natural gas utilities. Higher prices reduce the demand
for natural gas, and, therefore, they reduce the need for the delivery
service we provide. In addition, higher prices make our service less
affordable to consumers, and they also increase our uncollectible
accounts. Higher prices also increase the cost of financing storage
inventories and receivables. Additionally, higher prices strain the
relationship we have with our customers, most of whom assume,
incorrectly, that we do benefit from higher prices. Ultimately, we want
what our customers want--adequate supplies of natural gas at affordable
prices.
Question 4a. What can utilities do to bring down the price of gas
for consumers?
Answer. At a macro level, the price of natural gas is determined by
the balance of supply and demand in the marketplace, and there is
little that natural gas utilities can do to have a significant impact
on that balance and, consequently, on the market price. We can, and do,
however, inform our customers of market conditions and how they can use
gas most efficiently and wisely. We believe that this does serve to
ease some of the pressure in the market, but by itself is not capable
of overcoming the impact on price from the growth in demand we are
seeing for natural gas from new customers (particularly electricity
generators) coupled with stable or declining supplies of natural gas.
That said, while our ability to affect the overall price level of
natural gas directly is negligible, we can (and do) take actions that
reduce price volatility and buffer our customers from absorbing the
full impact of price increases. For example, most gas utilities like
Piedmont use financial and physical hedges and levelized billing to
mitigate large fluctuations in customer bills. In fact, over the course
of this winter alone, Piedmont's hedging programs will have saved our
customers $20 million. We also construct a diverse and competitive gas-
supply portfolio to meet our customers' long-term needs by pursuing
strategies that include competitive bidding processes for gas supply
contracts, the release of interstate pipeline capacity, upstream asset
management arrangements and secondary marketing and off-system sales.
These strategies saved our customers an additional $27 million in 2005
in reduced gas costs. Additionally, we try to purchase gas and place it
in storage when prices are most attractive. The availability and the
utilization of these storage assets resulted in another $28 million in
savings to our customers. Obviously, all of these measures benefit the
customer in terms of his monthly bill, but none directly moves the
price of the product--we simply do not have that ability.
Question 4b. What, in your opinion, can the Congress do?
Answer. Because supply and demand are in such a tight balance, any
increase in supply or reduction in demand should have a favorable
effect in lowering the price of gas or moderating its rise. There are
several steps Congress can take to increase supply or reduce demand.
Congress can also take steps to help those who have been impacted the
most by rising natural gas costs.
Steps to Increase Supply
Intermountain West: Congress should encourage the Administration
(BLM, Forest Service) to issue short-term waivers for expansion of the
Rockies (inner mountain west region) drilling window for this winter.
Outer Continental Shelf (OCS): Congress should encourage
legislation that lifts current restrictions on the OCS and opens
federal areas to exploration and production of natural gas resources.
Alaskan Natural Gas: Congress should support efforts to expedite
and facilitate the construction of the Alaskan natural gas pipeline to
bring Alaskan natural gas supplies to the lower 48 states.
Liquefied Natural Gas: Congress should encourage the development of
infrastructure to accept new supplies from LNG.
Natural Gas Pipelines and Facilities: Congress should encourage
FERC to continue acting on an emergency basis as needed and modify and
implement its rules to accelerate and streamline the permitting and
blanket certificate procedures for natural gas pipelines, especially to
facilitate hurricane recovery efforts.
Steps to Help Low Income Energy Consumers
LIHEAP. Congress can increase funding for LIHEAP for FY06 up to the
authorized $5.1 billion and consider amending LIHEAP eligibility
criteria to allow larger numbers of low-income residents to take
advantage of the program.
Steps to Reduce Demand
Question No. 5 below goes to the heart of this issue. The fastest
growing sector of demand for natural gas is electricity generation.
Given that natural gas supplies are constrained, it is simply not wise
policy to continue to rely on natural gas to provide 90 percent or more
of our new electricity generation capacity. AGA therefore supports
efforts to diversify the electricity generation fuel mix.
Fuel diversity at electricity generation facilities aside, end-user
conservation can play an important role in moderating demand and should
be encouraged. Similarly, the direct use of natural gas for those
applications it is best suited for should be encouraged as well in
order to fully leverage the inherent efficiency of the natural gas
distribution system and infrastructure.
Question 5. Explain the results of the proliferation following
trend. Electricity generation shifts more and more toward natural gas
while domestic production remains flat or decreases?
Answer. The trend is obvious and stunning. Roughly 90 percent of
the electricity-generating capacity added over the last decade has been
fueled by natural gas. In 2003, 19 percent of the natural gas consumed
in the U.S. was for electricity generation. This is projected to
increase to 33 percent by the year 2020. While natural gas consumed for
electricity generation has increased by roughly 1 trillion cubic feet
per year since 1999, natural gas production has fallen by nearly 1
trillion cubic feet annually over the same timeframe (a significant
portion of the decline in 2005 was attributable to the severe hurricane
season.)
Historically, the demand for natural gas declined in the summer
months, allowing for the refilling of gas storage facilities with
minimal impact on prices. Today, because electricity demand peaks in
the summer to meet air conditioning loads, natural gas demand now
spikes in the summer as generators purchase gas to meet their summer
needs. This fact was clearly evidenced last summer when gas prices
moved upwards throughout the summer--from a level of roughly $6.00 per
MMBtu to roughly $9.00 per MMBtu in response to a summer that was 17
percent warmer than normal.
Natural gas prices have become extremely high and volatile over the
past five years. High and volatile prices will remain with us until we
increase gas supply and/or decrease demand. Unfortunately, little has
been done on the supply side. The offshore moratoria remain in place,
too few LNG terminals have been constructed, an Alaskan natural gas
pipeline is at least a decade away, and expansion of Lower-48 onshore
drilling is slow and problematic.
The bottom line is that supply is not growing, but demand is,
primarily as a result of the demand for gas to fuel electricity
generators. Gas supply must be increased, existing gas fired power
generation facilities should be encouraged and incented to have dual
fuel capability, and new generation facilities must be diversified.
Nuclear power and clean coal technologies, as well as renewable
technologies, must lead the way in this diversification.
Responses of Thomas Skains to Questions From Senator Talent
Question 1. Assuming we pass this bill and it becomes law, how long
after that time will it take to begin producing oil and gas from the
Lease 181 area? Mr. Gravitz testified that it may be five or six years
at the earliest--my understanding is two years at most once we pass
this bill.
Answer. AGA's membership includes natural gas utilities rather than
natural gas producers. The response from the witness who represented
natural gas producers would be the best source of this information.
We do, however, encourage Congress to include language in S. 2253
that would not only expedite production in Lease Area 181 but also
prevent dilatory litigation.
Question 2. What would you expect the rate of annual production
will be from the Lease 181 area?
Answer. ACA's membership includes natural gas utilities rather than
natural gas producers. The response from the witness who represented
natural gas producers would be the best source of this information.
Question 3. What do you anticipate will be the affect on price?
Answer. This question is similar to the Chairman's Question No. 1.
Our response is identical.
Given the dynamic nature of natural gas markets, it is difficult,
if not impossible, to predict precisely the impact of opening Lease
Area 181 upon residential gas bills. We do not know how much gas will
be produced from that area or when it will be produced. Nor do we know
what other factors will be at work in the market when production is
finally realized. For example, the impact of opening Lease Area 181
upon residential bills will turn upon factors such as what other
sources of gas will come on line at that time, the weather (which is a
principal driver of demand), and environmental laws and regulations
that affect the volume of gas consumed by electricity generators.
We do, however, know two things. First, opening Lease Area 181 will
bring a significant amount of new gas to the market, and prices will
necessarily be lower than they would be otherwise. Second, because
supply and demand are now in such a tight balance (as they have been
for the past five years), even small changes to the supply-demand
balance have large impacts on price. For example, a warm summer in 2005
(17 percent warmer than normal) caused more gas to be used in
electricity generation to meet air conditioning demand, with the result
that gas prices at the end of the summer were 50 percent higher than at
the beginning of the summer. Conversely, gas prices have been dropped
by half since December, 2005, largely as a result of a very mild
January. These dramatic price movements were the result of market
changes of only a few billion cubic feet (Bcf) per day in a total
national market of 60 Bcf per day. Ten years ago a daily change of
several Bcf per day (whether up or down) had little impact on prices
because there was slack in the gas production and delivery system.
Today, the system is operating at full throttle, and there is no slack.
Consequently, even small changes have a large impact upon price.
In sum, any appreciable change in gas supply or demand results in
significant price movement, and production from Lease Area 181 would be
appreciable.
______
CF Industries Holdings, Inc.,
Long Grove, IL, March 8, 2006.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Chairman Domenici: Thank you for the opportunity to appear
before the Senate Committee on Energy and Natural Resources on February
16, 2006 to present the views of CF Industries Holdings, Inc. and The
Fertilizer Institute on the importance of approving natural gas
drilling on the Outer Continental Shelf.
Attached is our answer to Senator Talent's question provided in
your letter of February 22, 2006.
I appreciate your leadership on this very important issue.
Sincerely,
Stephen R. Wilson,
Chairman & CEO.
[Enclosure.]
Response of Stephen R. Wilson to Question From Senator Talent
Question 1. You highlight in your testimony the adverse affect of
high natural gas prices on American fertilizer production. How much
time do we have to act to ensure that we retain the jobs and production
capacity associated with fertilizer production and other similarly
situated industries? I am certain your industry cannot hold on for long
with gas prices three times higher than historical levels.
Answer. To answer the production capacity question we would have to
be able to predict both natural gas prices and fertilizer prices. As
evidenced by the last few years, it is impossible to predict either.
However, fertilizer is a commodity product for which natural gas cost
is the key factor. That, coupled with the fact that natural gas
currently makes up over 90 percent of the cost of ammonia production,
means that this industry needs a competitive natural gas pricing
environment. What is important to realize is that many of our global
competitors are securing natural gas for fertilizer at costs that are
far below what we currently pay. While predicting the future is not
possible, it is important to note that 38% of U.S. ammonia production
capacity was closed permanently between 1999 and 2005.
______
Responses of Timothy S. Parker to Questions From Senator Domenici
Question 1. Please comment specifically on your companies'
environmental record in the Gulf of Mexico. What was the impact of
Hurricanes Katrina and Rita on your operations in the Gulf?
Answer. Dominion Exploration & Production, Inc. has an outstanding
environmental record and complies fully with all applicable
environmental regulations. The company has repeatedly been a national
finalist for awards presented by the Department of Interior's Minerals
Management Service. Dominion received the prestigious 2002 Safe
Operations and Accurate Reporting (SOAR) award from the MMS. The SOAR
award recognizes companies that are outstanding in the areas of
offshore operating performance and fiscal responsibility. The MMS
considers SOAR recipients to be among the safest and most committed to
timely and accurate financial reporting of those companies operating
production platforms on the Outer Continental Shelf of the Gulf of
Mexico. Dominion also received the 2001 National Safety Award for
Excellence (SAFE). This award recognized the company's exceptional
safety record and its performance on its Gulf of Mexico facilities. The
company also earned the Lake Charles district SAFE award for 2005 and
the national SAFE award in 1998 as CNG Producing, the former name of
Dominion E&P.
Except as noted below, Hurricanes Katrina and Rita resulted in
minor physical damage to Dominion-owned facilities in the Gulf of
Mexico. Our production platform at Main Pass 270 was significantly
damaged during Hurricane Katrina, but repairs on this facility have
been completed and the field was returned to production in February of
2006. Other facilities received minor damage and were repaired more
quickly. The major impact of the storms on Dominion was damage to third
party facilities downstream of our platforms, which damage impacted
production from most of our fields in the Gulf of Mexico. Almost all of
this production has been restored.
Question 2. In your written testimony regarding the resource
assessments of 181 you say, ``if past experience is a guide, actual
production could end up being much more than [the current estimates]''.
What do you mean by this? Can you give us past examples of estimates
being substantially lower than actual production in the Gulf?
Answer. Typically, the ultimate size of the resource base in a
basin or area exceeds initial estimates. Since the geologic and other
subsurface characteristics of unexplored or under-explored regions,
such as lease sale 181, cannot be determined directly until drilling
occurs, indirect techniques and procedures must be used to develop
initial resource estimates. Although improved technologies and
increased understanding of hydrocarbon systems have allowed for more
accurate assessments of resource potential, significant uncertainties
remain and have generally resulted in conservative initial estimates.
The estimates of ultimate recovery usually increase over time as
drilling results in the extension of proved reservoir areas and the in-
field discovery of one or more new reservoirs. The addition of new
drilling data frequently improves the understanding of the nuances of
an area's geology and that often leads to new ideas as to how and where
hydrocarbons may be trapped. Finally, continuing technological advances
improve the ability to find new resources, recover more production from
existing reservoirs, and also lower the economic threshold for marginal
discoveries. All of these factors contribute to the ultimate resource
size usually being greater than initial estimates.
As I indicated in my testimony, in the areas of the Gulf of Mexico
where industry has been allowed to buy leases and explore, production
has been three times as much as was once thought to be there. The
current resource estimate, according to the MMS, is that there is
nearly five times as much remaining to be found.
A 1997 study published by the Energy Information Administration
further supports this concept at an individual field level. The study
analyzed data from the 200 largest liquid fields in the United States
over the period 1978 through 1993. The Ultimate Recovery Appreciation
(URA) ratio, defined as the generally observed increase of estimated
ultimate recovery from the field over time, was determined for each
field. About 85 percent of the fields had a URA greater than 1, which
corresponds to increasing ultimate recovery over time. About 2/3 of the
fields had a URA between 2 and 4, which means that estimates of
ultimate recovery increased by a factor of 2-4 over the limited 15-year
time period covered by the study. Dominion's experience with its two
Deepwater Gulf of Mexico fields that have significant production
history supports the recovery appreciation concept.
Question 3. How many facilities do you currently have in the Gulf
of Mexico? How much oil and gas do you produce in the Gull?
Answer. Dominion has interests in 61 active platforms and 156
active wells in the Gulf of Mexico. Production net to Dominion's
interest in February 2006 was 169 million cubic feet of natural gas per
day and 43.5 thousand barrels of liquids per day, which is 430 million
cubic feet of gas equivalent per day (with liquids converted to gas
equivalent at a ratio of 6.1) or 160 billion cubic feet of gas
equivalent per year.
Question 4. Comment on your operations in the currently leased
portions of 181.
Answer. Dominion has interests in two fields currently being
developed in currently leased portions of sale 181. The San Jacinto
field in Desoto Canyon 618/619 and the Spiderman field in Desoto Canyon
620/621 were discovered in late 2003 and early 2004. Both discoveries
are very attractive gas fields. The Independence Hub Project, a
production platform and pipeline owned by a third party are currently
being constructed to handle production from San Jacinto, Spiderman and
several other industry discoveries in the area. First production is
expected in 2007. Dominion also owns interests in seven other leases in
the Desoto Canyon area that are being evaluated for drilling.
Question 5. Please estimate, how quickly could you bring the oil
and gas to production in the area covered by S. 2253 of this bill were
enacted today?
Answer. There are a number of variables that will impact the time
to first production and the details are critical. Among the variables
that will impact the actual time to initial production are the time to
secure drilling and production permits, availability of a drilling rig
and other equipment, distance from existing infrastructure, details of
product characteristics, infrastructure capacity, availability of
fabrication facilities and so on. An example of the time required to
bring on production in a new area is Dominion's experience with the
Spiderman and San Jacinto projects in the Desoto Canyon area of the
Eastern GOM. Dominion is the operator of the San Jacinto project in
Desoto Canyon blocks 618/619 and one of our co-lessees operates the
Spiderman project at Desoto Canyon 620/621. The leases were part of OCS
sale 181 held in December 2001 and were awarded in the first quarter of
2002. The Spiderman discovery well was drilled in the fourth quarter of
2003 and the San Jacinto discovery well was drilled in the first
quarter of 2004. Additional delineation drilling, to further define the
size of the accumulations, also occurred in 2004. In November 2004, a
group of producers (the Atwater Valley Producers Group, which includes
Dominion) and Enterprise Products Partners, L.P. executed agreements
for Enterprise to build and install the semi-submersible Independence
Hub platform at Mississippi Canyon 920 and the 124-mile, 24-inch
diameter Independence Trail pipeline from the hub to existing pipeline
infrastructure in the West Delta area of the GOM Shelf. Fabrication and
installation activities are currently underway. The Independence Hub
will handle production from several fields in the area, including
Spiderman and San Jacinto. First production through the Independence
Hub is expected in 2007, slightly more than five years from the date
the leases were awarded and a little less than four years after initial
drilling.
The five-year type of lead time would be typical of a stand-alone
development remote from existing infrastructure, where new platform and
pipeline facilities must be constructed before production can begin.
Once sufficient infrastructure is in place, the lead time for smaller
discoveries that can be tied back to existing structures could be much
shorter. Assuming that capacity exists to handle the new production,
the lead time for these type of developments could be shortened to as
little as 18 months after drilling is completed.
Question 6. Are you confident that Dominion is in full compliance
with all applicable royalty laws? Please comment on the process you are
taking to ensure that Dominion is paying its proper share.
Answer. Dominion takes its royalty payment obligations very
seriously and is confident that it is in compliance with all applicable
rules and regulations. The company has an extremely competent staff
that is responsible for making royalty payments to the United States.
The average industry experience of the group's management staff exceeds
20 years. All managers are degreed professionals and three, including
the Director, are CPAs. The group stays up to date with MMS regulations
and standards issued by the Council of Petroleum Accountants Societies
(COPAS). It has access to experienced counsel regarding pertinent legal
issues. Finally, as indicated in question 1 above, Dominion was the
recipient of the 2002 MMS SOAR award. Recipients of this award must be
among the best-performing OCS lessees in terms of royalty reporting.
Responses of Timothy S. Parker to Questions From Senator Talent
Question 1. Assuming we pass this bill and it becomes law, how long
after that time will it take to begin producing oil and gas from the
Lease 181 area? Mr. Gravitz testified that it may be five or six years
at the earliest--my understanding is two years at most once we pass
this bill.
Answer. There are a number of variables that will impact the time
to first production and the details are critical. Among the variables
that will impact the actual time to initial production are the time to
secure drilling and production permits, availability of a drilling rig
and other equipment, distance from existing infrastructure, details of
product characteristics, infrastructure capacity, availability of
fabrication facilities and so on. An example of the time required to
bring on production in a new area is Dominion's experience with the
Spiderman and San Jacinto projects in the Desoto Canyon area of the
Eastern GOM. Dominion is the operator of the San Jacinto project in
Desoto Canyon blocks 618/619 and one of our partners operates the
Spiderman project at Desoto Canyon 620/621. The leases were part of OCS
sale 181 held in December 2001 and were awarded in the first quarter of
2002. The Spiderman discovery well was drilled in the fourth quarter of
2003 and the San Jacinto discovery well was drilled in the first
quarter of 2004. Additional delineation drilling, to further define the
size of the accumulations, also occurred in 2004. In November 2004, a
group of producers (the Atwater Valley Producers Group, which includes
Dominion) and Enterprise Products Partners, L.P. executed agreements
for Enterprise to build and install the semi-submersible Independence
Hub platform at Mississippi Canyon 920 and the 124-mile, 24-inch
diameter Independence Trail pipeline from the hub to existing pipeline
infrastructure in the West Delta area of the GOM Shelf. Fabrication and
installation activities are currently underway. The Independence Hub
will handle production from several fields in the area, including
Spiderman and San Jacinto. First production through the Independence
Hub is expected in 2007, slightly more than five years from the date
the leases were awarded and a little less than four years after initial
drilling.
The five-year type of lead time would be typical of a stand-alone
development remote from existing infrastructure, where new platform and
pipeline facilities must be constructed before production can begin.
Once sufficient infrastructure is in place, the lead time for smaller
discoveries that can be tied back to existing structures could be much
shorter. Assuming that capacity exists to handle the new production,
the lead time for these type of developments could be shortened to as
little as 18 months after drilling is completed.
Question 2. What would you expect the rate of annual production
will be from the Lease 181 area?
Answer. With all of the uncertainty regarding resource size, the
rate of discovery and development timing, it is extremely difficult to
forecast annual production from the Lease 181 area.
However, we would certainly expect rates to significantly exceed
the current capacity of the Independence Hub project referred to above,
which is 1 billion cubic feet of gas per day.
Question 3. What do you anticipate will be the affect on price?
Gas markets are notoriously complex, with many poorly understood
variables and relationships making quantitative predictions impossible
to make with any precision. However, gas markets are certainly forward-
looking and the presence of meaningful future supplies cannot help but
exert downward pressures on future prices. We are very hopeful that the
area will be leased, that discoveries will be attractively sized and
that the impact on future gas prices will be meaningful.
Appendix II
Additional Material Submitted for the Record
----------
State of Louisiana,
Office of the Governor,
Baton Rouge, LA, January 30, 2006.
Ms. Renee Orr,
Chief, Leasing Division, Minerals Management Service, Gulf of Mexico
OCS Region, New Orleans, LA.
Dear Ms. Orr: I have received the above-referenced Lease Sale
document sent by MMS Director R.M. ``Johnnie'' Burton via letter dated
November 16, 2005. As noted in the Environmental Assessment for Lease
Sale 198, the assessment of the 2005 hurricane season's profound
impacts on Louisiana's coastal resources and infrastructure is not yet
complete. As such, we are currently unable to determine whether the
assumptions made in the MMS consistency determination are still valid
and therefore unable at this time to determine the consistency of Lease
Sale 198 with our coastal zone management program. I do wish, however,
to point out the growing tension between uncompensated support for OCS
activities and the state's coastal zone management program.
The Louisiana Coastal Zone Management Program declares it to be the
public policy of Louisiana ``. . . to protect, develop, and where
feasible restore or enhance the resources of the state coastal zone''
(La. R.S. 49:214.22). As the state has mentioned in earlier OCS lease
sale comment letters, it is apparent that OCS development has a
significant impact on the Louisiana coastal zone and the fragile
wetlands in this area. Numerous onshore support bases and extensive oil
and gas infrastructure are located in Louisiana's Coastal Zone, through
which OCS waterborne traffic and petroleum pipelines must pass.
Consequently, Louisiana suffers disproportionate impacts resulting from
development of oil and gas resources in the Gulf area.
Development that degrades the state's coastal resources is
inconsistent with the state's public policy mandate to achieve
protection of those resources in coordination with development. These
impacts are also inconsistent with the public policy mandate in R.S.
49:214.22(3) prescribing, ``. . . the minimization of adverse impacts
of one resource use upon another.'' In an effort to bring OCS
development in line with the state's coastal zone management policy,
the state has advocated for significant sharing of recurring OCS
revenues so that these revenues could be dedicated towards restoration
and protection of coastal resources. A constitutional amendment has
been passed by the Louisiana legislature and will put before a vote of
the people this year that would dedicate OCS revenues received by the
state exclusively to coastal restoration and hurricane protection. The
state is thankful for the coastal impact assistance it has received
from Congress, but this assistance has been sporadic and inadequate.
Federal OCS policy has yet to make suitable provisions for the
protection of the natural resources of coastal Louisiana.
The hurricane season of 2005 has highlighted the vulnerability of
other resources in Louisiana's coastal zone. Many of the people and
communities and much of the infrastructure in Louisiana's coastal zone
have been displaced, damaged or destroyed. The people and
infrastructure impacted include the workforce and energy infrastructure
that provide vital support to federal OCS activities. Given the
dramatic impacts of Hurricanes Katrina and Rita to the Louisiana
Coastal Zone, the state has been required to reexamine its coastal zone
management policies. It is abundantly clear that allowing development
to occur where inadequate provisions are made for the protection of
that development is irresponsible. Development that is not sustainable
holds little benefit for the state and its coastal zone. As set forth
in R.S. 49:214.22, a successful coastal zone management policy must
include both development and protection of coastal resources.
Despite having abundant resources, in the form of OCS revenues, to
protect the development required for supporting OCS activities in
general and Lease Sale 198 activities in particular, the federal
government has not devoted adequate resources to this end. Instead,
Louisiana is being asked to continue its role as the workhorse for OCS
development while no provisions are being made to ensure the
sustainability of the onshore support for that development. Louisiana
is expected to continue to be a ``working coast,'' yet provisions are
not being made to protect the workers, communities, and high
concentration of energy infrastructure of our working coast. While the
indirect economic benefits to the state of OCS activity is significant,
the hurricanes have reminded us that any economic benefits pale in
comparison to the need to assure that coastal communities are safe and
protected. The amount of oil and gas activity off our coast means
little if we have no coastal communities to take advantage of this
activity.
We encourage MMS to help support Federal legislative changes so
that the impacted coastal oil and gas producing states receive a
significant share of OCS revenue. The Coastal Impact Assistance Program
included in the Energy Policy Act of 2005 will provide an estimated
$540 million to Louisiana and its coastal parishes over the next four
fiscal years. While Louisiana is appreciative of those additional
resources, they represent only a fraction of the billions of dollars
needed to properly restore and protect Louisiana's coast and its
communities. We continue to urge Congressional authorization of
recurring OCS revenue sharing so we can sufficiently address OCS-
related impacts to our coastal habitats, communities and
infrastructure. In light of Louisiana's continuing role in meeting
America's need for oil and gas through our support for OCS operations,
we strongly believe that the Nation should do its part to address those
OCS-related impacts to our coast.
Federal policy on OCS leasing must include provisions for the
protection of the very resources necessary for the exploration and
production of these leases. Future OCS lease sales that are not
accompanied by meaningful provisions for the protection of Louisiana's
human and natural resources will likely be inconsistent with
Louisiana's coastal zone management program.
I appreciate the opportunity to comment on Lease Sale 198 and the
need for recurring Federal assistance in addressing OCS-related impacts
to coastal Louisiana's natural resources, communities, and OCS-support
capabilities.
Sincerely,
Kathleen Babineaux Blanco,
Governor.
______
Dow Chemical Company,
Midland, MI, February 14, 2006.
Hon. Pete Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: I am writing to congratulate you and your
colleagues, Senators Bingaman, Talent, Dorgan and others for
introducing legislation to accelerate the natural gas production in
Lease Sale 181 in the Gulf of Mexico. When I had the honor of
testifying before your committee on October 6 of last year, I observed
that expediting energy production in that area was an essential step to
restore the global competitiveness of American manufacturing.
Fortunately, the mild winter in parts of the country has spared
many Americans from devastating increases in home heating costs.
Nonetheless, increases of up to 30 percent have still been felt. For
industry, the current price of natural gas remains at globally
uncompetitive levels. In a few years, Middle Eastern countries,
including Iran, will have developed a robust chemical industry, based
on natural gas available at a fraction of what we pay in the U.S.
American companies will struggle to hold their own in this environment,
and those who can will invest elsewhere if they want to grow.
We are not expecting a return to the natural gas prices of the
1990's. We are hopeful that renewed commitment to energy efficiency,
greater fuel diversity and additional natural gas supply will allow us
to compete using our advanced technology and economies of scale. You
have already done much on efficiency and diversity. The missing piece
of the puzzle is what you have proposed for Lease Sale 181. Bringing
new gas to market within a year will be an excellent economic signal,
and will show that natural gas can be safely recovered from previously
restricted areas.
More and more Senators are coming to realize that natural gas is to
manufacturing as flour is to baking. Natural gas is an important bridge
to help us grow and have the ability to invest in the new technologies
that will transform what energy we use and how we use it in the future.
I hope the Senate will support your bill, and that it will lead to
further action to secure additional American natural gas from the deep
waters of our Outer Continental Shelf. High quality jobs and investment
depend upon it.
Sincerely,
Andrew N. Liveris,
President, CEO and Chairman-Elect.
______
U.S. Senate,
Washington, DC, February 15, 2006.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Hon. Jeff Bingaman,
Ranking Member, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Chairman Domenici and Ranking Member Bingaman: We are writing
with regard to your recent introduction of legislation, S. 2253, which
would require the Secretary of Interior to offer certain areas of the
Gulf of Mexico known as the 181 area to oil and gas leasing. While we
support expanding access for responsible exploration and production on
the outer Continental Shelf (OCS), we cannot support legislation that
accomplishes this goal but does not share any of the projected revenues
(bonus bids, rents and royalties) that would be generated from this
production with the states and local communities off of whose coastline
the production will take place.
As you are aware, oil and gas production on the OCS currently
contributes for about 30 percent of domestic oil production and 21
percent of domestic natural gas production. It is estimated that 60
percent of the oil and natural gas still to be discovered in U.S. will
come from the OCS. Within the next five years, offshore production will
likely account for more than 40 percent of oil and 26 percent of
natural gas production. In fact, since the energy frontier of the OCS
was officially opened to significant oil and gas production in the
1950s, no single region has contributed as much to our nation's energy
production. About 95 percent of today's OCS production occurs in the
central and western Gulf of Mexico.
Thanks to your leadership, the recently enacted Energy Policy Act
of 2005 provides a significant stream of coastal impact assistance
funding to--the coastal producing states where this production has
taken place and will continue to take place for the foreseeable future.
In the aftermath of Hurricanes Katrina and Rita and their impact on
production in the Gulf of Mexico, we believe our nation better
understands the importance of offshore oil and gas production to the
nation's energy supply. In addition, these storms demonstrated clearly
and concisely the extent to which we depend on the central and western
portions of the Gulf of Mexico for our oil and gas supply.
While the area your legislation seeks to open up to exploration and
production is technically in the Eastern Planning Area, given the state
of Florida's objection to oil and gas production off its coastline, our
states will provide the platform for any development that could take
place as well as bear the impacts of that development. Without the
ports, fabrication facilities and tens of thousands of miles of
pipelines located in our states, it would be literally impossible to
access these mineral assets at all.
Again, we were grateful to secure $250 million per year for four
years in coastal impact assistance for our states from the Energy Bill
last year. We hope you will work with us during consideration of this
legislation or any other similar legislation that comes before the
Senate this year to provide coastal producing states with the
additional significant and steady funding necessary to ensure that the
coasts of our states are able to continue to serve as the nation's
energy hub for years to come.
Thank you in advance for your consideration. With kindest regards,
we remain
Sincerely,
Trent Lott,
U.S. Senator.
Mary Landrieu,
U.S. Senator.
______
American Forest & Paper Association,
Office of the President,
Washington, DC, February 17, 2006.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Pete: I am writing to applaud you for your leadership in
introducing S. 2253, a bill that will help restore balance to America's
energy policy by allowing production in resource rich areas of the Gulf
of Mexico.
For many years, federal policies have encouraged increased
consumption of clean burning natural gas to meet environmental
objectives. At the same time, other federal policies have restricted
access to supplies of natural gas both on and offshore. This dichotomy
has resulted in a serious supply-demand imbalance with natural gas
prices rising to levels significantly impacting the global
competitiveness of manufacturing in the U.S. Currently, energy is the
third largest manufacturing cost for the forest and paper industry at
18 percent for pulp and paper mills--up from 12 percent just three
years ago. For some mills, the cost of energy is about to eclipse
employee compensation.
S. 2253 will bolster our nation's energy supplies in the near term,
help put the natural gas market back on the road to recovery, and give
American businesses a fighting chance to compete in global markets. We
look forward to working with you to help pass this important
legislation.
With kindest personal regards, I remain,
Sincerely,
W. Henson Moore,
President and Chief Executive Officer.
______
Lee County,
Board of County Commissioners,
Fort Myers, FL, February 21, 2006.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Senator Domenici: Please accept this letter of support for S.
2239, the Permanent Protection for Florida Act sponsored by the bi-
partisan Senators from Florida. Please also accept copies of recent
resolutions unanimously passed recently by the Lee County Commission in
opposition to drilling off of the outer continental shelf of Florida.
We are striving to protect our natural resources and water quality
at all angles and we feel strongly that drilling at the coast of
Florida serves as a multiple threat to our coast.
This threat increases the potential harm to our marine ecosystem,
the preservation of the beauty of our coast and beaches and the loss of
our states' rights to protect our economy and coast line.
Thank you for the opportunity to share our concerns regarding
drilling off the coast of Florida. We hope that you respect our efforts
to protect Florida's world famous coast line for millions of our
residents and visitors far into the future.
Sincerely,
Tammara Hall,
Chairwoman, District 4.
______
National Petrochemical & Refiners Association,
Washington, DC, March 6, 2006.
Hon. Pete Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Chairman Domenici: NPRA, the National Petrochemical & Refiners
Association, thanks you for your continuing efforts to increase access
to domestic oil and natural gas supplies. I refer specifically to S.
2253, legislation that would require the Secretary of the Interior to
open the ``181 Area'' to oil and natural gas leasing. Although NPRA
hopes in time to see action on a broader front, aimed at most of the
OCS areas that are currently off limits to oil and gas production, your
bill has our wholehearted support. Increased access to domestic natural
gas and oil supplies is essential to the nation's overall economic
well-being and security.
As you know, NPRA members include virtually all U.S. refiners and
petrochemical manufacturers. The viability of these industries depends
on reliable and consistent access to energy supplies. The refining
industry is a major user of natural gas in its facilities. The domestic
petrochemical industry, which relies on natural gas as a feedstock, has
been particularly hard hit as plants and well-paying jobs migrate to
areas of the world with significantly lower feedstock prices. Thus,
your action to increase supplies of domestically-produced natural gas
will help keep a critical industry and high-paying jobs in the United
States while increasing domestic energy security.
S. 2253 acknowledges the substantial natural resources available in
the Gulf of Mexico, and its enactment will increase supply and could
help ease the upward price pressure in oil and gas markets. In this
crucial time, as the U.S. struggles to maintain its position as the
preeminent base of manufacturing, increased access to domestic energy
resources must be a top priority. S. 2253 directly addresses this issue
and will, by increasing access to domestic oil and gas supplies, make
the U.S. manufacturing sector in general, and our refining and
petrochemical industries in particular, more competitive in the global
marketplace.
NPRA supports S. 2253 in its present form and advocates its swift
approval by the Committee on Energy and Natural Resources and passage
by the full Senate. Again, NPRA wishes to thank you for your strong
leadership on and commitment to this important issue. Efforts to
increase supply from domestic sources of oil and natural gas will
ensure that our nation remains strong and secure and that the
petrochemical and refining industries continue to manufacture the bulk
of their critical products in the United States.
Sincerely yours,
Bob Slaughter,
President.
______
Statement of The American Petroleum Institute
API is a national trade association representing more than 400
companies involved in all aspects of the oil and natural gas industry,
including exploration and production, refining, marketing and
transportation, as well as the service companies that support our
industry. Its mission is to advocate public policy in support of a
strong, viable U.S. oil and natural gas industry essential to meet the
energy needs of consumers in an efficient and environmentally
responsible manner.
INTRODUCTION
Oil provides 97 percent of our transportation fuel. Manufacturers
and farmers alike depend on petroleum to get their products to market.
Clean-burning natural gas provides more than 20 percent of total
U.S. energy--generating about 23 percent of electric power (EIA 2004
data), supplying heat to more than 60 million households and providing
more than 40 percent of all primary energy for industrial use. It is a
heat and power source for major industries including iron and steel,
glass, food processing, paper, metals fabrication, textiles, rubber and
plastics. It is an essential building block for the chemical industry
and a feedstock for making fertilizer.
Natural gas and oil are used in many products that we use daily--
ranging from clothing to computers, medicines, sports equipment, CDs,
cosmetics, hospital equipment, carpets, insulation and lightweight
parts for cars and airplanes.
Energy demand is rising. Despite expected energy efficiency
improvements of 33 percent and renewable energy supply increases of 41
percent, the U.S. Energy Information Administration (EIA) forecasts
that, by 2025, petroleum demand will increase by 39 percent and natural
gas demand by 34 percent.
EIA also estimates that oil and natural gas will provide nearly
two-thirds of the energy consumed in 2025.
MMS and DOE forecast that without expanded access beyond the
Central and Western Gulf of Mexico, the growth in deepwater production
will not be able to offset declines in shallow-water production for
more than a few years.
In the past two years, higher energy prices have slowed U.S.
economic growth by 0.5 to 1.0 percent (based on pre-hurricane prices).
More than 2.8 million U.S. manufacturing jobs have been lost since
2000. Since 2002, 36 percent of the U.S. fertilizer industry--which
depends on natural gas--has been shut down or mothballed. Farmers paid
$6 billion more for energy in 2003 and 2004.
The U.S. chemical industry has been especially hard hit by high
natural gas prices since it relies on natural gas as a feedstock. Its
natural gas costs increased by $10 billion since 2003. And, $40 billion
in business has been lost to overseas competitors who pay less for
natural gas. Chemical companies closed 70 facilities in the United
States in 2004 and have tagged at least 40 more for shutdown. Of the
120 chemical plants being built around the world with price tags of $1
billion or more, only one is in the United States.
IMPORTANCE OF GULF OF MEXICO
The Gulf of Mexico OCS has been producing oil and natural gas since
the 1950s.
The OCS is a vital part of the nation's energy infrastructure. More
than 45,000 people are directly employed by OCS operations. There are
about 4,000 OCS production facilities and 33,000 miles of pipelines.
Recent advances in exploration and production technologies have
opened new frontiers in the deepwater Gulf of Mexico. Deepwater oil and
gas production has offset declining production from older, shallower
OCS wells. In 2003 (which is the latest year for natural gas
statistics), the Gulf of Mexico OCS contributed 29 percent of the oil
produced in the United States and 22 percent of domestic natural gas
production.
The Minerals Management Service (MMS), part of the Department of
the Interior, has called deepwater oil and natural gas development in
the Gulf of Mexico ``a workhorse for U.S. domestic oil and gas
production.'' According to MMS, offshore deepwater oil production rose
535 percent between 1995 and 2002 and deepwater natural gas production
rose 620 percent over those same years.
However, virtually all of the oil and natural gas produced from the
OCS is from the Central and Western sections of the Gulf of Mexico,
which played a key role in supplying growing demand for clean-burning
natural gas. The 1.5 million barrels per day (MMB/D) of oil from the
Central and Western Gulf of Mexico OCS is equivalent to our imports
from Saudi Arabia. The 4.4 trillion cubic feet (Tcf) produced annually
from the Central and Western Gulf of Mexico OCS is enough natural gas
to meet more than 80 percent of the electric power sector's consumption
of natural gas.
THE OUTER CONTINENTAL SHELF
The OCS is intended to meet many uses that sustain the nation,
including minerals development, fishing, shipping and other uses.
However, the Outer Continental Shelf Lands Act (OCSLA) explicitly
recognizes the importance of OCS oil and natural gas production.
The OCSLA declares that it is ``. . . the policy of the United
States that . . . the Outer Continental Shelf is a vital national
resource reserve held by the federal government for the public, which
should be made available for expeditious and orderly development,
subject to environmental safeguards, in a manner which is consistent
with the maintenance of competition and other national needs.''
Further, amendments to the OCSLA in 1978 found that ``. . .
increasing reliance on imported oil is not inevitable, but is rather
subject to significant reduction by increasing the development of
domestic sources of energy supplies . . .''
Limits on development (through Congressional and administrative
moratoria) prevent exploration and production in most of the Eastern
Gulf of Mexico and the entire Atlantic and Pacific OCS. That means
almost 90 percent of the OCS acreage off the lower 48 states is off
limits to energy development.
There are about 300 Tcf of natural gas and more than 50 billion
barrels of oil yet to be discovered on the lower 48 OCS. This is enough
oil to maintain current oil production (based on 2003 lower 48 OCS) for
87 years and current natural gas production for 68 years.
That is enough oil to produce gasoline for 116 million cars and
heating oil for 47 million homes for 15 years.
It is enough oil to replace current imports from the Persian Gulf
for 59 years. It is enough natural gas to heat 75 million homes for 60
years, or to supply current industrial and commercial needs for 29
years or to supply current electricity generating needs for 55 years.
And, that is before the Alaska OCS is considered with additional
resources of 122 Tcf of natural gas and 25 billion barrels of oil.
Thus, the undiscovered resources on the federal OCS that could be
recovered with today's technology is estimated at 420 Tcf of natural
gas and 77 billion barrels of oil. For perspective, that is equivalent
to the oil resources of Canada and Mexico combined and almost 3 times
the natural gas resources of these two countries.
Yet, these estimates may be conservative since these areas are
largely unexplored and these estimates have benefited from the use of
new seismic and computer modeling technology. Generally, the more an
area is explored, the more its resource estimates grow.
For example, the U.S. Geological Survey (USGS) estimates of
undiscovered oil resources for the Central and Western Gulf of Mexico
increased from 6.32 billion barrels of oil in 1995 to 33.39 billion
barrels of oil in 2003--an increase of more than 400 percent. And, USGS
estimates of undiscovered natural gas resources in the Central and
Western Gulf of Mexico increased from 88.1 Tcf to 180.2 Tcf over the
same time period--an increase of 104 percent.
THE NEXT 5-YEAR PLAN
U.S. energy policy has not sufficiently emphasized the importance
of developing domestic oil and natural gas supplies, which are
essential to our economic growth and our energy security. Speaking of
natural gas, the congressional Joint Economic Committee has pointed out
that U.S. policy has encouraged the use of this clean-burning fuel,
while discouraging the development of new supplies--and approach it
called ``a recipe for problems.''
The next 5-year plan can take an important step to address U.S.
consumers' future energy needs. It should provide for expanded OCS
leasing, including:
Opening the remaining Sale 181 area--an area with
substantial energy resource potential and access to existing
infrastructure that could help speed delivery to energy users.
Providing flexibility for future inclusion of areas where
development is currently prohibited should they be opened to
development in the future. For example, the Eastern Gulf of
Mexico is expected to hold significant resources (the National
Petroleum Council estimated 25 Tcf of natural gas based on
existing, but limited, data).
Around the world, virtually every other country with oil and gas
resources is promoting investment in and developing their offshore
resources.
If the United States continues to reject opportunities to develop
domestic offshore energy resources, U.S. consumers and businesses will
suffer the consequences. slower economic growth, higher energy prices,
reduced competitiveness vis-a-vis overseas manufacturers and continued
job losses.
THE DOMENICI-BINGAMAN PROPOSAL
We applaud the legislation introduced by Senators Domenici,
Bingaman and others that would instruct the Secretary of the Interior
to develop an oil and gas leasing program for Lease Area 181 100 miles
off the Florida Coast and West of the Military Mission Line. Approval
of this measure would go a long way toward increasing much-needed
supplies of oil and natural gas, and we look forward to working with
the Senators in this important endeavor.
We do believe, however, that the northern segment commonly known as
``the stovepipe'' should to be included in the area to be made
available for leasing, as should other areas outside the Gulf of
Mexico. We hope that as this bill makes its way through the legislative
process, members of Congress will see fit to include such areas. We
also believe the bill should address a fair and equitable sharing of
offshore revenues with producing states. Some states want to develop
their resources to reduce our dependence on foreign energy, and federal
policies should encourage them, not hinder them.
We are heartened by the bipartisan nature of this effort. It is a
strong indication that Americans are increasingly recognizing the need
for greater diversification of our nation's energy supplies, as well as
appreciating industry's well-established record for producing energy
from offshore areas while protecting the environment.
______
Statement of Obie O'Brien, Director, Governmental and Regulatory
Affairs, Apache Corporation
I appreciate this opportunity to add my comments to the record
concerning S. 2253 a bill to require the Secretary of the Interior to
offer the 181 area of the Gulf of Mexico for oil and gas leasing.
Testimony was presented and images were submitted on February 16,
2006 to the committee that allegedly indicate ``. . . extensive oil
slicks which appear to emanate from oil platforms . . .'' One of the
images purported to show an oil slick coming from Apache's
Corporation's West Delta Platform 104C.
The West Delta 104C platform was operated by Apache Corporation.
The image and description of that platform was published on the website
of an organization know as Skytruth and purportedly depicts it as the
cause of an oil slick. The truth is that the well in question was a
natural gas well not an oil well. The truth is that facilities at that
location were damaged by Hurricane Katrina but did not cause an oil
slick.
As soon as practical after Hurricane Katrina, Apache conducted
aggressive and diligent surveys of all platforms in the Gulf Coast area
affected by the hurricane to assess the damage and possible
environmental impacts caused by the storm. As part of that assessment
Apache conducted overhead flights to survey the area. I have attached
two photographs of the WD 104C location that were taken during those
inspection flights. Although the well did release natural gas after the
platform was damaged in the storm (which was the cause of the
turbulence that is visible in the photographs), there was no oil slick
associated with this incident. As part of our response and monitoring
efforts we did observe and report a light sheen on the water, which
dissipated with no effect on the environment.
Throughout the aftermath of Hurricane Katrina, Apache worked
closely with the United States Coast Guard--which, in turn, worked with
the National Oceanic and Atmospheric Administration--and the Mineral
Management Service to minimize the storm's effects on the environment
and to keep them apprised of our remediation efforts and progress.
Debbie Payton, an oceanographer and spokesperson for the NOAA, stated
in news media accounts that in response to false and misleading
satellite images, such as those on the Skytruth web site which appear
to show oil plumes, NOAA and the Coast Guard sent teams to the area and
found no evidence of oil plumes coming from platforms or rigs. Ms.
Payton added that the dark patches in the satellite images that
SkyTruth claims represent oil slicks could actually be caused by any
number of things. At this point no one knows what caused the images but
it has been proven that they were not the result of an oil slick, as
has been alleged.
Apache takes pride in its environmental stewardship and spends
tremendous resources each year to operate its platforms and wells in an
environmentally responsible manner. Misrepresentations such as those
that appear on SkyTruth's website damage Apache's reputation and
dishonor the hundreds of employees and contractors who invest thousands
of hours each year to produce oil and gas in an environmentally
responsible manner.
Thank you again for this opportunity to add my comments for the
record.
______
Statement of the Independent Petroleum Association of America
The Independent Petroleum Association of America (IPAA) represents
over 5,000 producers of domestic oil and natural gas. Independent
producers drill 90 percent of the nation's oil wells, produce 85
percent of America's natural gas and 60 percent of domestically
produced oil. IPAA appreciates the strong efforts of Senators Domenici
and Bingaman and the other cosponsors of S. 2253 in recognizing the
need to open a portion of the Sale 181 lease area and encourage the
Senate to be even bolder and open the entire region to exploration and
production.
Independent producers play an increasingly important role in
offshore energy development. Independents now hold 90 percent of the
leases in the Gulf of Mexico, including 75 percent of the deepwater
leases. IPAA's members are the leaders in providing natural gas and oil
from the U.S. waters that are open to exploration and production.
Continued development of the nation's offshore areas is needed to
meet the country's demand for energy resources. Unfortunately, only
about 10 percent of the nation's Outer Continental Shelf (OCS) areas
outside of Alaska are. available for our producers to apply the best
energy technology in the world. According to resource estimates made by
the American Petroleum Institute, if all of the restrictions on
America's OCS lands were lifted, the nation could replace oil imports
from the Persian Gulf for the next 59 years. If America is to meet its
growing demand for oil and natural gas, access to federal offshore
areas like Sale 181 is essential.
Although the IPAA supports any effort to open additional areas of
the OCS to exploration and production, it does not believe S. 2253
needs to include an arbitrary 100 mile buffer from the State of
Florida. The Senate should not reduce the size of the Sale 181 area,
but open the entire region for exploration and production. Every other
state should not be denied access to the valuable energy resources
contained in the Sale 181 area in order to placate the imaginary
concerns of a vocal minority in the State of Florida.
Through the use of advanced technology, the offshore oil and
natural gas industry has compiled an outstanding record for operating
safely in the OCS. In 2002, the National Research Council of the
National Academy of Sciences completed a report entitled ``Oil in the
Sea III'' in which it found that from 1985-2001 offshore oil and gas
development, including pipelines accounted for only two percent of the
volume of oil spilled in North American waters. The NRC report also
found that in North America, natural seepage was the single largest
source of oil in the water accounting for 63 percent of total inputs to
the marine environment. The U.S. Coast Guard completed a similar study
in 2002 in which it found that between 1971 and 2000, U.S. OCS offshore
facilities and pipelines accounted for only two percent of the volume
of oil spilled in U.S. waters. Finally, the recently completed U.S.
Commission on Ocean Policy, citing figures from the Minerals Management
Service, found that 97 percent of OCS spills from 1985-2001 were one
barrel of oil or less in volume and that the total volume and number of
spills continues to decline. Clearly, the industry continues to improve
its environmental and safety record even as worldwide offshore
production expands.
The entire Sale 181 area is a vital part of the nation's energy
future. The environmentally safe development of urgently needed oil and
natural gas supplies through access to the region is a vital component
of an effective national energy strategy. The limited offshore region
considered in S. 2253 contains an estimated 4.8 trillion cubic feet of
natural gas, which can play a critical role in helping America address
its energy needs. Finding new natural gas supplies from the Gulf of
Mexico is not simply a regional issue. The reserves in the sale area
would provide needed oil and natural gas throughout most of the United
States. In fact, the impact may be especially significant in the
Midwest, where natural gas is used in more than three-fourths of the
households and is a major energy source for agriculture and industry.
IPAA is pleased the committee is engaged in a serious effort to
increase access to America's offshore energy resources. Providing
access to the Sale 181 area is critical and requires making new policy
choices with regard to offshore federal lands. Offshore oil and gas
development has and can occur while accelerating the protection and
improvement of the environment, and increase America's energy security.
IPAA stands ready to work with the committee to address the
nation's energy needs and looks forward to working on expanding access
to the Sale 181 area.
______
Statement of The American Forest & Paper Association
INTRODUCTION
The American Forest & Paper Association (AF&PA) offers the
following comments on S. 2253 and the natural gas crisis. S. 2253 will
provide short term relief to manufacturers suffering from high natural
gas prices and will help restore some measure of balance to America's
energy policy. AF&PA is the national trade association of the forest,
paper and wood products industry. Our organization represents
approximately 250 member companies and related trade associations that
grow, harvest, and process wood and wood fiber; manufacture pulp, paper
and paperboard from both virgin and recycled fiber; and produce solid
wood products.
The U.S. forest products industry is vital to the nation's economy.
We employ more than one million people and rank among the top ten
manufacturing employers in 42 states with an estimated payroll of more
than $60 billion. Sales of the paper and forest products industry top
$230 billion annually in the U.S. and export markets. We are the
world's largest producer of forest products.
Energy is the third largest manufacturing cost for the forest
products industry, making up 18 percent of total manufacturing costs
for pulp and paper mills--up from 12% just three years ago. Annually,
forest products companies purchase about 400 billion cubic feet of
natural gas. While today the price of natural gas in the U.S. hovers
around $8 per million BTUs, in the last three months we have seen
prices as high as $15. This increased price for natural gas also puts
increased pressure on purchased electricity and the price of chemicals
needed for our manufacturing operations. Higher natural gas prices have
the additional effects of increased transportation costs, as pulp is
sourced from around the world.
Meanwhile, prices in the rest of the world are noticeably lower.
For example, the high cost of gas in the U.S. dwarfs gas prices in
other countries that have seen much lower prices per million BTUs, such
as South America, and Russia, putting our industry at a significant
competitive disadvantage. This disadvantage is on top of other
competitive disadvantages we face. Our taxes are higher than those of
competing nations, and there are unfair trade barriers to the export of
our products. The cost of compliance with our nation's environmental
laws is directionally higher than the cost for some of the countries
with which we compete, and transportation costs are greater than
anywhere else around the globe. Government restrictions are also
limiting our access to fiber--even though our forestry stock has
increased by 39% since 1952. If we cannot successfully address these
challenges, the public demand for forest products will increasingly be
filled by other nations who do not adhere to our high standards.
The impacts of rising energy prices on the industry have been
dramatic. The forest products industry has closed over 232 mills and
lost 182,000 jobs (12% of employment) since 2000 when energy prices
started a steep rise. High energy costs contributed significantly to
these closures/lay-offs. Mills also have suffered supply curtailments.
Ultimately, an adequate supply of energy at a reasonable price is
needed for vibrant economic growth.
recommendations for balance of supply and demand
We believe that balance can only be achieved if action is taken in
each of the following critical areas:
1) Remove federal regulatory barriers preventing new natural
gas supply;
2) Diversify the nation's energy portfolio through R&D and
incentives; and
3) Implement conservation and other demand reduction
measures.
1) Remove Barriers to Supply of Natural Gas
There are numerous areas in and around the continental U.S. that
contain more than enough natural gas to accommodate national demand for
years to come. Barriers to accessing these areas should be removed as
well as other barriers to increased supply discussed below.
OCS
Lasting relief from high prices for natural gas can mainly be
achieved by increasing the supply of natural gas. Federal restrictions
currently limit access to offshore natural gas resources in the
Pacific, Atlantic, and Eastern Gulf of Mexico Outer Continental Shelf
(OCS). AF&PA believes that the OCS is critical to America's energy
security. It contains huge, untapped resources of oil and natural gas
that are critically important to sustaining our national economic
growth and maintaining much-needed jobs in virtually every sector of
the economy.
For years OCS development has been limited to the Central and
Western Gulf of Mexico. This has been a vital area--supplying almost
30% of the oil produced in the U.S. and about 20% of the natural gas.
Nonetheless, Hurricanes Katrina and Rita have reminded us that
disruptions in supplies from this area have major national implications
affecting residential, commercial and industrial consumers throughout
the country. While this area will remain very important, it is clear we
must expand access to supplies in other parts of the OCS. Expanded
access to new OCS areas is needed to ensure adequate future domestic
energy supplies.
The National Petroleum Council estimates that there are
approximately 300 TCF of natural gas and more than 50 billion barrels
of oil on the OCS off the continental U.S. that can be recovered using
existing technology but which has yet to be discovered.
Short Term
Some estimates indicate that Lease 181, a resource rich area in the
Gulf of Mexico, might represent 20 percent of the entire Gulf gas
production for the next six years. Most importantly, it is an immediate
source of supply because the pipeline infrastructure necessary to
transport the gas to market is already built and operational in the
area. It has substantial energy resource potential and access to
existing infrastructure that could help speed delivery to energy users.
The oil and gas leasing program outlined in S. 2253 could bring 5
trillion cubic feet of natural gas online in the most expedited manner.
We urge Congress to act immediately on this important legislation. It
is our best hope for short-term relief from high natural gas prices.
Long Term
AF&PA also supports empowering states to explore and develop new
natural gas sources and find ways to increase long-term U.S.
production. Specifically, we are in favor of the kind of approach
outlined in Senator Lamar Alexander's ``Natural Gas Price Reduction Act
of 2005,'' (S. 726), Subtitle E (Chairman Richard Pombo's Ocean State
Options Act ) of the House Resources Committee's budget reconciliation
package and the ``Reliable Affordable Natural Gas Energy Reform Act of
2006'' (S. 2290) recently introduced by Senators Mark Pryor and John
Warner. In these legislative vehicles, states are granted permanent
authority to decide whether to pursue energy production off their
shores or to extend the ban on development. Further, the proposals take
the needs of neighboring states into account when determining the
boundaries for gas and oil leases and provide a portion of the revenues
to producing states.
Liquefied Natural Gas (LNG)
LNG can play a significant role in increasing supply, but a real
increase in LNG imports will take time, and will be a challenge
considering the difficulties inherent in siting these facilities. The
four existing LNG terminals in the U.S. have announced plans to expand
capacity, and a number of new facilities (including both onshore and
offshore terminals) are under consideration. Expedited FERC review of
these projects will help. Recent advances in liquefaction and
transportation technology have brought down the price of processing to
a level that is competitive with domestic production. Additional
discoveries of natural gas resources are bringing these worldwide
resources into the domestic planning horizon. In addition to helping
the supply situation, increasing LNG import capacity in the U.S. will
also help level out volatility in the market due to the ability of
these facilities to quickly ramp up/down production. Barriers to LNG in
the Natural Gas Act and FERC regulations need to be reduced or
eliminated altogether. The provisions in the Act to expedite LNG siting
and expansion should be aggressively implemented. Additional LNG
capacity is an important part of the solution, but it will not solve
the supply and demand imbalance in the near-term, nor will it be the
complete solution.
Alaska Natural Gas Pipeline
Alaska is the third largest gas producing state after Louisiana and
Texas. However, supplies cannot reach the lower 48 states. The Alaska
Natural Gas Pipeline, a $20 billion project, has been proposed to fill
that need. It is estimated that with construction of the pipeline, 1.5-
2.2 TCF per year could reach the lower 48 states, after 2015.
Unconventional Sources of Natural Gas
The U.S. already obtains 7 MCF of gas a year from unconventional
sources. The ultimate supply within the continental U.S. may be as much
as 760 TCF, according to Advanced Resources International. This is
enough to satisfy 35 years of U.S. gas needs at its current rate of
consumption. The EIA projects that production of unconventional gas can
be increased by 1.2 TCF within the next ten years. Congress should
encourage and provide incentives for new technologies to find and tap
supplies of these unconventional sources of gas.
2) Diversify the Nation's Energy Portfolio through R&D and Incentives
The price of natural gas has not increased in a vacuum. The prices
of other fuel sources (e.g., oil, coal) also have increased, although
not to the same extent as natural gas. To ensure an affordable energy
supply in the future, we must diversify and increase utilization of all
viable energy sources. Increases in the use of other fuels will reduce
the demand and price pressure on natural gas.
Renewable Biomass Energy
An important factor in diversification of fuel sources is improving
our industry capabilities for energy self-sufficiency, while
simultaneously reducing demand for natural gas and imported fossil
fuels. The industry works through AF&PA's Agenda 2020 Technology
Alliance to support and conduct research, development and deployment
(RD&D) that address both of these objectives, with a focus on energy
efficiency, energy security, and environmental performance. Through
Agenda 2020, AF&PA members partner with DOE, USDA, NSF, other federal
agencies and academia on collaborative, pre-competitive RD&D to address
both industry and societal needs.
The Integrated Forest Products Biorefinery (IFPB) is a key Agenda
2020 technology platform. The IFPB will give industry the ability to
make greater use of renewable biomass energy in its processes, while
becoming a net producer of renewable electric power, liquid
transportation fuels, and other bio-based energy and products. If fully
developed and commercialized, the IFPB technologies being pursued by
the forest products industry, which include biomass gasification
technologies, could produce enormous energy and environmental benefits
for the industry and the nation both, including contributing to a
diversified, more secure national energy supply. This can be done while
co-producing existing product lines.
AF&PA recommends that forest products research and development
efforts, including DOE's ITP and commercial biorefinery programs, be
fully funded. This research is essential to maximizing energy
production from non-fossil fuels and also to the achievement of new
manufacturing opportunities for additional products that can help
secure the competitive future of the U.S. forest products industry.
3) Conservation and Other Demand Reduction Measures
Continued Aggressive Energy Conservation Campaign
AF&PA supports the Administration's ``Easy Ways to Save Energy''
Campaign recently announced by Energy Secretary Bodman. The campaign
includes actions directed at consumers, businesses and government
agencies. We support the comprehensive nature of this campaign, with
its recognition that all societal sectors must contribute to
conservation efforts
At least 10 AF&PA member mills have participated in an existing DOE
energy saving program, which provided energy assessments for industrial
facilities. On average, implementation of the assessments'
recommendations has resulted in millions of dollars in savings per
mill. The Administration should continue and expand these and the other
measures in the campaign.
conclusion
We thank the Committee for its leadership in developing policies
that will address the fundamental imbalance in natural gas supply for
both the short-term and the long-term. Our nation's economic growth and
the ability of U.S. manufacturers to regain their competitiveness can
be greatly enhanced by implementation of a strong and balanced energy
policy that will reduce natural gas costs for all consumers.
______
Statement of Shell Exploration & Production Co.
Shell Exploration & Production appreciates the opportunity to
submit testimony before this Senate Energy & Natural Resources
Committee legislative hearing. The topic of this hearing could not be
more timely given today's energy supply and demand situation.
For the past two years, the market forces of supply and demand have
been driving prices up. The U.S. is clearly not self-sufficient in
energy, importing more than 60 percent of its raw material from other
countries. However, Shell's Exploration & Production (E&P) North
American businesses are dedicated to growing the North American energy
supply. Our commitment is underpinned by a history of investing
billions of dollars every year in the development of future domestic
energy sources and defining new frontiers.
Shell plans to spend around $15 billion dollars globally this year
in the upstream part of our business as we focus on integrated gas,
unconventional resources and material oil. We are building a tremendous
resource base and are on our way to unlocking 13 billion barrels of
resources over the next 5 years to meet the ever-growing demand for
energy worldwide.
In the U.S. Gulf of Mexico, our exploration strategy is to drill
prospects with large potential volumes to high-grade our portfolio and
pioneer new plays. Shell is pursuing natural gas prospects in a number
of onshore North American basins. It is our goal to build new supply
positions by developing both conventional and unconventional gas
resources. Today Shell is drilling for new natural gas supplies in the
Gulf of Mexico, Washington state, North Dakota, Texas, and the U.S. and
Canadian Rockies. In addition, we believe Alaska and its OCS, including
the Beaufort Sea, Chukchi Sea and Bristol Bay, hold the potential to
yield the large hydrocarbon discoveries needed to become a new core
area for Shell, to build our reserves, and to help provide future
energy resources for America's growing demand.
Given the sustained high energy demand in the U.S. and globally,
the key driver impacting oil and gas prices is supply. Although our
company is actively exploring for oil and gas in all the areas in North
America currently available, we are doing this with one hand tied
behind our back, as most of the Outer Continental Shelf (OCS) is off
the table for exploration and development.
Congress must address domestic supply issues, like the limited
access to oil and gas exploration off our coastlines. The U.S.
Government estimates that there are about 400 trillion cubic feet of
natural gas and more than 75 billion barrels of oil yet to be
discovered on the OCS. Congress has made a decision to take most of the
OCS off the table for exploration and development. However, given the
sustained high energy demand in the U.S. and globally, access to these
resources over the long-term is imperative.
For this reason, Shell commends Chairman Domenici and Senator
Bingaman, as well as Senators Dorgan and Talent, for introducing and
holding a hearing on S. 2253. This important bi-partisan legislation
would provide access to promising areas in the original Lease Sale 181
area of the Gulf of Mexico. It could potentially result in production
of oil and gas resources in areas of the Gulf of Mexico that have not
been accessible despite the fact that they are not under moratoria.
It is important to note that these deepwater areas of the Gulf of
Mexico are frontier areas for oil and gas exploration. These plays are
naturally very challenging with objectives that are either in ultra-
deep water, high-temperature and high-pressure and/or poorly imaged
seismically. Sufficient acreage is needed to provide adequate running
room to shoot seismic and drill wells that will give explorers a better
understanding of the geologic plays in the region.
This bill recognizes the importance of making new areas on the OCS
available for leasing in order to meet a fundamental need for
additional domestic supply. We look forward to working with the
Committee to support S. 2253 and expanded access on the OCS. We also
want to work with Congress, the Administration and all interested
stakeholders on expanded access to OCS resources through the Minerals
Management Service 5-Year Plan process.
Today's energy supply and demand situation highlights the need to
expand access to offshore oil and gas resources. We encourage the
Committee to continue its efforts to make additional areas on the OCS
available for future leasing, including some of those that are
currently under moratorium. Shell believes that this can be done in a
way that ensures industry's impact is minimized, and environmental
resources are protected.
Today's energy supply and demand situation highlights the need to
expand access to offshore oil and gas resources. We encourage the
Committee to continue its efforts to make additional areas on the OCS
available for future leasing, including some of those that are
currently under moratorium. Shell believes that this can be done in a
way that ensures industry's impact is minimized and environmental
resources are protected.
If we are to expand the areas in which oil and gas resources may be
accessed, the state and local communities that support the oil and gas
development should be fairly compensated. Currently, states receive
bonus, rental, and royalty income for oil and gas production in waters
within their coastal boundaries, and a 27% share of the bonuses,
rentals, and royalties paid to the federal government for ``8(g)''
zone, which is the area lying 3 miles beyond state waters. And even
though coastal state resources and infrastructure directly support the
generation of bonus, rental and royalty income from production beyond
the 8(g) zone, the federal government shares none of that income with
the states.
A fair share of the federal income received from offshore oil and
gas production should be made available to the coastal states and
communities. The present division of income between state and federal
governments does not adequately compensate the states for their
contribution to the generation of this income. Infrastructure, such as
ports, roads and bridges are needed to support OCS development. The
working wetlands of the coastal states could also greatly benefit from
offshore revenue sharing with states and localities.
Additionally, MMS and state agencies are facing budgets cuts at the
same time they are facing increased demands to perform environmental
work, monitoring, mitigation, and enforcement. Congress should consider
disbursing a portion of bonus, rental and royalty income to federal and
state agencies in order to meet some of these requirements.
We look forward to working with the Committee to support these
important concepts and other solutions to America's energy needs.