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concept of "fair market value" in favor of a position of greater involvement in the risk-reward sequence of mineral exploration, development,

and technology.

Within most of the oil exporting governments the goal of such moves is quite clear--to increase the taxation efficiency of mineral extraction on behalf of the government. The similar role in the U.S. exists in obtaining value for the public's resources. However, there is another goal which is not important within most foreign producing governments and that is to stimulate exploration and technological risk taking to help solve the U.S. energy supply problem. This second role may be partially in conflict with the first.

To the extent that no overall policy direction exists as to whether maximizing Federal revenues or stimulating development is the prime goal, it will be difficult to administer these more complex leasing systems effectively. If the goals can be laid out, however, the more complex bidding systems give the government greater latitude to promote exploration and new technology than the simple bonus bidding approach, and should be adopted.

Arthur D Little, Inc.





July 14, 1972

The Hon. Henry M. Jackson


Committee on Interior and Insular


United States Senate
Washington, D. C. 20510

Dear Chairman Jackson:

Your letter of June 1, 1972 requested that I submit a statement for the record in response to certain questions and issues raised by the Committee regarding public energy resource management. My response to Attachment A will address the questions and issues in the context of the reply by the Department of the Interior, since that department has the overall management responsibility for these resources.

Further, it is not in my present capacity but in my previous capacity as Chief of Division of Minerals, Bureau of Land Management of that Department for the past three years that I gained whatever insight I may have into these problems.

In my reply, I will be especially cognizant of questions 8 to 12 as you requested in your letter. My comments on Attachment B will be sent separately at a later date.

In general, Secretary Loesch's June 19 testimony was impressively candid and indicated a renewed spirit of management responsibility for the public's vast energy resources.

Q. (1)


Which energy resources on the public lands (a) are now, or (b) could be, made available in the forseeable future, as a major element in the nation's energy supply?

To some extent the Department has information to enable it to answer this question quantitatively. However, an overriding problem of federal resource management today is the fundamentally inadequate information base available concerning what and where the public's resources are, what has in the past been leased, or otherwise alienated and, for that matter, what could be leased now or in the forseeable future.

Public resource information is needed in two basic forms: (1) physical appraisal, and (2) economic translations of those appraisals into reserve information. At present it can be fairly safely stated that both are inadequate for modern management purposes in most instances. It can further be stated that manpower and funds have not been adequate to allow for the proper inventory of these vast resources. For instance, while it is estimated that approximately 417 billion barrels of crude oil are recoverable "under current technological and economic

conditions" in this country, those "reserves" constitute less than one seventh of what is presently thought to be the total available resources in the country. What additional portion of those resources might be recoverable under a more advantageous pricing policy is not really known.

Yet distinctions between resources and reserves are critical and quantification of which resources are recoverable at various future price levels is fundamental to proper minerals management. Whatever else we know about the future, we can be fairly certain that prices for these resources will rise steeply. If so, estimates as to recovery under current conditions tell us very little about what is really "available" domestically, particularly from the public sector.

Secretary Loesch testified that federal lands in the west contained approxi-
mately 40% of the country's known coal reserves and mentioned that most of
these reserves are very low in sulpher content. These reserves could become
extremely important in terms of solving our air pollution problems if mining
problems can be solved. The basic problem of course is that there is no
detailed understanding as to what the total resources are in the federal
domain in the west. Some aggregate information as to the total calculations
of resources and reserves, and of sulpher content is available. But there
is very little information available on a disaggregated basis. In other
words there is very little available that is useful for management decisions,
e.g. in terms of specific areas proposed for development. Yet it is in the
discussions about leasing or other disposals that the issue of knowing what
we have becomes of prime importance.

Nor do we know very much about what portion of those resources-reserves are amenable to underground mining rather than strip mining, a key issue from the environmental standpoint. Similar statements could be made on each of the other types of resources in addition to coal. We know more about some than others but our careful understanding of the total resource base leaves much to be desired.

It would appear fair to argue for massive increases in knowledge about what the Federal resources and reserves are prior to management decisions which can affect the course of Federal minerals management for many years. I understand that the Department is presently developing plans for a "Resource and Land Use" information system to support these management decisions.

Q. (2) What are the principal goals and objectives of the government with respect to management of each resource?





To what extent is each goal or objective specifically set out in law, or adapted at the discretion of the Department?

To what extent is each goal or objective compatible with other objectives for the management of individual resources? (For example, how are encouragement of current development, conservation of supplies for future use, and maximization of government revenue reconciled?)

What is the basis for any differences in goals or objectives with respect to different energy resources?

To what extent do the goals and objectives of the principal legal authorities under which individual energy resources are managed require review to determine if they are consistent with today's energy requirements and environmental goals?

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A. The Department's answer to this question is a major step forward in the careful articulation of a series of clearly defined goals and objectives regarding the management of these resources. Only a few years ago the issue of defining broad goals was a major problem. The question now is one essentially of fine tuning and of management. The balance between those goals, and the ability of the Department through its various bureaus to "achieve an optimum balance among the three goals" is the key issue now.

Granted that existing laws generally offer opportunities for achieving the goals and objectives, there are of course major legal deficiencies. While it is important that the Department makes no basic distinctions with respect to management of different energy resources, it remains a fact that some laws simply will not allow achievement of those goals.

For example, it is impossible under the Mining Law of 1872 to know whether the Government receives a fair market value return for resources alienated since disposal in a competitive market place is not allowed. Likewise, most of the resource disposal under the Mineral Leasing Act of 1920 has been through noncompetitive leasing, a situation which again precludes use of the market place, and automatically precludes the basic conditions under which fair market value could be achieved. To the extent that there is disposal of such resources in the future under the same provisions, it will be highly unlikely that we achieve a fair market value return.

Some sort of appraisal system might help assure a fair return in some instances, but test of the market place mechanism, which is a very useful tool for public resources management, would simply not be available. In addition, to the extent that resources might be alienated under "competitive" leasing but without a truly open competitive market, the achievement of fair market value would not be possible.

To the extent that environmental goals preclude leasing as they have on the Outer Continental Shelf since December of 1970, it would be hard to argue that orderly and timely resource development has taken place.

Q. (3) How do you relate the Mining and Minerals Policy Act to Department of Interior policy regarding federal leasing of energy minerals?

A. The issue here is whether the Mining and Mineral Policy act of 1970 is adequate for the leasing of energy minerals. As it is generally understood that act was designed primarily to relate to the development of hardrock minerals. I personally feel that the management of energy minerals requires essentially different policies.

Q. (4) For which energy resources does your Department (or agency) have a longterm schedule, plan, or strategy for leasing or disposal? To what extent, and how, does each take into account national and regional demand and alternative sources of supply (including outstanding inactive, nonproducing federal leases, private and state lands, etc.)? In particular, what are the Department of Interior's policies for leasing coal, Outer Continental Shelf oil and gas, oil shale, and geothermal resources?

A. The questions of proper strategy for leasing and disposal are crucial to sound management. The Department is much further along in the development of its Outer Continental Shelf program in this regard than it is in the development of its Onshore Leasing program.

To my knowledge, the Department does not presently have a mechanism to allow lease of onshore minerals, such as coal, on a supply/demand basis similar to that used for Outer Continental Shelf leasing. Vast amounts of coal for example, are already under lease but not in production. A conservative estimate is that some eight billion tons of coal are already under lease covering some 800,000 acres of federal land. There is very little production on that coal. A sound management plan based on good data, will be required both to manage properly the development of resources already under lease and to determine whether or not it would be in the public interest to lease additional coal at this time or in the future. Certainly development of a system sililar to that used on the Outer Continental Shelf for projecting supply and demand information would be a minimal requirement for management of onshore minerals.

The further question of overall coordination regarding on-shore and off-shore minerals and the questions of coordination of development of the various types of minerals such as oil shale, geothermal steam, coal and oil and gas need to be much more clearly detailed if there is to be a consist policy for the management of these resources.

Q. (5) In view of the large acreage and probable quantities of some energy resources in private ownership, or under current federal lease, what is your position on the need to issue additional leases or prospecting permits? Consider especially coal and oil shale.

A. The department's position in regards to this question is a major step in the right direction. Certainly it should "proceed cautiously on the issuing of further coal leases and permits pending an analysis of the quantity and quality of coal already under lease and the demand and need for additional coal." As mentioned in my answer to question 4, above, fundamental questions arise regarding whether or not any additional prospecting permits should be issued under prevailing circumstances. While the department should incorporate terms and conditions to foster development in its new leases and in renewal leases, the Department should attempt to vigorously enforce diligent development requirements in existing leases.

As it can be argued that there is little apparent reason for additional issuance of prospecting permits at this time or in the near future, it can be also argued that until more is known about the resource base no further disposal of any kind might be in the public interest.

The situation regarding hydrocarbons on the Outer Continental Shelf is far better defined, but even there sufficient information is not available in many areas outside of the Gulf of Mexico to allow development of satisfactory leasing decisions in those areas.

Finally the issue of whether or not there should be any exceptions to an allcompetitive leasing system continues to be one of concern. I personally see no advantages to a system which allows for non-competitive leasing of energy


Q. (6) For each resource, what conditions regarding land reclamation, protection of other resources, or environmental quality, are currently required for exploration or energy resource production on the public lands?

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