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(a) The demand or need for OCS production?

Answer (a). Realizing the natural gas shortage, the State Legislature in 1970 adopted an Act to allow the State to take its gas in kind. Implementation of this Act is being considered at this time.

Question E-1 (b). The sequence, size and timing of sales? and (c) The location, size and shape of specific tracts offered for lease?

Answer (b) and (c). Sales are presently being conducted on a monthly basis. The number of tracts, location, total acreage, size and shape depends upon nominations by industry although by statute a single tract may not exceed 5000 acres. The State Mineral Board has authority to advertise for lease any specific acreage on its own initiative. Thirty-five years of experience has proven that sales conducted at regular intervals is conducive to the orderly development of oil properties. Regular scheduling of sales has many advantages; it enables the industry to budget properly, grants it security in planning, and affords time in which to secure proper equipment.

Question E-1-A. What is the procedure currently used by Federal agencies for determining on a short range (1 year), intermediate (5 years) and long range (5 years and beyond) basis:

(a) The demand or need for OCS production?

Answer. With respect to Louisiana operations, crude demand is determined on a monthly basis through nominations from all crude purchasers in the State. In the past, the determination of intermediate or long range demand could only be ascertained through an extrapolation of demand trend. However, this is no longer valid as Louisiana can not satisfy the current market demand even at maximum productive capability. Louisiana's market demand for June, 1972 is 1,519,304 barrels per day. June allowables have been assigned so as to produce an estimated 1,314,000 barrels per day, or about 205,000 barrels per day less than market demand. Our best estimates of all out production capability for Louisiana would leave us far short of the current market demand.

Several years ago we were producing at much lower rates in response to lower market demand and therefore had a reserve producing capacity of sizeable proportion. This was demonstrated by our ability to produce an additional 250,000+ barrels of oil per day to satisfy the increased market demand during the 1967 and 1970 Middle East Crises. Louisiana cannot produce any appreciable amount of oil today to carry us over a national emergency of any proportion. For the above reasons, market demand no longer plays an important role in influencing Louisiana's production. Future production rates in Louisiana will be controlled by reservoir capabilities.

Question E-2. What is the procedure currently used by the State (Federal) agencies for taking into account recreational, fish and wildlife and other environmental values in choosing tracts to be leased?

Answer. The State has specific rules and regulations governing exploration and development of games preserves, fresh water supplies, and oyster beds. Public authorities or public bodies are notified when these sensitive areas are advertised for leasing, and close cooperation with all related agencies is maintained with supervision imposed.

Question F-1. What, in general, are the current procedures for lease supervision and inspection? Are there concrete indications of improved surveillance and compliance over past experience? To what extent has the risk of accidents, such as those which occurred near Santa Barbara and Offshore Louisiana been reduced, and to what factors are reductions (if any) due?

The Louisiana Department of Conservation exercises the police power of the state through extensive regulatory supervision. The Department is divided into six (6) districts, four of which border on the Gulf of Mexico. These districts have a total of twelve oil and gas inspectors assigned to fields in the bay areas and Zone I. They are responsible for the testing of wells, plugging and abandonment operations, casing tests, and platform inspections to insure compliance with Statewide Order No. 29-B which includes pollution surveillance regulations. The work of our oil and gas inspectors is supplemented by agents from the Inspection and Enforcement Division who make investigations and file detailed reports on production platforms and salt water disposal facilities in all fields at least once a year. Re-inspections are made upon the request of the local district managers or when otherwise appropriate. This method of operation has brought about more accurate reporting of production data and oil spills, induced cleaner operations and encouraged the installation of devices to reduce pollution. Spill pans under production vessels with drains to collecting sumps and pumps with automatic controls have been installed. This equipment is checked at regular intervals to insure that it will operate when needed.

Holes in the impervious platforms have been repaired along with broken retaining walls to insure that any spillage which occurs in everyday operations will not cause pollution. The efficiency of separation has been increased and the amount of entrained oil, formerly discharged with produced brime to the Gulf of Mexico, has been or is being reduced to meet new water quality standards. The accidents which occurred near Santa Barbara and offshore Louisiana caused the oil and gas operators along with the Lousiana Department of Conservation to re-evaluate their operations and pollution prevention requirements. Some companies established inspection teams, dispatched them to inspect their installations, and acted on their recommendations to reduce the possibility of similar accidents. Others set up waste oil salvage operations whereby waste from bilges, sumps, stock tanks, production vessels, etc., is picked up at regular intervals by barges and brought inshore for non-contaminating disposition. Equipment to contain and dispose of oil spills has been stocked in strategic locations. Funds for their purchase was provided by different companies for use on a cooperative basis by operators in an emergency. All of these factors have considerably reduced the quantity of oil which was formerly discharged to the Gulf accidentally or otherwise.

Question G. (a, b, and c-11). What jurisdictional issues remain unresolved regarding:

(a) The seaward limits of the OCS?

Answer. The question of where the Outer Continental Shelf ends in one that continues to divide international law experts. We wish merely to clarify the attitude of the State by means of a general policy observation.

Proposals to either internationalize or submit to international control what is presently considered the Outer Continental Shelf, a vital area of important natural resources upon which so many Louisianians depend for their livelihoods, will be strongly opposed by the people of this state. We disapprove of any such proposal which decreases State or National jurisdiction over our offshore submerged lands.

(b) The seaward limits of state jurisdiction?

Answer. The seaward limits of State jurisdiction are still the subject of litigation between the State and Federal governments. A Special Master appointed by the Supreme Court conducted extensive hearings over two years, and extensive briefs are now being written on the many complicated matters in dispute, Islands and low water elevations questions, cartographic and survey problems, natural entrance point selection tests, water area bay tests, and many, many other factual and legal questions complicate the dispute. It is not unlikely that another three to five years will be required to resolve the matter.

To here list and discuss the issues involved would be impossible but major points at issue include those itemized on a statement of the issues which the parties have agreed remain to be decided by the Special Master. (Appendix A attached).

We have heretofore commented in response to question A-5 concerning problems of the ambulatory boundary in a major deltaic coastal area. Unless agreement is reached on that problem, litigation is apt to be renewed after the present dispute is resolved.

(c) The authority of the Secretary of the Interior (11) to promulgate “conservation" regulations?

Answer. As to the authority of the Secretary to promulgate conservation regulations, such authority does not and should not affect areas owned by the State or subject to State leases. As earlier noted, this emphasizes the need for an agency or arbiter, independent of the Secretary's power, to resolve State-federal boundary disputes. The creation of such a body should be given serious consideration. It could, perhaps, be composed of State and federal representatives and invested with powers to enact conservation regulations for boundary areas.

Question I-1. In view of the recent Louisiana Offshore sale court decision, what changes in procedure, if any, do the State agencies contemplate to satisfy NEPA environmental impact statement requirements?

Answer. We feel the National Environmental Policy Act of 1969 should be reevaluated in light of the present energy crisis. Interpretation or clarification of certain segments must be made so that the petroleum industry can function. Individual impact statements on each tract is impractical if not impossible. An impact statement that is prepared covering a specific area should be sufficient for any future petroleum development activity in that particular area and repetitive individual impact statements on portions covered by a previous statement should not have to be submitted. These areas should be classified and identified with similar environmental aspects as the controlling factor. This is necessary to allow industry to operate as efficiently and effectively as possible from the beginning of the exploration activity to actual drilling and production operations. Experience has

proven that it is possible and realistic to have consistent rules and regulations governing those areas with the same or similar environment conditions.

SUBMISSION OF THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY

Senator HENRY M. JACKSON,
U.S. Senate,
Washington, D.C.

MASSACHUSETTS INSTITUTE OF TECHNOLOGY,

DEPARTMENT OF ECONOMICS,
Cambridge, Mass., June 13, 1972.

DEAR SENATOR JACKSON: This reply to your letter of June 1 is somewhat hasty because I have just returned from an extended trip abroad. My comments are largely confined to Attachment B, number 46. I believe that the present system of competitive bidding for oil and gas leases should be retained. It awards mineral rights to those who are able to make the best and therefore, most profitable use of a given lease. Thereby it rewards efficiency and risk taking. Unlike a royalty, it does not serve as a discouragement to production, and therefore does not tend to premature abandonment of wells when they are less productive but still worth operating.

The answer to question 46 a must be "no." The funds available for exploration are not a fixed amount. Whatever is worth spending because it promises a sufficient return will get spent whether the money is from retained earnings or borrowing or selling or trading of equity shares. The chance to explore in good areas does certainly cut down on spending in poor areas which is as it should be.

The answer to 46 b is not as clear cut but must again be negative. There is nothing to prevent independent operators from pooling their interests to present a single bid. There has never been a dirth of serious contenders for leases such that competition threatened to be diminished and the price paid less than would exist in a free market.

The answer to question 46 c is affirmative because the best test of who is a qualified operator is in how much he is willing and able to pay for the permission to operate.

Question 46 d is based on a confusion. The payment of a high cash bonus is not an incentive nor a disincentive. Once the bonus is paid, by-gones are by-gones and the decisions of the operator on the rate of exploration and production depend on his estimates of the investment and rate of return thereon. But where a royalty is a disincentive, a previously paid cash bonus is not.

An examination of the leasing methods used by the British government for granting licenses in the North Sea shows their criteria to be a set of ready justifications for picking anybody they happen to prefer. These vague standards of "public interest" have debeviled much public regulation in both countries and should by all means be avoided.

Yours sincerely,

Hon. HENRY JACKSON,

MORRIS A. ADELMAN.

MASSACHUSETTS INSTITUTE OF TECHNOLOGY,
DEPARTMENT OF ECONOMICS,
Cambridge, Mass., August 4, 1972.

Chairman, Committee on Interior and Insular Affairs,
U.S. Senate, Washington, D.C.

DEAR SENATOR JACKSON: In reply to your letter of July 26, I enclose the article on Long Run Cost Trends, which I hope may be incorporated in the record as an appendix, and the following summary, to serve as response to Part C of Attachment B, questions 18-23.

Since 1950 for oil and since 1957 for gas, there has been a dramatic shrinkage in large new-field discoveries. There are no acceptable estimates of finding cost per barrel, but it must have increased very much.

A failure of discovery is reflected in rising cost, of development of oil and gas fields by drilling, equipping, and connecting wells. But this tendency may be offset for a considerable time though not forever.

In crude oil, the failure to find new fields has been largely compensated by finding new pools in and around old fields, and by more intensive development. Over the last fifteen years, the great bulk of the new oil reserves have been developed in old fields. Since the average recovery factor is only about 30 per cent, there is a big cushion of undeveloped oil-in-place, some of which can be developed into new reserves albeit at increasing cost.

Natural gas is different from crude oil because it does not cling to rocks and needs little or no force to move it to the well-bore. The bulk of it is produced without leaving much for additional development. Therefore, there must be discovery to maintain the needed stock of gas reserves.

Up to the middle 50's, the new gas fields found were capable of supplying, and did later supply, a larger amount of reserves than were created up to that time to support production. Since then, discoveries have created insufficient gas-inplace. More reserves had to be developed in old fields, but for reasons stated above, this was a rapidly vanishing resource.

Analysis of development cost confirms these two pictures. The investment needed to develop an additional daily barrel of crude oil capacity, in constant dollars, was about the same in 1968-70 as in 1960-63. In view of the fact that 1964-67 was lower, and the many deficiencies of the data, it would be wrong to extrapolate this, but the change will probably not be dramatic.

In nonassociated natural gas (and liquids), the shrinkage of resources and reserves led to an increase in investment needed per unit of new capacity of gas plus liquids 180 percent from 1960-63 to 1968–70. The data are no more satisfactory than for crude oil, but the analysis does not depend on the reserves of gas, whose accuracy has been debated.

In order to calculate cost per barrel of oil and per mcf of gas, two more items are needed. One is the rate of return to be applied to the investment, adjusted by the current decline rate. If we assume a level 12 percent rate of return in 1960 and 15 percent today (anyone may supply his own estimate) adjusted for decline then the needed return for oil was 22 percent in 1960 and 29 percent in 1970; for gas, 18 and 26 percent. Perhaps the trend is more important than the exact numbers: a 30 percent increase in oil, 44 percent in gas.

The other piece of information needed is the current cost of operating oil and gas leases: labor, fuel and power, repairs and maintenance, etc. Here, unfortunately, we have almost no information. I have made some estimates for the year 1962 (in a forthcoming book, The World Petroleum Market, Chapter II Appendix) but so many special adjustments are needed that they are not worth reproducing here, having served the limited purpose of a base from which to estimate costs outside the United States, which are much lower and hence with much less margin for error. However, operating costs tend to follow development investment costs, and they are a minor though substantial fraction.

However insufficient the basic data, I doubt that any improvement could greatly change the picture. The economic concept of scarcity is clear cut: a rise in the value of inputs needed to create a new unit of output. By this criterion, crude oil is growing gradually more scarce, and the pace may quicken if improved regulation, the departure of market-demand-prorationing, is a one-time benefit. Natural gas is growing acutely more scarce, and not much can be done to stretch out the resource in the ground: only large new discoveries will help: in new provinces, or at greater depths, or in tight formations by nuclear fracturing. There is one basic qualification which is as important as the findings. The estimates here are all averages (except for the postscript on North Slope Alaska). Hence they are not necessarily good estimates of the cost of new supplies from the more promising new provinces like the Continental Shelf and Alaska. And within these areas, we need division of basic data by oil and gas, which as indicated here are different in their economics. More knowledge might allow more optimism than can now be justified.

This information has become much more desirable in the past 18 months. For reasons stated earlier this year to your Committee, I believe security of supply has been much impaired by the unwise action of the United States Government in supporting and encouraging the cartel of the oil producing nations. But once established, the cartel will not soon disappear even if we withdraw support, and in order to formulate sound policies on imports of oil and gas relative to domestic production we need better information on domestic oil and gas costs.

Respectfully submitted,

MORRIS A. ADELMAN.

SUBMISSION OF JAMES T. JENSEN

Arthur D. Little, Inc. ACORN PARK CAMBRIDGE MASSACHUSETTS 02140 (617) 864-5770

September 15, 1972

.

Mr. William J. Van Ness

Chief Counsel

Committee on Interior and Insular Affairs

Room 3204 N50B

United States Senate

Washington, D.C.

Dear Bill:

As a result of losing two key energy economics staff members to clients, ADL has had me spending the better part of the summer fire fighting with a substantial part of my time outside the country. I had hoped to be able to get my comments on the leasing issue in to you before your midJuly deadline. On the outside chance that the record may still be open,

I am sending my comments along now. If it is not, you may do with them what you will. I'll try to do better another time.

JTJ/np
Enclosure

Sincerely,

James T. Jensen

CAMBRIDGE, MASSACHUSETTS

ATHENS BRUSSELS CARACAS LONDON MEXICO CITY NEW YORK PARIS RIO DE JANEIRO SAN FRANCISCO TORONTO WASHINGTON

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