**State of Louisiana**

**Louisiana Department of Natural Resources**

**Marjorie A. McKeithen, Assistant Secretary**

**Office of Mineral Resources**

**Testimony to the Committee on Energy and Natural Resources**

**Hearing on**

**Oil and Gas Resources on the Outer Continental Shelf and Areas**

**Available for Leasing in the Gulf of Mexico**

**January 25, 2007**

**Introduction**

Mr. Chairman, Mr. Ranking Member, and distinguished members of the
Senate Committee on Energy and Natural Resources, I thank you for
extending to me the honor of testifying before you here today.

My name is Marjorie McKeithen, and I serve the State of Louisiana as
Assistant Secretary for the Department of Natural Resources, Office of
Mineral Resources.

**Louisiana: Heart of America's Energy Coast**

Louisiana has a long and distinguished history of oil and gas
production, both onshore and offshore. While many oil and gas companies
may have their corporate headquarters elsewhere these days, Louisiana is
the nation's energy backbone -- the working capital of our nation for
crude oil and natural gas exploration, production, refining, and
distribution, as well as for imports of foreign crude oil and liquefied
natural gas. I make this statement with a tremendous sense of pride on
behalf of the citizens of our great state. And I want you to know that
Louisiana not only understands, but embraces, her role as the
[working]{.underline} energy capital for America.

Currently, approximately 34% of the nation's natural gas supply and
almost 30% of the nation's crude oil supply is either produced in
Louisiana, produced offshore Louisiana, or moves through the state and
its coastal wetlands. Together with the infrastructure in the rest of
the state, this production is connected to nearly 50% of the total
refining capacity in the United States. Moreover, over 40,000 miles of
large transmission pipelines traverse the state to transport oil and gas
from production centers to consumption markets throughout the country.

Louisiana has 17 petroleum refineries, most of them large, world-scale
facilities, with a combined crude oil distillation capacity of
approximately 2.77 million barrels per calendar day, which is 16.2% of
total U.S. refinery capacity of 17.1 million barrels per day, the second
highest in the nation after our sister America's Energy Coast, Texas.
Louisiana produces approximately 42.1 million gallons of gasoline per
day and 29.9 million gallons of distillate fuel (that is, jet fuel and
diesel fuel) per day. Two of the four Strategic Petroleum Resource
storage facilities for our country are also in Louisiana. Louisiana is
also home of LOOP (Louisiana Offshore Oil Port), the only deep-water
offshore oil import terminal in the world.

Finally, while almost every state in the nation is trying to prevent the
siting of any new liquefied natural gas (LNG) facilities, Louisiana is
the site of the largest permitted LNG import terminal in the nation
(Cheniere Energy's 2.6 billion cubic feet per day facility in Cameron
Parish) and the home of the largest throughput facility of the existing
LNG import terminals in the country (Southern Union in Lake Charles,
which is undergoing more than a doubling of capacity from 1 billion
cubic feet per day to 2.5 billion cubic feet per day).

The magnitude of Louisiana's contribution to the nation's energy supply
is punctuated by taking a brief look at Louisiana's rank among the 50
states on the following (numbers include Louisiana's Outer Continental
Shelf production):

1^st^ in total crude oil production

1^st^ in OCS crude oil production

1^st^ in OCS natural gas production

1^st^ in OCS revenue generated for the federal government

1^st^ in mineral revenues from any source to the federal government

1^st^ in LNG terminal capacity

1^st^ in foreign oil import volume

1^st^ in natural gas plant processing capacity

2^nd^ in total natural gas production

2^nd^ in total energy production from all sources

2^nd^ in petroleum refining capacity

2^nd^ in primary petrochemical production

2^nd^ in dry natural gas proved reserves

2^nd^ in crude oil proved reserves

When it comes to developing the nation's offshore petroleum resources,
there simply would not be much if it were not for Louisiana's leadership
and participation. The offshore territory of Louisiana's coast is the
most extensively developed offshore territory in the entire world. As
most of you know, the offshore area beyond three miles from Louisiana's
coast is federal territory called the Outer Continental Shelf, or OCS.
OCS production off Louisiana's coast constitutes approximately 91% of
oil and 75% of natural gas production from all of our nation's OCS areas
combined. Additionally, Louisiana OCS territory has produced 85.4% of
the 15.9 billion barrels of crude oil and condensate and 81.1% of the
162 trillion cubic feet of natural gas ever extracted from all federal
OCS territories.

Simply put, based on its energy producing value to the nation, Louisiana
is, acre for acre, the most valuable real estate in the nation.

The landmark passage of the Domenici-Landrieu Gulf of Mexico Energy
Security Act recognizes the critical role that Louisiana and other Gulf
Coast producing states play in our national energy supply. By sharing a
portion of the revenue from OCS oil and gas activity with these states,
the nation is re-investing in one of its critical assets and ensuring
that a sustainable landscape exists to support these activities for
generations to come.

**Louisiana's Infrastructure: Planning for the Impact**

For the first time in more than 20 years, the Domenici-Landrieu Gulf of
Mexico Energy Security Act opened up a significant portion of new Outer
Continental Shelf (OCS) acreage to oil and natural gas development. The
addition of this 8.3 million acre area increases the available acreage
in the Gulf of Mexico OCS by nearly 20 percent.

The area, Eastern Gulf Lease Sale 181, lies approximately 125 miles due
south of Pensacola and Mobil; however, the nearest port is in south
Louisiana, which is roughly 90 miles from the Lease 181 area and roughly
130 miles from the Lease 181 south area.

Preliminary estimates show that this area contains at least 1.3 billion
barrels of oil and 5.8 trillion cubic feet of natural gas. However,
virtually no modern seismic surveys have been conducted in the area, and
its potential resource base could be significantly larger.

As a result, most experts predict significant interest in the region
from oil and gas companies. After all, the Gulf of Mexico has been one
of the most productive oil and gas provinces in the world for more than
fifty years. And while politics may respect state boundaries, geology
does not. The oil and gas resources that have been found in such
bountiful quantities just to the west of this new region are also likely
to be found there.

An effective logistical support system is an important prerequisite for
deepwater oil and gas exploration and development. Ports are critical
activity centers connecting the onshore processing plants, pipelines and
markets with the offshore oil and gas reservoirs.

In addition to cargo handling, ports also serve as industrial sites for
large shipyards, equipment fabrication and repair, and value-added
processing activities for both inputs and outputs of the industry. In
south Louisiana, the Ports of Iberia, Morgan City and Fourchon are the
largest service providers to the Gulf of Mexico offshore oil and gas
industry.

Morgan City is an important onshore supply base currently serving
several deepwater oil and gas installations. Shipbuilding and repair
activities at Morgan City play a larger role, and the port's location at
the intersection of several major waterways is advantageous.

The Port of Iberia is located along the Commercial Canal approximately 7
miles north of the Gulf Intracoastal Waterway. The port specializes in
platform fabrication, repair, and maintenance.

Port Fourchon has developed into the largest Gulf supply base for
offshore oil and gas services, due to its central location with easy
access to the OCS and the availability of port infrastructure. Distinct
advantages to the port are its proximity to offshore installations in
the Central and Eastern Gulf and its 300-foot wide navigational channel
with a 24 ft depth. In 2002, approximately 44 percent of the exploration
plans filed by oil and gas companies in the Gulf indicated that Port
Fourchon would serve as their supply base, and the market share of the
port is expected to expand as the industry develops the areas opened by
the *Gulf of Mexico Energy Security Act.* Port Fourchon is roughly 90
miles away from the newly-available acreage opened by the bill, and thus
it is the closest and most likely port to be used by operators
developing this region.

Each of these ports plays a critical role in the development of the
nation's offshore energy resources, and each of the communities around
these ports is strongly influenced by the growth trend of the offshore
industry.

Developing these newly-available oil and gas resources will undoubtedly
require a bolstering of the region's land based infrastructure and
industrial activity. This activity generates jobs and energy and
economic growth in the region and across the nation, but it also
generates wear and tear on roads, congestion, and significant coastal
development in one of the world's largest and most fragile estuarine
environments. Port Fourchon is connected to the State's main highway
network through a two-mile segment of LA Hwy 3090 that runs from the
port to LA Hwy 1, and a 40-mile segment on LA Hwy 1 to US Hwy 90.
Excessive roadway flooding, an older two-lane mechanical lift-span
bridge at Leeville, and the two-lane undivided roadway are identified as
the major constraints resulting in congestion, delay, incidents and
excessive travel times on this segment of the highway. Among the major
improvements planned are to construct a two or four-lane elevated
highway structure from Port Fourchon to Golden Meadow, construct a
four-lane fixed span bridge over the Gulf Intracoastal Waterway and
Bayou Lafourche at Larose, and widen and upgrade LA Hwy 1 from Grand
Isle to Port Fourchon.

Accordingly to MMS data, it is estimated that for every OCS well drilled
there is a corresponding increase in truck trips on LA Highway 1 by 744
trips per year. For every additional mile of pipeline extension, the
truck traffic will increase by 217 trips per year. Accordingly to model
estimates, for each additional OCS well drilled, port tonnage will
increase by 114,500 tons; for each exploratory well, port tonnage will
increase by 148,500 tons. For every additional extension of the pipeline
network by one mile, port tonnage will increase by 45,000 tons.

Between 1993 and 2000, Louisiana port tenants serving the offshore
industry have increased their share of port-owned land by 23 percent.
Since 2000, deepwater

exploration has only increased, and with the opening of new areas, this
trend will continue. The State of Louisiana will monitor this growth and
work to ensure that it proceeds in ways that protect local communities
and are environmentally sound.

**America's Wetland: Production and Protection Can Co-exist**

Louisiana is not an "either-or" state. Louisiana's coastal wetland is a
working wetland where crops are grown, energy is produced, fish are
harvested, petrochemicals are manufactured and ports are buzzing with
activity. Thirty percent of the total catch of commercial fisheries by
weight in the lower 48 states comes from coastal Louisiana, and our
coastal wetlands provide a habitat for over five million migratory
waterfowl. Louisiana knows that her oil and gas can be produced from
offshore regions in a manner compatible with the nation's highest
environmental standards and has taken steps to ensure just that.

Louisiana has certainly suffered some negative impacts in the past from
offshore production. And, yes, we still have to deal with some of those
legacies of the past, but that is largely because Louisiana pioneered
offshore production in the days before modern technology, before the
awakening of America's environmental consciousness, and before the
advent of environmental regulatory agencies and regulations.

Louisiana's first oil well was drilled in 1901. The first oil well over
water in the world was in Louisiana in 1910 in Caddo Lake. The first
well drilled off the coast of Louisiana was in 1938 near Creole,
Louisiana. Louisiana was the site of the first well drilled out of sight
of land in 1947. Those eras spawned some practices that harmed the
ecology of the state -- indeed some of the effects are still
reverberating through the region today.

However, we have learned some hard lessons, and things are different
today. They have to be: since the 1930s some 1,900 square miles of
coastal wetlands -- an area nearly the size of Delaware -- have been
eroded away into the Gulf of Mexico. For the industry to maintain its
access to these natural resources and protect its infrastructure, it has
needed to adapt its environmental practices.

Maintaining any ongoing operation requires reinvestment to maintain,
repair, and replace worn out or outdated equipment and facilities. As
any farmer can tell you, you cannot just take from the land forever
without putting something back into the operation. Out of the harvest of
crops, the farmer has to set aside a portion as seed to plant for the
next harvest. He has to fertilize the land to replace depleted
nutrients, plow and till the soil, rotate crops, control runoff and
erosion, irrigate, apply pesticides and herbicides, buy and repair
machinery. Likewise, to maintain, much less increase, production from
off our coasts, we must reinvest in the infrastructure that makes all of
the activity possible, whether it be port facilities, roads to transport
equipment and supplies, erosion control, or barrier island and wetlands
storm protection.

As is abundantly clear today, the massive energy infrastructure that I
have described rests atop an extraordinarily fragile environment.
Louisiana continues to lose about 25 square miles (65 square kilometers)
of land each year, roughly one acre every 33 minutes. Due to hurricanes
Katrina and Rita alone, coastal land lost totals the equivalent of 217
square miles. Imagine that -- an area the size of Washington, DC lost in
a matter of hours over two days. When the Louisiana coastline is eroded
at that rate, previously buried pipelines that carry the nation's oil
and natural gas are left perilously exposed to the elements. Refineries
that produce gasoline for Americans across the country are compromised,
as are the power plants that convert natural gas into electricity that
heats home in dozens of surrounding states.

But these fragile wetlands are precisely what protect communities and
infrastructure from destructive storms. One study has indicated that for
every mile of wetland, the storm surge in adjacent inland areas is
reduced by one foot.[^1] The nation's energy infrastructure -- all of
the waterways, energy conduits, ports, pipelines, refineries and process
plants -- is dependent upon the wetlands to protect and sustain them
from the elements.

Barrier islands also act as a buffer to reduce the effects of ocean
waves and currents on associated estuaries and wetlands. A recent study
indicates that the bays adjacent to the Isles Dernieres (about 75 miles
southwest of New Orleans) could experience an increase in wave height of
700 percent if the Isles Dernieres barrier chain is reduced to shoals.
The interior marshlands of the fringing bay marsh can expect increases
in wave and storm surge height of greater than 2 meters.[^2]

Today, scientists know how to restore the wetlands and they have been
very successful in reinforcing barrier islands so that they will
dramatically lower storm surges and waves. What has been lacking
heretofore is neither the will, nor the know-how, but the resources to
attack the problem. Until now, states have been rewarded with the
impacts of OCS development and not the benefits.

For the State of Louisiana and its neighboring energy producing states
on the Gulf Coast, the most important aspect of the Gulf of Mexico
Energy Security Act are its revenue sharing provisions. This landmark
legislation will share 37.5 percent of new revenues with Gulf
energy-producing states: Louisiana, Texas, Mississippi and Alabama. The
revenues will be used for wetlands restoration, hurricane protection and
flood control projects. An additional 12.5 percent share will be used
for the state side of the Land and Water Conservation Fund, which funds
building parks and preserving green spaces in all 50 states.

The revenue shared with Louisiana under this new law will not be wasted.
The citizens of Louisiana recently created a constitutional "lock box"
by overwhelmingly passing a constitutional amendment that specifically
directs that the funds be used for restoring Louisiana's working
wetlands and for hurricane protection. Under the *Gulf of Mexico Energy
Security Act*, Louisiana is projected to receive at least \$13 billion
over the next 30 years. The dedicated funds will be used to finance a
comprehensive coastal protection and restoration plan that will be
finalized this spring.

As noted, Louisiana has supported a great deal of oil and gas activity,
which can cause significant coastal wetland losses. Through hard work,
Louisiana has been successful in achieving its goal of no net loss of
coastal wetland habitat values, caused by activities over which the
State has control. Through innovative approaches such as the State-led
interagency review of proposed drilling projects and our SONRIS
computerized data base, Louisiana has been successful in reducing the
amount of coastal wetland impacts caused by State-regulated oil and gas
development.

Despite our efforts, the indirect and cumulative effect of OCS energy
development is still causing significant adverse impacts to our coastal
resources and communities. The cumulative effects of human and natural
activities in the coastal area, including OCS activities, have severely
degraded essential natural processes and shifted the condition of the
coastal area from one of net land building to one of net land loss.

In order for OCS energy development activities to be consistent with
State and national policies specifying no net loss of wetlands, it is
necessary for the Minerals Management Service to provide for
compensatory mitigation for all losses of wetland values that result
from OCS-related activities and that might not be obtained through the
State and Federal regulatory processes. This need, as well as the need
for more-accurate assessment of the impacts of OCS development on
Louisiana's coastal communities and infrastructure in the aftermath of
the recent devastating hurricanes, formed the primary basis for the
State's litigation last year involving OCS Lease Sale 200. Those
concerns were also paramount in the State's recent comments on MMS's
Draft Environmental Impact Statement for Gulf of Mexico OCS Oil and Gas
Lease Sales for 2007 through 2012. We are eagerly awaiting MMS's actions
in response to those comments.

**Louisiana: Managing Her Mineral Assets**

Given the profound purposes for which Louisiana's portion of the shared
revenue will be used, Louisiana has a heightened interest in how the
minerals off its coast are managed. In this regard, Louisiana offers a
brief outline of how her own minerals are currently managed.

The duties for managing Louisiana's mineral assets lie with the Office
of Mineral Resources within the Department of Natural Resources.
Currently, this includes approximately 5.4 million acres of state-owned
water bottoms, and approximately 1.9 million acres of state lands.

The Office of Mineral Resources is essentially the intersection for
private industry and the public's resources. And we certainly try to
conduct our business like just that -- the state's business. While
industry is our customer, and we pride ourselves on good customer
service, the people of Louisiana are our shareholders, and we owe them a
fiduciary duty of good asset management, from both a fiscal and an
environmental standpoint. Toward these ends, Louisiana's policies are
geared toward conducting our business at a fair, market-driven price to
maximize the return to the people of Louisiana, while at the same time
providing good, fair customer service to keep our customers coming back.

The actual awarding of state mineral leases and the oversight of the
Office of Mineral Resources is performed by the Louisiana State Mineral
Board, a seven-member body appointed by the Governor of Louisiana and
confirmed by the State Senate. Neither the Governor, the Secretary of
the Department of Natural Resources, nor I have authority to award a
mineral lease. This is exclusively the function of Louisiana's Mineral
Board.

Louisiana's leasing procedure is carried out primarily by the Petroleum
Lands Division of the Office of Mineral Resources and can be summarized
as follows: Industry nominates acreage for leasing every month. By law,
nominated tracts cannot exceed 5,000 acres, but by Mineral Board policy,
the size limit of a nominated tract is further limited to only 2,500
acres. The nominated tracts are then advertised in official state and
parish journals. Competitive, sealed bidding then takes place on bonus,
royalty and rental to be received by the state. The sealed bids are
opened and read into the record at a public meeting of the Louisiana
Mineral Board at the time and place advertised. The Mineral Board then
awards the leases to the highest bidder, if it determines that the bids
are sufficient, after evaluating data provided from the staff geologists
from the Geology and Engineering Division of the Office of Mineral
Resources. The term of the lease is limited to three years for inland
tracts and five years for offshore tracts.

By law, the royalty received must be at least 12.5%; however, in
reality, market competition has raised the average royalty received
considerably higher. The average royalty that Louisiana has received for
the last six fiscal years is 22.5%. The inland tract average is 22.85%,
while the offshore tract average is 21.85%. Louisiana currently has four
existing recent units involving common reservoirs with the federal
governmental on state leases granted from 1993 to 2002. Two of the state
leases have a 21% royalty provision, one has a 22% royalty provision and
one has a 23% royalty provision.

Louisiana currently has 2,368 active state leases covering over
1,022,000 acres, most of which are submerged, and Louisiana's leasing
program generated approximately \$430 million in mineral income last
fiscal year.

Each lease is reviewed at least once a year by the staff of the Geology
and Petroleum Engineering Division of Mineral Resources, with further
reviews dependent on lease development activity, the nonproductive
acreage attributed to each lease and the royalty income per acre.

The Mineral Income Division of the office of Mineral Resources is then
responsible for auditing at least 22% of the royalties received by the
state each fiscal year. The Mineral Income Division is directed by a
Certified Public Accountant and consists of a team of 25 auditors, some
of whom are officed in Louisiana's Houston and Dallas offices, where
most of Louisiana's payors are headquartered. Louisiana's Mineral Income
Division has recouped approximately \$146.5 million in royalty
underpayment, interest and penalty over the past six years.

**Conclusion**

Louisiana is indeed proud of its long and distinguished history fueling
America. We believe that our efforts can be summed up as "nation
building." When it comes to America's energy security there is no more
important piece of real estate than this, the great 18^th^ state of our
union. We must do everything as a nation to ensure its sustainability.

The environmental lessons of the past must not be forgotten. We must be
prepared to mitigate the impacts of energy development of our coast. We
must remember that the production of this energy can only be made
possible through the cooperation of a host state. The state is doing its
part to mitigate the impacts of these activities and create a safe and
sustainable landscape for the continued support of OCS activities in the
Gulf of Mexico, but we still rely on our federal partners and the
commitment to safely and responsibly deliver these critical resources to
the nation.

[^1]: "Regaining Ground: In the aftermath of Katrina and Rita,
    scientists make case for coastal recovery balancing ecology with
    economy" *University of Texas at
    Austin*.\_http://www.utexas.edu/features/2006/coastal/index.html

[^2]: Source: Prof. Gregory Stone, Coastal Studies Institute, Louisiana
    State University.