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34–267 PDF 2007

S. HRG. 110–10

OIL AND GAS RESERVES ON THE

OUTER CONTINENTAL SHELF

HEARING

BEFORE THE

COMMITTEE ON 

ENERGY AND NATURAL RESOURCES 

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

TO

RECEIVE TESTIMONY ON OIL AND GAS RESOURCES ON THE OUTER 

CONTINENTAL SHELF AND AREAS AVAILABLE FOR LEASING IN THE 

GULF OF MEXICO

JANUARY 25, 2007

(

Printed for the use of the 

Committee on Energy and Natural Resources 

(II)

COMMITTEE ON ENERGY AND NATURAL RESOURCES 

JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

MARIA CANTWELL, Washington 

KEN SALAZAR, Colorado 

ROBERT MENENDEZ, New Jersey 

BLANCHE L. LINCOLN, Arkansas 

BERNARD SANDERS, Vermont 

JON TESTER, Montana 

PETE V. DOMENICI, New Mexico 

LARRY E. CRAIG, Idaho 

CRAIG THOMAS, Wyoming 

LISA MURKOWSKI, Alaska 

RICHARD BURR, North Carolina 

JIM DEMINT, South Carolina 

BOB CORKER, Tennessee 

JEFF SESSIONS, Alabama 

GORDON H. SMITH, Oregon 

JIM BUNNING, Kentucky 

MEL MARTINEZ, Florida

ROBERT M. SIMON, Staff Director 

SAM E. FOWLER, Chief Counsel 

FRANK MACCHIAROLA, Republican Staff Director 

JUDITH K. PENSABENE, Republican Chief Counsel 

PATTY BENEKE, Senior Counsel 

(III)

C O N T E N T S 

TAB NO.

Allred, Hon. C. Stephen, Assistant Secretary for Land and Minerals

Management, Department of the Interior .......................................................... 4

Bingaman, Hon. Jeff, U.S. Senator From New Mexico ........................................ 1

Craig, Hon. Larry E., U.S. Senator From Idaho ................................................... 43

Domenici, Hon. Pete V., U.S. Senator From New Mexico .................................... 2

Jackson, Lisa P., Commissioner, New Jersey Department of Environmental 

Protection .............................................................................................................. 18

Landrieu, Hon. Mary L., U.S. Senator From Louisiana ....................................... 42

Manuel, Athan, Director, Lands Protection Program, Sierra Club ..................... 25

Martinez, Hon. Mel, U.S. Senator From Florida .................................................. 2

McKeithen, Marjorie A., Assistant Secretary, Office of Mineral Resources, 

Louisiana Department of Natural Resources .................................................... 10

Murkowski, Hon. Lisa, U.S. Senator From Alaska ............................................... 47

Nichols, J. Larry, Chairman and Chief Executive Officer, Devon Energy

Corporation ........................................................................................................... 21

Siegele, Paul K., Vice President, Deepwater Exploration and Projects,

Chevron North America Exploration and Production Company, Chevron 

U.S.A., Inc. ............................................................................................................ 34

Wyden, Hon. Ron, U.S. Senator From Oregon ...................................................... 40

APPENDIX 

Responses to additional questions .......................................................................... 57

(1)

OIL AND GAS RESERVES ON THE OUTER 

CONTINENTAL SHELF 

THURSDAY, JANUARY 25, 2007

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC. 

The committee met, pursuant to notice, at 9:45 a.m., in room 

SD–366, Dirksen Senate Office Building, Hon. Jeff Bingaman, 

chairman, presiding. 

OPENING STATEMENT OF HON. JEFF BINGAMAN,

U.S. SENATOR FROM NEW MEXICO 

The CHAIRMAN. All right. We’ll go ahead with the hearing. I 

thank you all for being here. Today we will receive testimony on 

the oil and gas resources in the Outer Continental Shelf and the 

areas available for leasing in the Gulf of Mexico. 

I’m very glad to have this hearing, at the request of Senator 

Domenici, today. During the last Congress, of course, Senator 

Domenici sponsored and I co-sponsored legislation, S. 2253. It 

would have required a previously un-leased portion of the Gulf of 

Mexico to be made available for leasing. 

That legislation was modified during consideration in the Congress. Unfortunately I was not able to support the final version, 

but I am glad that there are new areas of the Gulf of Mexico that 

are now available. 

The Outer Continental Shelf and the Gulf of Mexico hold abundant oil and gas resources. The latest assessment undertaken by 

the Minerals Management Service indicates a total hydrocarbon 

endowment in the Gulf of Mexico of almost 72 billion barrels of oil 

and 443 trillion cubic feet of natural gas. Estimates of oil in deep 

water have increased, as have the estimates of deep gas reserves 

in shallow water. 

So we look forward to hearing about these resources and those 

in the new Gulf of Mexico areas to be opened and to finding out 

when these resources can come on line and what role they can play 

in meeting our national energy needs. 

With respect to the remainder of the OCS, of course, production 

offshore—some areas of Alaska and also from longstanding leases 

off Southern California, but the OCS Leasing Program has generated substantial controversy here in the Congress. As most everybody knows, there are congressional moratoria and there are Presidential withdrawals of the remaining portions of the OCS. With 

only minor exceptions for many years, there has not been the political will to reverse these leasing bans. I would doubt seriously that 

2

that political will exists today. Our time and efforts are, in my 

view, better spent focusing on areas that are available in the Gulf 

of Mexico and also, of course, on alternatives to OCS production. 

Many of those we are already scheduling meetings and hearings 

on, such as renewables, energy efficiency, biofuels, new technologies and opportunities to enhance oil and gas recovery. 

So again, I thank the witnesses for being here and I thank Senator Domenici for suggesting the hearing and I’ll turn it over to 

him for any statement he has. 

[The prepared statement of Senator Martinez follows:]

PREPARED STATEMENT OF HON. MEL MARTINEZ, U.S. SENATOR FROM FLORIDA

Chairman Bingaman: Thank you for holding this hearing today. I wanted to share 

some of my thoughts as I reflect on the passage of S. 3711, the Gulf of Mexico Energy Security Act and the importance of its environmental protections to Florida 

and the energy resources it will provide for our economy. 

I want to thank members of this Committee and especially Senators Domenici and 

Landrieu and others who were so helpful in shepherding the passage of S. 3711. 

I thank them for their willingness to allow me the opportunity to help craft its 

environmental protections. Chairman Bingaman, I know you and I have different 

opinions on this legislation but I’ve always appreciated your efforts to find common 

ground between both parties on the energy issues that come before this committee. 

But I think what is clear today is that the desire and need to explore for energy 

resources in the Outer Continental Shelf, especially in the Gulf of Mexico; this has 

not changed with the elections of last November. 

High oil and natural gas prices are not Republican or Democrat problems; they 

are our nation’s problems. As long as prices remain high, coastal states with offshore resources will continue to face pressure to explore. Recently, the Administration lifted the executive moratoria in Bristol Bay, off the coast of Alaska, and the 

area known as Lease 181 in the Gulf of Mexico. For those who were critical as to 

the need for action on S. 3711, these two examples underscore why I found it imperative to act. Without the protections of federal law, the President has the power to 

remove coastal buffer zones. 

That is why I pushed for the passage of S. 3711, and refused to roll the dice in 

the hopes that a new Congress would be better able to protect the Gulf coast of Florida. 

For those that think we have protected too much territory, I am encouraged that 

we have witnesses testifying today on the amazing deep-water discoveries they have 

made 270 miles off the coast of New Orleans that potentially contain billions of barrels of oil. 

We are making incredible technological breakthroughs to discover new reserves 

of oil and gas, and I would encourage the industry to utilize these new techniques 

in the deep-water areas that are now available, so that we don’t have to continually 

pressure extraction on near-shore resources that predictably draw opposition from 

states like Florida. 

This week, in his State of the Union address, the President laid out ambitious 

and positive goals for alternative fuel development, greater independence from foreign oil, and a reduction in fuel consumption over the next decade. 

We are only scratching the surface of our future potential and we should not limit 

the capacity or ingenuity of America’s scientists to tackle this energy problem. However, we need a bridge to get to that future. The promise of deep-water exploration 

like the enormously energy-rich Jack Well off the coast of Louisiana and the passage 

of S. 3711 are good ways to keep our industries and utilities running while we find 

new ways to power our cars and cities, and create new and smarter sources of energy.

STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR

FROM NEW MEXICO 

Senator DOMENICI. Thank you very much, Mr. Chairman. Clearly, there are a lot of people here, so we ought to get on with the 

hearing, not delay them unduly. But I thank you for calling this 

important hearing. 

3

I’ve said on many occasions that a strong energy policy means 

utilizing a diverse supply that encompasses a spectrum of energy 

sources and technologies and it also means meeting our responsibility to deploy these resources in a smart, efficient and environmentally sound way. It is unacceptable to me to speak of energy 

independence on the one hand while supporting a moratorium that 

locks up 85 percent of the OCS acreage on the other. 

While vast resources in the Atlantic and Pacific coasts provide us 

with hope, this promise is an uncertain one. Based on old inventory 

data, we are told that the Atlantic and Pacific Oceans together contain nearly 17 billion barrels of oil and nearly 170 trillion cubic feet 

of natural gas. 

Despite this promise, for 25 years the Interior Appropriations 

Moratorium has quietly barred us from producing in vast areas of 

the OCS. This moratorium locks up our Nation’s resources and it 

weakens our foreign policy, our national security and economic 

strength. This is about American oil and gas and it is a debate that 

we should have, in the light of day, with the American people 

watching. 

Last year, on a bipartisan basis, my colleague joined me in such 

a debate, and as a result, we opened a substantial area in the eastern Gulf of Mexico to oil and gas leasing. I said then and I say now, 

we will not strengthen our energy security by locking up our Nation’s energy resources. 

In discussing energy independence, many people point to the role 

that ethanol has played in turning Brazil into a net exporter of oil 

in 2006. While this is true, they often fail to mention that Brazil’s 

oil production has risen significantly in recent years and the untold 

story is that most of Brazil’s crude oil is offshore in the deep water. 

Similarly, most of Mexico’s crude oil production occurs off the 

southeastern coast of the country in the Gulf of Mexico. 

Finally, within 50 miles of American land, Cuba leases to China’s 

national oil companies to explore in deep water. As we wring our 

hands, other nations act. And as a result, our increased dependence 

weakens our economic and diplomatic strength in the world. 

The task of energy security calls for us to be bold. We must 

rethink longstanding policies, like the OCS moratorium, stagnant 

CAFE standards and we must do more than that. It will require 

us to do things that some in this body don’t like and it will require 

us to do things that Republicans don’t like—Democrats sometimes, 

Republicans other times. And it will require us to do things that 

Republicans don’t like. It requires us to think differently. 

I thank the chairman for the opportunity to have this discussion 

and I look forward to hearing from the witnesses. Thank you very 

much, Mr. Chairman. 

The CHAIRMAN. Thank you very much. Let me just introduce our 

witnesses here and then we will hear a short statement from each 

of them. If they can make their main points, we will include all of 

your written statements in the record of the hearing. 

We are going to have a vote, we’re informed, at 10:30, so we 

probably will have to interrupt the hearing for about 15 minutes 

at that time and come back to ask a lot of our questions. 

Starting on the left-hand side, our left here, we have Assistant 

Secretary Stephen Allred, who is with the Department of the InteVerDate 0ct 09 2002 14:43 Apr 05, 2007 Jkt 011010 PO 34267 Frm 00007 Fmt 6633 Sfmt 6602 P:\DOCS\34267.TXT SENERGY2 PsN: PAULM
4

rior. He is a regular visitor at this committee, as all of us know, 

and we appreciate him being here. 

Next is Marjorie McKeithen, who is the Assistant Secretary for 

Mineral Resources for the State of Louisiana. Thank you very 

much for being here. 

Next is a witness—and Senator Menendez may want to say a 

word here—it’s Lisa Jackson, who is the commissioner of the New 

Jersey Department of Environment Protection. Did you want to 

make any statement about this witness, since she is here at your 

urging? 

Senator MENENDEZ. Well, thank you, Mr. Chairman. 

I want to take a moment just to both thank and introduce Commissioner Jackson. She is—since she has been sworn in as the commissioner of the Department of Environmental Protection in New 

Jersey, she has been a tireless champion of the environment and 

has earned a tremendous amount of respect from all corners of the 

State. 

Being the environmental commissioner in a State like New Jersey is an incredibly challenging job and she has met those challenges exceptionally well, making sure we’re good stewards of the 

land for future generations of Americans and New Jerseyians, most 

particularly, but at the same time, reconciling that with some of 

the economic concerns we have. And we certainly want to thank 

her for being here to share, particularly in our concerns about the 

Outer Continental Shelf, which is of incredible concern to us because of what it means to New Jersey’s economy and tourism and, 

of course, its natural resources. And we look forward to her testimony. We thank her for coming and thank you for the opportunity 

to recognize her. 

The CHAIRMAN. Thank you very much. Also as witnesses, we 

have Mr. Larry Nichols, who is the chairman and CEO of Devon 

Energy Corporation. We welcome him. 

Mr. Athan Manuel, who is the director of lands protection for the 

Sierra Club. Thank you very much for being here. 

And finally, Mr. Paul Siegele, who is the vice president for deep 

water for Chevron Corporation. Thank you for being here. 

Why don’t we start to the right and just go across and have all 

the witnesses make their statements and then we will take questions. 

STATEMENT OF C. STEPHEN ALLRED, ASSISTANT

SECRETARY FOR LAND AND MINERALS MANAGEMENT, DEPARTMENT OF THE INTERIOR 

Mr. ALLRED. Thank you, Mr. Chairman, Senator Domenici, and 

members of the committee. I appreciate the opportunity to appear 

before you here today. I’ll quickly summarize the written material 

that we’ve provided to you and then certainly be prepared to answer questions. 

The Federal portion of the OCS covers some 1.76 billion acres 

and is a major source of crude oil and natural gas for the domestic 

market. Since 1982, the Department has overseen the production 

of over 9.6 billion barrels of oil and more than 109 trillion cubic 

feet of natural gas from the OCS. 

5

I’m sure you’re going to get tired of me showing you the first 

slide, because you’ve seen it before, but I think it is important to 

continue to emphasis that there is no silver bullet to our energy 

needs and going forward, we will need, in addition to conservation 

and alternative and renewable energy supplies, to continue——

The CHAIRMAN. Would you move that podium out there so we can 

see it a little better? Thanks. 

Mr. ALLRED [continuing]. To continue to develop and supply oil 

and gas from the resources we have in the United States, a significant amount of which are found in the OCS. As you can see from 

that graph, our demand is expected to grow more than 25 percent. 

These slides, incidentally, are also in the written information that 

we have provided to you. 

Even with renewable energy and conservation, we expect that oil 

and natural gas will continue to account for the majority of energy 

use through the year 2030. 

This next slide that I have again is from the Energy Information 

Administration and it shows the 2007 forecast for total domestic oil 

and gas production and illustrates the significance of the OCS in 

that production. As you can see, it is a large amount of the production that we expect to occur. 

Now to talk about the OCS role. Much of the growth in the Nation’s energy demand will have to be met by OCS production in the 

Outer Continental Shelf, especially for new areas in the Gulf and 

Alaska. In the Energy Information Agency’s 2007 Annual Energy 

Outlook, the data shows a trend of increasing oil production from 

the Outer Continental Shelf to about 750 million barrels per year 

by the year 2010. National gas production should begin increasing 

again in 2007 and reach about 4 trillion cubic feet by the year 2011 

and we should be able to sustain those levels through at least 2022. 

The Gulf continues to represent a major domestic energy source 

for the United States. There is intense interest in our oil and gas 

potential in the deep- and ultra-deep-water areas. In 2006, there 

were 12 new deep water discoveries announced. These new discoveries represent a significant increase in the oil and gas reserves for 

decades to come. 

In looking at our 2006 resource assessment, which we completed 

on the potential oil and gas resources on the OCS—and I have, 

again, a map here that shows in summary, what those are. These 

again, are in the information that you have. According to that assessment, the OCS is thought to contain over 86 billion barrels of 

oil and 420 trillion cubic feet of natural gas that is undiscovered 

and technically recoverable. The OCS oil and gas resources represent about 65 and 40 percent, respectively, of the Nation’s remaining undiscovered oil and natural gas resources. 

However, about 20 percent—as you can see from the map that 

you have—of these undiscovered OCS resources have been unavailable for leasing due to either congressional or presidential moratorium or withdrawal. 

There is great uncertainty regarding the potential resources in 

these withdrawn areas. The last geophysical surveys and drilling 

exploration occurred more than 25 years ago. We simply do not 

have specific reliable estimates without the information or new geoVerDate 0ct 09 2002 14:43 Apr 05, 2007 Jkt 011010 PO 34267 Frm 00009 Fmt 6633 Sfmt 6602 P:\DOCS\34267.TXT SENERGY2 PsN: PAULM
6

physical and exploration methods and the information that they 

would provide. 

Today, even using outdated information, however, we have, for 

the areas under moratoria, undiscovered technically-recoverable resources of over 18 billion barrels of oil and 76 trillion cubic feet of 

gas. 

Now, typically these numbers will change substantially as we get 

additional information. Just for an example, the resource estimates 

for undiscovered economically recoverable oil and gas resources for 

the Gulf of Mexico, in 1975, were 6 billion barrels of oil and 50 trillion cubic feet of natural gas. Thirty years later, with the new information gained through exploration and production activities, 

those numbers are 38 billion barrels of oil and 185 trillion cubic 

feet of natural gas. That’s over a 470 percent increase just because 

we have better information. 

With regard to access, of the 1.76 billion acres of offshore land 

on the OCS, about 600 million are off limits to oil and gas leasing. 

The Department has finalized our new 5-year oil and gas—or is 

close to finalizing—a leasing program for 2007 to 2012. The proposed plan was published in August 2006 and identified 21 lease 

areas that would be offered over that 5-year period. 

The analysis completed anticipates production of an additional 10 billion barrels of oil and 45 trillion cubic feet of gas worth $170 

billion in net benefits for the Nation over a 40-year period of time. 

With the enactment of the Gulf of Mexico Energy Security Act, 

these numbers will probably change upward. 

In addition to moving forward with the planning of two lease 

sales required under the Gulf of Mexico Energy Security Act, the 

recent modification of the presidential withdrawal was in response 

to this legislation and to requests from Alaska State leaders. 

MMS is incorporating the sales called for by the Gulf of Mexico 

Energy Security Act into the new 5-year plan. While we are experiencing budget constraints under the continuing resolution, MMS 

has begun planning with the conducting of required environmental 

studies, in compliance with the National Environmental Policy Act, 

in preparation for the sales in 181 and in what we now call 181 

South. 

I’d like to just quickly mention that in addition to traditional resources, the OCS is poised to provide us with renewable and alternative sources of energy, with wind, wave and ocean currents. 

Through the new authorities that you provided us in the Energy 

Policy Act of 2005, the Department is moving forward to establish 

programs, including royalty evaluation, regulatory and leasing 

framework plans, to facilitate the development of these potent energy resources on the OCS. 

Our target is to have a programmatic EIS and draft rule available for public comment in late spring and finalize these documents 

toward the end of the year. The Department remains committed to 

the production of traditional energy that is environmentally acceptable as well as increasing energy conservation and alternative and 

renewable sources as critical components of a balanced and comprehensive energy policy. 

Thank you very much, Mr. Chairman. I’ll be prepared to answer 

your questions. 

7

* All figures have been retained in committee files. 

1 Energy Information Administration, Annual Energy Outlook 2007 Data (Special National 

Energy Modeling System run AEO2007.D112106A for MMS). 

[The prepared statement of Mr. Allred follows:]

PREPARED STATEMENT OF C. STEPHEN ALLRED, ASSISTANT SECRETARY FOR LAND AND

MINERALS MANAGEMENT, DEPARTMENT OF THE INTERIOR

Mr. Chairman, thank you for the opportunity to appear here today to discuss the 

Federal Outer Continental Shelf (OCS) and the role these Federal lands play in providing a secure source of domestic production of oil and gas. 

The Department and its agencies, including the Minerals Management Service 

(MMS), serve the public through stewardship of our Nation’s natural resources. The 

Department also plays an important role in facilitating domestic energy development. One third of all energy resources produced in the United States are managed 

by the Department of the Interior. 

The MMS has two significant missions: managing access to offshore Federal energy and mineral resources and managing revenues generated by Federal and Indian mineral leases, on and offshore. 

Managing access has resulted in OCS production of almost 11 billion barrels of 

oil and more than 116 trillion cubic feet of natural gas since 1982. Since 1982 OCS 

leasing has increased by 185 percent, and since 1994 OCS oil production has increased by 34 percent. 

NATION’S ENERGY OUTLOOK

The United States continues to face an energy challenge with high prices and increasing dependence on foreign supplies. Our security, economy, and our quality of 

life are dependent on energy. As this Committee knows well, there is no single solution. Achieving energy security will require diligence on both the supply and demand sides of the energy equation. 

Oil will continue to be vital to the American economy. According to the Energy 

Information Administration (EIA), over the next 20 years Americans’ demand for 

energy is expected to grow 25 percent. [see figure A: EIA projection of U.S. energy 

consumption*] Even with more renewable energy production expected, oil and natural gas are projected to account for a majority of energy use through 2030. This 

projection incorporates continued gains in energy efficiency and movement away 

from energy-intensive manufacturing to less energy intensive service industries. Offshore oil and gas production will continue to be a vital part of our Nation’s domestic 

energy resource portfolio. [see Figure B: EIA projection of U.S. energy resource production] 

Continued and growing reliance on oil and natural gas coupled with the need to 

reduce our dependence on foreign energy supplies causes us to look increasingly at 

the potential oil, natural gas and other energy resources from Federal waters on the 

Outer Continental Shelf (OCS) to enhance environmentally safe domestic energy 

production. 

Today, MMS administers more than 8,400 leases and oversees over 4,000 facilities 

on the OCS. According to MMS’s calculations, within the next 5 years, offshore production will likely account for more than 40 percent of domestic oil and 25 percent 

of U.S. natural gas production, owing primarily to deep water discoveries in the Gulf 

of Mexico. 

OCS ROLE IN NATION’S ENERGY PORTFOLIO

Much of the future United States oil and gas demand will have to be met by OCS 

production, especially from new areas in the Gulf of Mexico and Alaska. 

The Gulf of Mexico continues to represent a major domestic energy source for the 

United States. There is intense interest in oil and gas potential in the deep and 

ultra-deep water areas. Exploratory drilling in the deep water increased in 2005 despite the disruptions caused by hurricanes; and 12 new deep water discoveries were 

announced in 2006. Recent discoveries in the ultra-deep waters of the Gulf of Mexico 

represent a significant increase in oil and gas reserves for decades to come. The 

large volume of active deep water leases, the steady drilling program, and the deep 

water infrastructure indicate that the deep water Gulf of Mexico will continue to 

be an integral part of the Nation’s energy supply. 

The EIA provided MMS with Federal OCS data pulled from its soon to be published 2007 Annual Energy Outlook.1 The Federal OCS data shows a trend of inVerDate 0ct 09 2002 14:43 Apr 05, 2007 Jkt 011010 PO 34267 Frm 00011 Fmt 6633 Sfmt 6621 P:\DOCS\34267.TXT SENERGY2 PsN: PAULM
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2 Report to Congress: Comprehensive Inventory of U.S. OCS Oil and Natural Gas Resources. 

http://www.mms.gov/revaldiv/PDFs/FinalInvRptToCongress050106.pdf. 3GOMESA was Title I of Division C of Public Law 109-432, an act to amend the Internal 

Revenue Code of 1986 to extend expiring provisions, and for other purposes. 

creasing oil production from the OCS to about 750 million barrels per year by 2010. 

Natural gas production should begin increasing in 2007, again reaching 4 trillion 

cubic feet by 2011 and sustaining that level through at least 2022. Significant additional oil and natural gas production is expected when new projects, like Atlantis, 

Thunder Horse, and Independence Hub, come on line in 2007 and 2008. However, 

new deep water natural gas production may not keep pace with the expected declines in production from the shallow waters of the Gulf of Mexico. 

To encourage energy development from Federal offshore lands, MMS provides an 

orderly and predictable schedule of oil and gas lease offerings through competitive 

bid. Production from leases issued as a result of these sales will contribute substantially to future domestic oil and gas production and will provide bonuses, rentals 

and royalties to the U.S. Treasury and adjacent coastal states. To encourage increased drilling and production from the OCS, sales in the Gulf of Mexico have included royalty incentives authorized by Congress for the drilling of deep depth wells 

in shallow waters and for producing from deep water leases. Incentives have also 

been provided for newly issued leases offshore Alaska to encourage industry interest 

in that area. 

2006 RESOURCE ASSESSMENT

Last year, as part of the OCS inventory requirements of the Energy Policy Act 

of 2005, MMS completed an assessment of the potential quantities of undiscovered 

technically recoverable oil and gas resources that may be present on the OCS.2 According to this assessment, the OCS is thought to contain (at the mean level) 86 

billion barrels of oil and 420 trillion cubic feet of natural gas. For comparison, the 

most recent resource assessment estimates from the United States Geological Survey National Oil and Gas Assessment indicate that the total mean, undiscovered 

technically recoverable resources for onshore and State owned waters offshore are 

approximately 46 billion barrels of oil and 627 trillion cubic feet of natural gas. 

Thus, the OCS represents about 65 percent of oil and 40 percent of natural gas of 

the Nation’s remaining undiscovered technically recoverable oil and natural gas resources. [see Figure C: Resource Assessment Map] 

Approximately 20 percent of those undiscovered technically recoverable OCS resources have been unavailable for leasing due to longstanding congressional moratoria and/or Presidential withdrawal. When the 2006 resource assessment was completed, areas under congressional moratoria or Presidential withdrawal included the 

North Aleutian Basin off Alaska, the Pacific, the Eastern Gulf of Mexico, and the 

Atlantic. As discussed further in my statement, modifications to the status of some 

of these areas have recently been made. 

There is great uncertainty regarding the resource potential in areas where leasing 

has been prohibited and where the last geophysical surveys and drilling exploration 

occurred more than 25 years ago. Using the information available to us, we estimate 

that nearly 17.8 billion barrels of oil and 76.5 trillion cubic feet of technically recoverable gas remain unavailable for leasing consideration. 

ACCESS TO RESOURCES

Of the 1.76 billion acres of Federal offshore lands on the OCS, about 600 million 

acres are not available for oil and gas leasing. The potential resource in the areas 

under remaining moratoria and withdrawal are estimated to be approximately 18 

billion barrels and 76 trillion cubic feet of gas. 

There has been a 20-year congressional moratorium on new leasing along the Atlantic and Pacific coasts and in the Eastern Gulf of Mexico. In 1990, Congress 

placed Alaska’s North Aleutian Basin under a leasing moratorium. In 1998, these 

areas were placed under a Presidential Withdrawal which continues through 2012. 

In 2004, at the request of the Alaska delegation, Congress dropped the North 

Aleutian Basin from the annual moratoria language. The Gulf of Mexico Energy Security Act (GOMESA)3 was signed into law in December 2006, establishing a new 

moratorium on leasing activities until June 30, 2022 in the new Eastern Gulf Planning Area outside of Sale 181, and a portion of the Central Gulf Planning Area that, 

in general, is within 100 miles of the coastline of Florida. There are two small areas 

in the new Eastern Gulf Planning Area west of the Military Mission Line and one 

small area in the new Central Gulf Planning Area north of the Sale 181 Area that 

remain subject to the Presidential Withdrawal through 2012, but are not subject to 

9

the new 2022 moratorium under GOMESA. In addition, GOMESA repealed the congressional moratorium for the area in the Central Gulf Planning Area, known as 

‘‘181 Area South.’’ [See Figure D: Map of Sale 181] 

5-YEAR OCS OIL AND GAS LEASING PROGRAM (2007-2012)

The MMS is nearing completion of a new 5-Year OCS Oil and Gas Leasing Program for sales beginning in July 2007 through June 2012. MMS is preparing the 

Proposed Final Program and Final Environmental Impact Statement (EIS) for 

issuance in April of this year. Pursuant to the OCS Lands Act, the Program will 

be sent to Congress and the President for at least 60 days before the Secretary approves the final program. 

The Draft Proposed Program, issued in February 2006, contained 21 sales in 

seven planning areas—Western and Central Gulf of Mexico, Beaufort and Chukchi 

Seas, Cook Inlet and North Aleutian Basin off Alaska, and the Atlantic offshore Virginia. 

Following scoping and public comment, the Proposed Program and Draft EIS were 

issued in August 2006. The sales in Alaska are proposed in response the State of 

Alaska and industry interest, especially the Chukchi Sea. The North Aleutian 

Basin, as well as the 181 South Area in the Gulf of Mexico and the Atlantic offshore 

Virginia were included as areas for further consideration of leasing should Congress 

and the President modify the pertinent congressional moratoria and Presidential 

Withdrawal language. 

On January 9, 2007, the President modified the 1998 withdrawal to allow leasing 

in the North Aleutian Basin planning area offshore Alaska and the 181 South Area 

of the Gulf of Mexico. These actions were in response to the requests from Alaska 

state officers and local communities and enactment of the GOMESA respectively. 

The analysis completed for the proposed 5-year plan indicated that implementing 

the new program would result in the anticipated production of an additional 10 billion barrels of oil and 45 trillion cubic feet of gas, with $170 billion in net benefits 

for the Nation over a 40-year time span. With the enactment of the GOMESA, these 

numbers will probably change. Those changes will be reflected in the Final Plan. 

In response to passage of the GOMESA, which directs lease offerings in two areas 

of the Gulf, MMS plans to move forward with this Congressional directive in connection with the new 5-year program. Adding these two important areas to the leasing 

schedule under the final 2007-2012 leasing program provides access to a potential 

637 million barrels of oil and 2.8 trillion cubic feet of natural gas. 

The first area consists of approximately 546,000 acres that lie within the Sale 181 

area and in the Eastern Gulf Planning Area. MMS has begun preparation of a supplemental EIS to a previous National Environmental Policy Act (NEPA) document 

prepared in 2001 for Sale 181. 

The second area consists of approximately 5.8 million acres in the deep waters 

of the Central Gulf and was included in the Proposed Program as an area for further consideration for leasing. In response to the GOMESA and modification of the 

Presidential withdrawal, MMS intends to prepare a supplemental EIS and include 

this area in the Central Gulf sale scheduled for March of 2009. 

On the Atlantic coast, Virginia expressed an interest in looking into the gas resources off its coastline. While this area has been included in the Proposed Program 

and discussions continue, no leasing will occur in this area unless Congress lifts its 

moratorium and the President modifies the withdrawal to allow leasing activities 

to occur. 

Sales proposed will be completed in compliance with the National Environmental 

Policy Act to analyze potential environmental impacts. Other laws, such as the Marine Mammal Protection Act and the Endangered Species Act, will be complied with. 

RENEWABLES: ALTERNATIVE ENERGY ON THE OUTER CONTINENTAL SHELF

The United States faces a future of increasing energy demand causing a search 

for new sources of domestic energy supply. Our ocean frontiers may play a significant national role in this quest, particularly in the areas of new renewable and 

other alternative energy sources. MMS, drawing on its vast offshore engineering and 

environmental expertise, will work to help secure America’s energy future while protecting the environment. 

In addition to supplying the Nation with ‘‘traditional’’ energy resources, the OCS 

is poised to provide us with ‘‘alternative’’, renewable sources of energy such as wind, 

wave, tidal, and ocean current. Through new authorities established by the Energy 

Policy Act of 2005, the Department, specifically MMS, is establishing a regulatory 

framework to harness these potent energy sources. Our goal is to create a program 

that provides for meaningful dialogue with states and stakeholders; relies on sound 

10

environmental, engineering and scientific analyses; and culminates in a balanced 

approach that promotes safe and environmentally responsible renewable energy production. 

Along with the program, MMS is preparing a programmatic EIS that will focus 

on general impacts from each industry sector based on global knowledge and identify key issues that future project or site-specific environmental analyses should consider. Our target is to make the programmatic EIS and draft rule available for public comment in the spring of this year, and finalize these documents in the near future. 

The Energy Policy Act also gave the Secretary responsibility for two existing offshore alternative energy proposals, the Cape Wind Energy and the Long Island Offshore Wind Park projects. The MMS is reviewing each proposal and supporting information, and is preparing project-specific environmental analyses. 

Cape Wind Associates (CWA) has proposed to construct an offshore wind park located on Horseshoe Shoal in Nantucket Sound, 4.7 miles offshore Massachusetts. 

The purpose of the project is to provide a utility-scale renewable energy facility 

project providing electricity to the New England Power grid. The proposed wind 

park will consist of 130 offshore wind turbine generators arranged to maximize the 

park’s maximum potential electric capacity of approximately 454 megawatts. The 

draft EIS is anticipated to be available for public comment in late spring. 

The Long Island Power Authority (LIPA) and Florida Power & Light (FPL) have 

proposed an offshore wind park located between 3 and 4 miles off the South Shore 

of Long Island, New York. The proposed wind park would entail installation of 40 

turbines with a capacity of 140 megawatts of electricity for use in Long Island communities. The draft EIS is anticipated to be available for comment in late summer. 

CONCLUSION

The Department of the Interior remains committed to doing its part to provide 

access to both traditional energy resources and alternative and renewable sources 

on Federal lands as a critical component of a balanced, comprehensive energy policy. 

For this reason, the Department has ensured that the OCS remains a solid contributor to the Nation’s energy needs. The relative contribution from Federal offshore 

areas will increase in the coming years due to increased access and increased activity in the deep waters of the Gulf of Mexico. 

Mr. Chairman, this concludes my statement. I appreciate the continued support 

and interest of this Committee in 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, very much. 

Ms. McKeithen, why don’t you go right ahead. Thank you. Tell 

us the perspective from the State of Louisiana. 

STATEMENT OF MARJORIE A. MCKEITHEN, ASSISTANT SECRETARY, OFFICE OF MINERAL RESOURCES, DEPARTMENT 

OF NATURAL RESOURCES, STATE OF LOUISIANA 

Ms. MCKEITHEN. Good morning and thank you, Mr. Chairman 

and Mr. Ranking Member, distinguished members of the committee, in particular Senator Landrieu and her staff for having a 

representative from Louisiana here today. It is an honor. 

My name is Marjorie McKeithen. I am assistant secretary for the 

Department of Natural Resources for Louisiana, in charge of the 

Office of Mineral Resources, and I am secretary of the Louisiana 

State Mineral Board. 

Louisiana has a long and distinguished oil and gas history for 

our country both onshore and offshore. We look at ourselves as the 

heartbeat of America’s energy coast, sort of the working capital. 

While many companies may be headquartered elsewhere these 

days, we’re where the activity takes place. 

Thirty-four percent of the Nation’s natural gas supply and 30 

percent of the Nation’s crude oil supply is either produced in Louisiana, produced offshore Louisiana or moved through Louisiana’s 

coastal wetlands. 

11

Just a brief look at our rank among the 50 States will just give 

you a snapshot of Louisiana’s importance and our role in supplying 

energy to our great Nation. We are first, when you include offshore 

OCS production, in total crude oil production; first in OCS crude 

oil production; first in OCS natural gas production; first in OCS 

revenue generated for the Federal Government; first in mineral 

revenues from any source to the Federal Government; first in Federal oil import volume; first in LNG terminal capacity; and first in 

natural gas plant processing capacity. The list goes on and on, but 

we’re starting to become second right there so I’m going to stop. 

The bottom line is that Louisiana has provided a tremendous 

contribution to the energy needs of our Nation and we look forward 

to moving to forward. Of the offshore territory, off Louisiana’s 

coast, it is the most extensively developed offshore territory in the 

entire world. Of the 15.9 billion barrels of crude oil and 162 trillion 

cubic feet of natural gas ever produced, from all OCS Federal territories combined, 85.4 percent of the crude oil and 81.1 percent of 

the natural gas has come from Louisiana’s coast. And we’re proud 

of that. We want to continue. We want to move forward. We thank 

you so much, from the bottoms of our hearts, for sharing with us 

in this historic legislation and we’re ready to move forward as partners now, for the first time ever, getting a share of the money and 

not just the impact of all that activity. Thank you. 

Now, with this expansion is going to—with this expanded area 

is going to come some expanded needs and we need to be honest 

about it, take a look at it and know that it is going to have an impact on Louisiana’s infrastructure. Although this expanded area is 

off the coast of Alabama and Florida, the nearest oil and gas infrastructure and the nearest oil and gas ports are in Louisiana. 

And I wanted to just take a brief minute to look at those and 

talk briefly about what we can expect. Morgan City is close to the 

area in question. It is very important and advantageous to the oil 

and gas industry because it’s at the intersection of several waterways and important for shipbuilding and repair. 

The Port of Iberia is on the Commercial Canal and it is important for platform fabrication, repair and maintenance. And Port 

Fourchon is the largest Gulf supplier base for all offshore oil and 

gas services right now, and that is also expected to expand with the 

expanded activity. 

The bottom line is that developing these new areas will undoubtedly require a bolstering of our ports and infrastructure in Louisiana. We are thrilled to do it. We are thrilled for the economic 

activity that will be coming to Louisiana. We’re thrilled about the 

jobs but we’ve got to be honest about the impact that it is going 

to have and move forward in an environmentally responsible way, 

and we’re prepared to do that. 

Louisiana is a working wetland and Louisiana is not an ‘‘eitheror State’’. Louisiana firmly believes that—hey, Senator, good morning—that production and protection can co-exist. We have proved 

that time and time again. Louisiana’s wetlands is a place where 

crops are grown, energy is produced, petrochemicals are manufactured, and our ports are buzzing all at the same time where fish 

is being harvested. Louisiana’s commercial fisheries account for 30 

12

percent of the total catch, by weight, of commercial fisheries for the 

lower 48 states. 

We pride ourselves on being the ‘‘Sportsman’s Paradise’’. We 

have a ton of—what’s the word I’m looking for? Your brother is in 

charge of it—tourism. Focused on leisure and sports activities in 

Louisiana. Our recreational fishing industry—well, I guess, our 

pastime—is a $1 billion a year industry. Our hunting generates 

$446 million a year, all on Louisiana’s coast—or a lot of it in Louisiana’s coastal areas. 

Louisiana knows that production and protection can co-exist because we’ve been doing that. But we know that we can’t continue 

to do it without learning some of the hard lessons from the past. 

Those lessons cannot go unlearned. 

The massive energy infrastructure that I described in more detail 

in my testimony, sits atop an extraordinarily fragile environment. 

Louisiana continues to lose about 25 square miles a year, roughly 

an acre every 33 minutes. Through coastal loss—yes, sir? 

The CHAIRMAN. Can you go ahead and summarize the rest of 

your statement for us? We’re going to have to get on. 

Ms. MCKEITHEN. I will. Did I run out of time already? 

The CHAIRMAN. Yes, you have. 

Ms. MCKEITHEN. All right. Just one more minute and I’ll be 

done. 

The CHAIRMAN. That would be fine. One more minute, please. 

Ms. MCKEITHEN. Thank you very much. The good news is that 

scientists know now how to restore wetlands. They know how to 

bolster our Barrier Islands. What has been lacking in the past was 

not the will or the way but the resources to make a difference, and 

now you are providing us with those resources and we thank you. 

Now that it matters for us, now that we are getting a portion—

I’d just like to make a brief comment on the way we conduct our 

business in Louisiana, because it now matters to us more how the 

minerals off our coast are managed. We look at our model in Louisiana as Louisiana’s business, and it is a business. While industry 

are our customers, the people of Louisiana are our shareholders 

and we want to keep our customers happy and keep them coming 

back, but we want to maximize the profits for our shareholders as 

well. 

Three things dominate our process in Louisiana: transparency, 

checks and balances, and market—let the market drive the price. 

We have transparency in that our bidding process is done in a public forum, field bids, opened in public. We have checks and balances, because only the State Mineral Board, not me, not the Governor, not the Secretary of our Department, can grant a mineral 

lease in Louisiana, only a board appointed by the Governor and 

confirmed by the Senate can do that. And finally, we have bidding 

in Louisiana and let the market set the price, as to bonus, as to 

royalty, as to rentals and as to the actual acreage that is being put 

up. 

We have tract nomination, and then if a particular tract is on another company’s back burner and someone else nominates that 

tract, they have to advertise for 60 days and then they may realize 

they may need to put it on their front burner. While our royalty 

percentage is set at a 12.5 percent minimum, the industry has sigVerDate 0ct 09 2002 14:43 Apr 05, 2007 Jkt 011010 PO 34267 Frm 00016 Fmt 6633 Sfmt 6602 P:\DOCS\34267.TXT SENERGY2 PsN: PAULM
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nificantly raised that through competition. Our average royalty is 

22.5 percent in Louisiana. 

The CHAIRMAN. Why don’t we get into some more of the detail 

here in the question and answer. 

Ms. MCKEITHEN. All right. Thank you very much for the opportunity to speak to you here today and I’m sorry, I’ve tried to talk 

fast. 

[The prepared statement of Ms. McKeithen follows:]

PREPARED STATEMENT OF MARJORIE A. MCKEITHEN, ASSISTANT SECRETARY, OFFICE

OF MINERAL RESOURCES, LOUISIANA DEPARTMENT OF NATURAL RESOURCES, STATE

OF LOUISIANA

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 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):

1st in total crude oil production 

1st in OCS crude oil production 

1st in OCS natural gas production 

1st in OCS revenue generated for the federal government 

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

1st in LNG terminal capacity 

1st in foreign oil import volume 

1st in natural gas plant processing capacity 

2nd in total natural gas production 

2nd in total energy production from all sources 

14

2nd in petroleum refining capacity 

2nd in primary petrochemical production 

2nd in dry natural gas proved reserves 

2nd 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 modem 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 SeVerDate 0ct 09 2002 14:43 Apr 05, 2007 Jkt 011010 PO 34267 Frm 00018 Fmt 6633 Sfmt 6621 P:\DOCS\34267.TXT SENERGY2 PsN: PAULM
15

curity 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 modem 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 

16

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.lhttp://

www.utexas.edu/features/2006/coastal/index.html. 2Source: Prof. Gregory Stone, Coastal Studies Institute, Louisiana State University. 

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 

17

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 sevenmember 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 

18

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 18th 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.

The CHAIRMAN. Not a problem. 

Let me now call on the Honorable Lisa Jackson, the commissioner for the New Jersey Department of Environmental Protection. Thank you for being here. 

STATEMENT OF LISA P. JACKSON, COMMISSIONER, NEW 

JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION 

Ms. JACKSON. Thank you. Thank you, Mr. Chairman, ranking 

member and members of the committee. Good morning. I am 

pleased to be here today to represent Governor Jon Corzine and the 

citizens of New Jersey and the staff at the Department of Environmental Protection on this very important issue. 

I’d first like to recognize our Senator, Senator Menendez, for the 

leadership he has shown in protecting New Jersey’s coastal environment. We are a State that has consistently, consciously, objected to exploration and exploitation of the resources off of the 

Outer Continental Shelf and I come here today to say that our position has certainly not changed. 

We strongly support your legislation, Senator, to prohibit offshore drilling in the vicinity of New Jersey’s coastline, which coincidentally, was previously introduced by then-Senator Jon Corzine. 

I want to reaffirm our opposition to oil and gas lease sales off the 

coast of New Jersey as well as the opening of the Mid-Atlantic to 

offshore oil and gas development. Such actions leave us vulnerable 

to future damage, and quite frankly, in our opinion in New Jersey—and I carry with me the opinion not just of State leadership, 

but many of our mayors along the coast, who wrote specifically to 

ask me to convey their concerns that our coastal economy is frankly 

too important—our tourism economy is too important for us to 

move in the direction of exploiting our resources, natural gas or oil 

resources, off of our coast. 

I know that I can only speak for New Jersey, but I think it’s on 

the record that other Northeast States, certainly including Delaware and Connecticut, have been vocal in their opposition as well. 

It’s important for you to understand that in New Jersey, the 

coast drives our economy. In fact, it brings in about $36 billion a 

year. One in six jobs are related to our coastal zone, making coastal 

revenues our State’s largest economic sector. We have $4.5 billion 

that come from commercial, recreational fishing and aquaculture 

alone. 

19

As such, we are simply not interested right now, as we have not 

been interested, in risking that in any way in order to explore resources off the Outer Continental Shelf. We frankly feel that the 

risks of such exploration do not meet the potential for reward, and 

we think there are alternatives that are better and smarter at this 

juncture. 

There are environmental impacts as well. I don’t need to repeat 

what is in my written testimony, which I know will be in the 

record, Mr. Chairman, about those potential environmental impacts. And quite frankly, I would prefer us to avoid them rather 

than to learn to mitigate or restore, if we are unfortunate enough 

to have to deal with damages to our marine mammals, our coastal 

habitats, our recreation, our tourism, our commercial fishing, and 

our cruise ship economies. 

We strongly support the moratoria. And although Virginia seems 

to be a ways away, I do want to point out that the Virginia proposed program area is only 75 miles from the New Jersey coast. So 

we are very interested in what happens with that area as well. 

Physical processes do not honor administrative boundaries and 

we believe that that is why Federal leadership, in honestly evaluating the risks versus potential rewards, lead us and we hope you, 

to understand that the area of the North Atlantic and Mid-Atlantic 

areas should not be open for development. 

Instead, Governor Corzine and I ask this new Congress and you 

to be more comprehensive and forward-looking when you evaluate 

the North Atlantic and Mid-Atlantic regions and energy needs for 

our country. America certainly needs to strongly promote energy efficiency and conservation. We also need to be serious about producing alternative means of energy, and New Jersey would certainly like to partner with the Federal Government and join with 

other States that have led and embarked on initiatives that make 

our buildings more green, increase the use of hybrids and enhanced-mileage vehicles, and reduced our energy consumption. 

In our State, we have a strong push to look at alternative energy 

production. In fact, New Jersey is a national leader in solar energy. 

We have strong standards to implement, in New Jersey, the California low-emissions vehicles law. We have a renewable portfolio 

standard of 221⁄2 percent portfolio standard and we have a projected—we are set and will meet a goal of reducing energy demand 

20 percent by 2020 as a key goal of the Governor’s Energy Master 

Plan. 

I think, in conclusion, it is time for us to lead by example and 

that the specific decisions made when you weigh exploration and 

development in the Outer Continental Shelf and our region do not 

in any way justify going there at this time. I thank you for the opportunity to appear and I am happy to answer questions for you. 

[The prepared statement of Ms. Jackson follows:]

PREPARED STATEMENT OF LISA P. JACKSON, COMMISSIONER, NEW JERSEY

DEPARTMENT OF ENVIRONMENTAL PROTECTION

Good morning Mr. Chairman and members of the committee. My name is Lisa 

Jackson; I am Commissioner for the New Jersey Department of Environmental Protection. 

I appreciate the opportunity to testify before you today on natural resources on 

the Outer Continental Shelf. 

20

I would first like to recognize Senator Menendez for the leadership he has exhibited in protecting New Jersey’s coastal environment. We strongly support your legislation to prohibit offshore drilling in the vicinity of New Jersey’s coastline, which 

coincidentally was previously introduced by then-Senator Jon Corzine. 

I would like to reaffirm the State of New Jersey’s opposition to oil and gas lease 

sales for areas off the coast of New Jersey, as well as the opening of the mid-Atlantic to offshore oil and gas development. Such an action would leave New Jersey vulnerable to damage caused by drilling-related incidents in nearby waters. While I can 

only speak for New Jersey, other northeast states, including Delaware and Connecticut, have been just as vocal in their opposition to drilling in the Outer Continental Shelf. 

Our coast helps drive our tourism economy, which brings in more than $36 billion 

a year. In fact, one out of every six jobs in New Jersey is related to the ‘‘Coastal 

Zone,’’ making coastal revenues our state’s largest economic sector. $4.5 billion 

comes from commercial and recreational fishing and aquaculture alone. 

As such, development for oil and gas off our coast has the potential to threaten 

the economy of our entire state and the region as well. Adverse impacts on commercial and recreational fishing could deal a catastrophic blow to the economic welfare 

of the State and the region. 

Furthermore, the potential adverse impacts of development for oil and gas would 

not just be felt economically, but environmentally as well. New Jersey and other 

Northeast and Mid-Atlantic states have worked hard to enhance and protect our 

water quality and marine habitat and resources. New Jersey’s 127-mile coastline is 

a treasure of great ecological value; its integrity is essential to the environmental 

health of this state. 

The potential impacts of drilling are too risky to the health of our residents, coastal heritage, economy and environment. The potential impacts of a large oil spill include:

• effects to marine mammals and sea turtle populations, • adverse impacts on coastal habitats, • effects on the recreation, tourism, commercial fishing and cruise ship economies, • negative effects on the real estate markets and losses of job and income.

We strongly support the existing moratoria on OCS activities. The proposed special interest sale in the Mid-Atlantic planning area offshore Virginia is in conflict 

with this policy and presents serious environmental concerns to the New Jersey 

Coastal Region. I would like to point out that, while it may seem like different 

worlds, the Virginia Proposed Program Area is only 75 miles from the New Jersey 

coast. 

The physical processes in the ocean do not honor administrative boundaries. Activities anywhere in the Mid-Atlantic region could affect the uses and resources of 

the coastal zone and the marine environment off the New Jersey coast. 

In addition, there has been no evidence to date that exploring for oil and gas off 

our coast would be productive or economically feasible. Balanced against the 

downsides I have already discussed, the risks are way too high. 

New Jersey therefore has a direct interest in any proposed resource evaluation 

in the Mid-Atlantic region. Our State is opposed to any activity on the Outer Continental Shelf that could adversely impact our economy, maritime ecology, fishing and 

coastal-dependent tourism, particularly in a case such as off Virginia, where the 

Outer Continental Shelf development would be likely to make only a limited contribution to our energy needs 

Instead, Governor Corzine and I are asking this new Congress to be much more 

comprehensive and forward-looking in its search for ways to meet our country’s energy needs. America needs to strongly promote—as well as mandate—energy efficiency and conservation. We also need to be serious about developing alternate 

means to produce energy. Besides reducing our dependence on traditional fossil 

fuels, the use of these types of power has the additional benefits of reducing air pollution and greenhouse gases. 

New Jersey and many other states have already embarked on initiatives that 

would make our buildings more green, that would increase the use of hybrid or 

other enhanced mileage vehicles in our fleets or have taken other measures to reduce our energy consumption. At the state level, there has been a strong push to 

evaluate and implement alternative energy production strategies such as solar, geothermal, wave and wind power. In fact, New Jersey is a national leader in the solar 

market. 

Examples of Governor Corzine’s initiatives in this regard include:

• Implementing greenhouse gas tailpipe standards for automobiles, through New 

Jersey adoption of the California Low Emissions Vehicles (LEV) Program; 

21

• Moving forward on a commitment that 22.5% of electricity consumed in the 

State will be met with renewable energy resources via the New Jersey Renewable Portfolio Standard (RPS); • Setting an achievable goal to reduce total projected electricity demand by 20% 

by 2020 as key goal of the Energy Master Plan;

It is time for the federal government to follow the lead set by New Jersey and 

other states. Administration officials are only now acknowledging that climate 

change may in fact be a real phenomenon and that we need to take steps to reduce 

emissions of greenhouse gases. However, it is not too late for federal action and we 

urge Congress to act. 

As this committee explores the range of issues to be considered for offshore oil 

and gas exploration and production, I advise you to undertake a comprehensive review of not only potential energy alternatives and energy efficiencies but also the 

potential consequences of going down the wrong path. The risk to our economy and 

this natural treasure are too great to do anything less. 

Again, I thank you for the opportunity to appear before you today. I am available 

to answer any questions you may have.

The CHAIRMAN. Thank you very much. 

Next is Mr. Larry Nichols, the chairman and CEO of Devon Energy Corporation. Thank you very much for being here. You should 

push the button there to be sure that microphone works. 

STATEMENT OF J. LARRY NICHOLS, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, DEVON ENERGY CORPORATION 

Mr. NICHOLS. Thank you. Thank you, Mr. Chairman. As I was 

saying, I am Larry Nichols, chairman and CEO of Devon Energy 

Corporation. My father and I started Devon in 1971 as a very tiny 

company and owning an interest in five wells. Today, we are one 

of the largest U.S. producers of natural gas and oil in America. We 

are an independent producer, which means we focus purely on exploration and production, not on refining and other downstream operations. 

We are very excited about the potential of the Outer Continental 

Shelf. It has tremendous potential. The scientists of our industry, 

American scientists, are continually pushing things to a new frontier. 

I have with me a sand sample. This is a core that actually came 

from 27,000 feet in the ground, 7,000 feet below the ocean or the 

water. This core sample cost us about $100 million to get. It’s from 

a new discovery that we got recently with Chevron, our partner in 

the Lower Tertiary. I will pass this around so that the Senators 

can see it. It is a piece of rock. Not many people have held a piece 

of rock that old, that deep, but there it is. And I’ll use the Lower 

Tertiary as an example of the potential that exists in the Outer 

Continental Shelf. 

Mr. Chairman, if you had held this hearing 5 years ago or 7 

years ago, those people who are opposed to developing our resources, our American resources, would have told you that there 

was no scientific evidence that there was any oil and gas in this 

depth of water. And they would have been correct. There was none. 

They would have cited governmental studies that did not include 

this as a technical resource that our country could develop. And 

they would have been correct. Seven years ago, there were no drilling rigs that could sit out there in 5,000 and 10,000 feet of water 

and drill an oil and gas well. Our industry did not have seismic 

that could see that deep, could see the structures that were there 

that would allow us to do that. So they would have been correct 

22

in opposing that and saying that there were no resources there, as, 

indeed, we’ve just heard from the preceding witness. 

If you look at it today, we do have drilling rigs that can drill in 

10,000 feet of water. Today we do have seismic that can see to that 

depth and discover oil and gas reserves that are there. And we indeed do have discoveries. We’ve had 12 of them already, as the Assistant Secretary of the Interior said. The press has characterized 

those discoveries as the largest in the United States since Prudhoe 

Bay. No rational person can say with credibility that that kind of 

a discovery is not significant. The Department of the Interior 

projects that in the next 5 years, 40 percent of our oil and 20 percent of our natural gas will come from the Gulf of Mexico. No one 

can say with credibility that that is not significant. And that only 

comes from the 15 percent of the Outer Continental Shelf in the 

United States, excluding Alaska, that is available for leasing now. 

The original estimate back in the 1970’s for natural gas in the Gulf 

of Mexico was 50 trillion cubic feet. We have already produced 150 

trillion cubic feet. And the current estimate is that we can produce 

232 trillion cubic feet in addition to that. 

So these resources, the technology of our industry has demonstrated time and time again that whenever someone says it’s not 

there, it’s not technologically feasible, we have proven that to be 

wrong, time and time again. Not only offshore, but onshore. The 

same thing happens onshore. The second largest gas field in the 

United States is the Barnett Field in east Texas, which is a field 

that, in 2000, no one believed existed. And there it is, on the outskirts of Fort Worth, the largest gas field in Texas, the second largest gas field in the United States. 

Back in the Gulf of Mexico, the Independence Hub is about to 

come on string. It was a part of a lease that was originally authorized—that single gas hub is going to produce the gas equivalent—

enough gas to be the gas equivalent, the energy equivalent of windmills covering 300 square miles. We need to develop our alternative 

energy sources, we need conservation, but until we advance new 

technology to discover alternate energy, this country desperately 

needs the Outer Continental Shelf, not as a total solution, there is 

no total solution, but as a part of our country’s overall response to 

meeting the legitimate energy needs of our communities. 

It is a false choice to say you can either have a clean environment on one hand or you can have energy security on the other. 

We have both. The experience with the recent hurricanes—the 

worst hurricanes in history that blew through the Gulf of Mexico—

the beaches are clean and the fishing industry of Louisiana is in 

great shape, as the previous witness said. It is a false choice to say 

that we can do either/or. We can have both. We can have a clean 

environment and we can have energy security in the United States. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Nichols follows:]

PREPARED STATEMENT OF J. LARRY NICHOLS, CHAIRMAN AND CHIEF EXECUTIVE

OFFICER, DEVON ENERGY CORPORATION

Mr. Chairman and members of the Committee, I am Larry Nichols, Chairman and 

Chief Executive Officer of Devon Energy Corporation, one of the largest independent 

exploration and production companies in the United States. 

23

* All visuals have been retained in committee files. 

I am pleased to be here today. Thank you for the opportunity to share some of 

the excitement of our Devon Energy team—from geoscientists to our production personnel—as we work hard to provide the secure supplies of natural gas and oil that 

America needs. 

That excitement is especially keen with respect to offshore energy resources that 

are the focus of today’s hearing. 

Who could not be excited about our being able to tap potential energy-bearing geologic formations five miles below the seabed, under a mile-and-a-half-deep water? 

The sand sample I am going to pass to you to look at is from just such a formation. (There is oil trapped within the small pores of the sample, providing both the 

potential energy and some of the extraction and cost challenges for the future that 

must be understood.) 

This sample provides the starting point for my remarks today that will focus on 

our views of available Gulf of Mexico resources, other areas that should be made 

available for exploration, the advanced technologies that make our industry the best 

and most efficient in the world, and the need for good, stable energy and investment 

policies for us to best meet the nation’s energy requirements. 

GULF OF MEXICO

The members of this Committee know very well the crucial role that the Gulf of 

Mexico and the Gulf Coast states have today in providing oil and gas for America. 

The Department of the Interior projects that within the next five years fully 40 percent of U.S. oil production and 20 percent of U.S. natural gas production will come 

from the Gulf of Mexico. 

Some of that natural gas production will undoubtedly come from the areas in the 

Central Gulf that will be leased as a direct result of the Gulf of Mexico Energy Security Act passed first by the Senate and then approved by the House and signed into 

law late last year. That new access is shown in the beige shading on the map.* 

Opening this new area and putting in place the revenue sharing principle included in the new law are very significant steps toward what the country must do 

in providing increased access to better prospects for natural gas and oil exploration 

and production. I commend you and your colleagues for this progress. 

Devon Energy is already carefully evaluating where, and at what levels, we will 

be prepared to bid in the original Sale 181 area that is to be leased to the north 

later this year. We are also interested in acquiring seismic and other data to better 

assess the potential of the area to the south. 

We and others, including the large independents that are leading the way in developing the Independence Hub in the part of the Sale 181 area leased several years 

ago, are well positioned to be major participants in these new areas. 

In terms of resource expectations in these areas, we’ll defer to the MMS for official numbers. But these areas are very significant. They may even hold potential 

to have more gas than are in current official estimates. 

We must always keep in mind that resource estimates are based on available information. As more information is gained, resource estimates can grow substantially. That has certainly been the case in the Central and Western Gulf of Mexico 

where exploration and production has been allowed for decades. In those parts of 

the Gulf we have produced three times more natural gas than the first comprehensive 

resource estimates identified—and we now believe the Gulf still contains nearly five 

times those original estimates. The more we explore, the more we know. 

If you detect excitement about the natural gas potential in the Gulf, the same 

should be true with respect to oil potential. However, in the most promising areas 

in the deeper waters and deeper geologic formations, our enthusiasm must be tempered with a realization that we face very high technology hurdles and costs. We 

also face very long lead times—perhaps a decade—before there is any production, 

much less cost recovery or profit, from even the best prospects. 

You have seen and heard about recent deep water discoveries in what is known 

as the Lower Tertiary trend located hundreds of miles off the central and western 

Gulf of Mexico coasts. Devon has been associated with four of those discoveries, including Chevron’s Jack prospect (from which the sand sample was provided). The 

graphic shows industry results to date. 

Devon Energy has additional prospects and leases in the trend area. 

The trend’s resource potential may indeed eventually be in the billions-of-barrels 

ranges reported by media. But my previous point bears repeating: We are at the 

leading edge of technology and we have very high costs that may or may not lead 

to any particular project’s being determined to be economic. 

24

Technology and Costs 

Today we are able to use our geoscience technology such as 3- and 4-dimensional 

seismic imaging to ‘‘see’’ geologic formations better than ever before. 

For example, in the year 2000 we could not see through deep salt formations that 

cover parts of the Lower Tertiary trend. But with new seismic acquisition and improved processing capability we are able to study and target interesting formations 

we knew little about only a few years ago. At the same time, drilling and well completion technology that allows exploration and production in today’s water depths 

and deep formations did not exist. 

Today our advanced technology allows us to both find new supplies and then 

make the most efficient and cost-effective development and production facility decisions. 

The new technologies are expensive. Drill ships that use satellite and thruster positioning because of ultra deep water conditions cost one half million dollars a day—

more than twice as much as just a few years ago. We’re also contracting for new 

high-technology moored semi-submersible rigs that can operate in 10,000 feet of 

water. 

This means that we have single well investments of $100-million or more, field 

development costs that may exceed $1.5 billion, and project costs in excess of $2.5-

billion. Again, most of these costs may be incurred years or even a decade before 

any revenue is obtained, even if a project is assumed to be commercial. 

With such costs and timelines we must have a stable investment climate. 

Devon Energy and other companies in the large independent sector have a record 

of investing more than we earn, and 100 percent or more of our total cash flow to 

find and produce more energy. But we cannot risk making multibillion dollar decisions only to have royalty, tax or regulatory policies change—pulling project economics out from under us. 

The same is true for regulatory or other delays, such as in leasing processes. 

Given the many people involved at every phase of activity from leasing to the construction by service companies of drill rigs to actual drilling and development, slowdowns at any stage cause disruption and higher costs. 

On the other hand, if we assume a good, stable investment regime and smooth 

government and other processes, we are excited about the country’s offshore oil and 

gas potential in the Gulf of Mexico and beyond. 

This brings me to my comments on other offshore areas. 

Other Areas 

The remarkable technology improvements that we continue to experience have 

made our industry one that is sought after to explore offshore around the world. 

We explore, develop and produce oil and gas safely, cleanly and efficiently from 

the Gulf of Mexico to Angola and Azerbaijan, to Norway and the UK. But we don’t 

do it off the U.S. Atlantic and Pacific coasts. We hope this will change. We will continue to work in that direction. 

Which brings me back to the focus of this hearing—offshore resources. 

Offshore resources in current moratoria areas may be very large. When opponents 

of more access argue to the contrary, they turn logic on its head. Without access 

we do not know what is there—and remember that resource estimates are made on 

the basis of information—information ultimately available only by exploration. 

Based on exploration done in the Atlantic decades ago, for example, we know that 

there is natural gas 100 miles or more off the mid-Atlantic coast. But without further exploration we don’t yet know how much, or whether it is in formations that, 

with today’s technology, might be economic. 

With increased reasonable access to new areas in the future, we and our employees are excited about the possibility of providing more natural gas, with less price 

volatility, to heat our homes, generate our electricity and manufacture fertilizer, 

plastics, and the many consumer products America relies on everyday. 

Thank you once again, Mr. Chairman, for the opportunity to share my views 

today. 

I would be pleased to answer questions.

The CHAIRMAN. Thank you very much for your testimony. 

Mr. Athan Manuel, who is the director of lands protection of the 

Sierra Club. Thank you for being here. 

25

STATEMENT OF ATHAN MANUEL, DIRECTOR, LANDS 

PROTECTION PROGRAM, THE SIERRA CLUB 

Mr. MANUEL. Thank you, Mr. Chairman and Ranking Minority 

Member Domenici and members of the committee, good morning. 

My name is Athan Manuel and I am the director of the lands protection program for the Sierra Club. It is great to be here this 

morning representing the 750,000 members of the Sierra Club nationwide. Our membership makes us the largest environmental 

grassroots organization in the country. 

I want to thank you for the opportunity to testify this morning 

regarding oil and gas drilling in the eastern Gulf of Mexico and the 

Outer Continental Shelf. It will probably come as no surprise to the 

members of the committee that the Sierra Club strongly opposes 

any new offshore oil and gas drilling in areas that are currently offlimits and we oppose opening up the areas in the eastern Gulf that 

were opened up by S. 3711, the Gulf of Mexico Energy Security Act. 

Senator DOMENICI. Do you oppose it? You say that rather nonchalantly. I don’t know why——

Mr. MANUEL. Well, I’ll be happy to enumerate those reasons this 

morning, but I think most folks here know the reputation of the Sierra Club—that we work on environmental issues, but we also support clean energy programs—and I can give you the reasons why. 

We have three primary reasons why we oppose any new offshore 

oil and gas drilling and the primary reason is that it is still—despite increases in technology, it is still a dirty industry that is 

prone to accidents that leave problems for the environment. 

As we saw in the wake of Hurricanes Katrina and Rita, there 

were hundreds of spills that spilled oil and gas throughout the central and western Gulf of Mexico. And we just feel that new offshore 

oil and gas drilling represents a real threat to America’s marine 

environment. 

We do not believe that our beaches, coasts and marine resources 

and a billion-dollar tourism industry should be sacrificed for a relatively small amount of oil and natural gas, especially when we 

have alternative and clean energy resources that we can develop 

here in the United States. 

America’s coasts are a complex mosaic of sea grasses, wetlands, 

beaches and sand dunes. Our coastal waters support huge populations of fish, which commercial and recreational fishermen depend on. There are thousands and hundreds of species of birds and 

marine mammals, including environmentally sensitive species like 

sea turtles, whooping cranes, bald eagles, brown pelicans and 

manatees, that are found specifically in the eastern Gulf of Mexico. 

We just think again, offshore drilling is incompatible with this 

kind of environment and these kinds of environmental resources. 

Some of America’s most popular and famous beaches, from Pensacola Beach in Florida to Myrtle Beach in South Carolina to the 

Outer Banks in North Carolina, to Cape May in New Jersey and 

Cape Cod and the beaches of Maine, all those would be threatened 

by new offshore oil and gas drilling. 

Obviously, our chief concern is the potential for spills, both routine spills from operations, but also the threat of a catastrophic 

spill. Current cleanup methods are incapable of removing all the oil 

and usually only a small portion of the oil is recovered from spills. 

26

Offshore drilling platforms and pipelines spilled 1.8 million gallons of oil into U.S. waters from 1990 to 1999 in 224 reported accidents. That breaks down to about an average of 500 gallons spilled 

a day. 

The eastern Gulf of Mexico and America’s East Coast are the two 

areas most coveted by the oil and gas industry and are no strangers to hurricanes. We saw what happened in 2005 when Hurricanes Rita and Katrina caused spills off our coasts and damaged 

production and refining capacity and caused a spike in the price of 

gas. The storms caused 124 oil spills in the waters of the Gulf of 

Mexico, and during Katrina alone, 223,000 gallons of oil were 

spilled and there was 508,000 gallons spilled during Hurricane 

Rita. 

The Minerals Management Service reported that Hurricanes Rita 

and Katrina destroyed 115 production platforms in the Gulf of 

Mexico and damaged 457 pipelines connecting facilities in the Gulf 

to the shore. 

We simply think that putting more oil and gas rigs into hurricane-prone waters is precarious at best and simply is not a smart 

energy policy. 

Drilling rigs also produce a significant amount of air and water 

pollution. Rigs produce about 214,000 pounds of air pollutants 

every year. An average exploration well, either for oil or natural 

gas, generates tons of nitrous oxide, carbon monoxide, sulfur dioxide and other volatile organic hydrocarbons. These pollutants are 

the precursors to smog and acid rain and contribute to global 

warming as well. 

Water pollution is an issue. According to the National Academy 

of Sciences, a single well produces between 1,500 and 2,000 tons 

of waste material. Debris includes drill cuttings and toxic drilling 

mud that contain toxic metals, such as lead, cadmium and mercury. 

It’s not just pollution. The onshore network of roads, docks and 

buildings also hurt wetlands on our coasts. As the commissioner 

said, years of wear and tear by the oil and gas industry have damaged coastal wetlands in Louisiana. Twenty-five square miles of 

coastal wetlands each year are lost, wetlands that serve as important natural storm barriers for hurricanes. 

These are some of the environmental reasons we oppose offshore 

drilling and opening any new areas. The second reason we oppose 

it is that natural gas and oil estimated to be recoverable will simply not solve America’s oil problems or meet our energy challenges. 

As the commissioner mentioned, 80 percent of the areas that contain oil and natural gas off of our coasts are already opened up. 

We’re talking about the last 20 percent and we think that the oil 

and natural gas in those areas, again, could be replaced by increasing fuel economy standards for our cars and being more energy efficient and using renewable energy. 

And also, the area opened up by S. 3711 will produce a small 

amount of natural gas and oil, about 25 days worth of oil at current 

rates of consumption, and about 35 days of natural gas, again at 

current rates of consumption. That seems to be one of the main 

tradeoffs for us, is that again we see this one-of-a-kind environmental resource that contributes to a billion dollar tourism econVerDate 0ct 09 2002 14:43 Apr 05, 2007 Jkt 011010 PO 34267 Frm 00030 Fmt 6633 Sfmt 6602 P:\DOCS\34267.TXT SENERGY2 PsN: PAULM
27

omy around our country, then we see a small amount of oil and gas 

that would come on-line. Again, even the oil companies acknowledge that there is only about 3 percent—that the U.S. contains only 

about 3 to 4 percent of the world’s proven oil reserves. 

So, in conclusion, the Sierra Club feels there are smarter and 

cleaner ways to meet our energy needs. Last November, Americans 

cast their ballots and called for a new direction on a number of 

fronts, including energy policy. We now have an opportunity to 

make a fresh start and to shelve bad ideas like new offshore oil and 

gas drilling. 

The Sierra Club believes that the best and boldest way to address our energy concerns is to promote energy efficiency and renewable energy programs. We do not believe that our beaches, 

coasts, and marine resources and again, a billion dollar tourism industry should be sacrificed for a small amount of oil and natural 

gas, especially when efficiency and renewable energy programs are 

available to us right now. 

For instance, it typically takes——

The CHAIRMAN. Could you summarize the remainder of your——

Mr. MANUEL. Yes. Second to last paragraph. 

The CHAIRMAN. Great. 

Mr. MANUEL. For instance, it typically takes 7 to 10 years to 

bring an oil field on-line, but it only takes 1 year to build a 15-

megawatt wind farm that produces clean, renewable and domestically-produced energy. We strongly feel that it is time to begin to 

wean America off of fossil fuels, and instead, promote energy efficiency programs, such as increased fuel economy for our cars, 

trucks and SUVs and to promote renewable energy such as wind, 

solar and other clean energy sources. 

Again, thank you for the opportunity to testify and I look forward 

to questions later. Thank you. 

[The prepared statement of Mr. Manuel follows:]

PREPARED STATEMENT OF ATHAN MANUEL, DIRECTOR, LANDS PROTECTION PROGRAM, THE SIERRA CLUB

Mr. Chairman, ranking minority member, and members of the Committee, good 

morning. My name is Athan Manuel, and I am the Director of the Lands Protection 

Program for the Sierra Club. 

I am here representing over 750,000 Sierra Club members who belong to more 

than 65 chapters and 450 groups nationwide. We are the largest environmental 

grassroots organization in the country. 

I am very appreciative of the opportunity to testify this morning regarding oil and 

gas drilling on the Outer Continental Shelf and areas available for leasing in the 

eastern Gulf of Mexico. Most of my comments will focus on the environmental problems caused by off shore oil and gas drilling. 

NEW OFFSHORE OIL AND GAS DRILLING

It will come as no surprise that the Sierra Club strongly opposes drilling in the 

eastern Gulf of Mexico, the area opened by the Gulf of Mexico Energy Security Act 

of 2006 (S. 3711), or in any off shore areas in the outer continental shelf currently 

off limits, for a number of important reasons: 

1. New off shore oil and gas drilling represents a measurable hazard to 

the marine environment of the eastern Gulf of Mexico and all our coastal 

waters. We do not believe that the beaches, coastal environment, marine resources, and billion-dollar tourism industry of the eastern Gulf of Mexico 

should be sacrificed for a small amount of oil and natural gas. 

2. The natural gas and oil estimated to be recoverable in the eastern Gulf 

of Mexico will not solve our energy problems. According to the Minerals 

Management Service, offshore areas opened by S. 3711 will supply only 25 

28

1Deepwater Gulf of Mexico Environmental and Socioeconomic Data Search and Literature 

Synthesis. Volume I: Narrative Report. 2000. Minerals Management Service. 2 Interactions Between Migrating Birds and Offshore Oil and Gas Platforms in the Northern 

Gulf of Mexico. Final Report. 2005. Minerals Management Service. 3 Boesch and Rabalais, eds., ‘‘The Long-term Effects of Offshore Oil and Gas Development: An 

Assessment and a Research Strategy.’’ A Report to NOAA, National Marine Pollution Program 

Office at 13-11. 

days of oil and 35 days of natural gas over the next 60 years at 2004 consumption rates. The new area, loosely called 182, is in very deep water and 

contains relatively small amounts of oil and natural gas, about 525 million 

barrels of oil and 2.2 trillion cubic feet of gas, according to MMS. 

3. Most off shore oil and gas reserves are already available. According to 

the MMS, 80 percent of recoverable oil and natural gas reserves are in 

areas already available for leasing and drilling. The Sierra Club feels that 

there is no justifiable reason to turn to our special places for drilling. 

4. Finally, there are smarter ways that we can and should address our 

energy needs rather than allowing our coastlines to be threatened with oil 

and gas drilling.

1. NEW OFF SHORE OIL AND GAS DRILLING IS BAD FOR OUR COASTAL ENVIRONMENT, 

OUR BEACHES, FOR MARINE LIFE AND THEIR HABITAT, AND FOR THE BROADER ENVIRONMENT

While there have been many advances in oil and gas recovery technologies in recent decades, many serious consequences still result from exploration and drilling 

for either oil or gas. 

Harm to wildlife 

America’s coasts are a complex mosaic of sea grasses, wetlands, estuaries, beaches, and dunes. Off shore drilling is simply not compatible with this fragile ecosystem. 

The Gulf of Mexico is home to more than twenty species of marine mammals, four 

species of shark, seven species of tuna and five species of sea turtle. All five turtle 

species found in the Gulf are either endangered or threatened, making any adverse 

effects very significant to the overall populations. 

This area is the heart of one of the most important migration corridors in the 

world, traveled by hundreds of species of birds.1 Offshore oil rigs interfere with migratory routes, spawning, and feeding areas for target species, generate pollution 

that destroys crucial nursery habitat for larval and juvenile stages, and cause large 

and small oil spills that reduce catches.2 In addition to migratory birds, the eastern 

Gulf of Mexico supports large populations of brown pelicans and bald eagles. 

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: 

Important beach areas include the: Florida Panhandle, the Big Bend area, southwest Florida, and Ten Thousand Islands. All these could be affected by a large oil 

spill in the eastern Gulf with the beaches of the Florida Panhandle most at risk. 

Onshore damage 

The onshore infrastructure associated with offshore oil or gas causes significant 

harm to the coastal zone. The shoreline processing infrastructure for offshore drilling often requires industrialization within the coastal zone of affected states, using 

installations similar to onshore storage and processing facilities including miles of 

pipeline and roads and other industrial apparatus like ports, helipads, and dorms. 

For example, OCS pipelines crossing coastal wetlands in the Gulf of Mexico are 

estimated to have destroyed more coastal salt marsh than can be found in the 

stretch of coastal land running from New Jersey through Maine.3 Years of wear and 

tear by the oil and gas industry had torn apart the coastal wetlands of the Louisiana Bayou. Thanks in part to drilling operations, Louisiana is losing 25 square 

miles of coastal wetlands each year, eating away at natural storm barriers. 

Water pollution 

Drilling muds are used to lubricate drill bits, maintain downhole pressure, and 

serve other functions. Drill cuttings are pieces of rock ground by the bit and brought 

up from the well along with used mud. Massive amounts of waste muds and 

cuttings are generated by off shore oil and gas drilling operations—an average of 

29

4MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181, Draft Environmental Impact 

Statement (DEIS), p. IV-50. 5 Id.

6 Id., p. IV-32. 7 Id., p. IV-32-33. 8 Id., p. IV-40. 9 Congressional Research Service, Report RS20050, ‘‘Methane Hydrates: Energy Prospect or 

Natural Hazard?’’ James E. Mielke. February 14, 2000 10MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181, Draft Environmental Impact 

Statement (DEIS), pp. IV-50. 

180,000 gallons per well.4 Most of this waste is dumped untreated into surrounding 

waters. Drilling muds contain toxic metals, including mercury, lead and cadmium. 

Significant concentrations of these metals have been observed around drilling sites.5

A second major polluting discharge is ‘‘produced water,’’ the water brought up 

from a well along with oil and gas. Offshore operations generate large amounts of 

produced water. The Minerals Management Service estimates that each platform 

discharges hundreds of thousands of gallons of produced water every day.6 Produced 

water typically contains a variety of toxic pollutants, including benzene, arsenic, 

lead, naphthalene, zinc and toluene, and can contain varying amounts of radioactive 

pollutants. All major field research programs investigating the fate and effects of 

produced water discharges have detected petroleum hydrocarbons, toxic metals and 

radium in the water column down current from the discharge.7

Air pollution 

Drilling an average exploration well for oil or gas generates some 50 tons of nitrogen oxides (NOX), 13 tons of carbon monoxide, 6 tons of sulfur dioxide, and 5 tons 

of volatile organic hydrocarbons. Each OCS platform generates more than 50 tons 

per year of NOX, 11 tons of carbon monoxide, 8 tons of sulfur dioxide and 38 tons 

of volatile organic hydrocarbons every year.8

Global warming pollution 

Methane hydrates are ice-like structures formed from frozen water and methane. 

These structures are found in Arctic permafrost and beneath the seafloor of the 

Outer Continental Shelf where water depths are greater than 500 feet. The Congressional Research Service reports ‘‘safety problems related to gas hydrates may 

be anticipated. Oil and gas operators have recorded numerous drilling and production problems attributed to the presence of gas hydrates, including uncontrolled gas 

releases during drilling, collapse of well casings, and gas leakage to the surface.’’ 

The report continues that methane hydrates easily become unstable, potentially 

triggering seafloor subsidence and catastrophic landslides. In addition, a single unit 

of methane hydrate can release 160 times its own volume in gas.9 As methane is 

a greenhouse gas more than twenty times more potent than carbon dioxide in contributing to global warming, this volume of gas release would be extremely dangerous. 

Oil spills 

If offshore areas are leased for gas exploration there is always the possibility that 

oil also will be found. There is no known example of a case where a lease prohibits 

an oil company from developing oil if oil is found in a ‘‘gas prone’’ region. There is 

no documented instance of any company ever agreeing to such a condition in the 

history of the OCS leasing program. Without such a restriction included in a lease 

there would be no assurances that oil would not in fact be developed, raising the 

possibility of an oil spill. According to statistics compiled by the Department of the 

Interior, there were some 3 million gallons of oil spilled from OCS oil and gas operations in 73 incidents between 1980 and 1999.10 Oil is extremely toxic to a wide 

variety of marine species, and as noted by a recent National Academy of Sciences 

study, current cleanup methods are incapable of removing more than a small fraction of the oil spilled in marine waters. 

It would only take 24 hours after a petroleum spill in the eastern Gulf of Mexico’s 

Lease Sale 181 area for oil to ‘‘sully Florida’s Panhandle beaches if the spill was 

swept up by the gulfs powerful Loop Current. This spill could travel around the 

Florida Keys and contaminate estuaries and beaches from the Everglades to Cape 

Canaveral,’’ according to Congressional testimony by oceanographers from the University of South Florida. 

It is important to note that, with the exception of oil spills, the environmental 

damages described above result from drilling or exploring for either oil or natural 

gas. Any suggestion that restricting leases to natural gas drilling only will not adequately reduce risk of environmental impacts 

30

11 U.S. Minerals Management Service. Estimated Petroleum Spillage from Facilities Associated with Federal Outer Continental Shelf (OCS) Oil and Gas Activities Resulting from Damages Caused by Hurricanes Rita and Katrina in 2005. 8 August 2006. 12 U.S. Minerals Management Service. News Release. MMS Updates Hurricanes Katrina and 

Rita Damage. 1 May 2006. 13 NMFS, NOAA Fisheries Status Report: Preliminary Findings on the Stranding of Beaked 

Whales in the Bahamas (June 14, 2000); NMFS, NOAA Fisheries Status Report; NMFS, NOAA 

Fisheries Status Report on the One Year Anniversary of the Stranding of Beaked Whales in the 

Bahamas (Mar. 26, 2001). 14McCauley.R.D., J. Fewtrell and A.N. Popper, 2003. ‘‘High intensity anthropogenic sound 

damages fish ears.’’ J.Acoust.Coc.Am. 113, January 2003. 15 Id.

Hurricane risks 

The Gulf Coast and East Coast—the two offshore areas most coveted by the oil 

and gas industry—are no strangers to destructive hurricanes that could wreak 

havoc on offshore drilling operations. The 2005 hurricane season highlighted the 

danger of depending on this vulnerable offshore oil and gas infrastructure. It was 

the first year in recorded history with three category 5 storms—Katrina, Rita, and 

Wilma. 

In 2005, Hurricanes Rita and Katrina caused massive spills of oil and other pollutants and seriously affected the production, refinery capacity, and price of oil in 

the United States. The storms caused 124 oil spills into the waters of the Gulf of 

Mexico. During Hurricane Katrina alone 233,000 gallons of oil were spilled. There 

were 508,000 gallons spilled during Hurricane Rita.11 The U.S. Minerals Management Service reports that Hurricanes Katrina and Rita destroyed 115 petroleum 

production platforms in the Gulf of Mexico. The storms also damaged 457 pipelines 

connecting production facilities in the Gulf and bringing oil and natural gas to 

shore.12

A full year after Katrina, BP admitted that a damaged oil well valve in the Gulf 

of Mexico was still leaking oil. The knee-jerk reaction to throw up more rigs offshore—especially in hurricane-prone waters like Florida’s Gulf Coast and the Eastern Seaboard—is precarious at best and not smart energy policy. For more on the 

pollution and hurricane risks of offshore drilling: 

Drilling and Testing 

Seismic Surveys 

The first step to drilling for oil and gas involves doing an inventory of estimated 

resources. One technology used for this type of inventory is a ‘‘seismic survey.’’ This 

technology involves ships towing multiple ‘‘airgun’’ arrays with tens of thousands of 

high-decibel explosive impulses to gather geologic profiles of seabed rock structures. 

These airgun arrays fire regular bursts of sound at frequencies in the range of 20 

to 150 Hz, which is within the auditory range of many marine species, including 

whales. 

Marked changes in behavior in marine species in response to loud underwater 

noises in the ocean have been well documented. Seismic survey devices and military 

sonars (which operate at a similar decibel level) have been implicated in numerous 

whale beaching and stranding incidents, including a December 2001 mass stranding 

of 16 whales in the Bahamas, an incident of Cuviers beaked whales being beached 

and stranded in the Galapagos Islands and a more recent stranding in the Canary 

Islands.13

The auditory organs of fish are particularly vulnerable to loud sounds such as 

those produced by survey airguns. As fish rely on their ability to hear to find mates, 

locate prey, avoid predators, and communicate, damage to their ears can seriously 

compromise their ability to survive.14 In addition, mortality is possible in species 

like salmon that have swim bladders (the flotation organ that fish use to orient 

themselves vertically in the water), which have been shown to rupture on exposure 

to intense sounds.15

‘‘Dart Core’’ Seabed sample extractions 

‘‘Dart core’’ sampling, another survey technique, consists of dropping large hollow 

metal tubes from ships to vertically puncture the seafloor. The samples are retrieved and analyzed for information about subsea rock structures. This technique 

is extremely destructive to seafloor benthic organisms and fish habitat, discharging 

silt plumes that are transported on ocean currents and smothering nearby life on 

the seabed. 

31

16Long, D.T., W.E. Cooper, W.B. Harrison III, R.H. Olsen, B.J. Premo and K.G. Harrison. 

1997. Evaluation of Directional Drilling under the Great Lakes, October 1997. Michigan Environmental Science Board, Lansing, Michigan. 17 Houston, James R. (2002). The Economics Value of Beaches. U.S. Army Engineer Research 

and Development Center. 18World Travel and Tourism Council. (2001). Year 2001, World, United States, TSA Research 

Summary and Highlights. www.wttc.org/ecres/pdfs/a111/pdf. 19 U.S. Travel and Tourism (1993). World Tourism at the Millennium. U.S. Department of 

Commerce. 20Marlowe, Howard. Assessing the Economic Benefits of America’s Coastal Regions. Trends 

and Future Challenges for U.S. National Ocean and Coastal Policy. 21Murley, James, Lenore Alpert, William Stronge. (2005). Tourism in Paradise: The Economic 

Impact of Florida Beaches. 14th annual Biennial Coastal Zone Conference. 22Strong, W.B. (1994) Beaches, tourism and economic development. Journal of the American 

Shore and Beach Preservation Association. 62(2). 

Seafloor ‘‘Grab samples′′

‘‘Grab samples’’ are retrieved from the seafloor sediments with large hinged 

‘‘buckets’’ dropped from the shipboard into the seafloor to analyze silt, rocks, and 

seabed sediments and seafloor organisms. These buckets damage benthic organisms 

at the seafloor and cause silt plumes. 

Directional Drilling 

Directional drilling has been used to access oil and gas reserves under our National Parks, the Great Lakes, and the Gulf of Mexico. In the case of drilling off 

shore, the wellhead is on shore while the bottom of the well may be thousands of 

feet offshore. In 1997, Governor Engler of Michigan directed the Michigan Environmental Science Board to study the impacts of directional drilling on environmental 

and human activities. This study concluded impacts from directional drilling could 

result in the contamination of groundwater aquifers and loss of habitat while also 

increasing noise levels, odor, and congestion, impacting recreation and tourism.16

Impact on coastal economies 

Our coasts and marine waters provide the economic lifeblood for thousands of 

tourism and fishing communities, providing billions of dollars of economic activity 

and millions of jobs. They are destinations for thousands of vacationing families 

each year, sanctuary for fish and wildlife and a critical part of America’s ‘‘sea to 

shining sea’’ natural heritage. Offshore drilling is simply not compatible to the quality of economy and life this fragile ecosystem supports. 

There are five main economic benefits attributed to beaches and coastlines.

1. Increased sales, income and employment opportunities resulting from 

spending. 

2. Enhanced property value, 

3. Expansion of the federal, state and local tax base. 

4. Protection of developed shorefront property from storm surges, 

5. Provide recreational opportunities for people

Tourism in America is a $1.2 trillion industry with coastal communities representing over $700 billion annually.17 Travel and tourism is one of the largest employers in America, employing approximately 16.9 million people.18 It is estimated 

that in 1992 beaches contributed approximately $170 billion annually to the national economy.19 In South Carolina alone, beaches generate $1.54 billion in wages 

and earnings.20

Florida is one of the world’s top travel destinations with 825 miles of beaches.21

With nearly 80 million tourists in 2005, the hospitality industry generated approximately $57 billion for Florida’s economy and helped create nearly one million jobs. 

Florida’s tourism industry is responsible for 20 percent of Florida’s economy. Miami 

Beach alone reports approximately 21 million tourist visits annually. In 1992, about 

40 million tourists visited Florida, spending nearly $14 billion and creating about 

630,00 jobs with a payroll of $8.9 billion.22

In addition to potentially catastrophic effects on the tourism industry, drilling for 

gas and oil off our coasts could have significant negative impacts on commercial 

fishing. Florida generates more then 800 million dollars worth of commercial fish 

caught annually. Florida also has more then $5.6 billion in annual recreational fishing expenditures. 

In a Norwegian study conducted in the central Barents Sea, seismic shooting severely affected fish distribution, local abundance, and catch rates over a large geographic area. In this study, catch of cod and haddock fell precipitously within a 38-

32

23 Engas, Arill, Svein Lokkeborg, Egil Ona, and A.V. Soldal. Institute of Marine Research, 

1996. Effects of Seismic Shooting on Local Abundance and Catch Rates of Cod (Gadus morhua) 

and Haddock (Melanogrammus aeglefinus). Can. J. Fish. Aquat. Sci. 53: 2238-2249. 

nautical-mile by 38-nautical-mile area, and remained depressed for at least five 

days following the conclusion of seismic survey activities.23

In addition, the Canadian T. Buck Suzuki Environmental Foundation and the 

United Fishermen and Allied Workers Union—CAW recently weighed in on the Canadian Statement of Practice on the Mitigation of Seismic noise, citing their concern 

for the B.C. marine-based industries, which employ over 20,000 and contribute over 

$2 billion in revenues and $600,000 in total GDP. These groups point to mortalities 

in fish eggs, fish and shellfish larvae, and adult fish with swim bladders; trawl 

catch declines from 50 to 70 percent and long line catch declines by 44 percent for 

5 days after cessation of seismic shooting; and the particular concern about seismic 

activity during salmon migration or herring spawning. Salmon are of particular concern because of the endangered status of some populations off the Atlantic and Pacific coasts, and because of their apparent inability to detect and avoid low-frequency sound until damaging levels are reached. 

2. MORE OFFSHORE OIL AND GAS DRILLING WILL NOT SOLVE OUR ENERGY PROBLEMS

The natural gas and oil estimated to be recoverable in the eastern Gulf of Mexico 

will not solve our energy problems. According to the Minerals Management Service, 

offshore areas opened by S. 3711 will supply only 25 days of oil and 35 days of natural gas over the next 60 years at 2004 consumption rates. The new area, also referred to as lease sale 182, is in very deep water and contains relatively small 

amounts of oil and natural gas, about 525 million barrels of oil and 2.2 trillion cubic 

feet of gas, according to MMS. 

The same is true for oil and gas in areas in the eastern Gulf of Mexico outside 

of Lease Sale 182. There is an estimated 930 million barrels of oil in the entire eastern Gulf of Mexico, which breaks down to approximately 47 days worth of oil when 

you consider that Americans use about 21 million barrels of oil a day. Obviously, 

that is not enough oil to impact the price of a gallon of gas or solve our energy problems. 

Drilling anywhere on the Outer Continental Shelf will not solve the problem of 

high natural gas prices either. It simply takes too long to develop a natural gas field 

to impact prices in the short term (1-3 years). Natural gas from areas currently off 

limits to drilling will not reduce prices in the long term either, since there is not 

enough gas there compared to either annual U.S. production or consumption. 

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. 

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 percent from the addition of 10 times more gas 

reserves than would be freed up under this bill. 

This is hardly major or even significant price relief. The effect is of such a magnitude that it would probably be drowned out by the marketplace 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. 

3. MOST OFF SHORE OIL AND GAS RESERVES ARE ALREADY AVAILABLE

The vast majority—80 percent—of the nation’s undiscovered technically recoverable OCS gas is located in areas that are already open to drilling, according to the 

Department of the 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 percent of the gas thought 

to exist in the OCS. 

33

24 BLM, ‘‘EPCA Inventory Fact Sheet,’’ 1/15/03, p. 3 25 BLM, ‘‘Total Number of Acres Leased’’ (unpublished table, January 31, 2005) and BLM, 

‘‘Number of Producible Acres on Federal Lands’’ (unpublished table, January 31, 2005) 26 BLM, ‘‘Number of APDs approved by Year on Federal Lands’’ (unpublished table, January 

31, 2005) and BLM, ‘‘Number of Well Spud During the Year on Federal Lands’’ (unpublished 

table, January 31, 2005) 27Freidman, David, et al. ‘‘Drilling in Detroit: Tapping Automaker Ingenuity to Build Safe 

and Efficient Cars.’’ Union of Concerned Scientists. June 2001. p. 41. 28 American Wind Energy Association—http://www.awea.org/pubs/documents/

FAQ2002percent20-percent2Oweb.PDF.

Furthermore, according to the 2003 Energy Policy and Conservation Act (EPCA) 

report issued by the Department of the Interior, 85 percent of federal onshore oil 

resources and 88 percent of federal onshore natural gas resources (122.6 trillion 

cubic feet, or tcf) occurring on federal lands in Montana, Colorado, New Mexico, 

Utah and Wyoming are already available for leasing and development. Only 12 percent of federal onshore natural gas resources are off-limits to leasing.24

Thus, permanent protection for the coastal moratorium areas will leave the vast 

majority of the nation’s OCS gas available to the industry. 

In addition to availability for leasing, Bureau of Land Management (BLM) data 

indicates that the vast majority of federal lands currently under lease are not being 

developed. Of the more than 35,000,000 acres of public lands under lease, development is occurring or has occurred on approximately 12,000,000 acres.25 Drilling permit approvals on Western public lands by the BLM increased by 62 percent in 2004, 

to a record number of 6,052, while the number of new wells that were drilled declined by nearly 10 percent, to 2,702.26

Based on this data, it is clear that the vast majority of federal oil and gas resources occurring on federal lands and waters are available for development. The 

oil and gas industry clearly has plenty of access to our public lands already; there 

is no reason to grant access to additional areas currently under moratorium for additional leasing. 

4. THERE ARE SMARTER, CHEAPER, AND FASTER SOLUTIONS FOR RISING GASOLINE AND

NATURAL GAS PRICES

America’s coasts and marine waters provide the economic lifeblood for tourism 

and fishing communities, a destination for thousands of vacationing families each 

year, and sanctuary for fish and wildlife. Offshore drilling would industrialize our 

coasts and put our coastal communities and economies at risk. 

Sacrificing America’s shoreline is not what will bring down—and keep down—energy prices. The United States has about 5 percent of the world’s population but 

consumes about 25 percent of the world’s energy. Instead of drilling off out coasts, 

which will only add to the billions in profits already being made by Big Oil, Congress should raise the fuel economy of our cars, encouraging the use of renewable 

energy like wind and solar power, and adopting other, existing energy-saving technologies that cut pollution, curb global warming and create good jobs. 

For example, if our cars, trucks and SUVs together averaged 40 miles per gallon—something that is achievable with existing technology—we would save as much 

oil as the United States currently imports from the Persian Gulf, with another million barrels to spare. And the average driver would save nearly $600 a year at the 

pump.27 A single modem turbine can produce enough power to meet the annual electricity needs of 500 average homes.28

There are other examples of clean energy solutions and alternatives to off shore 

oil and gas drilling. Many states have adopted renewable energy standards. By 

2017, the renewable energy standards already enacted by states such as New Mexico, California and Texas will produce as much renewable energy as would be produced by gas fired power plants using 0.6 TCF of gas per year. That is twice as 

much gas annually than the amount of oil and gas thought to be in the area covered 

by the original Lease Sale 181. 

By simply making our homes, offices, cars and trucks more efficient we will save 

energy and money today and far into the future. Instead of relying on volatile and 

expensive sources of oil and gas, we can use better technology to reduce our energy 

demand while producing more energy from renewable sources of energy like wind 

and solar power. These cheaper, cleaner and faster policies reduce short-term demand and costs while also providing long-term solutions to our energy needs. And 

it does not require you to put your favorite vacation spot on the chopping block. 

34

CONCLUSION

The Sierra Club strongly opposes efforts to open areas currently off limits to off 

shore oil and gas drilling. Off shore oil and gas drilling is a dirty business, one incompatible with America’s coastal ecosystems and economies. 

We feel that the oil and natural gas thought to be in these areas will make, at 

best, a very marginal difference in the supply or price of gas in the future. Any oil 

and gas found would not be available any time soon and therefore would not address immediate concerns regarding prices or supply. 

We suggest that a better way to address these concerns is to promote energy efficiency and renewable energy programs. For instance, it typically takes seven to ten 

years to bring an oil or gas field on line. But it only takes one year to build a 50-

megawatt wind farm that can produce 50 megawatts of clean, renewable electricity. 

Finally, we do not believe that the beaches, coastal environment, marine resources, and billion-dollar tourism industry of the eastern Gulf of Mexico should be 

sacrificed for a small amount of oil and natural gas, especially when efficiency and 

renewable energy solutions to our energy problems are available right now. 

We strongly feel that it is time to begin to wean America off of fossil fuels, and 

in their stead promote energy efficiency programs such as increased fuel economy 

for our cars, trucks and SUVS, and to promote renewable energy such as wind, solar 

and other clean energy sources. 

Once again, thank you for the opportunity to testify before this committee.

The CHAIRMAN. Thank you very much. 

Our final witness here is Paul Siegele, who is the vice president 

of deep water exploration and projects for Chevron’s North American Exploration and Production Company. 

STATEMENT OF PAUL K. SIEGELE, VICE PRESIDENT, DEEPWATER EXPLORATION AND PROJECTS, CHEVRON NORTH 

AMERICA EXPLORATION AND PRODUCTION COMPANY, 

CHEVRON U.S.A. INC. 

Mr. SIEGELE. Thank you, Mr. Chairman, members of the committee. I appreciate the opportunity to be able to appear here 

today. As Chevron’s vice president of deep water exploration and 

projects, my responsibilities involve exploring for, developing, and 

bringing on-line new sources of oil and gas in the deep water Gulf 

of Mexico. 

Energy diversification is a good way to provide energy security. 

The Gulf’s deep water is a critical part of a diversified energy portfolio because it has a tremendous potential for significant new finds 

of oil and gas. However, it is also a high-cost, high-risk area to explore and produce and it requires new technology to develop these 

resources. 

For instance, we have drilled six to eight exploratory wells per 

year over the past several years. These wells cost $50 million to 

$100 million each and often result in dry holes. 

We are also participating in three new offshore developments 

that are anticipated to yield 300,000 barrels of oil per day within 

the next few years. We operate two of these, the Tahiti and Blind 

Faith projects, which will represent over $4.5 billion in capital investment. 

Chevron is also a partner in the Perdido Regional Development 

Project, another multi-billion-dollar effort. All these are located in 

exceptionally deep waters, requiring development of new technologies. 

As Mr. Nichols has mentioned, an example of how we are meeting deep-water challenges is the record-setting Jack #2 production 

test conducted in June 2006. This well was completed and tested 

35

in 7,000 feet of water and more than 20,000 beneath the sea floor. 

More than half a dozen world records for test equipment pressure, 

depth and duration were set during the test. The test was significant because, for the first time, we showed that oil could be commercially produced from the newly discovered Lower Tertiary area, 

given the right economic conditions. Due to the exceptionally high 

costs, the ultimate potential for this area is particularly sensitive 

to oil prices and fiscal terms. 

To ensure that we can implement our long-term deep water plans, in 2006 we committed $2.5 billion to extend two deep water 

rig contracts and entered into two long-term lease agreements to 

build two new, state-of-the-art drill ships. These new ships will be 

capable of drilling in 12,000 feet of water and to a total depth of 

40,000 feet. 

Deep-water exploration and production is commercially risky and 

success is in no way guaranteed. As mentioned earlier, exploratory 

wells can cost up to $100 million each and many result in dry holes 

or are uncommercial. Companies invest billions of dollars in early 

phases of exploration and development and income from production 

can be a decade away or longer. 

Government incentives designed to stimulate activity and grow 

energy production from high-risk, high-cost areas, such as the deep 

water Gulf of Mexico, encourage companies to invest by reducing 

costs or increasing revenues, ultimately resulting in reducing the 

need for foreign sources of oil. 

The Deep Water Royalty Relief Act is a successful program. Production from the Gulf’s deep water has grown dramatically over the 

past decade and will continue to grow as projects currently under 

construction are completed and energy production starts. 

Before closing, I would also like to address the issue of price 

thresholds for deep-water leases issued in 1998 and 1999. We remain committed to finding a mutually acceptable resolution to this 

issue. With this in mind, we have had a series of discussions with 

MMS officials where we have proposed a range of options and we 

have submitted a written proposal for resolution of the issue. We 

continue to honor the proposal and look forward to further discussions with the MMS. There are many details to work out and we 

remain hopeful that we will reach an agreement. 

In summary, Chevron has a long history of working to maximize 

the production of energy from the Gulf of Mexico, and our efforts 

will continue. We are committed to being a leader in deep-water exploration and development, a partner of choice and a leader in innovation and technology development. We take our job of providing 

energy for our great Nation very seriously and look forward to 

working with all stakeholders to ensure we maximize energy production to meet our Nation’s energy needs. 

Thank you again for giving me the opportunity to be here today. 

I will be happy to answer any questions you may have. 

[The prepared statement of Mr. Siegele follows:]

PREPARED STATEMENT OF PAUL K. SIEGELE, VICE PRESIDENT, DEEPWATER EXPLORATION AND PROJECTS, CHEVRON NORTH AMERICA EXPLORATION AND PRODUCTION

COMPANY, CHEVRON U.S.A. INC. 

Mr. Chairman and Members of the Committee, on behalf of Chevron North America Exploration and Production Company (hereinafter ‘‘Chevron’’) I wish to express 

36

our appreciation at having the opportunity to appear here today to discuss oil and 

gas resources on the Outer Continental Shelf and areas available for leasing in the 

Gulf of Mexico. 

As Vice President, Deepwater Exploration and Projects, my job responsibilities include looking for new sources of oil and gas in the deepwater Gulf of Mexico. My 

previous position was General Manager for Deepwater Exploration and Production. 

INTRODUCTION: ENERGY SECURITY AND GULF OF MEXICO DEEPWATER EXPLORATION

In a world of increasing strategic competition for resources and heightened geopolitical risks, safeguarding America’s energy security requires an integrated, strategic approach. This approach must focus on reducing and managing America’s energy vulnerabilities while providing Americans with affordable, reliable energy—the 

foundation of our competitiveness and way of life. Energy portfolio diversification is 

the best way to provide energy security. Long-term energy security will require increasing our energy assets here at home (efficiency measures, alternative energy 

sources, and traditional hydrocarbons), while engaging strategically with foreign 

partners who share these same goals of increasing energy supplies, reducing energy 

demand and promoting global energy diversification. 

Oil and gas production from the deepwater Gulf of Mexico is a critical part of a 

diversified energy portfolio. The Gulf’s deepwater is an important frontier area for 

oil and gas exploration in the U.S. My testimony focuses on Chevron’s deepwater 

exploration prospects because the deepwater is the area of the Gulf of Mexico with 

the most potential for significant new finds of domestic oil and gas at this time and 

because it is my job to steer Chevron’s deepwater Gulf of Mexico exploration activities. My testimony addresses our current activity in the deepwater Gulf of Mexico, 

our future plans for growth, and our vision to remain an industry leader in producing tomorrow’s energy resources from this basin. My testimony also provides examples of our design and application of industry-changing technology. 

CHEVRON’S PARTICIPATION IN GULF OF MEXICO DEEPWATER EXPLORATION

Chevron is a leader in drilling exploratory wells in the deepwater and is a leading 

leaseholder in the region. (An exploratory well is a ‘‘wildcat’’ well, a well drilled in 

an area where it is unknown whether crude oil or natural gas is present.) We drilled 

an average of 6-8 exploratory wells per year over the past few years in the Gulf of 

Mexico and plan to maintain a robust drilling program for the long term. Exploratory wells cost $50 to $100 million dollars to drill and often result in dry holes, 

wells not capable of producing in commercial quantities, rather than discoveries. 

Chevron is participating in three new offshore developments involving investments of more than a billion dollars each that are anticipated to yield approximately 

300,000 barrels of oil production per day within the next four years. Chevron operates two of these—the Tahiti and Blind Faith projects—which represent over $4.5 

billion in capital investment and are designed to produce 165,000 barrels of oil per 

day. In these projects, we are drilling development wells (wells drilled in a known 

reservoir in a proved oil-or gas-producing area) and constructing associated facilities, with first oil production targeted for 2008. Chevron is also a partner in the 

ultra-deep Perdido Regional Development Project, which will include a regional production host facility to allow future expansion beyond the initial core fields. This 

facility is expected to be on production near the turn of the decade and is capable 

of handling 130,000 barrels of oil per day of production. These projects are located 

in very deep waters (4000 feet to 9500 feet), which requires the development of new 

technologies for successful completion. 

In addition to these new offshore developments, Chevron is involved in six 

projects where the company and its partners are actively appraising significant discoveries. Chevron is the operator of three of these projects, those involving the Jack, 

Saint Malo, and Big Foot discoveries. These projects are anticipated to provide significant volumes of production for the U.S. for the long term. Each of these projects 

faces challenges, however, as each requires significant commitment to capital investment, subsurface evaluation, development and testing of new technology, and design 

of complex subsea production systems. 

An example of how we are meeting deepwater development challenges is the 

record setting Jack well production test in June 2006. The Jack well was completed 

and tested in an area 270 miles southwest of New Orleans in 7,000 feet of water 

and more than 20,000 feet under the sea floor. The Jack well test broke Chevron’s 

own 2004 Tahiti well test record as the deepest successful well test ever completed 

in the Gulf of Mexico. During the test, the well sustained a flow rate of more than 

6,000 barrels of crude oil per day, with the test representing approximately 40 percent of the total net pay measured in the Jack #2 well. More than a half a dozen 

37

world records for test equipment pressure, depth, and duration in deepwater were 

set during the Jack well test. For example, the perforating guns were fired at world 

record depths and pressures. Additionally, the test tree and other drill stem test 

tools set world records, helping Chevron and its partners to conduct the deepest extended drill stem test in deepwater Gulf of Mexico history. The test was also significant in that it proved the application of technology required to achieve substantial 

production rates from a reservoir type and a reservoir depth not previously proven 

to be economically productive in the Gulf of Mexico deepwater. As a result of the 

Jack well test and other company activities, Chevron has become the recognized 

leader in exploring, evaluating, and developing the promising area of the deepwater 

Gulf of Mexico known as the ‘‘Lower Tertiary Trend.’’

Chevron is applying its experience in deepwater appraisal and project design 

methods to all of its deepwater Gulf of Mexico projects in order to improve productivity, reliability, and safety, and to expedite production in both current and future 

projects. Further, to assure that Chevron will have the capability to implement its 

long-term deepwater exploration and development plan, in 2006 we committed $2.5 

billion to extend two long-term deepwater drilling rig contracts and to enter into 

long term lease arrangements to build two new state-of-the-art drill ships. The ships 

will be capable of drilling in 12,000 feet of water and to total depth of 40,000 feet, 

further extending our ability to explore for and produce new deepwater Gulf of Mexico resources. 

ROLE OF INCENTIVES

From a fiscal perspective, deepwater exploration and production is a risky business proposition. As discussed above, exploratory wells can cost $100 million each, 

and many result in dry holes. The process of bringing new energy supplies to the 

marketplace, from leasing through exploration, development, and construction, can 

take a decade or more. Companies invest billions of dollars years before there is any 

income from production, and assume all this risk. Government incentives, designed 

to grow energy production from high-risk, high-cost areas such as the deepwater 

Gulf of Mexico, encourage companies to invest by reducing costs, and thereby reducing reliance on foreign sources of oil. The Deepwater Royalty Relief Act is a successful program—production from the Gulf of Mexico has grown dramatically over the 

past decade, and will continue to grow as projects currently under construction are 

completed and energy production starts. 

CONCLUSION

Chevron has a long history of commitment to the development of resources in the 

Gulf of Mexico, and this commitment will continue. We are the largest operator on 

the Gulf of Mexico shelf and a leader in all aspects of deepwater exploration, appraisal, and new project design and execution. We are a partner of choice and a 

leader in innovation and technology development. We look forward to continuing to 

explore for and produce oil and gas from the Gulf of Mexico for years to come.

The CHAIRMAN. Thank you very much for your testimony. I 

thank all the witnesses for your testimony. Why don’t we take 5-

minute rounds. I’ll start and then Senator Domenici, and we’ll just 

take people in the order that they arrived. 

First, Secretary Allred, let me ask you: There are about 33 million acres of Federal Outer Continental Shelf, as I understand it, 

that are currently under lease but are not producing; could you explain why there is such a large amount that is not in production? 

Do we have rules to encourage diligent development of leases once 

a lease is issued and are those adequate to get the production underway? 

Mr. ALLRED. Thank you, Mr. Chairman. Yes, in the offshore 

leases, when we offer them for sale, depending upon the depth of 

water, they are offered for a term of either 5 years or 10 years and 

essentially, it’s about—that breaking point is 400 feet. 

They are required, in that lease term, to start producing or to do 

certain diligence or the lease expires and then it comes back on the 

market and is resold. 

38

The CHAIRMAN. Expires in what period of time? Are these 5-year 

leases? 

Mr. ALLRED. Either a 5-year or 10-year, depending upon the 

depth of the water where the lease occurs. 

The decisions that the oil companies make—and it’s probably a 

better question to ask them, but the decisions that the oil companies are faced with on those leases has to do with the information 

that they gain after they are awarded the lease and decisions that 

they have to make as to where the most productive information—

or the information indicates where the productive resource is, as 

they develop it under their lease, after the lease is acquired. So 

they’re making decisions, after they acquire the leases, as to 

whether they should go. 

Now, we will see—remember, there are payments with regard to 

rental rates on these leases going forward, before they produce. 

They will make decisions, sometimes, to turn those leases back, before the 5- or 10-year period is up. And again, they will go back 

onto the market in our next sale in that area. So there are due diligence requirements. They have to proceed or they cannot retain the 

lease. But there are many decisions that they have to make, based 

upon data that they acquire after they are awarded that lease. 

The CHAIRMAN. Let me ask, also, as I heard Ms. McKeithen’s testimony, and in her written testimony as well, she points out that 

in Louisiana, the royalty received has to be, by law, at least 121⁄2

percent—in fact, it’s on average 22.85 percent for inland tracks and 

21.85 percent for offshore—and I believe she said that the leases 

that the State of Louisiana issues for the land it owns or has leasing rights in, those leases are bid, not just the original bid price, 

but also the rate; why do we not pursue that at the Federal level, 

if that’s what the market will bear? 

Mr. ALLRED. Mr. Chairman, we try to analyze what market conditions are when we make decisions as to what to set the royalty 

rates on a particular sale. One of the differences between the lease 

rates or the royalty rates with regard to market conditions in the 

inland waters and the waters on the Outer Continental Shelf, of 

course, is the depth and the cost of developing those. In the 3-mile 

areas, you’re talking about technology that is well developed and 

costs, which when compared to the OCS, are fairly moderate. So we 

try to make decisions as to what is attractive or what will be attractive in the lease sales that we offer in order to maximize the 

greatest money to the United States. 

Now remember, they are bidding-in the U.S. sales, they are bidding two items and both of those are driven by the market. The 

first is the bonus bid that they give us, which is a fairly immediate 

income to the United States, and then second, they are required to 

pay the royalty rate that we specify in the sale. If you raise the 

royalty rate—the companies are going to be able to pay a certain 

amount in their minds for that lease. If you raise the royalty rate, 

then you’re probably going to get less on the bonus bid. And that 

was the kind of analysis we looked at when the President decided 

to raise the royalty rate to 162⁄3 percent. And our analyses indicate 

that when we did that, we probably—in the short term, we’re going 

to decrease the bonus bids. 

39

So we try to balance those two in the process that we have, and 

which is in legislation, to make sure we get the best money for the 

United States. 

The CHAIRMAN. My time is up. 

Senator Domenici. 

Senator DOMENICI. Thank you, Mr. Chairman. 

I am really very impressed that I see the Honorable Marjorie—

how do you say your last name? 

Ms. MCKEITHEN. ‘‘Mc-KITH-in.’’ I think we mispronounce our 

own names, Senator. 

Senator DOMENICI. ‘‘Mc-KITH-in,’’ and the Honorable Lisa Jackson, sitting side by side, and one is so happy about offshore leasing 

and the other is so dour and so scared. I do not quite understand 

that we are living in the same world. But nonetheless, it is nice 

that we can sit together and talk and be decent about things. 

Let me move from that to a couple of questions. Mr. Secretary, 

when we did 181 and 181 North and opened that up, we tried to 

put in language expediting you as much as possible, so we do not 

have that very valuable leasehold sitting around, that we would get 

it done, that we would get on with it. Is that happening? Are we 

working on what must be done to get that lease up and get it 

going? 

Mr. ALLRED. Senator Domenici, yes, we are working on both 

lease sales to try to make sure we have the information and have 

met the requirements of NEPA with regard to that sale. I think we 

have told you before that we have some concerns that we are going 

to be able to complete this sale by the end of the year because of 

the NEPA documentation and the studies that have to be done. But 

we are doing what we can to do that. 

We are further complicated, as I think we have said before, by 

the continuing resolution. But we are proceeding expeditiously. If 

we cannot do it by the end of the year, it will be soon after. So we 

understand what you want and we are working as hard as we can 

to do it. 

Senator DOMENICI. The same person. Would you comment, sir, on 

Mr. Manuel’s contention that there were hundreds of oil spills during Hurricane Katrina on the OCS? Is this true? 

Mr. ALLRED. Mr. Chairman—Senator Domenici, our records with 

regard to—this is the Federal OCS. 

Senator DOMENICI. Yes. 

Mr. ALLRED. I do not have information on the other areas down 

there. But our records indicate that there were a little over 17,600 

barrels of oil spilled during Katrina and Rita. That was 124 spills—

89 of them were classified by the Coast Guard as minor, 52 of the 

spills were from platforms and rigs, and 72 of those 124 were from 

pipelines. The pipelines represented a little over 7,000 barrels of 

oil. The spills from the rigs represented about 10,000 barrels of oil. 

But as we looked at the results, I think it is rather amazing, all 

of the shut-off or shut-in valves performed as they were intended. 

There were no reports of spills from OCS facilities reaching shore. 

There were no reports of oiled birds or mammals from the OCS 

spills and there were no observations of large slicks that required 

collection or clean-up. 

40

Now, there were spills that reached the ocean from onshore facilities, but as best we can tell the OCS facilities performed as we 

had expected. 

Senator DOMENICI. Thank you very much. 

Mr. Nichols, could I ask you, you went out there and drilled extremely deep and kind of struck it rich in terms of finding a new 

yield that may not have been expected, that indicates there might 

be more oil in the offshore than we had expected; is that true? 

Mr. NICHOLS. We potentially have major discoveries out there. 

We have drilled discoveries, in our case, in four different wells, four 

different fields. Each of these wells are costing about $100 million 

each. To fully determine commerciality of these projects, it is going 

to cost $2 billion to $3 billion of additional money. 

We are right on the edge of technology. As my colleague from 

Chevron testified, we are breaking world records every time we do 

something out there. So there is, potentially, major discoveries out 

there and we have 35 prospects that we have already identified 

seismically that look very attractive. We are eager to move forward 

with those as aggressively as we can. 

We, as an independent producer, get measured by how we book 

reserves and how we build production. So there is tremendous 

pressure on us to move as fast as we possibly can. Our shareholders demand that. 

The delays are caused by equipment. Because we are on the edge 

of technology, there is not an abundance of drilling rigs out there 

or equipment to allow us to do that. 

Senator DOMENICI. Sir, when we look at the offshore are you—

these that you have found, discovered, that you continue to go 

after, are they on open leaseholds or do we have to let these? 

Mr. NICHOLS. No, they are on prospects that we have already 

leased from the Department of the Interior. 

Senator DOMENICI. All right. So that business of whether you can 

do it or not has already been accomplished as far as the Government of the United States is concerned? 

Mr. NICHOLS. Yes. And those are in the western part of the Gulf 

that is now available for leasing. 

Senator DOMENICI. I think I am finished. Thank you very much. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

We have 13 minutes on this roll call vote. As we know, the Majority Leader is trying to get these votes done on time. Senator 

Wyden has asked to go ahead with his 5 minutes of questioning, 

and why do we not do that, and then if he would just recess the 

committee at that point and we will come back in about 10 or 15 

minutes and startup again. 

STATEMENT OF HON. RON WYDEN, U.S. SENATOR

FROM OREGON 

Senator WYDEN [presiding]. Thank you very much, Mr. Chairman. 

Mr. Siegele, to me, it just defies common sense to argue for opening new environmentally-sensitive areas to oil and gas drilling 

when so much land already leased for oil and gas drilling in enviVerDate 0ct 09 2002 14:43 Apr 05, 2007 Jkt 011010 PO 34267 Frm 00044 Fmt 6633 Sfmt 6602 P:\DOCS\34267.TXT SENERGY2 PsN: PAULM
41

ronmentally-sensitive areas just sits out there idle. So I want to 

ask you about a concrete case, to begin with. 

The State of Alaska recently terminated the Point Thomson unit 

on the North Slope in Alaska. Chevron and its partners—Exxon, 

BP, and Conoco—held the leases for more than 20 years without 

developing the field. Chevron owns about 14 percent. Now, the 

Thomson Sand Reservoir is known—known—to contain 200 million 

barrels of oil and the shallower reservoirs are known to contain 

hundreds of millions of barrels of oil more. And yet Chevron has 

never developed this field. 

Now, after years of listening to excuses, the State of Alaska basically said there is no legitimate reason to let Chevron sit on these 

leases. Now, this is a huge deal for us in the Pacific Northwest. 

Alaskan crude is our major source of crude in our part of the country. 

Why should the Congress let Chevron or Exxon or BP drill off 

the coast of Oregon for oil when we have these kind of concrete examples of you all not developing the resources you have? 

Mr. SIEGELE. Let me answer that question by starting with—my 

responsibilities are for the deepwater Gulf of Mexico, not for Alaska. So with that caveat, maybe I could attempt to answer it by—

what little I know, and it has been years since I have worked Alaska, but I think the answer to your question lies in the commercial 

uncertainty. And it is the very same problem that we face in the 

deepwater Gulf of Mexico, particularly with this new trend that we 

were talking about, the Lower Tertiary. The costs are enormous. In 

the case of Point Thomson, I believe part of the issue is pipeline 

and getting into the Trans-Alaska Pipeline. There are a lot of commercial issues. So it is not due to an unwillingness of companies 

to go forward, it is due to a lack of commercial incentive. 

Senator WYDEN. I recognize you may not know much about this, 

but there are scores of these kinds of examples, example after example. And nobody can divorce politics from this debate. I will tell 

you, you just cannot reconcile arguing for going into new areas 

when so much has been passed up, to date. 

I am going to see if I can get one more in and it deals with the 

royalty issue that, as you know, our committee feels strongly about. 

Mr. Nichols, your company, Devon, unfortunately has been one of 

those to sue the government in recent years in order to avoid paying billions of dollars in royalties to the taxpayers. Devon was a 

plaintiff in the Santa Fe Snyder case, and in 2004 convinced a U.S. 

Circuit Court of Appeals to apply price thresholds to individual 

leases in the Gulf, not to overall fields, thereby guaranteeing companies a more generous level of royalty relief than the Interior Department ever intended. 

Now the decision in your case is being cited by another company, 

Kerr-McGee, in its lawsuit to erase any price thresholds on any 

Gulf lease issued from 1996 to 2000, potentially costing the taxpayers $60 billion. Devon says it agrees. You informed your shareholders in your 10Q statement, filed with the Securities and Exchange Commission, that it does not recognize the Interior Department’s right to impose any price thresholds on the Gulf leases 

issued from 1996 to 2000. And I gather that you have said how 

42

great it is to save this $100 million in royalties and that more will 

be forthcoming. 

Tell me, if you would, so we have it on the record, why you think 

your company should not pay the Federal Government royalties on 

the oil you produce from these Federal leases? 

Mr. NICHOLS. Several corrections, Senator. First, that lawsuit 

filed by Santa Fe Snyder was a separate company that was filed 

and litigated long before we bought them, so I really have no 

knowledge about that particular lawsuit. 

Senator WYDEN. Do you agree with the Kerr-McGee position, sir? 

Mr. NICHOLS. We did not join Kerr-McGee in that lawsuit. 

Senator WYDEN. Do you agree with the position? 

Mr. NICHOLS. I have not studied that. We did not file that lawsuit. 

How we got those leases I think, though, is instructive. Devon 

bought several companies. We did not buy those leases through the 

open auction bid that came from the Department of the Interior. 

Instead, we bought two companies that had those leases. Part of 

our due diligence, Senator, was we go in and look at the terms of 

all the leases that we buy, both onshore and offshore, and in the 

process of that, run it through our computers to evaluate those 

leases. 

We looked at the terms of those leases. They were offered by the 

Department of the Interior during the Clinton administration. We 

evaluated them. The leases had been in existence for 5 or 6 years. 

We evaluated based on the terms. 

So there was no reason for us to assume, in evaluating those, 

that the Government would not honor the terms of those leases. 

Senator WYDEN. Mr. Nichols, do you deny that you informed 

your shareholders, in the 10Q, that you do not recognize the Interior Department’s right to impose any price thresholds on those 

leases? 

Mr. NICHOLS. The terms of those leases do not have price thresholds in them. We have disclosed in our 10K obviously the amount 

of money that would be owed to the Government if those leases 

were retroactively amended to include price thresholds. That is 

clearly laid out in the 10K for all of our shareholders to see. 

Senator WYDEN. My time has expired. Perhaps my colleague 

wants to get into this before the vote. But I think this is a textbook 

case of what has gotten us into this predicament on these oil 

leases. I think everybody knows that there is plenty of blame to go 

around. It goes back to the past administration. 

But companies like yours have got to be constructive rather than 

look for ways—and it is stated in your 10Q statement that you all 

basically think it is a great thing that there should not be any price 

thresholds. That is not in the public interest. 

I want to recognize my colleague. 

STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR

FROM LOUISIANA 

Senator LANDRIEU. We only have 7 minutes. And I will be back, 

but I wanted to follow this line of questioning, because I am looking forward to working with my colleague Senator Wyden to work 

through these many difficult challenges. But for the record, I want 

43

to say that it would be no sense for an oil company to drill any 

well, whether it was 10 feet or 10,000 feet, or a gas well, 10 feet 

or 10,000 feet, if there was no way to get the oil or gas to market. 

Now, I know that there are some people that represent States 

that do not know a lot about oil and gas drilling, so I am going to 

be patient with my colleagues as they learn. But you have to have 

a pipeline or a railroad or a road or some infrastructure to distribute the oil and gas to other places. It would be foolishness for 

any company to drill anywhere where there was not the infrastructure. 

I am not familiar, Mr. Siegele, with Alaska and the details of 

that, but for the record, I just want to be clear that you would be 

a fool to drill if you did not have the infrastructure. So one of the 

reasons that oil companies and gas companies drill in some places 

more than others is because some places have more infrastructure. 

I am going to leave that fact there and then, Mr. Manuel, I am 

going to come back and talk to you about the spillage that occurs 

naturally in the ocean versus the spillage that occurs from the oil 

and gas platforms. Also, you might want to get your windmill information out, because I am going to ask you how many windmills it 

is going to take to keep the lights on in California. So you can start 

your calculating, and I will be back. 

[Recess.] 

The CHAIRMAN. The next set of questions is from Senator Craig. 

Why don’t you go right ahead. 

STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR

FROM IDAHO 

Senator CRAIG. Mr. Chairman, thank you very much. 

For the hearing today, I think it is tremendously enlightening for 

all of us to understand what is and is not possible, and that our 

limitations today are more political than they are either scientific 

or engineeringly so, and the choices that we as a Nation have to 

make in relation to the politics of the issues versus the technology 

of the issues. 

I am not going to embarrass anybody this morning by asking any 

of you your age, especially you ladies. That would be inappropriate. 

But I did a little math and I find that the Sierra Club is still suffering under a ghost effect of Santa Barbara. But many in the audience would not know what I was talking about if I mentioned 

Santa Barbara. I am talking about something that happened in 

January 1969, 38 years ago. 

I find it also interesting that the world we live in today is so dramatically advanced from 1969, even though some of us are still 

stuck in that mind set. I think that is what Larry Nichols and 

Paul—how do you pronounce your last name, Paul? 

Mr. SIEGELE. ‘‘SIGG-lee.’’

Senator CRAIG. ‘‘SIGG-lee.’’ In part are telling us, that their 

world has changed dramatically. It has even changed in the last 

few years, based on technology or reprogrammings or some ability 

to change an old instrument into a newer instrument, and to do so 

in a very safe and environmentally-sound way. That causes us to 

arrive at—having to look, from a public policy point of view, at 

what we do for our country for energy security. 

44

Of course, I have been a bit direct and open about it. I was the 

first to go to the floor to talk about the hypocrisy of Florida and 

our allowing—by disallowing ourselves—China to drill just literally 

miles off our coast in the Northern Cuban Basin. And, of course, 

I was extremely pleased this past year when 181 finally made it 

across the finish line to be now implemented by the Department 

of the Interior. 

There are three levels of protection for the Gulf: there is Presidential moratoria; there is the Interior Department’s 5-year MMS 

plan, also at the Presidential discretion; and then there is the Interior Appropriations moratoria. Now that I am ranking on Interior, 

I really think we ought to change that attitude there to an opt-out, 

so that if New Jersey wants to opt out they can. But other States 

might not want to any more, based on what we now know as capable and potentially possible. 

I do not know if I have got that chart here. I love showing it, 

because it is a direct contradiction to what Steve Allred is telling 

us. Not that it is not there, but because—now I know that Democrats will accuse me of being Kent Conrad. I always accuse Senator 

Conrad of being unable to speak without a chart and now I am 

doing the same thing. 

This is Santa Barbara, 1969, Mr. Chairman. This is not the 

America we live in today. And therefore I am pleased you are revisiting this issue. Whether it is adjustments in royalties, whether it 

is the bringing on of new technology, this is all about energy security today in an environmentally sound way. It has nothing to do 

with conservation. It has nothing to do with new technologies. We 

are going to do all of those, and over the decades to come we will 

do more of those as we deal with this. But I think the core sample 

that was sent around today is literally an example of a very real 

change in our capability. 

I am sorry, I can’t live in the past and I won’t live in the past, 

and if I have anything to do about it, public policy will adjust a 

little bit to be reflective of that. 

Let me come back to you, Steve, Secretary Allred. In the implementation of the legislation that has been passed relating—well, 

the Gulf of Mexico Energy Security Act that we passed in 2006, you 

talked about where we are on timelines; can you be more specific? 

When will leases be let, to your knowledge, based on the work you 

have yet to get done? 

Mr. ALLRED. Senator, we expect that the first sale—first of all, 

the plan will be done midyear. It will be adopted by midyear. The 

first sale will probably be in August, and then the second sale probably a month after that. That is our current—what we anticipate. 

The only question is the one new area, whether or not we can get 

the environmental studies done to include that in a sale this year. 

Just from a business standpoint, from the standpoint of getting 

the most return to the Federal treasury, it may also be better to 

wait until early spring of 2008. But those are the things that we 

will evaluate. We will be ready to go as quickly as we can and it 

makes sense. 

Senator CRAIG. We understood during the debate over 181 that 

this was not an unknown area, that it was relatively well known 

and known prior to it being taken out of lease or lease opportunity 

45

some years ago. Is that, based on your knowledge, a fact and will 

that expedite it at least as it relates to industry’s interests? 

Mr. ALLRED. Senator, I think it will. There is a lot of information 

known there, although as you go out further, obviously, you will 

gain additional information. What we have not been able to do, 

when an area is under a moratorium, we cannot begin the environmental studies that are necessary, so while on all of the other 

areas in the plan we were well along on the collection of environmental data and the analysis that was required under NEPA, on 

those that were added in last December’s legislation we had not 

been able to start that. So that is why it is a little bit later. 

But we are accelerating that and I think there will be, from what 

we understand, a tremendous amount of interest. 

Senator CRAIG. I see I am out of time. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

I appreciate all the witnesses being here. Let me start with Secretary Allred. We have only touched on the question of whether 

there is enough oil and gas in the Atlantic Ocean to make this all 

worthwhile in the first place. So my question, Mr. Secretary, is are 

you familiar with the most recent MMS resource assessment on the 

Outer Continental Shelf? 

Mr. ALLRED. Senator, in general terms, yes. 

Senator MENENDEZ. So is it correct that the entire Atlantic OCS 

is estimated to hold less than 6 percent of the total gas on the OCS 

and about 3 percent of the total oil? 

Mr. ALLRED. Senator, I can give those to you in cubic feet, but 

I do not remember what the percentage rates are. 

Senator MENENDEZ. Well, let me just tell you, the actual numbers, from what I have gleaned from the Department’s statements, 

are 5.8 percent of the gas and 3.3 percent of the oil, according to 

your 2006 assessment. So that is about 37 trillion cubic feet out of 

a total of 633 trillion. But that is over the entire Atlantic seaboard, 

is that correct? 

Mr. ALLRED. That is correct. 

Senator MENENDEZ. Now, in that respect, that is about 259 million acres that covers that stretch of territory; is that correct? 

Mr. ALLRED. That is correct. 

Senator MENENDEZ. So meanwhile the western and central Gulf 

of Mexico planning areas have over 400 trillion cubic feet of gas; 

is that correct? 

Mr. ALLRED. That is correct. 

Senator MENENDEZ. And those two planning areas cover only 

about 84 million acres, about 1⁄3 the size of the Atlantic planning 

area; is that correct? 

Mr. ALLRED. Correct. 

Senator MENENDEZ. So let me get this straight. In the Gulf of 

Mexico, you have over ten times the natural gas concentrated in an 

area 1⁄3 the size, that is far easier to find. You have the infrastructure. You have legal authority to drill. So why in the world are we 

looking at the Atlantic seaboard when you look at the benefits 

versus the potential costs and the amount that your own Department determines may be available? 

46

Mr. ALLRED. Senator, as you are aware, we cannot do anything 

on the areas that are under moratoria until such time as you 

change that. The reason that the sliver off Virginia was included 

in the plan was at the request of the State. And even with that request, we could not proceed until such time as this committee and 

the President were to decide that the moratoria or the withdrawal 

should be released. So as far as being in the 5-year plan, they cannot be unless you took action to change that. 

I will say, though, that again I want you to realize that the numbers on which we developed the resource estimates are over 25 

years old and are not comprehensive. Our experience elsewhere is 

that if the data were there you might find substantially more than 

what is in our assessment. We do not have the resources or did not 

have the resources to gather new data for that assessment. 

Senator MENENDEZ. Well, I am working with what we have now 

and listening to the other witnesses’ costs of expenses of drilling 

and all of that, I am not quite sure. I learned—I listened to one 

of my colleagues suggesting that we are living in the past, but 

sometimes the past is prologue in terms of consequences. 

Commissioner Jackson, first of all, thank you for your powerful 

statement laid out in terms of New Jersey’s vision in all of this, 

and particularly the economic consequences to New Jersey if, in 

fact, we had a challenge. We heard a little while ago, in answer to 

one of the questions, that there was a spill in New Orleans during 

the context of the hurricane, so this is not without some risk. 

In a different context, we have seen some environmental damages in New Jersey in the past during the 1980’s, did we not? 

Ms. JACKSON. Thank you, Senator. We certainly did, and I do remember the past and certainly I remember the 1980’s, without telling my age. 

Senator CRAIG. How about the 1960’s? 

Ms. JACKSON. Yes, I do, unfortunately. 

I think it is important for you to realize that we——

Senator MENENDEZ. In her infancy, I would add. 

Ms. JACKSON. Thank you, Senator. 

We face a variety of issues besides this. Certainly in the 1980’s 

our issue then on the shore was wash-ups on our beaches. We had 

medical waste, we had sewage spills from some of our neighbors 

and from plants in our own State. We had nonpoint pollution. And 

in that year, 1988, we had over 800, 803 beach closings. We normally average—our lowest ever has been 30 and last year we had 

about 79. Those are—by the way, that 79 was almost entirely because of one area on our coast. 

Senator MENENDEZ. And what happened, Commissioner, to our 

economy? 

Ms. JACKSON. Our economy suffered tremendously at that point, 

Senator. We saw about a third—we went from 8.6 million people 

traveling to our shores to under 7 million, about 6.7 million. Our 

numbers dropped 22 percent. There was a decrease of $800 million 

in revenue just from that one incident. And it took several years—

and it is important for people to realize that—for a shore-based 

economy, several years for people to feel comfortable coming back 

to the clean beaches of the Jersey shore again. 

47

Senator MENENDEZ. And I will finish on this. I see my time is 

up, Mr. Chairman. 

But $800 million in the 1980’s is a lot more today. 

Ms. JACKSON. It certainly is, Senator. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much. 

Senator Murkowski. 

STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR

FROM ALASKA 

Senator MURKOWSKI. Thank you, Mr. Chairman. 

I appreciate all those of you who have joined us here this morning and for the hearing. Again, it is a very important issue. 

To you, Secretary Allred, we understand that MMS has been 

holding meetings with the six current OCS-producing States, and 

this is to implement the coastal impact assistance program that we 

approved in 2005. And that law calls for the States to split $250 

million of the nearly $8 billion a year that the Treasury is collecting from OCS. Now, I understand that, in implementing this 

act, MMS feels that it needs to spend money to essentially set up 

a funding formula for allocation and to monitor the State’s use of 

the funds. 

I think we can understand that, but it has recently come to our 

attention that MMS feels that it doesn’t have the funding needed 

to implement the program unless the budget for fiscal year 2007, 

the likely-permanent continuing CR, adds several million dollars to 

it. I understand that MMS wants $2.5 million extra to administer 

this, which seems like a large amount of overhead. But my question to you is whether or not it is true that MMS does not plan 

to make any disbursements to the States unless the CR accommodates such additional money. 

Mr. ALLRED. Senator, we have gone ahead and developed the 

procedures and the rules and regulations in draft form and the actual process that had to be developed so we could go ahead. The 

problem we have is that in order to undertake the activities that 

are contemplated and to actually look at the proposals that we 

have, do the engineering, the environmental work, and all of the 

things that have to be done, the only way we could do that without 

additional funding is at the expense of other programs. 

So the issue with the continuing resolution is a real issue for us 

just from a staffing standpoint. 

Senator MURKOWSKI. Well, we understand that. I guess I would 

just ask that you look specifically to that language that directs the 

Secretary to disburse the impact aid without further appropriation. 

Now, for my State this is not—the dollars coming are not that significant, but I think certainly for those Gulf States that were affected by Katrina and Rita it is significant, and we would like to 

see that certainly be implemented. 

Next question for you, Mr. Allred, is about the 5-year OCS sale 

schedule, which I understand will be released—or the final schedule will be released in mid-April. When this comes out, what can 

we expect in terms of the public’s opportunity to have the ability 

to express their views as to size, specific location, conditions, any 

48

kind of environmental stipulations that might be imposed? What is 

that process, if you can just lay that out quickly for me? 

Mr. ALLRED. Senator, as you are aware, the proposed plan was 

released and has been subject to public comment. There was an environmental impact statement that was done for the plan. That has 

been released and has been subject to public comment, and we 

have gotten significant comments. Those closed I believe—it closed 

just recently, I don’t remember the date. But there was a significant amount of information that we received. 

As we go forth with those sales, we have to look at those sales 

from a standpoint of what we will offer for sale. And again, the 

Secretary has not made a decision on the plan. 

Senator MURKOWSKI. And let me ask you further on that, as it 

relates to Alaska and the North Aleutian Shelf specifically, it has 

not been announced whether or not that will absolutely be added 

to the 5-year schedule, but again the question is what type of environmental stipulations might be included to provide for the protection that we would like to see for our fisheries and the other resources there; can you speak more specifically to that? 

Mr. ALLRED. Yes. I was just double-checking to make sure I get 

it right. 

Each sale requires an EIS. Also, at the time we offer the sale 

there will be a preliminary notice of sale that will have all of the 

restrictions that would be applied to any resulting lease from that 

sale. So there will be a number of times that people can look at 

what is going on and there will be the opportunity to influence it. 

With regard to—I think there were two comment periods specifically with regard to the plan and the overall EIS. But there will 

be individual EIS’s with regard to these sales as well. 

Senator MURKOWSKI. We also have a related issue—I know my 

time is up, but up north in the Beaufort and the Chukchi Sea, 

where we have whalers that are very concerned about providing for 

those environmental stipulations and protections, so we want to 

again ensure that those are taken into account and consideration. 

Mr. ALLRED. Senator, we understand that very well. In fact, I 

have a real interest in, particularly, the marine mammals up there, 

and to make sure that if we make decisions, we know what the impacts are. We have been closely working with the boroughs and 

with the people up there to make sure that what we do does not 

adversely impact their subsistence. 

Senator MURKOWSKI. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much. 

Senator Domenici has to leave for another meeting. Let me just 

defer to him to ask another round of questions, and then I will 

have some questions. 

Senator DOMENICI. Thank you very much, Senator Bingaman. 

I want to make, just as a general statement for the record, because we have been talking about both estimates of what we have 

got by way of resources and we have been talking a lot about what 

kind of environmental damage we might be causing by this activity. And I want to make sure that the record is clear that most of 

what we have been talking about is old information. And when you 

are talking with offshore and talking about estimating reserves and 

talking about estimating what kind of damages are going to ensue, 

49

if you are dealing with any back information, late information, old 

information, you really are not dealing with what is relative to the 

offshore today. Things having changed so dramatically in terms of 

the equipment that is used to do the work, to drill the holes, in 

terms of cleanliness and getting down without making any mess, 

that it is not fair to compare 15 years ago with today, because that 

is really worse than apples and oranges, they just are not comparable. 

The best we can do is to get busy providing you with sufficient 

money, Secretary Allred, so you can do the kind of broad and 

lengthy evaluation that we have asked be done with reference to 

the geological—putting the geological estimators and experts out 

there to tell us what is in certain areas that we know we want to 

take on after—the next, and next and next, so that we can tell the 

American public what they own. We also can be honest with them 

as to what kind of damage will be caused and what kind won’t. 

And those will oppose it and talk in terms of 10 and 15 years 

ago, I hope you are wise enough to tell the American people that 

they have got to get up out of their slumber and their sleep and 

come alive and do their looking and estimating today, not what 

they expected 15 or 20 years ago, because it just ain’t true. Right? 

Mr. ALLRED. Yes, Senator. 

Senator MURKOWSKI. If I can just interrupt the Senator for one 

moment. We had asked for an inventory of all that we have, but 

I understand that, even though the Department has conducted the 

inventory, they rely on—they have not done new seismic testing. So 

it is basically an inventory based on old information that is 25 

years old. 

Senator DOMENICI. That is true, and I guess their excuse is they 

do not have enough money. 

Is that true, Mr. Secretary? What is the answer to that? I was 

going to get to that. 

Mr. ALLRED. Senators, as the oil companies have testified here, 

some of those holes can cost $100 million, and the seismic work, 

while less expensive, is still very expensive. So it is very difficult 

to gather new information on these deep areas with any of the resources that MMS has available. 

I think it is important, though, while it is not directly related to 

the oil and gas inventory, it is certainly related to the inventory—

environmental inventory of the oceans. And one of the things that 

is not well recognized anyplace is that MMS is one of the primary 

research organizations for ocean environmental situations. We have 

spent over $780 million in environmental studies on the Outer 

Continental Shelf and environs over the last 30 years. That is a lot 

of money. 

It is done for a number of reasons. Part of it, one of the most 

important, is that we have to have that information in order to 

make intelligent decisions on when we go forward with leases or 

the other regulations that we have. 

I certainly would like to go out and get more information. However, I think that would also require a change in your moratoria. 

But we know that there are—we are pretty sure that there are resources out there. Given our experience elsewhere, the numbers 

50

that we have, since they are based on old data, probably would increase substantially if there were new data available. 

Again, it is under moratoria and it is not going to be offered for 

lease unless you were to change your position with regard to that 

moratoria. But there are resources there, they are valuable, and I 

think that we would find over time that they would probably increase. 

Senator LANDRIEU. Mr. Chairman, can I interject on that for 1 

minute? Because both the chairman and the ranking member came 

to agreement and pursued a more up-to-date, modern inventory of 

the assets that the American people own. Regardless of whether 

you are for or against drilling, I do not know anybody in America 

that would not like to know what assets they own. 

I think it has a great deal of bearing not only on our energy industry, but in our security, particularly in our current challenging 

situation. I would urge the chairman and the ranking member to 

pursue vigorously this more modern inventory. 

And I wanted to ask for the record if there was a better way to 

get the data using the private sector, which may have more information than we might, and if we could pursue or you could submit 

for the record on this point, some suggestions to us about how to. 

I do not know, Mr. Nichols, if you wanted to say a word about or 

a suggestion real briefly. Is that OK, Senator Domenici, or should 

I wait for my questions? 

The CHAIRMAN. Why do we not just see if Senator Domenici had 

one final statement. He is going to have to leave here. 

Senator DOMENICI. Well, I have to go see Senator Byrd with an 

appointment that I made. I do want to know what you think about 

this, Mr. Nichols, and I will read about it afterwards because I will 

not be here. I consider the question to be very important to me. I 

would second it and ask that you answer it. 

And, Mr. Secretary, I wanted to say, from my standpoint, whatever you are doing is not enough unless you are able to answer 

that you are proceeding either with—vigorously with—the drilling 

and the kind of work that is necessary to prove up the next and 

the next and the next, however you do that. Because it seems to 

some of us that we have a huge inventory that we have not 

touched, and that we should be deciding, based upon its proximity 

to the United States—the fact that we can prove that it will do no 

damage to the abutting property, and it is seriously something that 

moves us toward independence or at least moves us to using less 

of somebody else’s oil. 

I do not see how we can, as a committee, not insist that the information be forthcoming as to what these assets are worth. And 

if we have to go to the private sector to get it, we are going to have 

to get it. You can’t just be getting $100 million or $200 million in 

royalties or $500 million and not paying for the best information 

on the future that is out there. 

I do not know what the Senators here think about it, but I think 

we could win that in this committee, and I think Senator Bingaman would have to help us do it. But they have to get it done. I 

do not know what they are charged with yet, but I think we ought 

to charge them with it pretty darn soon, because we cannot sit 

around here 6 months from now and say nobody has told the InteVerDate 0ct 09 2002 14:43 Apr 05, 2007 Jkt 011010 PO 34267 Frm 00054 Fmt 6633 Sfmt 6602 P:\DOCS\34267.TXT SENERGY2 PsN: PAULM
51

rior Department, subject to whatever limitations they insisted that 

they needed, go ahead and find out. 

Do you agree with me? 

Senator LANDRIEU. Yes. 

Senator DOMENICI. It is a big-time asset and we have got to find 

out. It is pretty darn close to or shoreline. We do not have to run 

off to Alaska. I am sorry, we should and we are, but it is pretty 

close. 

Thank you. Thank you very much, Senator. 

The CHAIRMAN. Thank you very much. 

Senator Landrieu had not had her chance for 5 minutes of questions. Why don’t you go ahead. 

Senator LANDRIEU. Thank you. 

I will start with Mr. Nichols. If you could respond to the question 

that I just asked for the record: Are there any ideas that you might 

have about how we could work more in partnership with MMS to 

get a better idea—without divulging proprietary information, because I understand this industry is quite competitive. We hope to 

make it even more competitive. But do you have any suggestions 

to MMS about how we could get an accurate inventory of the Outer 

Continental Shelf? 

Mr. NICHOLS. Thank you, Senator. 

Of course, the entire Pacific coast, the entire Atlantic coast, and 

the eastern half of the Gulf of Mexico have been off limits for seismic work, for exploration for decades, if not generations. There is 

very little information out there as to whether there is anything 

there or how big it would be. Anyone who argues that there is 

nothing there cannot do that with certainty, anymore than we can 

argue with certainty that there is a lot there. It is just a great void 

on the map that has not been explored. 

We are the only country in the world that has that kind of acreage offshore that is off limits, including very environmentally conscious countries like England and like Norway, that certainly do 

not look—are not inferior to the United States in their environmental sensitivity. Because that it is all off limits and it has been 

off limits for so long, my company, and I would speculate very 

few—and most other companies, have done no work out there, certainly not to apply modern technology. You use your shareholders’ 

money where you have some prospects, and if you discover something you can go work on it. 

Senator LANDRIEU. To follow up, the seismic that is available to 

us now, which is so much more superior than it was even 10 years 

ago and most certainly in the early part of the century, are there 

serious or moderate or minimal environmental impacts to just tests 

to see what is there? Could you talk about it, because the argument 

is we cannot even run the test because it will damage the environment. And we would like an answer from you about your knowledge about that. 

Mr. NICHOLS. There is no serious environmental damage to do 

that. There are people who do not want that knowledge because 

they are afraid that we might discover that there is actually something there and then we would want to develop it, to provide for 

this country’s energy resources. To do a simple seismic survey out 

52

in the middle of the ocean is as environmentally friendly as you 

can be, certainly when you compare it to other alternatives. 

Senator LANDRIEU. Thank you. 

If I could ask about this seepage or spill issue, because I most 

certainly think that we need to enter this argument, not with fear 

and ignorance, but with fact and reason. And I am going to try to 

do everything I can to make sure that organizations—and I have 

great respect for members of the Sierra Club, but sometimes I 

think the leadership of organizations like that leads with fear and 

ignorance as opposed to fact and reason. 

So I want to, just for this record of this committee, to have it either challenged or I want to put it on the record unchallenged that 

there are 43 million gallons of oil released by natural seepage in 

the Gulf each year. Does anybody disagree with that at this table? 

43 million gallons of oil, of seepage, every year in the Gulf? 

Mr. MANUEL. We will get back to you on that. I do not have that 

in front of me, but I am happy to. 

Senator LANDRIEU. Would you check that? And if you have any 

question about the validity of that I would like to hear directly 

from the Sierra Club and why you will not acknowledge that. Because the percentage of oil that is spilled from pipelines and the 

rigs is less, according to my data, than one-tenth of 1 percent—no, 

one one-thousandth of 1 percent. I want to say that again. Naturally, by nature, if no human ever touched or swam in the ocean 

or fished one fish out of it, 43 million gallons of oil will seep naturally into the Gulf. Yet, with all the human activity, to create the 

lights that turn this room on, the energy that keeps this great 

country moving, we spill less than one-tenth—one one-thousandth 

of the amount of the oil. 

So Mr. Chairman, I have to insist that the Sierra Club get the 

facts straight, not just for your members, but for the whole country. 

Now, No. 2, I would like to ask, Ms. McKeithen, if you would describe—and I only have a minute or two—why you think that our 

process of competition for revenues in Louisiana, why our system 

is superior to the Federal system? And you may not know all the 

details of the Federal system, and if you do not that is fine. But 

again, for the record, say how you think the Louisiana system encourages competition, makes sure that the taxpayers get a good return for the resources that they own, and that the companies are 

also encouraged to continue the drilling? 

Ms. MCKEITHEN. Thank you, Senator. 

Well, it is market-driven. We let the market do the work. We 

have tract nominations, limited to 2,500-acre tracts, and they are 

nominated so everybody is on notice for 60 days. We have public 

advertising about what tracts are being nominated by industry for 

public bid. That way, as I said earlier, if another company has an 

interest in that particular tract, they are on notice that somebody 

else does, too. That promotes competition. 

Then I think it increases because we have bidding, competitive 

bidding, on our royalty, on our bonus and our rentals. It increases—the market increases our price. And I do think that that 

is superior, as evidenced by the common reservoirs. Just a sampling that I gave in my written testimony, we have four common 

53

reservoirs, recent ones, where we actually—there is no difference in 

depth appreciable. 

So I understand the concerns as you go deeper. There may be 

some reasons for some adjustments as you go deeper, but at the 3-

mile mark: common pools. The Federal Government we know is 

getting no more than 16.7 percent. We are getting in those pools—

if they are older leases, it would be less than that, but we are getting 21 percent on two of them, 22 percent on one of them, and 23 

percent on the fourth one. That is just a sampling. 

We are averaging 21.8, I think—I can’t tell you the exact number, but it is in my testimony—on our offshore leases. 

Senator LANDRIEU. Mr. Chairman, considering that we have an 

extraordinary deficit and rising—although the Federal deficit has 

been coming down, the debt relative to the gross national product 

and the debt we are carrying in this country is tough, and we have 

got a challenge by the President to balance our budget and we 

would like to help do that. One way is to make sure that this system is not only transparent and accountable, but that the market 

is driving it and that the companies are being treated fairly in the 

sense that they have a return on their investment, but the taxpayers can feel like they are getting a good bargain, too. 

I would like to suggest that this committee pursue more vigorously this, not only reform of MMS, but look to what Texas, Louisiana, and Alaska, to get best practices for maybe how we shape 

MMS, because these moneys can come for good uses to the Federal 

treasury. Obviously, we are directing most of ours to save our wetlands. 

But I want to remind this committee that children are sent to 

college with these revenues, roads are built with these revenues, 

and jobs are created with these revenues. So leaving something on 

the table or underneath the water just because we do not want to 

spend the time to figure out how to do it better is not what this 

Senator would suggest. 

My time is up, but I have additional questions and I will submit 

them for the record. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much. 

Let me just ask a few other questions and then we will finish the 

hearing. Let me ask, Mr. Manuel, about the Sierra Club position 

on the development of alternative energy on the Outer Continental 

Shelf. I think Secretary Allred pointed out that is a new authority 

they have in their Department. Is it your view that we should go 

forward with that or not? What is the position of the Sierra Club? 

Mr. MANUEL. I think our general position on alternative energy 

off our coasts is that as long as they follow NEPA, we do not have 

any opposition to the siting of alternative sources of energy off of 

our coasts. 

The CHAIRMAN. So additional wind farms off the coast, if they 

are put there in conformity with NEPA requirements, are acceptable, from your perspective? 

Mr. MANUEL. Yes, from our perspective, they are not as hazardous as certainly offshore drilling for oil and gas. So again, as 

long as they abide by NEPA, we do not oppose those projects generally. 

54

The CHAIRMAN. Let me ask Secretary Allred a couple more questions here. In the 2005 energy bill we put a directive in there to 

provide deepwater royalty relief. I think we did that over the objection of the administration, that is my recollection. Given the level 

of industry interest in the area, does the administration have a position as to whether deepwater relief is still warranted as an incentive to drilling in that area? 

Mr. ALLRED. Mr. Chairman, as you are aware, we try to look at 

it on a lease—or a sale-by-sale basis. And that is one of the questions we will look at for the next sale—whether or not we think 

that market conditions and the difficulty involved should or would 

dictate that we give some royalty relief. But at this point in time, 

the Secretary has not made any decision. 

The CHAIRMAN. I assume that is still—that is also your position—we also had a provision in there regarding royalty relief in 

deep gas, for deep gas wells in shallow water; is that your position 

with regard to that as well? 

Mr. ALLRED. Mr. Chairman, we would have the same position 

there, that we need to look at it on, not a well-by-well basis, but 

a lease-by-lease, given the market conditions that are projected to 

exist during that lease. 

The CHAIRMAN. Let me just ask Mr. Nichols and Mr. Siegele if 

they have any more information for us. I think, Mr. Siegele, you 

indicated that you are still in negotiations with the Department of 

the Interior with regard to the leases that you have that were 

issued in 1998 and 1999 and trying to settle up on royalty issues 

there; is that a correct understanding on my part? 

Mr. SIEGELE. That is correct. 

The CHAIRMAN. Do either of you know whether the other leaseholders that have those leases are still pursuing a settlement of 

that, or do we have a group that are just adamantly opposed to any 

change in the agreement? Do either of you know? Mr. Nichols, do 

you have any information? 

Mr. NICHOLS. Well, we too are in conversations with the Department of the Interior, as recently as yesterday in fact. As to what 

other companies are doing, I do not know. 

Mr. SIEGELE. I do not know either. 

The CHAIRMAN. Well, we had a hearing on this issue last week, 

or at least partially on this issue, with Secretary Allred, and obviously it is a major issue of concern here in the Congress. As I am 

sure you have noticed, the activity on the House side has been focused on this as well. So we are going to have to make some decisions on it here in the fairly near future. 

That is all the questions that I had at this point. Senator 

Landrieu, did you have another question? 

Senator LANDRIEU. Just one. 

Ms. Jackson, thank you very much for coming to testify. Your 

Senators, both Senator Lautenberg and Senator Menendez, have 

been very vocal on this subject, and of course the New Jersey position is not to drill. So I am going to address this request to you 

and to Governor Corzine, and I will copy them as well so they will 

know. But if New Jersey is not interested in drilling off the coast, 

since you are a large State, not in land mass but population-wise, 

and you consume a tremendous amount of energy per capita, not 

55

just your residential consumption, but you are also a very strong 

industrial State like we are, so we can appreciate that, what is the 

plan that New Jersey has to be more energy sufficient? 

Are you supporting nuclear? Are you supporting wind farms in 

your State? What exactly is New Jersey prepared to do to contribute to the electricity grid and the power grid of the Nation? 

Ms. JACKSON. Thank you, Senator. New Jersey is in the process 

and by October will have developed its first energy master plan in 

well over a decade. And Governor Corzine has stressed from the beginning of his term and before he was Governor that it was vitally 

important for New Jersey, both from an economic growth perspective as well as an environmental perspective, for a myriad of reasons, to address the issue of energy generation and use in our 

State. 

A couple of options are clear. Governor Corzine personally supports nuclear power. He has been very vocal about that. Just recently—actually, it has been almost 6 months now, but we concluded a blue ribbon task force on offshore wind. Wind resources 

in New Jersey are, unfortunately for us, almost entirely located offshore. So that means higher costs, but it is also certainly not something that we are willing to walk away from. And I am very hopeful that we will be able to put some resources into doing the environmental studies to determine where it is best, in terms of other 

offshore coast, for wind. And we look forward to MMS’s work to 

allow us to move forward with permitting and licensing there. 

I think, for a variety of reasons, we have done a lot of work in 

New Jersey to move our portfolio standards, not just toward renewable, but toward generation for our coal plants that—until greenhouse gases, which is our latest challenge—are well controlled. And 

we have quite a bit of generation from nuclear as well. 

So while I do not have the answer yet—and I am happy to give 

you, through the chair, more information, Senator—I think we do 

recognize that we have to plan and make policy decisions based on 

a realistic plan for New Jersey. 

Senator LANDRIEU. I appreciate that, and I really do appreciate 

your forthrightness, because I plan to write a letter to every Governor of every State in the Union, particularly the coastal States, 

to ask them, if they are not for drilling oil and gas, what are they 

for? 

Because I want to show a chart, for the record. This is what the 

gas grid looks now. The gas that comes to the Northeast, as you 

can see, comes basically from the Gulf of Mexico, which is why we 

are proud of the drilling that we do for the country, proud to lay 

these pipelines, because we think that America does well when it 

has reasonable prices for energy so that we can compete, protect 

our troops in Iraq, and lead the world in almost every area. 

But as you can see where this gas goes, primarily to the Northeast—and the only other place it comes from is Alaska. So I am 

going to ask the Governors—because we are happy to shut these 

pipelines down about right there, and we may decide that that is 

what we want to do until the Northeast figures out what they can 

contribute to this grid. And if you want to put windmills in every 

place offshore, that is fine; build more nuclear power plants, that 

is great; make sure that no cars can run on the streets unless they 

56

are electric cars or whatever, but every part of this country has to 

do something, and we are going to do better conserving. And we 

recognize that we are not doing what we need to do in Louisiana 

and the Gulf Coast to conserve. We do not have very efficient 

plants. We want to tighten that up. 

We have wind also on the Gulf that we can contribute. We believe we have options for more solar power. We have a lot of sunlight in the South and a lot of heat, and if we can figure out how 

to get that going to the grid—but, Mr. Chairman, I think it is 

about time that every Governor in every region answer the call to 

energy independence, because the goal will not be met until every 

Governor and every legislature figure out their plan. Maybe Louisiana’s plan, Mr. Chairman, is different than others, but everybody 

should have a plan, and I would like to get that discussion started 

in the country. 

Thank you. 

The CHAIRMAN. Thank you very much. 

Let me just advise any staff for members that if they have additional statements or questions they want to put in the record, 

please do that by the close of business tomorrow. 

Again, thank you all for being here. Thank you very much for 

your testimony. 

[Whereupon, at 11:39 a.m., the hearing was adjourned.] 

(57)

APPENDIX 

RESPONSES TO ADDITIONAL QUESTIONS

RESPONSE OF J. LARRY NICHOLS TO QUESTION FROM SENATOR WYDEN

Question 1. You stated at the hearing that your company was not involved in 

Santa Fe Snyder v. Norton, the 5th U.S. Circuit Court of Appeals decision against 

the Interior Department on the subject of price thresholds by lease as compared to 

field. However, Devon Energy announced in May 2000 that it was acquiring Santa 

Fe Snyder Corp. Santa Fe Snyder sued the Interior Department later that year. 

Subsequent court records listed Devon Energy and Santa Fe Snyder as plaintiffs 

when the district court ruled in 2003 and the circuit court ruled in 2004. Please explain how Devon Energy was not involved in the lawsuit. 

Answer. The Santa Fe Snyder v. Norton case was filed by Santa Fe Snyder prior 

to the merger of that company into Devon Energy Corporation. It is true that Devon 

became a named party in that case as a result of the merger. 

The Santa Fe Snyder case did involve an issue concerning the interpretation of 

the Deepwater Royalty Relief Act, but the issue in that case was whether the Department of the Interior could put a restriction on a qualifying lease that royalty 

relief would only be available if the production from that lease was from a field designated after the date of the lease issue. It did not address the issue of price thresholds. 

Although Devon by merger was a party to the Santa Fe Snyder case, Devon is 

not a party in the Kerr McGee v. Burton case that is currently pending in the Western District Court of Louisiana. That case is addressing the issue of price thresholds. 

RESPONSES OF J. LARRY NICHOLS TO QUESTIONS FROM SENATOR BINGAMAN

Question 1. Jack Field—When do you expect the resources in the Jack Field to 

be produced? Is additional infrastructure needed? 

Answer. First production from the Jack Field could be seen between 2011 and 

2013 depending on current development evaluation work and potential future schedules being met. Significant new infrastructure will be required. 

With discovery in 2004, we and our partners are currently evaluating development scenarios. As is explained more fully under Question 5 and its attachment, 

significant time between now and potential full development will be required for 

geoscience, engineering, development and complex infrastructure construction operations for both Jack and other discoveries (such as St. Malo) in the area. While no 

specific development plan decision has yet been made, a stand-alone project could 

result in total costs including infrastructure exceeding several billion dollars. 

Question 2. Deep Water Royalties—Both of your companies hold 1998 and 1999 

OCS leases that do not contain price thresholds for royalty relief. Do you anticipate 

entering into a settlement with the Interior Department to make these price thresholds applicable to production under these leases? Why or why not? 

Answer. The price threshold issue can and should be resolved. We have been actively pursuing an acceptable agreement with the Interior Department’s Minerals 

Management Service since mid-2006. 

The January 25 hearing provided a valuable opportunity for senators to perhaps 

better understand the contract sanctity and complexity elements of this matter. As 

I pointed out, Devon Energy acquired its 1998-9 leases as a result of corporate 

mergers, with no reason to believe at the time that these leases would be questioned 

or that we would be asked to ‘‘renegotiate’’ them. So, the challenge has been to find 

a way of putting the threshold matter behind us in a way that does not totally violate contracts or disrupt the very successful US offshore leasing program. 

We will continue to work toward an agreement. 

58

Question 3. Infrastructure—What additional infrastructure is needed to use the 

Gulf of Mexico resources that will be made available under the Gulf of Mexico Energy Security Act? What is the time frame for constructing it? 

Answer. Of course we and other companies must first obtain leases and then explore for the resources we believe may be available in areas designated under the 

Gulf of Mexico Energy Security Act. The results of that work over several years will 

allow us to better answer this question, including whether any early discoveries will 

be close enough to, and there is ability to put initial production through, the existing Independence Hub that will collect natural gas from leases in the original Sale 

181 area. 

If we assume significant exploration success, we may be able to use the Independence Hub (a collecting point for 10 fields of some 15 wells each over an area with 

a radius of 30 miles and a 130-mile pipeline connection to shore) as a model. We 

might also assume similar discovery rates, with another 2-to-3 such hubs. 

The design, approval, permitting and construction for each hub could take 3 years 

once enough discoveries were made to justify development. The amount of time from 

leasing to hydrocarbon production could be 5-7 years, depending availability of rigs 

capable of drilling in water depths greater than 8,000 feet. Some of the discoveries 

currently dedicated to the Independence Hub were made on leases acquired in 

2001—6 years before initial production that is expected later this year. Since the 

economics of these discoveries did not justify ‘‘stand alone’’ development, pooling of 

them was necessary to create a commercial venture. 

Question 4. Resources—How long will it take for the new resources made available 

under the Gulf of Mexico Energy Security Act to come online? 

Answer. The answer to this question depends in large measure on the leasing 

schedule and the exploration success that follows. 

First production could be seen somewhere in the 2011-2018 time period, perhaps 

earlier if leasing occurs quickly and significant discoveries are made close to, and 

are able to have production put through, the Independence Hub. 

Depending on the specific location and size of the new resource, first production 

may be brought on line between three and ten years from the time leases are 

awarded. On the low end of the range would be new, smaller-size, resources discovered in close proximity to existing infrastructure (subsea tie-backs). Larger resource 

discoveries not close to existing infrastructure could be producing in five to ten 

years from the time leases are awarded. 

Question 5. Diligent Development—Can you help us understand why there are 33 

million acres of the Federal OCS that are under lease but that are not producing? 

Answer. Successful oil and gas exploration, development and production must include significant inventories of leased-but-not- (or not yet) producing acreage at any 

given time. (This is both normal and necessary as the attached paper more fully details.) 

In summary, when companies purchase leases at an OCS lease sale, those leases 

are in various stages of technical maturity. In some cases enough technical work 

has been done to define a ‘‘drillable’’ prospect. If such a lease is awarded, it may 

be drilled within a year of acquisition if a drilling rig is available. 

Most leases, however, need additional technical work (seismic, geologic interpretation, engineering, etc.) to refine drillable prospects. Many times a lease is ‘‘condemned’’ by additional work. 

Very deep drilling targets combined with sub-salt objectives create very high capital exposures. Shelf wells now exceed $50-million and deepwater wells commonly 

exceed $100-million. Seismic image refinement to lower the risk of drilling these expensive wells can cost millions of dollars and take up to two years to complete. Since 

this technology investment is made once the lease is acquired, it adds considerable 

time to the process of creating a drill-ready prospect. In addition, the process also 

requires that several blocks be leased to refine a prospect; six-to-ten blocks may be 

secured to refine a drilling location on a single lease. Non-prospective leases would 

be turned back to the Minerals Management Service or allowed to expire and put 

up for lease in a future lease sale. Historically we see about 25 percent of leases 

bought in lease sales drilled in their primary term. 

Some acreage is acquired ‘‘on trend’’ with other discoveries. This purchase of trend 

acreage is highly speculative and considerable uncertainty exists on perhaps 1⁄2-to- 2⁄3 of the blocks leased. If this uncertainty cannot be overcome with new seismic, 

geologic or engineering data, the block may not be drilled. Industry therefore is risking considerable money competing for leases that may not be drillable when all the 

data is in and interpreted. Lease terms allow companies to generate a portfolio of 

opportunities out of which the best prospects are chosen for drilling. In addition, the 

other factors described in previous question responses and the attachment (includVerDate 0ct 09 2002 14:43 Apr 05, 2007 Jkt 011010 PO 34267 Frm 00062 Fmt 6601 Sfmt 6621 P:\DOCS\34267.TXT SENERGY2 PsN: PAULM
59

ing permitting time, rig availability, facility design and engineering, etc.) add to the 

years, or perhaps a decade or more, that leases may not have production from them. 

Question 6. Royalty Rates—What royalty rates do you pay under state oil and gas 

leases? What rates do you pay for oil and gas produced on private lands? 

Answer. There is significant variation among royalty rates paid on oil and gas 

production from state and private lands due to many factors. The average for state 

royalty rates is the standard 1⁄8 (12.5%) royalty with a few instances of higher rates. 

Similarly, the average rate for fee owners is 12.5%. However, due to varying terms 

of specific leases, there are some rates that are slightly higher for owners of private 

lands. We also do have cases of specific leases with lower rates. 

RESPONSES OF PAUL SIEGELE TO QUESTIONS FROM SENATOR BINGAMAN

Question 1. Jack Field—When do you expect the resources in the Jack Field to 

be produced? Is additional infrastructure needed? 

Answer. We cannot at this time state when the resources in the Jack Field will 

be produced. Additional infrastructure is needed before production can occur. Most 

significantly, a new 90-mile deepwater pipeline will likely need to be constructed. 

Question 2. Deep Water Royalties—Both of your companies hold 1998 and 1999 

OCS leases that do not contain price thresholds for royalty relief. Do you anticipate 

entering into a settlement with the Interior Department to make these price thresholds applicable to production under these leases? Why or why not? 

Answer. We remain committed to negotiated settlement of the price threshold 

issue and are looking for a mutually satisfactory solution for all parties. We have 

had a series of discussions with Department of the Interior (‘‘DOI’’) officials covering 

a range of options, and we have submitted a proposal for resolution of the issue. 

There are many details to work out, but we remain hopefully that we will reach 

agreement with our lessor the DOI. 

Question 3. Infrastructure—What additional infrastructure is needed to use the 

Gulf of Mexico resources that will be made available under the Gulf of Mexico Energy Security Act? What is the time frame for constructing it? 

Answer. New pipelines and production systems will likely be needed to produce 

the resources that may be found in the new areas made available for leasing by the 

GOM Energy Security Act. Based on our experience from other GOM locations, exploratory drilling could begin within a year or two after the next lease sale occurs. 

If oil or gas is discovered in commercial quantities, construction of the infrastructure necessary for production would take six or seven or more years beyond that. 

Question 4. Resources—How long will it take for the new resources made available 

under the Gulf of Mexico Energy Security Act to come online? 

Answer. Based on our experience from other GOM locations, it can take a decade 

or more to bring new resources online in previously unexplored areas of the Gulf 

of Mexico. 

Question 5. Diligent Development—Can you help us understand why there are 33 

million acres of the Federal OCS that are under lease but that are not producing? 

Answer. A successful exploration program in a geologically risky area like the 

deepwater Gulf of Mexico requires a large inventory of prospects from which to 

high-grade the best drilling opportunities. The leases are small, and it typically 

takes several leases to secure a prospect. If a company is unsuccessful in securing 

an entire prospect in the lease-bid process, the company must enter into a partnership with the other companies that acquired leases in the prospect before drilling 

can occur. Prospects are often secured with immature seismic imaging, and it can 

take years to technically mature the prospect through additional seismic work. Negative drilling results can decrease the attractiveness of a prospect over time, and 

many leases are returned to the DOI undrilled if the prospects are too commercially 

risky to justify the costs of proceeding. 

Question 6. Royalty Rates—What royalty rates do you pay under state oil and gas 

leases? What rates do you pay for oil and gas produced on private lands? 

Answer. For the major portion of its state and private oil and gas leases, Chevron’s royalty rates are 1⁄8, 3⁄16, or 1⁄6. In some anomalous cases, Chevron’s royalty 

rates are lower than 1⁄8 or higher than 1⁄6. Generally, the variances occur because 

of circumstances particular to each lease, such as the era in which a lease was 

issued, the location of the lands leased, or other factors affecting the valuation of 

the oil and gas rights provided by the lease.

[Responses to the following questions were not received at the 

time the hearing went to press.]

60

U.S. SENATE, 

COMMITTEE ON ENERGY AND NATURAL RESOURCES, 

Washington, DC, February 1, 2007. 

Hon. C. STEPHEN ALLRED, 

Assistant Secretary for Land and Minerals Management, Department of the Interior, 

Washington, DC. 

DEAR SECRETARY ALLRED: I would like to take this opportunity to thank you for 

appearing before the Senate Committee on Energy and Natural Resources on Thursday, January 25, 2007 to give testimony on issues relating to oil and gas resources 

on the Outer Continental Shelf and areas available for leasing in the Gulf or Mexico. 

I am enclosing a list of questions which have been submitted for the record. If 

possible, please respond to these questions by Thursday, February 15, 2007. 

Sincerely, 

JEFF BINGAMAN, 

Chairman. 

[Enclosure.] 

QUESTIONS FROM SENATOR BINGAMAN

Question 1. Royalty Rate—Earlier this month, the Administration announced that 

the royalty rate for certain offshore oil and gas leases would be increased to 162⁄3

percent.

• Exactly which leases does this apply to? 

• If 162⁄3 percent is the appropriate level of royalty, shouldn’t it be the operative 

royalty rate for existing leases as well?

• Is there any opportunity to make this applicable to existing leases? 

• Does the Secretary have discretion to increase the rate for existing leases? 

Are they subject to renewal and revision of lease terms?

• I understand that the State of Louisiana gets a royalty rate of over 21 percent 

for oil and gas produced in State waters. As a matter of policy, do you think 

162⁄3 percent is the correct royalty rate to charge in adjacent federal waters?

Question 2. Bidding Systems—The Outer Continental Shelf Lands Act authorizes 

the Secretary to use several different bidding systems including a variable royalty 

bidding system for OCS lease sales. Please describe how such a variable royalty system would work. Has the Secretary considered using such a system? Has the Department done any analysis of the revenue impacts of the use of such a system? 

If so, please provide. 

Question 3. Diligent Development—Do you think we need to change federal law 

or policy to require more diligent development of the 33 million acres of the Federal 

OCS that are under lease but not being produced? 

Question 4. Deep Water Negotiations—The Department has entered into six settlement agreements with respect to these 1998 and 1999 leases, that I understand 

cover approximately 20 percent of the expected production under the 1998 and 1999 

leases. How many additional settlement agreements do you think you will be able 

to negotiate’? How much production will be covered? 

Question 5. Deep Water Royalty Relief—An additional directive to provide deep 

water royalty relief was included In the Energy Policy Act of 2005. Given the anticipated increase in production from deep water, do you have estimates of impacts royalty collections resulting from these provisions?

• Given the level of industry interest in this area, is deep water relief still warranted as an incentive to drill? 

• Am I correct in my recollection that the Administration did not support inclusion of this provision in EPAct?

Question 6. Deep Gas Royalty Relief—The Energy Policy Act also included royalty 

relief for deep gas in shallow water. What are the estimated revenue impacts from 

this provisions? Do you think royalty relief is warranted as an incentive to drill this 

resource? Am I correct in my recollection that the Administration also did not support this provision’s inclusion in EPAct? 

QUESTIONS FROM SENATOR WYDEN

Bobby Maxwell, a former audit manager at the Minerals Management Service, on 

Jan. 23 won his False Claims Act lawsuit against the Ken-McGee Oil and Gas Corp. 

before a federal district court jury in Denver. The jury concluded, as had Maxwell, 

61

that Kerr-McGee underpaid the government more than $7.5 million in royalties. 

Maxwell’s superiors at MMS told him not to pursue the case on the job; and when 

he pursued it privately through his suit, his job was eliminated. During today’s 

hearing, MMS issued a press release regarding this jury decision (the release is now 

posted on the MMS Web site) in which it continued to side with Ken-McGee against 

its former auditor. ‘‘The Minerals Management Service maintains its original position that Kerr-McGee paid the royalties it owed to the U.S. government,’’ the release 

stated. 

Question 1. Why did the Interior Department choose not to join Maxwell’s suit? 

Question 2. Specifically who at the Interior Department decided not to join the 

suit, and when was that decision made? 

Question 3. Did the Justice Department make a recommendation regarding the 

suit, and if so, specifically who at Justice and Interior communicated on the subject? 

Question 4. At any time did the Interior Department advise the Justice Department against joining the suit, and if so, specifically who at Interior made that recommendation and to whom at Justice was it made?

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