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[House Document 110-149]
[From the U.S. Government Publishing Office]

                                     

110th Congress, 2d Session - - - - - - - - - - - - House Document 110-149

 
 CONTINUED PRODUCTION OF THE NAVAL PETROLEUM RESERVES BEYOND APRIL 5, 
                                  2009

                               __________

                                MESSAGE

                                  from

                     THEPRESIDENTOFTHEUNITEDSTATES

                              transmitting

NOTIFICATION OF HIS DECISION TO EXTEND THE PERIOD OF PRODUCTION OF THE 
  NAVAL PETROLEUM RESERVES FOR A PERIOD OF THREE YEARS FROM APRIL 5, 
    2009, THE EXPIRATION DATE OF THE CURRENTLY AUTHORIZED PERIOD OF 
            PRODUCTION, PURSUANT TO 10 U.S.C. 7422(c)(2)(B)

   October 3, 2008.--Message and accompanying papers referred to the 
         Committee on Armed Services and ordered to be printed
To the Congress of the United States:
    Consistent with section 7422(c)(2) of title 10, United 
States Code, I am informing you of my decision to extend the 
period of production of the Naval Petroleum Reserves for a 
period of 3 years from April 5, 2009, the expiration date of 
the currently authorized period of production.
    Attached is a copy of the report investigating continued 
production of the Reserves, consistent with section 
7422(c)(2)(B) of title 10. In light of the findings contained 
in the report, I certify that continued production from the 
Naval Petroleum Reserves is in the national interest.

                                                    George W. Bush.
    The White House, October 2, 2008.

 Continued Production of the Naval Petroleum Reserves Beyond April 5, 
                                  2009

                               background

    The Naval Petroleum Reserves Production Act of 1976 (Pub. 
L. 94-258) directed that the Naval Petroleum Reserves be 
developed and produced at their maximum efficient rates for an 
initial 6-year period beginning in April 1976. Pub. L. 94-258 
authorizes the President to extend production in increments of 
up to three years provided that he first requires an 
investigation of the necessity for continued production; that 
he submits to the Congress, at least 180 days prior to the 
expiration of the current production period, a copy of the 
report on the investigation, along with a Presidential 
certification that continued production is in the national 
interest; and that neither House of Congress adopts a 
resolution, within 90 days of receiving the report and 
certification, disapproving further production.
    President Reagan exercised his authority to continue 
production on three occasions; President George H. W. Bush 
exercised his authority once; President Clinton, three times; 
and President George W. Bush, twice, in 2002 and most recently 
in 2005. As a result, production from the Reserves has been 
continuously authorized since 1976 and is currently authorized 
through April 5, 2009.
    Under Pub. L. 94-258 the President may:
         Continue production at the maximum efficient 
        rate for up to three years beyond April 5, 2009, or
         Shut in production at a level that would 
        protect the reservoirs from ultimately losing oil 
        reserves, perhaps indefinitely or until a national 
        defense emergency required activation of the Reserves.
    This report addresses the continuation of production 
operations at Naval Petroleum Reserve No. 3 (NPR-3, Teapot 
Dome) a small, mature stripper field located near Casper, 
Wyoming. NPR-3 is the only remaining Naval Petroleum Reserve 
administered by the Department of Energy under the Naval 
Petroleum Reserves Production Act of 1976.\1\ The Strom 
Thurmond National Defense Authorization Act for Fiscal Year 
1999, Pub. L. 105-261, authorizes DOE to dispose of NPR-3 by 
sale, lease, or transfer to another Federal agency, after 
abandoning oil and gas operations in accordance with commercial 
operating practices.
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    \1\The Department of Energy (DOE) divested its interest in Naval 
Petroleum Reserve No. 1 (NPR-1, Elk Hills, in Kern County, California) 
in 1997. In addition, section 331 of the Energy Policy Act of 2005 
transferred administrative jurisdiction and control over all public 
domain lands in Naval Petroleum Reserve No. 2 (NPR-2, Buena Vista 
Hills, in Kern County, California) (with certain limited exceptions) 
from DOE to the Department of the Interior for management in accordance 
with laws governing management of the public lands. Therefore, 
continued production from NPR-1 and NPR-2 is not analyzed in this 
report.
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                     CONTINUED PRODUCTION OF NPR-3

Economics and assumptions

    NPR-3 is a mature crude oil stripper field (i.e., 
production averages under 10 barrels per day per well). It is 
nearing the end of its economic life (the time during which 
revenues from the sale of produced oil exceed the costs of 
production to yield a positive net cash flow). Estimated 
average production from all wells during FY 2008 is projected 
to be 230 barrels of oil per day (BOPD).
    With a projected average crude oil sales price of $95.79 
per barrel, FY 2008 revenues from the sale of the produced oil 
would exceed $8.0 million. The crude oil sale price for June 
2008 exceeded $120 per barrel, thereby making the projected 
revenue stream somewhat conservative. In FY 2008, direct and 
overhead operational costs will be about $5.0 million, thereby 
resulting in estimated net revenues to the U.S. Treasury of 
$3.0 million.
    NPR-3 will generate revenues that exceed the operational 
costs through the period of this report and for several years 
beyond. The primary assumptions of this forecast are:
           Straight-line funding consistent with the 
        2009 budget request, which allows production of about 
        60 percent of the economically producible wells at NPR-
        3;
           The average sales price for crude oil for FY 
        2009 is equal to the average projected price for FY 
        2008, estimated to be $95.79 per barrel. Projected oil 
        prices for FY 2010 and beyond are adjusted per the 
        Energy Information Administration (EIA) crude oil price 
        forecast found in its FY 2008 Annual Energy Outlook;
           No capital investment projects are 
        undertaken;
           Overhead is, allocated between the Rocky 
        Mountain Oilfield Testing Center (RMOTC), production 
        operations, and environmental restoration proportional 
        to costs, consistent with standard accounting 
        practices;
           An annual production decline rate of 11% 
        throughout the projection period with the exception of 
        FY 2010 in which there will be no decline from FY 2009 
        as a result of wells which had been temporarily been 
        shut-in being returned to production. Beginning in FY 
        2011, the decline rate will return to 11%, which is 
        based on recent production history from 2004 to the 
        present; and
           All costs are in current year dollars.
    Profitable operations are projected to continue through at 
least FY 2012. Cash flow projections for continued operations 
of NPR-3 for the four fiscal years which encompass the three-
year continued production period that is the focus of this 
report indicate that profits from the oil production will 
average $1.3 million per year.
    The cash flow calculation for NPR-3 reflects an allocation 
of overhead costs proportional to direct operating costs. The 
other activities supported by NPR-3 overhead are environmental 
restoration and RMOTC. Some overhead costs will shift between 
production operations, environmental restoration, and testing 
as the level of effort shifts between these programs.
    Co-located at NPR-3, and utilizing the same production and 
processing facilities, is RMOTC, a program initiated by DOE in 
1994. Conducted largely in cooperation with private industry 
and academic institutions through cost-shared projects, RMOTC 
provides for the development and demonstration of enhanced oil 
recovery techniques, production tools and processes, and 
environmental compliance technologies that can be transferred 
to and utilized by the domestic oil and gas industry. An 
additional benefit to NPR-3 is that testing successful 
technologies provides increased production and reduced 
operating costs directly to NPR-3, thus positively impacting 
the economic performance of the field.

Impacts

    While the revenues from production operations at NPR-3 are 
not significant in the context of the overall federal budget, 
crude oil sales nonetheless provide income to the U.S. 
Treasury. Discontinuing production at NPR-3 would result in the 
loss of revenue from oil sales. Similarly, discontinuation 
would accelerate the government's cost obligations associated 
with the abandonment, restoration, and reclamation of the field 
which are estimated at $112.7 million over a 6.5 year period to 
comply with state and federal regulations. However, 
discontinuing production and accelerating environmental 
restoration at NPR-3 would accelerate realization of 
environmental benefits.
    Given the nature of its crude oil reservoirs, production at 
NPR-3 is unlikely to resume if its wells are plugged and 
abandoned and the field restored. Environmental regulations 
require wells that are shut-in for more than a short, fixed 
amount of time must be permanently abandoned. At that point, 
the reserves can be recovered only through drilling new wells. 
Drilling new wells or re-drilling cemented wells in a stripper 
oilfield is uneconomic for the foreseeable future. Once shut-
in, the field would remain closed, and more than 400,000 of 
barrels of economically recoverable oil will become much less 
economic. Closing the field also significantly increases the 
cost to produce some of NPR-3's remaining 200 million barrels 
of presently non-recoverable oil resources. The amount of this 
resource that could be economically recovered either before or 
after shut-in varies as the economics continue to change based 
on the price of oil and the cost of recovery.

Emergency preparedness

    NPR-3 provides less than 0.002 percent of daily domestic 
crude oil consumption and would have no measureable effect on 
mitigating supply interruptions. Although NPR-3 production 
rates are so small that there is no defense value or other 
national benefit in conserving the oil field for future use, it 
is important in the local, state, and regional context.

                               CONCLUSION

    Given that the revenues generated and deposited into the 
U.S. Treasury exceed the cost to operate the Teapot Dome Field, 
continued production of Naval Petroleum Reserve No. 3 beyond 
April 5, 2009, is in the national interest.

                                  
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