U.S. GOVERNMENT PRINTING OFFICE

55–644CC WASHINGTON : 1999

THE IRAQI OIL FOR FOOD PROGRAM AND ITS

IMPACT

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND POWER

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

MARCH 26, 1999

Serial No. 106–27

Printed for the use of the Committee on Commerce

(

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COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

THOMAS C. SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON ENERGY AND POWER

JOE BARTON, Texas, Chairman

MICHAEL BILIRAKIS, Florida

CLIFF STEARNS, Florida

Vice Chairman

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

TOM BLILEY, Virginia,

(Ex Officio)

RALPH M. HALL, Texas

KAREN MCCARTHY, Missouri

THOMAS C. SAWYER, Ohio

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ALBERT R. WYNN, Maryland

TED STRICKLAND, Ohio

PETER DEUTSCH, Florida

RON KLINK, Pennsylvania

JOHN D. DINGELL, Michigan,

(Ex Officio)

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C O N T E N T S

Page

Testimony of:

Bole, David L., Corporate Research and Development, Randall and

Dewey, Inc ..................................................................................................... 85

Brown, F.W.‘‘Pete’’, Co-owner, Cimarron Production Company ................... 80

Hakes, Hon. Jay, Administrator, Energy Information Administration, Department of Energy ....................................................................................... 21

Sieminski, Adam E., Principal and Senior Oil Analyst, BT Alex Brown ..... 66

Smith, Hon. Carl Michael, Secretary of Energy, State of Oklahoma ........... 26

Taylor, Tom, Regional Vice President, Texas Independent Producers and

Royalty Owners Association ......................................................................... 73

Watkins, Hon. Wes, a Representative in Congress from the State of

Oklahoma ...................................................................................................... 7

Williams, Hon. Michael L., Commissioner, Texas Railroad Commission .... 39

Wood, Hon. William B., Principal Deputy Assistant Secretary, Office of

International Organizations, Department of State .................................... 34

Material submitted for the record by:

Larkin, Barbara, Assistant Secretary, Legislative Affairs, letter dated

April 16, 1999, on behalf of Wood, Hon. William B., Principal Deputy

Assistant Secretary, Office of International Organizations, Department

of State, enclosing material for the record .................................................. 97

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THE IRAQI OIL FOR FOOD PROGRAM AND ITS

IMPACT

FRIDAY, MARCH 26, 1999

HOUSE OF REPRESENTATIVES, COMMITTEE ON COMMERCE, SUBCOMMITTEE ON ENERGY AND POWER, Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2322, Rayburn House Office Building, Hon. Joe Barton (chairman)

presiding.

Members present: Representatives Barton, Largent, Burr,

Shimkus, Bryant, and Hall.

Staff present: Catherine Van Way, majority counsel; and Rick

Kessler, minority professional staff member.

Mr. BARTON. The Subcommittee on Energy and Power of the

Commerce Committee hearing on the Iraqi Oil-For-Food Program

will come to order.

I would like to welcome everyone. I believe that this is an issue

which impacts our national energy security and which everyone,

not just individuals from the oil-producing States, should pay attention to.

After Iraq’s invasion of Kuwait in 1990, the United Nations imposed sanctions which prohibited all trade with Iraq. However, in

April 1995, in recognition of the humanitarian needs of the people

of Iraq, Security Council Resolution 986 was passed, which authorized the sale of oil from Iraq to be used to purchase goods authorized by the United Nations Security Council. Under this program, Iraq is currently allowed to sell up to $5.2

billion worth of oil every 6 months. The money generated from the

sale is deposited in the bank of the choosing of the government of

Iraq and is supposed to be used to provide humanitarian goods to

the Iraqi people under United Nations supervision.

Under this program, Iraqi oil sales have risen over the past year

from 1.47 million barrels per day to 2.1 million barrels per day.

The revenue received for those sales has been approximately $3 billion every 6 months.

The United States recently proposed that the Security Council

consider lifting the ceiling on oil sales permitted under the Oil-ForFood Program. It is worth noting that the Oil-For-Food Program is

not the only way Iraq currently sells its oil. Some oil is exported

to Jordan under a long-standing program; some oil we are told is

smuggled into Turkey and sold on the black market. In addition,

other oil is exported through Iran and from seaports in the south,

again for what we believe to be black market sales.

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Since the Oil-For-Food Program was begun, $2.75 billion worth

of food, over $500 million worth of medicine, and $400 million

worth of supplies for things such as water, sanitation, electricity

and education projects have been delivered to the people of Iraq.

The program has been criticized for its slowness. In February of

this year, the U.N. Secretary General reported that there are $275

million worth of medicine sitting in Iraqi warehouses that have

been undistributed.

All that being said, the question arises, is this a worthwhile program? Two-thirds of the world’s proven reserves of oil reside in the

Middle East. In fact, Saudi Arabia and Iraq are first and second

in proven reserves of oil and Iraq, which is largely unexplored,

might ultimately have more oil than Saudi Arabia. For the past

several months, oil prices have languished at historic lows. The

precipitous and sustained drop in oil prices have been attributed in

part to the Asian economic crisis, which caused a drop in anticipated demand, while oil production has continued to grow. Many

also attribute growing Iraqi oil exports as a factor for today’s low

oil prices. Some argue that Iraqi oil is not impacting prices, but I

find it interesting that oil prices rose slightly this week because of

an announcement by OPEC that its member countries would be

cutting production by 2.1 million barrels a day. It may be a coincidence, but Iraq is exporting 2.1 million barrels a day.

Low oil prices pose the greatest threat to domestic producers of

oil and gas, because in the United States, our small independent

oil and gas producers have the highest cost of production. We are

beginning to see the impact as U.S. oil production has begun to decline in the wake of these sustained and abnormally low prices.

The U.S. is now dependent on imports to meet more than 50 percent of our daily petroleum needs. That number is likely to grow

dramatically as more marginal wells are shut in and domestic exploration activities are slowed in the wake of these continued low

oil prices.

I believe that we should not ignore the humanitarian needs of

the people of Iraq, but I also believe that we should not ignore the

needs of our own people here in the United States, and these low

oil prices, which I believe are caused in part by the Iraqi oil production, are having an impact on our energy security.

I will be most interested to hear from our administration witnesses today to see if they can explain this apparent policy disconnect.

Finally, I want to note that I hope today’s hearing will be the

first of a number of hearings that this subcommittee will be having

on the domestic oil and gas industry. I am deeply concerned that

the current situation in the Oil Patch in the United States in the

long term does cause a national security risk to our country. If we

cannot maintain existing production and to some extent encourage

new exploration for domestic resources, we will be in a situation

where we are more and more dependent on foreign oil.

I want to welcome everyone, especially our witnesses, to this

hearing. I am sure they are going to find it very informative.

With that, I would like to recognize the ranking member from

Rockwall, Texas, Mr. Ralph Hall, for an opening statement.

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Mr. HALL. Mr. Chairman, I thank you, and members of the committee, I thank you for having this hearing, but not much to have

it on Friday. I would have rather had it on Tuesday or Wednesday

or Thursday.

Mr. BARTON. I understand.

Mr. HALL. I see folks on the committee that would be strapped

to an airplane right now.

Mr. BARTON. You and me, that’s right.

Mr. HALL. My folks over here, Democrats are poorer than Republicans, they all caught the bus out last night.

Seriously, Joe, thank you for the good hard work you do and the

very successful work you do as chairman of this committee. You do

a great job and I am very proud to work with you as our chairman.

Few live in the Oil Patch, as I do. It is, I guess, stunningly apparent to you that when you talk to anyone in or even near the oil

business, that these days are about the toughest and the most

frightening in the history of the people that are in the oil business.

Regrettably, this is not an idle boast, considering the market calamities of the 1980’s and the 1950’s, because we have some pretty

bad times to compare it with.

We are here today to examine one of the most often cited reasons

for today’s low oil prices, and the Iraqi Oil-For-Food Program, as

the chairman has pointed out, is considered one of the big problems

of it. I am a big believer in the unfettered operation of markets,

and I also believe in being compassionate to people, particularly

those who are unfortunate enough in life to have to live under a

regressive regime of a Saddam Hussein. At the same time, it is important for us to think about this country and for us to examine

how the world oil market is doing and whether or not it is working,

and then to get our own assessment of how well it is working. If

it is not working properly we need to make some changes in it, and

we can only change that over which we have some control. So we

have very good panelists today and I am sure we will know a lot

more about it after we hear them.

I, for one, am suspicious of this program. It seems to be borne

out of an appropriate humane consideration, but it may be disruptive of the worldwide crude oil market and could spawn a lot of

abuse.

We have good witnesses here today who can help us better understand the impact of the Oil-For-Food Program. I want to extend

a special welcome to my old friend, Congressman Wes Watkins,

whose district lies just across the Red River from mine. I don’t

know of anybody that works harder, day and night, than Wes Watkins. You know, Wes was a Democrat at one time and we worked

together then. He, when he switched over to the Republican Party,

they asked me about it. We have a mutual television station that

comes into Oklahoma and Texas and they asked me about Wes.

And they said well, what do you think about him switching over

to the Republican Party? I said, well, I would be for him, and he

could win even with the laundry ticket. And they tell me that he

used that for a commercial. But I got a few ugly letters from Democrats. But I got my friend back up here, and I am glad to work

with Wes.

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I also want to welcome a fine group of Texans. The newest member of the Texas Railroad Commission, Mike Williams, whom I had

the pleasure of having lunch with yesterday. He is on the Railroad

Commission, and I think that is one of the most dignified and prestigious offices that we have in the State of Texas, and the most important. Tom Taylor, who represents TIPRO, and Dave Bole of

Randall and Dewey. We have good, outstanding—Joe, you invited

some good Texans up here, and I am proud of you.

Mr. BARTON. There is no such thing as a bad Texan, though.

Mr. HALL. Well, I don’t know.

I thank the chairman. I thank you for having them here, and I

hope this hearing is only one of however many it takes to determine what remedies exist to deal with the current price situation.

It is a situation that is helping to destroy the domestic onshore petroleum industry, even as we sit here today. And while we have

seen some upward pressure on prices lately, we need not to be

lulled by any underlying factors which remain unchanged that we

can change.

I guess that is the testimony we are going to hear today. Seriously, thank you for having this hearing. It is a very important

hearing, and it can yield an awful lot to folks that are hurting.

Thank you.

Mr. BARTON. Thank you, Congressman Hall. I might point out we

wanted to do this hearing yesterday, but we had a full committee

markup of the satellite bill, and Chairman Bliley thought that we

ought to do the markup.

Mr. HALL. Well, I haven’t had anything to fuss at you about this

year yet, and this gave me a first shot.

Mr. BARTON. Okay. But you and myself and Mr. Largent are normally on the first plane out of town after the first vote, so we are

all in the same boat on that.

The chairman recognizes the distinguished gentleman from Illinois, Mr. Shimkus, for an opening statement.

Mr. SHIMKUS. I would like to ask permission to submit my statement for the record and just say that it seems like we are in a

Catch-22 where consumers all love the low oil prices, but what it

does is shut down marginal wells. I have the two largest fields in

Illinois in my district. Most of the operating wells are in my colleague David Phelps’ district, and we all know what this does is it

closes down those wells, the low prices, thus making us more dependent on foreign oil. And national security and energy security

is one of my main focuses on this subcommittee.

So I appreciate this, and I am also looking forward to talking

with the folks from the administration, with the, Iraqi intransitives

on the inspections and stuff. I think it is time that we reopen this

debate on this program, and I look forward to this hearing.

I yield back my time.

Mr. BARTON. Good. We thank you, Mr. Shimkus. Without objection, his statement will be inserted in the record in its entirety.

We welcome Mr. Largent from Oklahoma to give an opening

statement. Congressman Largent has put a lot of emphasis in the

last year or so on this issue and is one of our congressional experts

on it.

Mr. Largent for an opening statement.

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Mr. LARGENT. Thank you, Mr. Chairman. I, too, will submit my

entire statement and just make some brief opening remarks. First,

I want to thank you for having this hearing. I wish we could draw

even more attention to this issue, because as you know, it is very

serious. I also want to recognize two Oklahomans that are also on

our panels today. Mike Smith, who is our Oklahoma State Department of Energy Secretary, and Pete Brown, an independent producer from Oklahoma City. Thanks for coming.

There is a number of questions that I hope that we can get some

answers to, and I would like to verbalize those right now. One is,

why is the Iraqi oil export quota measured on a revenue basis, currently $5.2 billion worth of oil over 6 months, rather than measured on a quantity basis? The second question I would like to ask

is what assurances do we have that the money is being spent in

the manner intended; in other words, for food, and are we relying

on Iraqi government entities to verify this. I am glad to see that

there is somebody from the State Department that hopefully will

answer that question for us today.

Why are the funds allowed to be spent by the Iraqis for oil production equipment? Has this policy been revisited since we began

responding to the Iraqi military aggression by bombing their missile defenses on almost a daily basis? And what about the 5 percent

of the Oil-For-Food funds that are going to fund the U.N. investigations and costs. Currently, as we know, there are no inspectors

there. Also, I think it would pose an interesting question to try to

figure out why one of the military targets, when we are exchanging

oil for food, why one of the military targets in the latest round of

bombing was an oil refinery in Iraq. That seems a small irony to

me. Can the U.S. truly determine what the oil production export

capacity of Iraq is, given their ability to sell oil on various black

markets? And how can the U.S. propose that the U.N. Security

Council could consider lifting the ceiling on oil sales permitted

under the Oil-For-Food Program while conceding that increased

U.S. dependence on foreign oil imports is a threat to our national

security?

Mr. Chairman, one thing that I think that is imperative for this

Congress and this administration to come to terms with, we had

a vote last week on the import of steel, and I think many of the

arguments that were made during that debate were about the importance of the steel industry for national security reasons. If we

don’t have the ability, the capacity to make steel in this country

anymore, we can’t build tanks and airplanes and ships to protect

this country, and the same is equally true of our ability to produce

energy domestically.

I know that back in the 1980’s there was a push to develop a national energy policy, and included in that was to say that we

should cap imports at 50 percent, this was back in the 1980’s, because anything beyond that would pose a very critical national security risk. And now, as you know, we have well exceeded 50 percent, it has even gone up as high as 58 percent in recent years, and

I think this is a very important question that Congress, the American people, the President, and the Pentagon need to address, is

that at what point, what is the threshold that we are going to say

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enough is enough. How much oil can we import without severely

and critically undermining our national security interest?

Mr. Chairman, I appreciate you having this hearing, and hopefully, this is the first in many steps toward resolving a number of

these questions. I yield back.

[The prepared statement of Hon. Steve Largent follows:]

PREPARED STATEMENT OF HON. STEVE LARGENT, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OKLAHOMA

I want to thank the Chairman for holding this hearing on the impact of foreign

oil imports on our domestic oil industry, specifically the Iraqi Oil for Food Program.

At the outset, I want to acknowledge the Chairman’s efforts to include two Oklahomans on the panels of experts testifying today. I doubt that there is anybody more

qualified to speak on the current state of our domestic oil industry and the impact

of increased U.S. dependence on foreign oil than Secretary Mike Smith of the Oklahoma Department of Energy and Pete Brown, an independent oil and gas producer

from Oklahoma City. I would encourage the committee to pay close attention to

their testimony because I believe it will shed some light on the seriousness of the

state of our domestic oil industry.

It is my hope that the hearing today on the Iraqi Oil for Food Program will address some concerns I have about the goals and merits of the program. These concerns include:

1) Why is the Iraqi oil export quota measured on a revenue basis (currently $5.2

billion worth of oil over 6 months) rather than measured on a quantity basis?

2) What assurances do we have that the money is being spent in the manner intended? Are we relying on Iraqi government entities to verify this?

3) Why are funds allowed to be spent by the Iraqis for oil production equipment?

4) Has this policy been revisited since we began responding to Iraqi military aggression by bombing their missile defenses on almost a daily basis? What about the

5% of the Oil for Food funds that are going to fund the U.N. investigations and

costs?

5) Can the U.S. truly determine what the oil production and export capacity of Iraq

is given their ability to sell oil on various black markets and transport it by

other than pipeline means?

6) How can the U.S. propose that the U.N. Security Council consider lifting the ceiling on oil sales permitted under the oil for food program, while conceding that

increased U.S. dependence on foreign oil imports is a threat to our national security?

Our domestic petroleum industry is currently facing a severe crisis: one that if

not addressed expeditiously could prove disastrous economically, yet more importantly, threatens our national security. Since October of 1997, it is estimated that

our domestic oil and gas industry has lost 57,000 jobs—5 times the number of jobs

lost in the American steel industry! And each barrel of domestic oil lost will be replaced by imported oil.

In December of 1994, the Secretary of Commerce issued the results of an investigation conducted under the Trade Expansion Act which studied the impact of

crude oil imports on the national security of the United States. The investigation

determined that oil imports threaten to impair our national security.

In February of 1995, President Clinton concurred with the Commerce Department’s finding that ‘‘the nation’s growing reliance on imports of crude oil and refined petroleum products threaten the nation’s security because they increase U.S.

vulnerability to oil supply interruptions.’’ At that time (1995), imports comprised

about 50 percent of the United States consumption. In 1998, gross imports had risen

to 53 percent!

Unfortunately, little has been done over the past four years to heed this ominous

warning. Now, the domestic petroleum industry faces a more complicated and potentially devastating set of problems than it did four years ago. According to recent figures released by the Independent Petroleum Association of America (IPAA), preliminary employment data for the exploration and production sector of the oil and natural gas industry, as of December 1998, stood at 309,300, compared to 339,800 in

the same month last year. Since the early 1980’s, roughly half a million jobs relating

to the oil and natural gas industry have been lost. And rather than attempting to

decrease our reliance on foreign imports—the U.S. has become more dependent on

imported oil.

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The hardest hit by this latest crisis has been the independent producer. The Energy Information Agency recently released a report that indicated that about 60 percent of oil production in the lower 48 states comes from independents, a percentage

that increased by ten percent over the past ten years. This reflects an irreversible

trend. Major oil companies are leaving the onshore lower 48 states. They have concluded that these wells do not produce the volumes they need to meet the return

on capital that they seek. Majors now operate in the United States primarily offshore and Alaska, but more and more they are seeking their new production overseas. At current prices, most—if not all—of the onshore lower 48 production is at

risk of loss.

If we lose our independent producers, our reliance on foreign oil will likely increase from about 55 percent to over 70 percent. If we continue on this course, we

will systematically degrade our ability to produce a sufficient amount of oil to maintain a secure energy source vital to our national security policy.

Simply put, we can’t fight a war, even a defensive war, if we are counting on Saddam Hussein to ship us oil to fuel our tanks, aircraft and ships. And notwithstanding the fact that domestic oil producers are suffering now because of low oil

prices, once they are gone we cannot revive their wells or industrial expertise or

hope the market will rebound. It will not. The national security impact of losing our

ability to produce oil domestically is no different than losing our industrial base to

build nuclear submarines. If more than half of our nuclear submarines were imported from foreign countries, I think we could agree that the United States would

be in grave danger.

I look forward to the testimony of our expert panelists today. Our domestic oil industry, and the current impact of Iraqi imports, must begin to appear on the nation’s radar screen so all Americans can understand the threat that exists. I am

committed to making this case so that we can move quickly to look for viable solutions to a very real problem.

Mr. BARTON. I thank the Congressman from Oklahoma for that

statement.

We would now like to hear from our first panelist, the Honorable

Wes Watkins from the great State of Oklahoma, representing very

well with a distinguished career the Third Congressional District.

So, Mr. Watkins, if you will come forward. We will put your

statement in the record in its entirety, and being from Oklahoma,

which we think is a great State, we will recognize you for such

time as you may consume.

STATEMENT OF HON. WES WATKINS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF OKLAHOMA

Mr. WATKINS. Thank you, Mr. Chairman. I appreciate the distinguished members being here. Even though short in number, I know

we are high in quality, and I can also tell the States that are hurting out there and the districts that are hurting concerning not only

this policy that we are talking about today, but the entire failed

policy of this administration and the U.N. Security Council dealing

with the Oil-For-Food Program and all. I want to acknowledge that

I know each of you well and I know some of the things that you

are working on, and I appreciate the commitments you have made.

My colleague from Oklahoma, Congressman Largent, Steve, you

asked some very logical questions. It reminds me of a guy who

says, you know, common sense is not common anymore, you know,

and there is not much of it around, and this is something that I

think the Oil-For-Food Program is not a—Ralph, my good friend

across the river, it is not one of those things that our people in our

area find that has much common sense, and I would like to talk

about that a little bit.

I call it a failed policy because the sanctions, you might as well

not have them. My members of the committee, I will say to friends

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that I work closely with, Saddam Hussein has won. Saddam Hussein has won. We are bombing Iraq. At the same time, we have

opened up for him, for his people, a lot that we are not willing to

do for ourselves. Today it is at $5.2, it is actually at about $10.5

billion/year worth of oil that can be sold, and it is a question why

net barrels. That is more oil than Iraq exported before the Gulf

War in 1991. It is not just being utilized on food or hospitals and

medicine, it is being used to help rebuild their infrastructure. Our

CRS reports have pointed that out. So when you look at the system

we have there and the policies that we have, and I wonder why we

are not willing to do it as a State Department, as a country, as the

U.N. Security Council, why don’t we insist that they abide by what

is legal in what they sell.

You know, I have never understood that. We close our eyes just

to illegal things that go on. And there is around 300,000 barrels a

day that is being sold illegally over the black market to Jordan and

to Iran, Syria, and Turkey. And you know, also part of the fallacy

of this lack of common sense that I look at and wonder about, on

the emergency programs that just passed yesterday, it had $100

million in there for Jordan, but Jordan is also buying about $100

million of illegal oil from Iraq. It is hard for me to explain why the

policy of this administration is to allow that to happen that way,

destroying our oil patches, destroying our means of making a living. I hear in their voices the pain of people I have never heard

before, the fact that they are losing everything. I know in my area

the oil patches are a war zone. They are yanking up pipe, they are

closing down oil wells, and there is going to be a lot more of that,

and I cannot stand idly by, and I know you cannot either. I know

every one of you right here are the same way I am. We have to

try to do something. I don’t understand the administration and our

country willing to go along with that.

In the last 14 months, we have allowed Iraq to go from 700,000

barrels a day up to 2.3 million barrels a day. Mr. Chairman, as you

rightly said, the irony is that the OPEC is dropping production,

and I was going to be at OPEC Tuesday. They have dropped, have

a policy of 2.1 million drop per day in the oil, and Iraq has gone

up about 2.1. Now, I may not be a rocket scientist, but let me tell

you, it doesn’t take much more than common sense to recognize the

fact that literally, OPEC has staggered the market and it has gone

up a little bit when they dropped to 2.1 or even the discussion that

that is what is happening. We know that it hasn’t gotten there yet,

but it has cut production, and it has increased the price. Does it

stand to reason that the 2.1 million that Iraq has increased affects

the market the same way? Am I thinking, Ralph, wrong? I mean

is that logic there? Is that is wrong, if 2.1 over here on OPEC affects it like we have seen it, is the 2.1 in there, or are we just seeing something a lot differently? I think we need to look at that. We

have allowed it. It is common sense to me.

If our policy, if our policy in the United States in dealing with

Iraq is to allow a dissatisfied group of people in Iraq, the Iraqis,

to overthrow Saddam Hussein, we have gone about it the wrong

way. Because our reports show that they are basically importing

anything and everything they want to, and why worry about it? In

fact, as I tell them, we have a mental institution in Oklahoma, and

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the old boy told me one time, he said I have proof that I am sane,

that I have got good sense. I submit to you Iraq has got it better

than OPEC, OPEC should be mad, we should be mad. They are

having to come down; Iraq is out of the box. Even though they belong, they don’t have to abide by that reduction.

In fact, I am going to follow up on the statement that as I prepared for this, under the new program they have a standard or a

statement I saw there, I want to check it out, they have a higher

price they are going to be able to get. I hope that is a wrong statement I am reading, because I think that also is something we need

to be concerned about.

Let me share with you and close on two things, and I think we

have to reevaluate this. It is again something that deeply disturbs

me. Thomas Pickering, the Under Secretary, said this is in the

newspaper of March 18, told the Senators, that is the Senators

across on the other side, as we all know, ‘‘The humanitarian needs

of the Iraqi people must be addressed. The Oil-For-Food Program,’’

he said, ‘‘has had a tremendous positive impact on the conditions

of the average Iraqi.’’ I don’t disagree with that.

With regard to the program’s effectiveness on crude prices and

domestic energy industry, Pickering agreed with Richardson, our

Secretary of Energy, that Iraqi’s exports are just one factor. Well,

yeah, it is just one factor. It is 2.1 million barrels a day. They said

the policy toward Iraq has never been linked to the world oil market. I don’t care. ‘‘Allowing oil price consideration to drive our sanctions decisions or seeking to use sanctions to target oil prices would

undermine our ability to provide for the humanitarian needs of the

Iraqi people.’’

I don’t think I am looking in the face of any person here that is

not against trying to help with some humanitarian aid. But I want

to know how much is for their military buildup, how much money

are they using there? How much money are they getting from illegal sources?

The infrastructure, I have infrastructure needs, I think many of

you know, in my district, and I have a need to try to rebuild that

area.

Then I read over here, in closing my statement, a statement

that—you know, it is kind of like our welfare program, a failed program. It is kind of like a giveaway program. What it states here,

supporters of increased oil sales, on the other hand, say that the

tactic would reduce suffering among Iraqis and make it more difficult for the Iraqi government to maintain anti-government, or

anti-American and British sentiment because of being in favor because we give them stuff.

You know, members of the committee, there is one man who

stands between us and the Iraqi people and his name is Saddam

Hussein. Do you think we are going to have favor of being able to

do all of these things, or Saddam Hussein? We are dealing with

failed policy that is coming from our administration and the U.N.

Security Council and we have to correct it. It is not taking any consideration in for the American people.

I thank you so much for letting me come by to just share with

you a little bit, because we need the common sense of this committee at work in trying to shape, Mr. Chairman, some of the policy.

10

I too plan to be strapped on that airplane heading toward Oklahoma, but I delayed it until about 1 o’clock because of wanting to

come here and be with you. I just thank you so much.

[The prepared statement of Hon. Wes Watkins follows:]

PREPARED STATEMENT OF HON. WES WATKINS, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OKLAHOMA

Chairman Barton, Ranking Member Hall, I would like to thank you for calling

this hearing and allowing me the opportunity to testify before the Subcommittee on

Energy and Power. Those of us from oil producing states need to do a better job

of educating the American public about the importance of our domestic oil industry.

I believe this hearing is a step in the right direction, but we need to do more. I

would like to encourage our colleagues in the Congress and the Administration to

reduce Iraqi oil sales to pre-Persian Gulf War levels—not increase them.

As we all know, we are facing a crisis in our domestic oil and gas industry. World

oil prices have dropped from above $20 a barrel in 1997 to less than $9 a barrel

this year. When adjusted for inflation, these are the lowest prices seen since the

Great Depression. This crisis is having a devastating effect on our domestic industry. Since October of 1997, our domestic oil and gas industry has lost 57,000 jobs.

That is more than five times the number of jobs lost in the American steel industry.

This subcommittee knows that the backbone of our domestic oil and gas industry

is the small, marginal well. Marginal wells are defined as those wells which produce

less than 15 barrels a day. At these low prices, it is impossible to keep many of our

small, marginal wells open. These marginal wells account for 1.3 million barrels of

daily production—equivalent to the amount of oil the Unites States imports from

Saudi Arabia. Marginal wells also contribute 80,000 jobs and generate close to $14

billion each year in economic activity. However at these low prices, it is becoming

impossible to keep many of our marginal wells open. When we lose these marginal

wells, the backbone of our domestic oil industry, we become more dependent on foreign oil. We must not lose sight of the fact that the economic health and national

security of our country are tied to the strength and stability of the domestic petroleum industry.

There is a general consensus that the current crisis in the domestic oil patch has

been caused by a combination of several factors. Certainly the Asian financial crisis,

warmer than expected winters, and increased oil production by certain countries

have played an important part in driving down prices. However we should not minimize, as some have done, the impact that the resumption of Iraqi oil sales under

the oil-for-food program has played in driving down prices.

We are here today because the Clinton Administration is currently considering

asking the United Nations to remove the U.N. imposed ceiling on Iraqi oil sales. I

am strongly opposed to this proposal because, I believe it would severely damage

our already devastated domestic oil and gas industry and would not accomplish the

objective of alleviating the suffering of the Iraqi people. Iraq should not be allowed

to sell greater quantities of oil then they were prior to the Persian Gulf War, as

they are doing now. The extended period of below cost prices is causing more and

more of our small, independent producers to plug their marginal wells. Allowing

Iraq to sell additional quantities of oil on the world market will only drive down

these already depressed prices and force our marginal producers to plug their wells.

Once these wells are plugged, we have basically lost this valuable resource for secondary recovery.

It is important that Members understand the flaws inherent in the oil-for-food

program’s structure and how that effects the amount of oil Iraq can sell on the

world market. Iraq’s quota is based on a dollar amount rather than on quantitative

limits. Currently, the oil-for-food program allows Iraq to sell $5.2 billion worth of

oil every six months. As the price of oil fell through late 1997 and 1998, Iraq was

allowed, under this flawed structure, to drastically increase its production. Under

this expanded oil-for-food program, Iraq has increased its daily oil production from

around 700,000 barrels to 2,300,000 barrels during the last 14 months. This excess

Iraqi production has exacerbated the current glut on the market and caused the

price of oil to slide even lower. In fact, the 2.3 million barrels a day more than offsets the recent decision by the Organization of Petroleum Exporting Countries

(OPEC) to reduce oil production by 2.1 million barrels a day in an effort to prop

up prices.

The Administration will likely argue today that Iraq is already producing at capacity and therefore increasing the amount of oil Iraq is allowed to sell will not have

an effect on world prices. This argument is flawed in several aspects. First, if Iraq

11

is already producing at capacity, then there is no need to raise the dollar ceiling

on Iraqi oil sales because Iraq cannot sell any more oil than it is currently selling.

Second, while Iraq is currently producing at capacity, the UN allows Iraq to use

$600 million annually from the oil-for-food program (which is supposed to be for humanitarian supplies) to improve its oil production capability. This will allow Iraq

to improve its production facilities and to further flood the world market with cheap

oil.

I am also opposed to this proposal because I do not believe that expanding the

oil-for-food program would help alleviate the suffering of the Iraqi people. Iraq has

failed to meet the conditions of the 1991 cease-fire agreement and the 1996 oil-forfood program. I am concerned that the oil-for-food program itself is flawed and that

many Iraqis will never see the benefit of the oil sales. The State Department has

acknowledged that Iraq has not distributed much of the humanitarian supplies they

have already acquired through the oil-for-food program. According to U.S. officials

cited in the press, ‘‘Iraq has kept large supplies of food and medicine in storehouses,

refusing to distribute them to the needy’’ (Associated Press Wire, 1/4/99). State Department Spokesman Jamie Rubin was quoted in the January 14, 1999 State Department Briefing as saying:

‘‘The facts are that (the Iraqis) are failing to order and distribute food and medicine as quickly as they could. The facts are that they are failing to order and

distribute food and medicine that would alleviate the problem, and that Iraq

plans to order less food and medicine for the Iraqi people than in previous

times. So those are the facts.’’

Why would the Administration even consider a policy which would further damage our domestic oil industry and, according to their own spokesman, do little to

alleviate the suffering of the Iraqi people?

I also have concerns about the manner in which humanitarian supplies are distributed. If the Iraqi people are starving, as Saddam Hussein claims, why is the oilfor-food money being spent on oil field and telecommunications equipment. Are

these not the same telecommunications facilities we have bombed because they are

an important part of Saddam Hussein’s command and control complex? I am also

concerned that Iraq is allowed to use $600 million annually in its oil-for-food receipts for oil production equipment. If Iraq can allow food and medicine to sit in

warehouses, than why should we allow the Iraqis to expand their oil production and

further flood the world market with cheap oil? The oil-for-food program also allows

Iraq to spend $250 million to rehabilitate the agricultural sector. While I have nothing against the Iraqi people growing their own agricultural commodities, does anyone honestly believe that Saddam Hussein will use those crops to feed the Iraqi people at the expense of his treasured military?

The Administration will likely say that Iraq’s increased production is necessary

to lessen anti-American and anti-British sentiments among the Iraqi people. However, does anyone believe that Saddam Hussein and his regime will allow the

United States to claim credit for these humanitarian supplies? I believe it is more

realistic to expect that he will continue to let food and medicine sit in warehouses

while the Iraqi people starve. Instead, we are rewarding Saddam Hussein for his

lawlessness. We are rewarding him for shooting at our planes. We are rewarding

him for illegally smuggling oil through Turkey, Jordan, and Iran and we are punishing hard working American families in the domestic oil patch.

Mr. Chairman, a tremendous disconnect between a policy where we bomb Iraq on

almost a daily basis yet remain the largest consumer of Iraqi oil. That is why I,

along with our colleague from Texas Mr. Thornberry, have introduced H. Con. Res.

39. This resolution urges the Administration to oppose the unmerited expansion of

the oil-for-food program.

Mr. BARTON. Does that conclude your oral statement?

Mr. WATKINS. I have a lot more to say, but I better conclude.

Mr. BARTON. I thought you were a little bit moderate today, Congressman. I have heard you be in the Republican Conference what

we would call excited. We appreciate your moderate tone.

We are a real high-tech committee, so this is our timer. It is a

little egg timer. The Chair is going to recognize himself for 5 minutes. I don’t think I will take the 5 minutes.

I want to make sure I understand you, though, Congressman

Watkins. You are not opposed to food supplies and medicines going

to the people of Iraq, isn’t that correct?

12

Mr. WATKINS. I do not. I do not like the attitude about saying

they are not going to buy American food with it. It is a slap in our

face again. We are hurting the farmers, as well as the oil patches.

It is a double whammy.

Mr. BARTON. Your problem is the producers in your district and

in the State of Oklahoma, some of the small, marginal producers

that are going out of business, and it doesn’t appear that anybody

in the U.S. Government cares about that?

Mr. WATKINS. That is correct. I feel strongly about it. I have a

tax credit bill coming through my committee, and I hope the leadership and the administration will back that in order to help us

have some kind—as we all say, greater national security.

Mr. BARTON. So if we could come up with a program that maintains the current level of humanitarian supplies to Iraq, but cutoff

the oil exports, or if not totally cut it off, substantially reduced it,

you would support such a program?

Mr. WATKINS. Yes, I would. I think we need to definitely do that.

The food, I don’t think it should be more than the essential food

and medicine. If our policy is for a dissatisfied society over there

that would overthrow Saddam Hussein, we have the wrong policy.

He is laughing, he is laughing at us.

Mr. BARTON. I would assume that there are corn growers and

wheat growers and cattle producers in Oklahoma that would be

willing to provide that food for a reasonable price to the people of

Iraq.

Mr. WATKINS. I am quite sure we would be happy to do that.

Mr. BARTON. I am going to yield back the balance of my time and

recognize the gentleman from Texas, Mr. Hall, for 5 minutes.

Mr. HALL. Thank you, Mr. Chairman. I will try to be brief, too,

because I know we have other witnesses that we are very anxious

to hear from, and perhaps soon the gentleman from the Department of State will be able to give us a little more input as to some

of the whys of what has taken place.

As I said in my opening statement, I am troubled and suspicious

of this program. I am not unlike anyone else in that I care about

little children and old people, but you know, MacArthur made a

great statement one time. He said ‘‘The object of war is victory,’’

and I think the President right now today while we are here dispatching men and women of our armed forces to inflict pain and

hopefully disgrace on the Yugoslav leadership over there, Milosevic,

in an effort to cause the people to drive him out, the easier you

make it on people, the more you help the people that need the leadership of even a dictator, the longer he is going to be there. The

program doesn’t make that much sense to me. But, who cannot

feed little hungry kids? And of course, you know, Hiroshima and

Nagasaki would have been a lot better off if they had given them

a couple of weeks notice to move all the young people and old people offshore and just put the folks that were fighting the war there

under the bomb, but that is not the way it works, not the way it

can work, not the way it works over there today.

I asked George Bush one time why they didn’t destroy Iraq’s

ability to produce war, and he said well, it wasn’t totally his decision, it was a U.N. decision. Besides, they were afraid of Iran.

Didn’t want to weaken Iraq and then have Iran. And I said well,

13

while we are over there, why can’t we take care of them too while

we are there. Of course, that is not the way we do it. I think we

missed out when Iran and Iraq were fighting each other, why we

didn’t just arm the hell out of both of them.

How can we impress on people that are voters and are interested

citizens the importance of people outside the producing areas that

they ought to care about domestic oil producers? If everyone could

hear you speak today, that would get through to them. But how do

we get that message over to them?

Mr. WATKINS. Are you really asking me that question?

Mr. HALL. Yes, yes.

Mr. WATKINS. If I knew the answer to that, we would solve all

of our problems. Because right here, the members who are not here

are the ones that need to be listening and hearing your feelings

and the chairman’s and other members from the Oil Patch. We do

bring in national security.

But I went to Venezuela. I went down and met with the new

President the week before, a couple of weeks before, who is probably one of the most dynamic men I ever met in my life. I mean

he can look you right in the eye. And I talked to him about the

oversupply of production, and he is sincere in wanting to lower it

in helping the price, and I think he has followed up on that. There

is a lot of hope there. There is 80 percent poverty in Venezuela.

I want to get to this point, right to what you are talking about.

There is a lot of hope in Venezuela, but they don’t know anything

about the new President. All they know is that 6 years ago he tried

to overthrow their government and he ended up in jail for 2 years.

Less than 2 years ago, we would not even give him a visa to come

to this country.

Now, he has his hand on the spigot of the greatest supply of

crude oil to the United States. He chased out the president for

PdVSA, but yet we have now relied more on Venezuela and Mexico

and Canada and of course Saudi Arabia. The Saudi Arabians will

produce as much oil as we consume or we produce out of our marginal wells, 1.3 million barrels a day.

So if people understand, we have become more dependent than

ever before in the history of our country. And I thought about that

when we celebrate Independence Day. I said, we are not independent anymore.

Mr. HALL. You were here when we tried to get an import fee put

on, and we have not been able to muster the votes, and the reason

given by those that voted against it was the hardship of the people

in the Northeast for their heating oil and things like that, and you

know, they had a good, sensible argument there. The effort was

made at one time by Charlie Cooke back here that worked for me

and worked with the committee back at that time to try to produce

a paper that would be a good position for one of the Presidential

aspirants to use on supporting an oil import fee, and I think Charlie had to write about 300 pages, and that is not good for a oneline quip for a Presidential runner. Finally, we decided that there

ought to be an import fee on all oil-related goods. You can imagine

how long that takes to put together and explain, and finally the

Presidential aspirant was told just to forget it. He didn’t put part

of that in his program. Yes, it was Al Gore. He wasn’t running too

14

fast then. I don’t know how he is going to do now, but he hasn’t

asked us to put that together for him again, and I doubt that he

will.

I thank you. You know, once again I will leave you with this.

This is not a question that you can answer. People outside the Oil

Patch want cheap gasoline. People in the Oil Patch want to make

some money producing the basic ingredient.

Mr. WATKINS. Just trying to make a living this time.

Mr. HALL. I thank you, Wes. Appreciate it.

Mr. BARTON. I recognize the gentleman from Illinois for 5 minutes.

Mr. SHIMKUS. Thank you, Mr. Chairman, and Wes, welcome. As

you know, I am a cosponsor of your bill and I appreciate all the

good work you do.

One question that hasn’t been asked, and we have been talking

about it in Illinois, the problem with the base closings and the people who say there is a savings, we never take in the environmental

cost of cleanup. When we have marginal wells that are going bankrupt, the State has to assume the cost of cleanup, not only in closing down the well, but also the cleanup of the surrounding area,

and that is also a taxpayer issue in Illinois that with these historically low prices, because of the oversupply, that we will have to address as citizens of the State of Illinois. Is that a similar effect on

the taxpayers in your district and the State of Oklahoma?

Mr. WATKINS. I am delighted with the vision and commitment

and dedication of our independent oil producers in Oklahoma. We

established the first checkoff program per barrel, which helps a

great deal with environmental and also educational matters. Even

in Oklahoma we try to educate the people about the value and the

importance, et cetera, of the oil industry. But also, it helps a great

deal in matching some money, but also helping in the environmental cleanups. And it has been very good, because the industry

itself is helping clean up old wells that they have no connection

with.

So I know exactly what you are saying. It is costly to plug a well.

It is very expensive, the environmental requirements to do that

today. As well as if you ever tried to open one of them back up,

it becomes—a marginal well, it is not conducive.

I would just say, I do have—I am cosponsoring with Charlie

Stenholm, or we offered it together and are working on it right

now, is the Environmental Equalization Act, trying to do exactly

what Ralph was talking about. It is a fee. I don’t know how we

want to work it, but we may want to try to say all the money coming in from this goes to offset the heating oil cost or we do something like that, but it helps us get maybe the offset of $3 to $4

where we are paying for the environmental requirements put upon

us in this country, but the other countries do not have to do that.

They just shift oil to us. And there should be some equalization to

that. We should look back also, I might say, at some research in

the 1950’s and 1960’s, where we had a tariff against Venezuela, we

had one against Mexico and also Canada. We don’t talk about tariffs nowadays basically, but I think as late as the 1960’s, in the research, Mr. Chairman, I think we had some tariffs on.

15

Mr. SHIMKUS. My last question is I am really concerned with our

foreign policy with respect to Iraq and Saddam Hussein. The fact

that we bombed them and now we have no inspectors in the area,

so they can continue to develop their weapons of mass destruction,

nuclear, biological and chemical, and I fully believe that they are

doing that.

Mr. WATKINS. It is crazy.

Mr. SHIMKUS. How do we know that the revenue generated from

the Oil-For-Food Program is not going into those developmental

programs?

Mr. WATKINS. I think, I believe and feel, the research I have

done indicates some of it is. Let me say the money has been agreed

to by the U.N. Security Council to go into an Iraqi bank of their

choice. I just think about that just a little bit. Also, if we look at

it and see the breakdown, they can have chemicals and everything

like this they can buy for agriculture, fertilizers. The biggest bombing ever in this country in domestic is Oklahoma City and it is

from fertilizer, and moneys from this program is going to do exactly

that. You have every right to be concerned, and I hope you will just

get as mad as I am about this thing, because it is the wrong policy.

It is a failed policy for our people and for our country.

Mr. SHIMKUS. Thank you. Mr. Chairman, I yield back my time.

Mr. BARTON. The gentleman from Oklahoma, Mr. Largent, is recognized for 5 minutes.

Mr. LARGENT. Wes, I want you to give us a little domestic production 101 course here this morning for our friends that may not

be aware of some of these facts.

Tell us what a stripper well is. That is not a Demi Moore movie,

but what is a stripper well?

Mr. WATKINS. In Oklahoma we call it 10 barrels or less. A marginal well is considered 15 barrels or less.

Mr. LARGENT. And what percent of our domestic oil production

comes from stripper wells, approximately?

Mr. WATKINS. About 25 percent of the overall production. Eightyfive percent of the wells in Oklahoma are stripper wells.

Mr. LARGENT. Okay. And what percent of our domestic production actually comes from our small oil independent producers?

Mr. WATKINS. Small oil independent—oh, from independent

wells? About 20 percent. Wouldn’t that be about right? Sixty percent of our—did I get the question correctly?

Mr. LARGENT. I think it is closer to 60, 60 to 70 percent of the

oil that is produced in this country is done so by our small independents.

Mr. WATKINS. Yes, well over 50 percent.

Mr. LARGENT. Let me ask you a couple of questions here. A lot

of times when we hear oil prices, we hear that Nynex Mercantile

figure, but how does that differ from what the producers are making at the wellhead? In other words, if we hear $16 a barrel or $17

barrel, what are they actually making, the producers, what are

they actually getting at the wellhead.

Mr. WATKINS. Well, the various ones, like Oklahoma or Texas Intermediate and all, most of the time is a couple dollars less than

what we are hearing out of New York. And also the futures have

a play on some of that today now, some of the prices.

16

Mr. LARGENT. And what would you say approximately is the cost

of production for a small independent with stripper wells or marginal wells?

Mr. WATKINS. Of course that would vary, but I would say $13, $14 would be an amount that just, if you call it break even. Some

would not break even at that amount.

Mr. LARGENT. What are they getting——

Mr. WATKINS. We are up to close to 15, give or take? Twelve at

the wellhead.

Mr. LARGENT. So a dollar or 2 less than it costs them to produce

the oil?

Mr. WATKINS. That’s right. So it is kind of like an artery that has

been cut. It is flowing and you can’t stop it unless you plug it.

Mr. LARGENT. Well, this is 101. So what we have established

here is that it costs them more to produce it than they are making.

And what is the result now that you are seeing in your district in

terms of personnel and equipment? What is taking place in the oil

and gas industry, especially the small producers today?

Mr. WATKINS. They are yanking up pipe, they are plugging up

wells, they are stopping the production, and some on the verge I

think of suicide.

Mr. LARGENT. And once you close a stripper well or marginal

well, what happens to it?

Mr. WATKINS. 90 percent of them are not worthy of opening back

up.

Mr. LARGENT. You have lost them.

Mr. BARTON. Will the gentleman yield on that?

Mr. LARGENT. Yes.

Mr. BARTON. It may be different in Oklahoma than in Texas, but

you can suspend production with permission of—in our State it is

the Railroad Commission. I am not sure what it is called, it may

be the corporation——

Mr. WATKINS. Corporation commission.

Mr. BARTON. For what, up to 90 days without having to plug it,

but after a certain amount of time, if you are not going to resume

production, you do have to go ahead and plug the well.

Mr. WATKINS. I would ask Mike or Pete, they would probably

know exactly that on the corporation commission. Do they give you

forgiveness time and not plug it?

Mr. SMITH. Two years, Mr. Chairman. Two-year moratorium

now, unless it is a health or environmental situation.

Mr. WATKINS. By the way, the way your colleague Ralph Hall described the railroad commissioner, I think I want to leave this job,

because that sounds like a very honorable job and a very nice job.

Excuse me, Steve.

Mr. BARTON. Well, you have already tried to quit Congress once

and we didn’t let you.

I yield back to Mr. Largent.

Mr. LARGENT. Wes, just a couple of other questions. There has

been—we are seeing the same thing obviously in the First Congressional District where people are leaving the industry. I think the

number is close to 50,000 since November have left the industry.

I think the number is about a half a million in the last 10 years

have left the industry. Those people don’t come back. The equipVerDate 12-OCT-99 12:17 Oct 25, 1999 Jkt 010199 PO 00001 Frm 00019 Fmt 6633 Sfmt 6602 Z:\HSECOM\55644 txed01 PsN: txed01
17

ment is rusting, the drilling equipment lays dormant. It is irretrievable at that point. You shut up the stripper wells at some

point in time and they are irretrievable.

I guess I would just like to throw out one other question, if I

could have an additional minute.

There has been a lot of remedies suggested, some of them that

you have proposed. Some people are suggesting an oil import fee.

There has been suggestions of regulatory relief. There is a loan program I just learned of yesterday that the Senate is talking about

putting into effect; capping imports and tax relief. You have a tax

relief bill. What do we need to do, Wes?

Mr. WATKINS. My feeling is this. Maybe it is just the way I—I

have always taken a full court press. You understand that term.

I mean take everything we can and move it as quickly as we can

and move forward. Do I expect everything I am trying to do to get

done? No. I hope a few of those things are sending a message to

the Arabs and others, and what we are doing today I hope sends

a message, and what you do after this can send a message one way

or the other. But yes, we need some immediate relief, and I think

the income-averaging that Bill Thomas and I are on, trying to go

back and pick up some good years they have had where they have

paid in some taxes, they could carry that forward. The tax credit

bill that I have is one of the quickest things we can do. All of those

things, if we can do it, would help secure the industry here in

America so we can have a—in agriculture we say we need to have

a domestic food basket. I agree that we have to have. I think we

have to have a domestic energy basket for national security. We

are walking into a trap if we don’t. I think common sense tells us

that.

So Steve, all of the above is what I would say. Let us try everything we can, knowing full well we have to try to come out with

one or two of those things if we possibly can.

The other thing, and this committee could address that. You remember we got a trade adjustment, the displaced workers, I would

encourage you to revisit that and make sure that we can get our

oil field workers in that, so they can get that kind of training. Because Steve, as you indicated, we are displacing those workers too

and they are not going to come back. They are going to go into

some computer work, technology, other things out there, and we

are losing that infrastructure, and you cannot gear it back up overnight. Even if we had to, we couldn’t get it to.

Mr. LARGENT. Thank you, Mr. Chairman. I yield back.

Mr. BARTON. Thank you, Congressman.

I recognize the gentleman from North Carolina, Mr. Burr, for 5

minutes.

Mr. BURR. Wes, I wasn’t going to ask a question and I may not

ask one, but I may make a statement. You are right, we probably

ought to include them in that displaced worker list. What alarms

me is how long that list could be if we actually looked at displaced

workers that we have had policy that has displaced them, whether

it is inadequacies in trade negotiations or decisions as it related to

foreign policy, and I guess what you are here saying is our foreign

policy decisions do affect the livelihood of the American people.

Mr. WATKINS. Exactly right.

18

Mr. BURR. It doesn’t seem to play a part necessarily in the formation of that policy or those negotiations, and I think maybe we

ought to raise that question a little louder. I thank you for your

willingness.

Mr. WATKINS. If I can respond to that, I have a sinking feeling,

because I think a lot of our State Department people and some of

our international people literally are more concerned about getting

and having a favorable feeling from where they may be stationed,

Ambassadors and others, than our concern about the people on the

farms and in the oil patches of this country or other industries. I

have detected that. Maybe I am a little harder nosed than what I

should be, but I mostly think I have a warm heart.

Mr. BURR. I hope the workers in the oil fields don’t find the same

end results as the textile workers in the mills across the South.

I thank the chairman, and I yield back.

Mr. WATKINS. By the way, I married a Presbyterian minister’s

daughter.

Mr. BARTON. We are not going to ask you a second round of questions, but I think Congressman Hall has one final question and

then we will excuse you.

Mr. HALL. Wes, just for the record, are you in favor of continuing

the Iraqi Oil-For-Food Program?

Mr. WATKINS. Limited to the necessities of food and medicine.

Mr. HALL. And being able to check on them.

Mr. WATKINS. And being able to check on them. You bet. You bet.

Mr. HALL. Somebody said trust, but verify?

Mr. WATKINS. If we go what was above the 700,000 barrel area,

then we are just handing them over everything they need and

more.

Mr. HALL. I thank you.

Mr. BARTON. Well, Congressman Watkins, we really appreciate,

on behalf of this subcommittee, the leadership that you have shown

in this area. Almost single-handedly you have raised the visibility

of this, and as I said in my opening statement, this is not the only

hearing we are going to do on the domestic oil and gas industry.

It is unfortunate that this is on a Friday and that we don’t have

any television coverage for it, at least we don’t have now, but I can

assure you, and you can assure the people of the Third Congressional District of Oklahoma that if there is something that can be

done to change this program and this subcommittee can do it, we

will do it, and we will continue to work with you. I just hope that

the people of your district appreciate the efforts that you are making on their behalf.

Mr. WATKINS. I thank you, Mr. Chairman, members of the committee, my neighbors in Oklahoma and Texas. I appreciate it.

Mr. HALL. See you out at National.

Mr. BARTON. Save a seat on the plane for Congressman Hall.

We want to recognize our second panel now. We have Mr. Bill

Wood, who is the Principal Deputy Assistant Secretary of the Office

of International Organizations, the United States Department of

State; we have the Honorable Jay Hakes, who is the Administrator

of the Energy Information Agency within the United States Department of Energy; we have the Honorable Carl Michael Smith, the

Secretary of Energy from the great State of Oklahoma; and we

19

have, not to be outdone, the Honorable Michael Williams, who is

the Commissioner of the Texas Railroad Commission.

Gentlemen, we want to welcome you. Your statements are in the

record in their entirety. I am going to recognize you to speak in a

second, but before I do that, I want to direct some comments to our

representative from the State Department.

We don’t call State Department witnesses too frequently to this

subcommittee. We have fairly frequent testifiers from our friends

at the Department of Energy. It is not normal that we would ask

a representative of the State Department. But we have a rule that

we like testimony 2 days in advance so our members can actually

study it. I won’t swear to you that every member uses that time

to study, but some do. We got the State Department’s testimony I

believe this morning, and you were the first people we asked.

Now, if you were me, what kind of—what would your attitude be

if you were me and you are the, in some ways, the most important

government, Federal Government witness we are going to hear

from because you all are in charge of this program and we get your

testimony some time this morning.

Mr. WOOD. Mr. Barton, I can only apologize for the lateness of

the arrival of the testimony. We don’t testify before the subcommittee very often. We are very, very pleased at this opportunity

to do so and we thank you very much for inviting us here. If the

opportunity arises again in the future, we assure you we will do

better.

Mr. BARTON. Well, we had the ability to look at some testimony.

I don’t know if you are the individual that gave it, but a representative gave similar testimony on a similar issue over in the Senate

several weeks ago. I guess it is possible that whoever prepares it

is on vacation. I guess it is possible you all don’t think very much

of the House of Representatives. I guess it is possible that you all

don’t think it is a very important issue. But I am going to send a

letter to the Secretary of State and I may send a letter to the Appropriations Subcommittee chairman asking that we dock your

part of the State Department $100,000, maybe take it out of the

Iraqi Oil-For-Food Program, just to send a signal.

We have problems with our friends at DOE, not EIA. EIA has

been pretty good, but there are others in the Department of Energy

that are almost as bad, but I don’t think we have ever had an administration witness, and I was chairman of the Oversight and Investigation Subcommittee for 4 years, that had the effrontery to

send in the testimony the day they were testifying. I just don’t appreciate it. I really don’t.

Mr. BURR. Mr. Chairman, I ask that the witness be excused and

not have the ability to testify.

Mr. BARTON. Well, unfortunately, we have to have their testimony. They have us between a rock and a hard place.

Mr. BURR. We have his testimony, Mr. Chairman, but we don’t

need to hear from him verbally.

Mr. BARTON. I think if I send a letter to the Secretary of State and we dock them $100,000, I think that will get their attention.

I mean we are going to be doing a series of hearings on the oil

and gas industry and some of it is domestic, but a lot is international, so we are going to be calling other State Department witnesses, and I really want you to go back, I don’t know if this was

20

in your chain of control or not, Mr. Wood, but I want you to let

folks know, we don’t expect the State Department to turn cartwheels when they are asked to testify, but we do expect reasonable

courtesy and we would like to get it in what the notice requires,

which is 2 days ahead of time. But we at least want to get it a day

ahead of time so that we can copy it and send it around to the

staffs and let everybody review it.

Mr. BURR. Mr. Chairman, could I at least ask the witness to tell

the committee why we received the testimony so late, why he

couldn’t fulfill the rules of the committee.

Mr. BARTON. Well, sure. I mean I tried to ask him that. Why did

it take the day of the hearing to get it?

Mr. WOOD. Mr. Chairman, I don’t want to try to offer an excuse.

All I can say is we were wrong not to get it to you on time. It won’t

happen again. We apologize. We do consider it both a lack of courtesy and a lack of professionalism. We are very grateful for your

suggestion that in the future it has to be, at a minimum, 1 day in

advance. We will get it here 2 days in advance.

Mr. BARTON. Again, I am new on this subcommittee, but I have

been chairman of the oversight, and Mr. Burr has been one of my

distinguished members on the oversight, and we have had this

problem with the FDA and we have had it with the EPA. We finally got their attention. We didn’t let them testify one time. You

know, we just said go home and sit in the corner for the day. We

don’t want to start out that way. But we do want to let you know

that we need to get the testimony on time.

Mr. WOOD. You got our attention, sir.

Mr. BARTON. All right.

We are going to start with Mr. Hakes. Your testimony is in the

record in its entirety. We are just going to go right down the line,

Mr. Hakes, Mr. Smith, Mr. Wood and Mr. Williams and then we

will let our committee members ask questions.

Mr. HALL. Can I ask Mr. Hakes a question before we start?

Mr. BARTON. Yes, sir.

Mr. HALL. Aren’t you glad you submitted yours this morning?

Mr. HAKES. I am going to try to get it in 3 days early next time.

Mr. BARTON. Well, my good friend from Texas, it does help the

minority staff, too, to help prepare the questions and to read it. I

actually read it. I may be the only member, but I read the testimony ahead of time as the chairman so I can know a little bit

about where you all are coming from. So I was very upset.

Mr. HALL. I withdraw my question.

Mr. BARTON. Okay. We will give each of you 7 minutes, and if

you need a little more time, so be it. So, Mr. Hakes, you are recognized for 7 minutes.

21

STATEMENTS OF HON. JAY HAKES, ADMINISTRATOR, ENERGY

INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY; HON. CARL MICHAEL SMITH, SECRETARY OF ENERGY,

STATE OF OKLAHOMA; HON. WILLIAM B. WOOD, PRINCIPAL

DEPUTY ASSISTANT SECRETARY, OFFICE OF INTERNATIONAL ORGANIZATIONS, DEPARTMENT OF STATE; AND

HON. MICHAEL L. WILLIAMS, COMMISSIONER, TEXAS RAILROAD COMMISSION

Mr. HAKES. Thank you, Mr. Chairman and members of the committee. As you know, the Energy Information Administration is an

independent analytical and statistical agency within the Department of Energy. I would like to talk a little bit today about the role

that Iraq plays in world oil markets.

We have identified four factors that influenced world oil markets

since the end of 1996 and the interaction between these factors

make it difficult to assess the impact of each individually, but I

would like to discuss them and sort of put them in some context.

One factor that has clearly influenced the world oil market has

been the increase in Iraqi oil production and the consequent exports that have occurred since the beginning of the United Nations

Oil-For-Food Program. Iraq’s oil production is currently 2.5 million

barrels per day, which is about 2 million barrels per day higher

than it was prior to the Oil-For-Food Program, although it is still

lower than it was prior to their invasion of Kuwait in 1990. You

can basically follow the movement of price there with that blue

line, and you can see where the program started, it sort of zigzagged up to the 2.5 million level.

Even with the current oil exports of about 2 million barrels per day, Iraq is still below the ceiling of $5.3 billion per 6 months imposed under the current phase of the Oil-For-Food Program. In

order for Iraq to approach the ceiling during the next year or 2, the

price of West Texas Intermediate crude would have to average

about $18 to $19 per barrel day.

Mr. BARTON. $18 per barrel?

Mr. HAKES. Yes, excuse me. $18 to $19 per barrel, which are

prices that we are not currently forecasting, incidentally.

Another factor that is important in terms of its impact on the

world oil market is the dramatic slowdown in oil demand growth

in Asia as a result of the economic crisis. I think after the Persian

Gulf War most oil producers around the world realized that eventually at some point Iraq would come back, and that this would pose

a problem for the market. And a number of them, including Saudi

Arabia and others, made the comment that they thought that the

increased demand in Asia would probably help soak up the Iraq increased production when that happened. But you can see that almost at the same time that Iraq is coming back onto the world

market, there is an economic collapse in Asia, and the demand sort

of stops.

Demand in Asia was growing roughly 850 thousand barrels a day

each year, and that is adding a lot of demand into the world market. Then you can see for 1998, demand growth was virtually negligible. So at the very time when there was a hope that Asian demand would soak up the Iraqi extra production, that demand was

not there.

22

EIA is estimating that Asian oil demand will grow by only 1.5

million barrels per day during the entire period from 1997 to 2000,

instead of the 3.4 million barrels per day that would have been expected before this economic crisis occurred.

Added on top of this have been three warm winters in a row,

which has reduced the demand for heating oil, and this has further

thrown the world market out of balance and created excess supply.

Another factor that contributed to it is as Iraq was coming back

on the market in 1997, other areas of the world instead of cutting

back on their production actually were increasing production.

There was quite a bullish market internationally in oil, and OPEC,

which some thought might cut back because they had increased

after the Persian Gulf War to cover the absence of Iraq, they actually had an increase in 1997, and it was not until 1998 that they

began to cut.

Let me just speak briefly, Mr. Chairman, about the outlook for

Iraqi oil production in the world oil market. We feel that Iraq is

currently producing at pretty much its full capacity since its oil

revenues are significantly less than allowed and they would be producing more today if they could. Our current forecast assumes that

Iraqi crude oil production capacity increases only by 100,000 to

200,000 barrels per day between now and the year 2000. Currently,

the United Nations is allowing Iraq to import about $300 million

worth of parts that are used to improve their oil infrastructure.

How fast Iraq receives these parts and how well these parts are

used will determine how quickly Iraqi oil production might increase. Some analysts believe that the capacity would be somewhat

higher in the year 2000 than the EIA is estimating, but most of

them expect the increases to be fairly modest.

Now, the newest issue on the block of course is the recent announcement by OPEC that they are setting targets for reducing

production. OPEC itself has pledged 1.7 million barrels per day of

cuts and some nations outside of OPEC have joined into the agreement and pledged another 0.4 million barrels per day cuts. The cartel in the past has had a difficult time fully enforcing these cuts.

However, Saudi Arabia has already put them into effect for April

orders, so at least a part of this seems to be quite real. We have

been predicting up until the OPEC action that the price of oil

would probably, for West Texas Intermediate, get to slightly below

$15 a barrel at the end of this year. I am sure we will raise that

estimate when we come out with our next update, which is scheduled for April 8. At that time we will do a fairly detailed analysis

of the estimated impact of the OPEC actions. But that is where it

stands for now, and I of course will be glad to answer any questions the members of the committee may have.

[The prepared statement of Hon. Jay Hakes follows:]

PREPARED STATEMENT OF HON. JAY HAKES, ADMINISTRATOR, ENERGY INFORMATION

ADMINISTRATION, DEPARTMENT OF ENERGY

Short-Term World Oil Market Outlook

Mr. Chairman and members of the Committee, I wish to thank you for the opportunity to testify today on our short-term world oil outlook, paying particular attention to Iraq’s role in the international oil market. As Administrator for the Energy

Information Administration (EIA), which is an independent analytical and statistical agency within the Department of Energy, I have been asked to provide an overVerDate 12-OCT-99 12:17 Oct 25, 1999 Jkt 010199 PO 00001 Frm 00025 Fmt 6633 Sfmt 6621 Z:\HSECOM\55644 txed01 PsN: txed01
23

view of the world oil market—how we got here and where we think we are headed.

As part of this discussion, I will highlight Iraq’s oil production history thus far in

the 1990s and provide our assessment of the short-term outlook for Iraqi crude oil

production.

EIA has identified four factors that have influenced the world oil market since

the end of 1996. The interaction between these factors makes it difficult to assess

the impact of each individually. Nevertheless, I will discuss each factor separately

and try to put the oil market impact of each in context.

One factor influencing the world oil market has been the increase in Iraqi oil production (and exports) that have occurred since the beginning of the United Nations’

‘‘oil-for-food’’ program. Iraq’s oil production is currently 2.5 million barrels per day,

which is about 2 million barrels per day higher than it was prior to the ‘‘oil-for-food’’

program, although it is still lower than it was just prior to their invasion of Kuwait

in 1990 (figure 1). But even with current oil exports of about 2 million barrels per

day, Iraq is still well below the ceiling of $5.256 billion imposed under the current

phase of the ‘‘oil-for-food’’ program. In order for Iraq to approach the ceiling during

the next year or two, the price of West Texas Intermediate crude oil would have

to average about $19 per barrel during a 180-day phase of the United Nations’ ‘‘oilfor-food’’ program. I would like to point out, however, that EIA is not forecasting

prices at this level in the short-term.

Another factor that is equally important in terms of its impact on the world oil

market is the dramatic slowdown in oil demand growth in Asia as a result of the

economic crisis, which began in the summer of 1997. Between 1991 and 1996, Asian

oil demand was increasing on average by about 850,000 barrels per day each year

(figure 2). If Asian oil demand had continued to grow at this pace, EIA would have

expected oil demand to be about 2 million barrels per day more in 2000 than in our

current forecast, which would have helped soak up the increased production from

Iraq. Instead, EIA is estimating that Asian oil demand will grow by only 1.5 million

barrels per day during the 1997-2000 period, instead of the 3.4 million barrels per

day that would have been expected before the Asia crisis occurred.

Weather has also been a major factor influencing the world oil market in recent

years. Oil demand typically peaks in the winter, along with the demand for heating

oil. Weather patterns in the northeast United States and Western Europe are particularly important to the world oil market since these are the regions where oil is

used significantly as a fuel for heating. The winters of 1996-97 and 1997-98 were

particularly warm compared to ‘‘normal’’ temperatures, and now it is apparent that

this winter will be the third significantly warmer than normal winter in a row. As

a result, global oil inventories are much higher than they would have been had temperatures been more ‘‘normal’’ during the past three heating seasons.

The last major factor that EIA has identified as a major influence in the world

oil market was oil production increases from many countries outside of Iraq, particularly in 1997. Global oil supply increased by about 2.3 million barrels per day

in 1997, much more than the 1.7 million barrels per day of global oil demand growth

that year. This followed a period of 32 months in which the price of West Texas

Intermediate crude oil averaged above $17 per barrel each month. While oil production from Iraq increased more than any other single country in 1997 (about 600,000

barrels per day) as a result of the ‘‘oil-for-food’’ program which began in December

1996, other OPEC and non-OPEC countries also increased oil production significantly in 1997 (world production increased by 2.3 million barrels per day, making

Iraq’s increase about 25 percent of the total). Within OPEC, Saudi Arabia oil production increased by 370,000 barrels per day, Venezuela increased by 227,000 barrels per day, Qatar increased by 139,000 barrels per day, and Nigeria increased by

129,000 barrels per day. Outside of OPEC, most of the growth was in the Americas

(North, Central, and South America, but excluding Venezuela, an OPEC member),

which increased by over 500,000 barrels per day. Since demand growth did not keep

pace with the supply growth in 1997, much of this oil found its way into inventories.

Turning to the future, let’s look at where EIA thinks the oil market is headed

in the short-term (through 2000). In 1998, OPEC and some non-OPEC countries

agreed to cut oil production in order to help increase oil prices. In part because of

these agreements and the beginning of an expected gradual recovery in Asia, EIA’s

most recent forecast had prices increasing by about $3.50 per barrel by December

1999 from the historical low point in December 1998, and by an additional $1-$1.50

by the end of 2000. Now that OPEC and some non-OPEC countries have agreed to

cut production by about 2 million barrels a day (figure 3), we would expect prices

to increase even more. EIA’s next Short-Term Energy Outlook, which is updated

monthly, is scheduled for release on April 8, 1999. At that time, EIA will incorporate a detailed analysis of the new OPEC cuts into our price forecast. I can say

now, however, that our forecast for oil prices will be higher. This forecast will be

24

based on the assumption that demand growth will outstrip supply growth in both

1999 and 2000, even if producers only partially implement the planned cuts.

Let me spend a little time discussing our outlook for Iraqi oil production. As I

stated before, Iraq’s crude oil production has increased by about 2 million barrels

per day since late 1996. However, we feel that they are currently producing at full

capacity since their oil revenues are significantly less than allowed and would

produce more if they could, and that their oil production capacity is not expected

to increase substantially through 2000. Our current forecast assumes that Iraqi

crude oil production capacity increases by only 100,000-200,000 barrels per day between now and 2000 (figure 1). Currently, the United Nations is allowing Iraq to

import $300 million worth of parts that are to be used to improve their oil infrastructure. How fast Iraq receives these parts and how well these parts are used will

help determine how quickly Iraqi oil production capacity might increase. There are

some analysts that expect Iraqi oil production capacity to be somewhat higher by

the end of 2000 than EIA is estimating. However, most analysts expect Iraq’s oil

production increases this year and next to be far less than what they were in 1997

and 1998.

This concludes my testimony before the Committee. I would be glad to answer

questions at the appropriate time.

25

26

Mr. BARTON. Just before we recognize Mr. Smith, Iraq is part of

OPEC, is it not?

Mr. HAKES. Yes.

Mr. BARTON. Mr. Smith, we will recognize you for 7 minutes. Mr.

Largent, do you want to formally introduce Mr. Smith.

Mr. LARGENT. Yes, I did in my opening statement. This is our

Secretary of Energy from the great State of Oklahoma. We are glad

to have him here.

Mr. BARTON. You are recognized for 7 minutes.

STATEMENT OF CARL MICHAEL SMITH

Mr. SMITH. Thank you, Mr. Chairman, and members of the subcommittee. As Congressman Largent mentioned, I serve as Secretary of Energy for the State of Oklahoma, and this year I am vice

chairman of the Interstate Oil and Gas Compact Commission. I

have been a member of Oklahoma’s oil and gas community my entire adult life, either as a producer, as an attorney for operators,

and currently in my public service. I have experienced firsthand

the Arab embargo of 1973, the oilfield pipe and equipment shortage

of the mid-1970’s, the ill-conceived Natural Gas Policy Act of 1978,

the misguided Fuel Use Act of 1978, the plunderous windfall profits tax of 1980, the Middle East turmoil of the late 1970’s and early

1980’s, the collapse of our domestic oil and gas industry in the mid1980’s, precipitating, as Congressman Largent mentioned earlier, a

loss of about a half a million jobs, the advent of computer technology into the industry, the Gulf War, and now, Operation Desert

Fox. In short, I have seen a lot of success, a lot of failure, and an

abundance of public policy, most of which has, unfortunately, been

poorly conceived and missed the mark.

Since entering public life in 1990, I have been assisting in the

conception and implementation of energy policy. Most of this work

has involved assisting the IOGCC Governors in drafting and implementing A Dependent Nation: How Federal Oil and Gas Policy is

Eroding America’s Economic Independents. Recently, I have assisted my Governor, Frank Keating, as he has led the other oil and

gas producing State Governors in addressing an unprecedented oil

price trough which is approaching its 18th month.

Today’s hearing focuses on the Iraqi Oil-For-Food Program and

its impacts. Mr. Chairman, the American people, and the people of

my State, are very confused. Occasionally a constituent asks for my

explanation of our Iraqi policy, and a rational answer is impossible.

I overhear comments in elevators and discussions in coffee shops

throughout my home state. No one can understand why, according

to press reports, 3 days of Operation Desert Fox cost the American

taxpayers almost $1 billion, yet the rogue of the world, Saddam

Hussein, is seemingly stronger than ever. Our proposed response is

not to isolate him or cutoff his funding for weapons of mass destruction, rather to allow his continuing military threat to be enhanced through unlimited oil production, or so it seems. No one can

argue that the Iraqi people have suffered a mighty hardship under

his reign of terror, or that they deserve humanitarian aid. What is

hard to explain to my constituents, who are losing their jobs due

to less than break-even oil prices, is why our government would

put our military at risk, spend balances of tax dollars, and then

27

allow Saddam to flood the world oil market. Even more puzzling

was America’s acquiescence in the United Nations formula allowing

Iraqi oil sales to be limited by a dollar amount rather than by volumes of oil. The Oklahoma Geological Survey, which is in my cabinet policy area, has reported that the almost singular contributor

to the 1997 and 1998 world oil glut has been Iraq. As the attached

data attached to my testimony which, by the way, Mr. Hakes, was

from your agency, demonstrates that most of the world oil production, both OPEC and non-OPEC, has been relatively stable. The exception to that has been Iraq. Even more shocking is Iraq’s rise to

No. 4 source of U.S. imports last year, and in 1 month, Mr. Chairman, they were actually No. 3, almost nosing out Kuwait. They

have sort of been neck and neck for the three and four spot.

Certain facts are not in dispute. America is importing nearly 60

percent of its daily crude oil needs. Current wellhead prices are far

below the break-even point for most domestic producers. The world

is awash in over-produced oil. Allowing Iraq to produce unlimited

oil impairs America’s economic and military security, and the lifting of limitations helps finance Saddam’s almost certain future

mischief.

Long before the current crisis, President Clinton approved 1994

findings by the U.S. Department of Commerce that oil imports,

which were then at a much lower level, threatened U.S. security.

Can you imagine our response if this morning we awakened to 60

percent of our air, water or food controlled by foreign sources? Oil

is the lifeblood of our Nation and we cannot permit Iraq to further

the disintegration of our domestic oil industry.

Mr. Chairman and subcommittee members, I cannot count the

number of times I have wanted to shout from the rooftops, America, wake up. We need America’s oil to protect our shores and our

way of life. I am proud to say, my constituents have always been

first in line on both counts, and on their behalf I thank you for this

opportunity to testify.

[The prepared statement of Carl Michael Smith follows:]

PREPARED STATEMENT OF CARL MICHAEL SMITH, SECRETARY OF ENERGY, STATE OF

OKLAHOMA

Mr. Chairman and members of the subcommittee, I serve as Secretary of Energy

for the State of Oklahoma and as Vice-Chairman of the Interstate Oil and Gas Compact Commission (IOGCC).

I have been a member of Oklahoma’s oil and gas community my entire adult life.

I experienced first hand the Arab embargo of 1973, the oilfield pipe and equipment

shortage of the mid-1970s, the ill-conceived Natural Gas Policy Act of 1978, the misguided Fuel Use Act of 1978, the plunderous windfall profits tax of 1980, the Middle

East turmoil of the late 70s and early 80s, the collapse of our domestic oil and gas

industry in the middle 1980s (precipitating a loss of approximately 500,000 jobs),

the advent of computer technology into the industry, the Gulf War, and now, Operation Desert Fox. In short, I’ve seen a lot of success, failure, and lots of public policy,

unfortunately, most of which has been ill conceived. Since entering public life in

1995, I have been assisting in the conception and implementation of energy policy.

Most of this work has involved assisting the IOGCC governors in drafting and implementing A Dependant Nation: How Federal Oil and Gas Policy is Eroding America’s Independence. Recently, I have assisted my Governor, Frank Keating, as he has

led the other oil and gas producing state governors in addressing an unprecedented

oil price trough which is approaching its 18th month.

Today’s hearing focuses on the Iraqi Oil for Food Program and its impacts. Mr.

Chairman, the American people are confused. Occasionally, a constituent asks for

my explanation, and a rational answer is impossible. I overhear comments in elevators and discussions in coffee shops throughout my home state. No one can underVerDate 12-OCT-99 12:17 Oct 25, 1999 Jkt 010199 PO 00001 Frm 00030 Fmt 6633 Sfmt 6621 Z:\HSECOM\55644 txed01 PsN: txed01
28

stand why, according to NBC News on December 23, 1998, three days of Operation

Desert Fox cost the American taxpayer almost $1 billion, yet the rogue of the world,

Saddam Hussein, is seemingly stronger than ever. Our response is not to isolate

him or cut off his funding for weapons of mass destruction, rather allow his continuing military threat to be enhanced through unlimited oil production. No one can

argue that the Iraqi people have suffered a mighty hardship under his reign of terror or that they deserve humanitarian aid. What is hard to explain to my constituents, who are losing their jobs due to an oil market producing a dollar price per

barrel less than break-even cost, why our government would put our military at

risk, spend billions in tax dollars, and then willingly allow Saddam to flood the

world oil market. Even more puzzling was America’s acquiescence in the United Nations formula allowing Iraqi oil sales, under current sanctions, to be limited by a

dollar amount rather than volumes of oil. The Oklahoma Geological Survey, which

is in my cabinet policy area, has reported that the almost singular contributor to

the 1997 and 1998 world oil glut has been Iraq. As the attached data demonstrates,

most world oil producers (both OPEC and non-OPEC) have been relatively stable—

the exception being Iraq. Even more shocking is, during 1998, Iraq rose to the number 4 source of U.S. imports, almost nosing out Kuwait for the number 3 spot.

Certain facts are not in dispute:

• America is importing nearly 60% of its daily crude oil needs

• Current wellhead prices are far below the break-even point for most domestic producers

• The world is awash in overproduced oil

• Allowing Iraq to produce unlimited oil impairs America’s economic and military

security, and a lifting of monetary limitations helps finance Saddam’s almost

certain future mischief

Long before the current crisis, President Clinton approved 1994 findings by the U.S.

Department of Commerce that oil imports (then at a much lower level) threatened

U.S. security.

Mr. Chairman and subcommittee members, I cannot count the number of times

I have wanted to shout from the rooftops, ‘‘America, wake up—we need America’s

oil to protect our shores and our way of life.’’ I am proud to say, my constituents

have always been first in line on both counts, and on their behalf, I thank you for

this opportunity to testify.

29

30

31

32

33

34

Mr. BARTON. Thank you, Mr. Smith. We would now like to hear

from Mr. Wood. We do have your testimony, so you are recognized

for 7 minutes to elaborate on it.

Mr. WOOD. Thank you very much, Mr. Chairman. Let me again

repeat how pleased I am to be here to discuss——

Mr. BARTON. You need to speak into the microphone so that we

can hear you.

STATEMENT OF WILLIAM B. WOOD

Mr. WOOD. Okay. I am pleased to be here today and I want to

reiterate that fact. Thank you for inviting me.

The U.S. policy is to contain Saddam Hussein until he can be removed from power.

In the meantime, U.S. sanctions on Iraq and the Oil-For-Food

Program are critical to the containment of Iraq. We must maintain

broad international support for these programs in order to keep

Saddam Hussein contained. Sanctions on Iraq were put in place by

the international community following the brutal invasion by Iraq

of its peaceful neighbor, Kuwait. The sanctions deprived Saddam of

the revenue he would otherwise use to reconstitute his weapons of

mass destruction.

It is essential that we address the humanitarian needs of the

Iraqi people. Doing so is right in itself, but also crucial to maintaining Security Council, regional and other support for the international sanctions regime while we continue our efforts to change

the Iraqi regime. It is also consistent with our message to the Iraqi

people that the United States is not against the people of Iraq, only

the regime that is responsible for their plight. By meeting Iraq’s

general humanitarian needs, Oil-For-Food allows us to maintain a

tough sanctions regime against Iraq.

In 1991, the Bush Administration first proposed an Oil-For-Food

Program to meet the humanitarian needs of the Iraqi people. Iraq

rejected the program. In 1995, the Security Council, with full U.S.

leadership and support, adopted a revised Oil-For-Food Program,

which Iraq finally accepted at the end of 1996. The first food shipments under this program arrived in Iraq in March 1997. In February 1998, based on the Secretary General’s recommendations

that additional funds were needed to meet the needs of the Iraqi

people, the legitimate humanitarian needs of the Iraqi people, the

Security Council expanded the Oil-For-Food Program. That program has most recently renewed last November.

I might add that that is the reason why the Oil-For-Food Program is accounted for in dollars, because it is based on estimates

of what it would cost to take care of the humanitarian needs of

Iraq. It is not an effort to promote Iraqi exports, it is an effort to

raise money for the specific humanitarian needs of Iraq.

The current Oil-For-Food Program permits Iraq to sell up to $5.2

billion worth of oil every 6 months, two-thirds of which goes toward

the purchase of food, medicine and other humanitarian goods such

as water and sanitation infrastructure supplies. The remaining

one-third goes to pay claims arising from Iraq’s occupation of Kuwait, and to pay U.N. administrative and UNSCOM disarmament

costs. All revenues of Iraq’s oil sales are deposited in a U.N. escrow

account to which Baghdad has no access. Although it is true that

35

Iraq’s agreement as to which bank was selected was necessary,

Iraq did not get to choose the bank and, indeed, its first choices

were refused under the memorandum of understanding between

Iraq and the United Nations. We are assured that the bank in

which the escrow account exists is functioning in a transparent and

effective manner and funds cannot be released from that account

without U.N. agreement.

All contracts are reviewed by the U.N. sanctions committee, of

which the U.S. is a member. Because the committee operates by

consensus, we can hold or block any contract that is inappropriate

or ill-advised. U.N. monitors on Iraq’s borders and inside Iraq oversee importation and distribution within Iraq, and in northern Iraq,

the three northern governments, distribution is actually carried out

by the U.N. itself.

Oil-For-Food, the largest humanitarian program in the U.N.’s

history, requires that Saddam spend his own money on the thing

he cares least about: his own people.

Oil-For-Food is not a step toward lifting sanctions, nor does it reward Saddam Hussein. In fact, it makes sanctions, his worst

enemy, sustainable. Without an Oil-For-Food Program, history has

shown that Saddam Hussein would starve his own people to buy

weapons and build palaces and to force the international community to lift sanctions. Although we could use our veto at the U.N.

to prevent the lifting of sanctions, the pressure of a sympathetic

international community, absent Oil-For-Food, could well lead to a

de facto breakdown of the implementation of the sanctions regime.

So it is not simply a distribution problem, it is also an implementation problem.

Sanctions have slowed considerably Iraq’s ability to expand oil

exports. We estimate that sanctions have prevented Iraq from exporting more than $120 billion of oil from 1991 to 1996. In the last

two phases of the Oil-For-Food Program, the Security Council earmarked limited funds for the importation of spare parts and equipment to improve Iraq’s crumbling oil infrastructure so that funds

can be made available for legitimate, necessary humanitarian

needs. Those spare parts have just begun to arrive in Iraq, and it

will be many more months before there will be an appreciable

growth in the Iraqi ability to export oil as a result of them.

We are also discussing in Security Council capitals and in the Security Council itself how to keep Oil-For-Food viable and effective.

We have proposed that the Security Council consider raising the

ceiling on oil sales consistent with Iraq’s legitimate humanitarian

needs. In the short run, Iraq would be unable to expand oil exports.

Over time, allowing increased Iraqi oil exports would address concerns regarding the shortfall in revenues needed for humanitarian

purchases. Saddam would not benefit from these increased oil export revenues. The revenues would be put into the escrow account

and released only for the purchase of humanitarian goods.

Raising the ceiling on revenue available for the purchase of humanitarian goods would also serve to counter growing calls from

Arab states and Security Council members to lift sanctions outright. By removing the root cause of calls for lifting sanctions, we

free our allies in the Arab world and elsewhere to support our

broader Iraqi policy goals. We also draw Security Council support

36

away from more radical French and Russian proposals to lift sanctions altogether.

We also understand your concerns about the current oil market.

However, Iraq is only one among several factors which has adversely impacted oil prices. Our sanction—our Iraq sanctions policy, frankly, has never been linked to the price of oil on world markets. This was true in the early 1990’s, when Iraqi oil was completely cutoff the world market, putting upward pressure on oil

prices, and it remains the case today. Allowing oil price considerations to drive our sanctions decisions or seeking to use sanctions

to target oil prices would undermine our ability to maintain an

international consensus aimed at containing Saddam Hussein, as

well as provide for the humanitarian needs of the Iraqi people.

Were international support for an effective U.N. sanctions regime

to erode, Saddam Hussein would be a much greater threat to the

world community. He would quickly regain the free use of $10 billion to $15 billion per year to put into his weapons of mass destruction programs. But we have promoted raising the ceiling under

monitoring. Moreover, the prospect of Iraq without U.N. sanctions

would also have a negative effect on oil prices.

Over the long term, the only way to ensure that Saddam no

longer threatens either his people or his neighbors is to work for

a new government of Iraq, one that will maintain the territorial integrity and unity of Iraq, respect the rights of Iraq’s people and

neighbors and fulfill Iraq’s international obligations. We are committed to helping the Iraqis achieve this regime change or transition.

Mr. Chairman, I realize I am over my time, but let me only make

one sort of summary comment. The Oil-For-Food Program has been

characterized repeatedly as a humanitarian program. It is certainly

a humanitarian program. We are a humane Nation. We are not

making war on the population of Iraq. That is Saddam’s strategy.

But it is not the policy of the administration to benefit the populations of other countries at cost to our own population. That is not

our goal, and that is not what we believe we are achieving here.

Mr. BARTON. That may not be the goal, but that is certainly the

result. And I am not going to get in a debate right now. We still

need to hear from Mr. Williams, but I guarantee you when we get

to the question and answer period, we are going to have a dialog.

Mr. WOOD. We do believe, however, that this is a national security requirement. That is my last comment.

[The prepared statement of William B. Wood follows:]

PREPARED STATEMENT OF HON. WILLIAM B. WOOD, DEPUTY ASSISTANT SECRETARY

OF STATE

Mr. Chairman: I am pleased to be here today to discuss US policy toward Iraq

and the role the Oil-for-Food program plays within it.

The Administration’s policy is to contain Saddam Hussein until he can be removed from power. We will contain Iraq by maintaining sanctions on Iraq, enforcing

the no-fly zones in the North and South, and by maintaining a robust military presence in the region and a readiness to use force if Iraq reconstitutes its prohibited

weapons programs, threatens its neighbors, or moves against the Kurds in the

north.

In addition to these elements of containment, we are also working at the United

Nations to build consensus in the Security Council in support of an effective disarmament and monitoring presence in Iraq.

37

Over the long-term, however, the only way to ensure that Saddam no longer

threatens either his people or his neighbors is to work for a new government in

Iraq—one that will maintain the territorial integrity and unity of Iraq, respect the

rights of Iraq’s people and Iraq’s neighbors, and fulfill Iraq’s international obligations. We are committed to helping Iraqis achieve this regime change or transition.

There are many tools we can use to help them, including both the $8 million in Economic Support Funds Congress has appropriated for this purpose, and the Iraq Liberation Act. In the final analysis, change has to come from the Iraqi people themselves. We cannot impose ideas or initiatives on them.

In the meantime, UN sanctions on Iraq and the Oil-for-Food program are critical

to the containment of the Iraqi regime. We must maintain broad international support for these programs in order to keep Saddam contained.

Sanctions on Iraq were put in place by the international community following the

brutal invasion by Iraq of its peaceful neighbor Kuwait. The sanctions deprive Saddam of the revenue he would otherwise use to reconstitute weapons of mass destruction.

It is also essential that we address the humanitarian needs of the Iraqi people.

Doing so is right in itself, and crucial to maintaining Security Council and regional

support for sanctions while we continue our efforts for regime change. It is also consistent with our message to the Iraqi people that the United States is not against

the people of Iraq—only the regime that is responsible for their plight. By meeting

Iraq’s genuine humanitarian needs, oil-for-food allows us to maintain a tough sanctions regime against Iraq. The current oil-for-food program permits Iraq to sell up to $5.2 billion worth of

oil every six months, two-thirds of which goes towards the purchase of food, medicine and other humanitarian goods such as water and sanitation infrastructure supplies. The remaining one-third goes to pay claims arising from Iraq’s occupation of

Kuwait, and to pay UN administrative and UNSCOM disarmament costs. All revenues from Iraq’s oil sales are deposited in a UN escrow account to which Baghdad

has no access. All contracts are reviewed by the UN Sanctions Committee, of which

the U.S. is a member. Because the Committee operates by consensus, we can hold

or block any contract that is inappropriate or ill-advised. UN monitors on Iraq’s borders and inside Iraq oversee their import and distribution. In northern Iraq, the distribution is carried out directly by UN personnel.

Sanctions have never prohibited the import of food or medicine to Iraq. However,

the regime in Baghdad has been unwilling to take full advantage of this exemption,

and, therefore, in 1991, the Bush Administration first proposed an oil-for-food program to meet the humanitarian needs of the Iraqi people. Iraq rejected the program.

In 1995, the Security Council, with full US leadership and support, adopted a revised oil-for-food program, which Iraq finally accepted at the end of 1996. The first

food shipments under this program arrived in Iraq in March 1997. In February

1998, based on the Secretary General’s recommendations that additional funds were

needed to meet the needs of the Iraqi people, the Security Council adopted an expanded oil-for-food program. That program was renewed again in November.

Oil-for-food is not a step towards lifting sanctions, nor does it reward Saddam. In

fact, it makes sanctions—his worst enemy—sustainable. Without an oil-for-food program, history has shown that Saddam Hussein would starve his own people to force

the international community to lift sanctions. Although we could use our veto at the

UN to prevent the lifting of sanctions, the pressure of a sympathetic international

community—absent oil-for-food—could well lead to the de facto breakdown of the

sanctions regime.

The oil-for-food program has had a tremendous positive impact on conditions for

the average Iraqi. Since the beginning of the program, $2.75 billion worth of food,

over $500 million of medicine and $400 million worth of supplies for such things

as water, sanitation, electricity and education projects, has been delivered to Iraq.

The average daily food ration has increased from 1275 calories per day in 1996 to

2100 calories per day now. However, problems remain. Although malnutrition rates

have declined, they are still too high. Significant work on the sanitation and water,

electrical, education, agriculture and other sectors is still required.

Sanctions have slowed considerably Iraq’s ability to expand oil exports. We estimate that sanctions have prevented Iraq from exporting more than $120 billion

worth of oil from 1991 to 1996. We have in the last two phases of the program permitted funds to be earmarked for the importation of carefully screened spare parts

and equipment to improve Iraq’s crumbling oil infrastructure to fund needed humanitarian purchases. Those spire parts have just begun to arrive and it will be

many months before there will be significant growth in Iraqi ability to export oil.

We are also discussing in Security Council capitals how to keep Oil-for-Food viable and effective. We have proposed that the Security Council consider raising the

38

ceiling on oil sales consistent with Iraq’s legitimate humanitarian needs. In the

short run, Iraq would be unable to expand oil exports. Over time, allowing increased

Iraqi oil exports would address concerns regarding the shortfall in revenues needed

for humanitarian purchases. Saddam would not benefit from these increased oil export revenues. The revenues would be put in an escrow account and released only

for the purchase of humanitarian goods.

Raising the ceiling on revenue available for the purchase of humanitarian goods

also would serve to counter growing calls from Arab states and Security Council

members to lift sanctions outright. By removing the root cause of calls for lifting

sanctions, we free our allies in the Arab world and elsewhere to support our broader

Iraq policy objectives. We also draw Security Council support away from more radical French and Russian proposals to lift sanctions altogether.

We also understand your concerns about the current oil market situation. However, Iraq is only one among several factors which has adversely impacted oil prices

over the last year. Our Iraq sanctions policy, moreover, has never been linked to

the price of oil on world markets. This was true in the early 1990s when Iraqi oil

was completely off the world market, putting upward pressure on oil prices, and it

remains the case today. Allowing oil price considerations to drive our sanctions decisions, or seeking to use sanctions to target oil prices, would undermine our ability

to maintain an international consensus aimed at containing Saddam Hussein as

well as to provide for the humanitarian needs of the Iraqi people.

The US will continue to work to improve the oil-for-food program, and to ensure

that it serves its intended purpose. In February, the UN Secretary General reported

that there are $275 million worth of medicine sitting in Iraqi warehouses undistributed. This is unacceptable, and we will work to change it. We will continue to scrutinize every contract for goods under the oil-for-food program and can veto any contract that we judge to be inappropriate or ill-advised. Given the absence of

UNSCOM and IAEA, which have a role in monitoring dual-use goods, we have

tightened our standards for contract approval. In January, the Security Council

formed three panels to examine disarmament, humanitarian and Kuwait-related

issues. We expect that the humanitarian panel’s report, due in mid-April, will suggest additional changes that may enhance the program’s effectiveness.

Were international support for effective UN sanctions regimes to erode, Saddam

Hussein would be a much greater threat to the world community. He would quickly

regain the free use of ten to fifteen billion dollars per year to put into his WMD

programs. Moreover, the prospect of Iraq without UN sanctions would also have a

much greater negative impact on oil prices.

We remain concerned about the illegal traffic of oil and petroleum products out

of Iraq—to Turkey, Jordan, Syria and the Persian Gulf. Each of these avenues presents unique problems, and we are addressing each of them differently. We continue

to work with Turkey to find a way to bring illicit trade over the Turkish border

within the framework of the oil-for-food program. We believe a similar approach

should also be taken regarding Syria. With respect to the smuggling of Iraqi gasoil

through Iranian territorial waters, we have had considerable success over the past

year in combining efforts to bring third-country pressure to bear on Tehran to end

the trade with more direct military actions. This has included bombing of the section of the Basra refinery devoted to this trade during Desert Fox, and the conduct

of ‘‘surge operations’’ by the multi-national Maritime Interception Force or ‘‘MIF,’’

in areas of the northern Gulf known to be used by the Iraqis and others as routes

for smuggled cargoes. As for Jordan, although the UN has taken note of Jordan’s

trade of bartered humanitarian goods in exchange for Iraqi oil at concessionary

prices, we continue to work to reduce Jordan’s dependence on Iraqi oil.

Although the oil-for-food program is not perfect, it is essential to our policy of containing Saddam until there is a new government in Baghdad. Without it, sanctions

would be much more difficult to sustain. Saddam Hussein would once again have

control over tens of billions of dollars a year to spend on weapons of mass destruction.

Over the long-term, however, the only way to ensure that Saddam no longer

threatens either his people or his neighbors is to work for a new government in

Iraq—one that will maintain the territorial integrity and unity of Iraq, respect the

rights of Iraq’s people and Iraq’s neighbors, and fulfill Iraq’s international obligations. We are committed to helping Iraqis achieve this regime change or transition.

Thank you, and I welcome any questions you may have.

Mr. BARTON. Thank you. Mr. Williams, your statement is in the

record in its entirety and we will recognize you for up to 7 minutes

to elaborate on it. We welcome you as one of the members of the

39

Railroad Commission from Texas. I believe you are the newest

member. You have a distinguished background. I won’t put that all

in the record, but you are a former administration official in the

Bush Administration, you have a distinguished record in the private sector and public sector in Texas. We are very glad that you

could testify today.

STATEMENT OF MICHAEL L. WILLIAMS

Mr. WILLIAMS. Chairman Barton, thank you, and members of the

committee, thank you for the opportunity to be with you. Before I

go any further, Congressman Hall, thank you for the kind words

earlier this morning.

I appreciate this opportunity to testify on behalf of the Texas

Railroad Commission on the impact of the United Nations sponsored Oil-For-Food Program and the impact that it has on the vital

interests of Texans, as well as the Nation.

Admittedly, the goal of the Iraqi Oil-For-Food Program is quite

laudable. However, I must admit that as presently structured, that

program is adverse to the interests of Texans and Americans. No

Texan would take issue, and quite frankly no American would take

issue with a responsible attempt to provide food and medicine and

other necessities for the Iraqi people. Arguably, however, we do

have some serious doubts that the program is actually meeting the

humanitarian needs of the Iraqi people, and nonetheless quite

frankly it is more troublesome that Iraq is being permitted to sell

oil and make money out of the pockets of Texas producers and, I

might add, Oklahoma producers and other domestic producers,

their workers and their families at the same time that Iraqi ground

troops are firing at American fighter pilots who are protecting the

no-fly zone. Moreover, by allowing Iraq to sell $10.4 billion of oil

during a 12-month period, irrespective of linking it to the impact

that Iraqi production is having on worldwide crude oil supplies and

price, provides no incentive for the Iraqis to be proper stewards of

their crude oil reserves, nor is there any incentive whatsoever for

the Iraqis to concern themselves with the harmful impact that

their behavior might be having on producers worldwide, particularly those producers here in the U.S.

Quite the contrary, the Oil-For-Food Program places a premium

on how much money Iraq is allowed to generate, rather than how

many barrels of crude oil it is being allowed to sell. So the program

encourages them to provide and dump as much crude oil as possible on the market during the 6-month period to reach that $5

plus billion mark with no regard to the price per barrel.

The Oil-For-Food Program doesn’t just permit Iraq to act in a

way that is adverse to American interests, but to some extent it encourages them to do so and that puts domestic production at great

risk. We have already heard today about the cost and what happens to domestic production when prices are running at somewhere

below $15 a barrel. What is happening in Texas is that we are now

at an all-time low for oil rig count. We have 191 oil rigs presently

in service compared to 377 at this time last year. Between February 1998 and 1999, some 9,500 wells in Texas were plugged.

In the same time period, some 2,200 wells were shut in. So wells

in Texas and across the country have been placed at great risk beVerDate 12-OCT-99 12:17 Oct 25, 1999 Jkt 010199 PO 00001 Frm 00042 Fmt 6633 Sfmt 6602 Z:\HSECOM\55644 txed01 PsN: txed01
40

cause of the impact of Iraqi production on the world market depressing prices.

And what is the impact in terms of what is happening to real

people? In Texas we have had since December 1997 the loss of

some 11,000 jobs. Unemployment claims in Texas has risen some

304 percent compared to this time last year. And I might add that

I grew up in the oil patch in Midland—and most people typically

think of folks in the oil business as being, as we frequently say, a

bunch of J.R. Ewings with cowboy boots and exotic gold cuff links.

The oil patch is comprised of a wide variety of folks; and of those

11,000 folks who have lost jobs, many of the people who have lost

jobs in the oil fields are Hispanic, and many of the people in the

accounting departments and the personnel departments and the

H.R. departments and otherwise are African-American. This is an

industry that represents the bulk and the diversity of Texas, and

it is being hurt.

What is happening to our schoolchildren? In Texas, about twothirds of the 1,000 school districts in the State of Texas receive

some funding from oil and gas revenues, particularly from ad valorem and tax revenues. Ninety-five of those school districts receive

half of their funding from that source, and we are estimating in

Texas that we lose anywhere from $150 million to $160 million because of the depressed prices.

This is also affecting those royalty interests owners in Texas,

many of those who are living on fixed incomes who look for that

royalty check each and every month in order to make payments.

But obviously with depressed prices, they are not in a position to

do so.

And so what might be done? While I am the newest member of

the Texas Railroad Commission and have not been around a long

time, I will take the liberty to make some suggestions. And the

first might be that Congress and the administration might press

the United Nations to conduct a thorough investigation to determine whether the Iraqis, indeed, are using the designated amount

of oil-for-food funds to provide food and medicines and other necessities for the Iraqi people.

The second thing, frankly, you might look to restructure the oilfor-food production formula. Currently the cap allows for $5.26 billion of Iraqi oil production every 6 months without regard to the

number of barrels it would take to reach that target. And I have

heard that this program has never linked the production to the

barrels; and, quite frankly, I think that would be helpful to do so,

so that we would not encourage overproduction and a depression on

prices.

And the third would be that we look at and revisit the notion of

allowing the Iraqis to use the oil-for-food funds in a way to rebuild

Iraq’s oil infrastructure. I just want you to think about the irony

of producers in Texas and Oklahoma and elsewhere who have to

look for refinancing and have to find money and capital in order

to go out and work rigs; and we are providing an opportunity for

the Iraqis who are now assisting in providing the oversupply to the

industry. We are providing dollars for them to buildup and retrofit

their infrastructure.

41

Mr. Chairman and members of the committee, I thank you again

for the opportunity of being with you this morning; and I stand to

answer any questions that you might have.

[The prepared statement of Michael L. Williams follows:]

PREPARED STATEMENT OF MICHAEL L. WILLIAMS, COMMISSIONER, TEXAS RAILROAD

COMMISSION

Mr. Chairman, and members of the committee, I appreciate this opportunity to

testify on the impact of the United Nations sponsored oil-for-food program on our

vital national energy interests. For time purposes, I have summarized my testimony

and have submitted additional written testimony for the record.

Founded in 1891, the Texas Railroad Commission’s chief responsibility is to protect and conserve one of Texas and America’s most precious natural resources: oil.

As America’s number one producer of oil, Texas’ proper resource management of oil

has yielded profound contributions for both our state and the nation:

• The discovery of crude oil at Spindletop in Beaumont, Texas in 1901 changed the

face of the American transportation industry and gave way to thousands of oil

and related service companies that have employed untold millions of Americans.

• Plentiful supplies of Texas crude oil made possible our modern automobile industry. World War II may well have taken a different course.

• Allied Forces would not have sailed to victory on a sea of oil if it were not for

Texas’ extra production capacity and Hitler’s lack of oil during World War II.

• And today, petrochemicals derived from oil and natural gas have enabled us to

create everything from Teflon to televisions.

Crude oil exploration and production have been central to the modern industrial

age. As we approach the 21st Century, we must continue to protect and conserve

this precious natural resource that has proven a powerful economic, military, political, and strategic tool. And with the proper stewardship of the 120 billion barrels

of crude oil still locked underground in Texas, our nation’s energy future could be

just as bright.

THE IRAQI OIL-FOR-FOOD PROGRAM AS PRESENTLY STRUCTURED THREATENS AMERICAN

INTERESTS

The Iraqi oil-for-food program is another matter. The goal of the program is quite

laudable. No Texan would take issue with a responsible attempt to provide food and

medicine for the Iraqi people. Arguably, there are some serious doubts that the program is actually meeting the humanitarian needs of the Iraqi people.

U.N. Secretary General Kofi Annan, someone who knows the ins-and-outs of the

program, admitted in February, ‘‘Only half of the $540 million worth of drugs and

medical supplies delivered to Iraq since the program was launched in 1995 have

reached hospitals and clinics.’’

The Iraqi oil-for-food program, as presently structured, is adverse to American interests. It is more than troublesome that Iraq is being permitted to sell oil and take

money out of the pockets of Texas producers, workers and families at the same time

that Iraqi ground troops are firing at American fighter pilots who are protecting the

‘‘no-fly zone.’’

Moreover, by allowing Iraq to sell $5.26 billion of oil during a six month period

(irrespective of the impact that Iraqi production has on worldwide crude oil supplies

or price), there is no incentive for Iraq to properly steward its crude oil reserves.

Nor is there an incentive for Iraqis to concern themselves with the harmful impact

their behavior might have on producers worldwide.

Quite the contrary, the oil-for-food program places a premium on how much

money Iraq is allowed to generate rather than how many barrels of crude oil it is

allowed to sell. In so doing, the program encourages Iraq to sell as much crude oil

as possible during the six-month interval to reach the more than $5 billion mark,

with no regard to price per barrel. Oil for food doesn’t just permit Iraq to act in

a way that is adverse to American interests, it encourages it to do so.

While there is no certain number, there appears to be developing a consensus in

the industry, that the amount of excess oil on the world market is roughly between

one and two million barrels a day. That said, on average, Iraqi oil production accounts for more than 2.3 million barrels a day. Furthermore, evidence indicates that

Saddam may be illegally exporting an additional 100,000 barrels a day. Even the

U.S. Department of Energy admitted in late 1998, ‘‘[The] increase in Iraqi oil exports has been playing a significant role in the world oil glut which is responsible

for the sharp decline in world oil prices.’’

42

We may be dropping bombs on Iraq without visible retaliation; however, Saddam

Hussein is engaged in a clandestine campaign of full-scale economic terrorism. His

conduct is keeping world oil prices low by pouring even more oil onto an already

saturated market under the guise of the oil-for-food program.

THE OVERSUPPLY OF CRUDE OIL HURTS DOMESTIC PRODUCTION

In his letter to Congress earlier this month, President Clinton stated that ‘‘The

United States has expressed its support for [once again] lifting the cap on Iraqi oil

exports under the oil-for-food program.’’ In fact, the Clinton Administration advocates eliminating the cap. In light of Secretary Annan’s recent report, however, that

dog simply won’t hunt.

More oil on the already flooded world market would adversely affect oil prices

across the globe. It’s Supply and Demand 101: the more product on the market, the

cheaper it is. In the United States where production costs are relatively high and

production is relatively low, drastic price declines have sent the rig count and production spiraling. Since last year, U.S. production has fallen by 4.7%. In Texas, production has fallen by 7.4%. The rig count, the historical barometer of industry vitality, is down 78% since a year ago. Texas’ rig count has plunged 97% during the

same period.

LESS DOMESTIC PRODUCTION MEANS LESS FOR TEXANS

The Iraqi people are not the only ones who stand to lose something under Oil for

Food. Texans like the Ryder family from our state’s Permian Basin have seen their

lives fall apart during the past year. In their early fifties, Ronnie Ryder and his

wife, Inatte, used to think retirement might not be so far off. After working in the

oil business for 30 years, Ronnie is now looking for ‘‘any job he can get.’’ Inatte is

back in school and working nights at an elderly care facility. Unfortunately, the

Ryder’s story doesn’t stop there.

Until the price crisis hit, Ronnie’s son was working in a roustabout gang for Phillips Petroleum. Today, with their first child on the way, Rusty and Priscilla Ryder

don’t get to spend much time together as Rusty has been forced to take a job driving

trucks cross-country. I wish the Ryder’s story was the exception, but I’m afraid that

in the oil patch, it’s become the rule.

The overwhelming majority of producing wells in Texas are marginal wells—or

wells that produce 10 barrels or less per day. Those wells are placed in jeopardy

by low and unstable prices. With profits falling and the amount of oil on the market

increasing, thousands of Texans who operate marginal wells have been forced to

shut in wells—an irreversible process. When those wells get shut in workers get

shut out.

Economic studies have shown that for each dollar invested in the oil and gas industry at the wellhead, there is a positive economic effect of $2.91 on the Texas

economy. Without marginal well production, millions of dollars and thousands of

Texas jobs will be severely impacted. State unemployment will increase, sales tax

revenues will drop, and property tax revenues used to fund schools will plummet.

As the number of producing marginal wells decline because they are no longer

economically viable to produce, royalty and interest owners are directly impacted by

a loss in revenue. Royalty income has sustained countless families, small farms and

ranches and rural towns for decades. In turn, royalty dollars circulate many times

through a local economy by way of the grocer, the doctor, the pharmacist, small

shops, retail stores, and service providers. In many rural communities people are

dependent on royalty payments for their daily existence. Shutting in or reducing

marginal well production could mean financial devastation to some.

The importance of marginal well production and its rippling effect on the state

economy is reinforced in a recent article published by the Texas Workforce Commission. According to their December 1998 publication of the Texas Labor Market Review, mining (oil & gas extraction) continued its trend of declining employment and

loss of jobs. The article states that persistently low crude oil prices are placing tremendous pressure on mining employment counts and are affecting other industries

that support drilling and explorations activities in Texas. Employment in all three

of the major industries within the goods producing sector (mining, construction, and

manufacturing) declined in December, for a total loss of 2,400 jobs. As of January

1999 release, mining was suffering the seventh straight month of declining employment. Employment estimates in the mining sector alone decreased from 169,300 in

January 1998 to 160,600 for January 1999—a 75% decrease of some 8,700 jobs. Additional workforce impact information can be found on the Texas Workforce Commission web site at www.twc.state.tx.us.

43

Low oil prices are also taking a toll on Texas’ greatest resource: our children. It

is estimated that Texas’ statewide Fiscal Year 2000 school district losses will be between $150-$160 million. The impact is already been being felt by many cities and

counties across our state as jobs are lost, related services are cut, and state and

local revenues plunge. I think David Goodman, superintendent of Andrews Independent School District in West Texas summed it up best when he asked, ‘‘Do you

know of any businesses that could stand to lose one-third of its operating budget

and still open its doors the next year?’’

The Texas Comptroller’s Office recently surveyed appraisal districts and contract

firms that appraise oil and gas reserves for property tax purposes. Although the appraisals are not complete, the appraisers’ consensus is that oil properties will decline in value from January 1, 1998 to January 1, 1999 by about 40% and gas properties will decline about 15%. In school districts where oil and gas reserves comprise

more than $250 million, these value losses were translated into property tax levy

losses and are available on the Comptroller’s web site at www.window.state.tx.us/

taxinfo/proptax/levyloss.html.

According to the American Petroleum Institute, at least 51,000 Americans have

lost their jobs since December of 1997 because of low oil prices—nearly 9,000 of

them are in Texas. Compared to a year ago, oil-related unemployment claims are

up 304%. Contrary to the impression left by popular culture, those are not men and

women who wear exotic cowboy boots and wear gold watches. Rather, they are

Americans like you and me, like the Ryders with real car payments, real mortgages,

and real families to feed.

WHAT TO DO

Like the families of America’s steelworkers or farmers, oil families are suffering

in ways that they have not felt before. And, like we have to the steel and farming

industries, we should reach out and correct policies like Oil for Food that make bad

times even worse. For the sake of American families and schoolchildren, the oil-forfood program should be revisited and restructured. To that end, I would urge you

to consider the following.

• First, Congress and the Administration might press the United Nations to conduct a thorough investigation to determine whether Iraq is using the designated

amount of oil-for-food funds to provide food and medicines for the Iraqi people.

According to U.S. National Security Adviser Sandy Burger, ‘‘Saddam is so indifferent to the suffering of his people that he still refuses to make full use of this

allowance.’’

• Secondly, while the humanitarian needs of the Iraqi people might necessitate additional revenues, we should seek to insure that any attempt to eliminate the

crude oil production cap takes into account and does not exacerbate the negative impact that additional Iraqi production might have on domestic producers.

• Third, the United States should call on the United Nations to revise the resolution so that oil-for-food funds are not used to rebuild Iraq’s oil infrastructure.

Common sense says that it is not in the United States’ best interest to rebuild

a competitor’s economic and industrial arsenal.

• Fourth, we should urge the United Nations to restructure the oil-for-food production formula. Currently, the cap allows for $5.26 billion dollars of Iraqi oil production every six months without regard to the number of barrels it would take

to reach that target. Nor does it take into account the impact Iraqi production

has on world oil prices. During every six-month period the U.N. should designate the number of barrels of oil Iraq would be allowed to produce to reach

a designated revenue target. We must urge that the target be placed at a level

that neither fosters price instability nor that is harmful to the preservation of

domestic production.

• Fifth, members of Congress from producing and non-producing states should band

together—as they have recently for other vital U.S. industries—to boycott the

sale of Iraqi oil within the United States, thereby mitigating the insult to our

men and women in uniform stationed in the Persian Gulf and working in the

oil patch.

It’s a disgrace that hard-working Texans have been forced to bear the brunt of

a skewed foreign policy that does more harm than good. Congress and the Clinton

Administration should revisit and revise the United State’s support of the oil-forfood program as it stands—if not for our oil producers, for the sake of the coming

addition to the Ryder family.

44

RAILROAD COMMISSION OF TEXAS

AUSTIN, TEXAS

March 22, 1999

The Honorable JOE BARTON

2264 Rayburn House Office Building

Washington, D.C. 20515

DEAR MR. BARTON, there’s a clear and urgent need to evaluate our nation’s domestic energy policy. Texas Railroad Commissioner Michael Williams will testify before the House Subcommittee on Energy and Power on Friday, March 26th. He’ll

offer his insight into our nation’s domestic energy policy and the U.N.-sponsored

‘‘Oil for Food’’ program with Iraq. I want you to know that as Chairman of the Railroad Commission of Texas, I’m in complete support of Commissioner Williams’ testimony.

When the energy industry in Texas suffers, we all feel its effects through decreased state revenues and fewer dollars for our state’s public schools. The Texas

Comptroller of Public Accounts estimates that with every dollar drop in the price

of oil, approximately 10,000 Texas jobs are lost. Lower prices and an increasing dependence on foreign oil means many of those jobs are going abroad. These losses

are particularly staggering when you consider that the U.S. already imports more

than 50% of the oil we use, placing our nation more and more at the mercy of foreign—and often unfriendly—governments.

In Texas, Governor George W. Bush recently signed emergency legislation that

gives certain oil and gas producers temporary exemptions from severance taxes

when prices fall below set levels. It’s not a silver bullet, but it’s a step in the right

direction and shows that Texas is committed to helping one of our state’s most important industries. Now it’s time for Washington to step up to the plate for domestic

producers.

The Independent Petroleum Association of America will hold Crude Awakening

rallies in Washington, D.C., Austin, Texas and across the nation this week where

members will sign the ‘‘Oil Price Crisis Relief Resolution.’’ The IPAA and its members make it very clear: the federal government needs to respond to this downturn

in prices. The resolution states that Washington should support the filling of the

Strategic Petroleum Reserve (SPR), get behind a reduction of taxes on marginal

wells, work to encourage domestic production, investigate improper trade practices

in the U.S. market by foreign suppliers, and offer much needed regulatory reform

for the industry.

Your actions in the coming weeks will show just how committed Washington is

to a strong domestic energy policy. It’s more than simple economics. It’s an issue

of critical importance for our national security. With best wishes, I am,

Sincerely,

TONY GARZA

Chairman

Mr. BARTON. We thank you, Mr. Williams. The Chair is going to

recognize himself for 5 minutes. We are going to be very flexible.

We have got four members here. We are going to use the 5-minute

rule, but we are going to give additional time and probably do additional questions; and if people want to interrupt, that is fine.

If the staff would put the first chart there, the EIA, the Iraq

crude oil production chart. Let’s put that back up on the easel.

I want to start off—this is off of the CNN news line that we get

on the Internet: March 4, the headline is ‘‘British jets attack Iraqis

in the southern no-fly zone.’’ March 6, ‘‘U.S. launches new attacks

in Iraq no-fly zone.’’ March 14, ‘‘U.S. jets strike at Iraqi northern

no-fly zone.’’ March 15, ‘‘U.S. war planes attack Iraq’s northern nofly zone.’’ March 16, ‘‘Iraq breaks sanctions by flying pilgrims to

Saudi Arabia.’’ March 17, ‘‘Sanctions-busting Iraqi pilgrims snub

no-fly zone rules again.’’

This chart shows that right before the Kuwaiti invasion by Iraq,

they were producing about 3.5 million barrels. Once the invasion

occurred and President Bush declared that would not stand, their

production fell to about 500,000 barrels per day. And then when

the oil-for-food program began in January or late November 1996,

45

it started ratcheting back up; and it is currently up to 2.6 million

barrels a day.

Mr. Wood, does the State Department dispute any of those figures?

Mr. WOOD. I don’t believe we do.

Mr. BARTON. Okay. If it is true that Mr. Hakes’ statement that

they—I mean, at least before the invasion they were producing for

a short spike period up to 3.5 million. But I believe, Mr. Hakes, you

said you don’t believe they could get much higher than what they

are doing right now?

Mr. HAKES. They would need a lot more spare parts and capital

development to repair the equipment to get back up to that level.

Mr. BARTON. So for all intents and purposes, is it fair to say that

we are allowing Iraq to produce as much oil as they are capable

of producing? Is that a fair statement?

Mr. WOOD. It is certainly true at the moment, yes, sir.

Mr. BARTON. I can only characterize the current policy, after listening very intently and scanning the testimony, that our Iraqi policy is designed to maximize Iraqi production at the expense of the

marginal producer in the United States, which is a small independent oil and gas producer. And I don’t, quite frankly, think that

makes a lot of sense. Do you disagree that if it is not the intent,

that is the effect of this policy, Mr. Wood?

Mr. WOOD. The intent of the policy, sir, is to maximize international support for the continued isolation and containment of

Iraq.

Mr. BARTON. And it seems to be working really well. ‘‘Sanctionsbusting Iraqi pilgrims snub no-fly zone rules again.’’ Now, that is

not some political headline. That is the CNN news line March 17,

1999. Could you explain to me how these sanctions are working

when Iraq can produce as much oil as they are capable of, regardless of the price; they can fly pilgrims to wherever they want to in

the world; they have thrown our inspectors out. So please explain

to me and the American people how effective these sanctions are.

I think the sanctions are driving constituents in the oil producing

States with marginal producers out of business. I think that is

what the sanctions are doing.

Mr. WOOD. Mr. Chairman, there is no question that Iraq is, as

it always has, resisting sanctions implementation. At the same

time, first, the sanctions are being very effective in controlling

Iraqi exports and the revenues that come from those exports.

Mr. BARTON. But the only export they have, Mr. Wood, is oil.

Maybe some olives, I don’t know.

Mr. WOOD. I understand and we are controlling with a high degree of confidence where the revenues from those exports go.

Mr. BARTON. I see.

Mr. WOOD. We are also—we are preventing, through this regime,

the use of those revenues for the purposes that Saddam Hussein

would most like to use them for.

Mr. BARTON. Let me ask this question, because my first 5 minutes is about out. Where did this determination that they needed

$5.2 billion every 6 months come from? Who made that determination?

46

Mr. WOOD. That was the result of an extensive United Nations

study that was completed in February 1998, I think.

Mr. BARTON. And did the Iraqi government have any input into

that study?

Mr. WOOD. The Iraqi government refused to cooperate with that

study in large part. It was conducted, for the most part, by organizations like the World Food Program and others.

Mr. BARTON. Okay. Now, do we have any confidence that the

food that is being purchased is actually getting to the Iraqi people?

Mr. WOOD. We do have, obviously, some problems. The papers reported very recently that the Iraqis were—that the government

was not distributing medicines, for instance, that were supposed to

be distributed. But at the same time, we know that Iraq has imported an average of 3.8 billion metric tons of food a year, which

is more than 50 percent higher than the annual average for the 6

years prior to the program’s implementation.

We know that the malnutrition rate in the government-controlled

south has stabilized over the past year at about 15 percent for infants and 25 percent for children between 1 and 4 years of age; and

that is an improvement over the previous years. We know that

UNICEF reports that malnutrition in the north for the Kurds has

dropped—for children under 5 has dropped to 25 percent last year

from 30 percent in 1997 and 37 percent in 1994.

So we have got some clear indications that the goal of the oilfor-food program, which is to take care of the Iraqi population in

spite of Saddam Hussein’s intentions, is being achieved.

Mr. BARTON. Now, is it true—one of my briefing papers said that

Saddam Hussein has refused to let any of this money be spent on

food that is purchased or manufactured in the United States. Is

that true?

Mr. WOOD. That is only true very recently, sir.

Mr. BARTON. But it is true right now?

Mr. WOOD. Right, it is true. We have under the oil-for-food pro- gram roughly $240 million of U.S. products have been purchased,

of which——

Mr. BARTON. I want you all to listen to this. This program has

been in effect since what, November 1996?

Mr. WOOD. Right.

Mr. BARTON. And we allow up to $5 billion every 6 months, so

that is potentially $10 billion a year. So that is potentially maybe

$12, $13 billion since we are just into 1999; but I am told that it

has not been that much. We have spent how many billions of dollars? Do you know the exact number? I am going to guess it is $8

or $9 billion, but I don’t know that.

Mr. WOOD. Well, it is important to remember again that the proceeds for the oil-for-food, a large part of it, a third of it goes to the

compensation commission to compensate Kuwaitis for their

losses—Kuwaitis, Americans, and others for their losses during the

Gulf War. So not all of that program goes for the purchase of food.

Mr. BARTON. Give me your best number for how much of the billions of dollars that they have collected has been spent on food that

actually went into Iraq.

Mr. WOOD. Our best understanding is that $902 million have

been approved for food.

47

Mr. BARTON. Only $902 million?

Mr. WOOD. Let me keep going. $172 million for health.

Mr. BARTON. Let’s just focus on food right now. A little less than

a billion dollars on food? Is that your best number?

Mr. WOOD. That is right.

Mr. BARTON. Less than a billion, and of that billion, $240 million

was purchased from the United States sources?

Mr. WOOD. That is right.

Mr. BARTON. Okay. Well, I think I could equate that to how

many jobs have been lost and how many millions of barrels of production have been lost in the United States. But that would be hitting a little bit below the belt. But I think you get my drift.

Mr. Hall is recognized for 5 minutes.

Mr. HALL. Thank you, Mr. Chairman. Mr. Williams, I will start

with you. You have—one of your cures for the dilemma is that we

get the U.N. to do some searching and see what is happening with

the food when it gets there, who it goes to. I know you are highly

educated, and I also know that you have got an awful lot of street

sense, street smarts. Doesn’t your street sense tell you that if they

couldn’t find the dang nuclear plants, that they are going to have

a hard time catching those guys stealing that food?

Mr. WILLIAMS. It probably does and it should. The import of that

suggestion goes to the fact that we need to have—someone needs

to do the investigation and make the——

Mr. HALL. You pointed out by your answer now the dilemma that

we are in. And my thrust probably is going to be to see what we

can do to kill the policy. I don’t think it is a good policy. I don’t

think it is a sensible policy. We used the Space Station for foreign

policy and wound up putting money galore into Russia; and still

apparently we are not saving the Space Station. Here we are using

food-for-oil as another—really a kind of a—I don’t know why we

would try to have a good foreign policy with Iraq, but apparently

somehow we are trying to keep our foot in the door.

It seems to me—I am not saying cut all the trees and kill all the

whales and everything is bad and we ought to disconnect everybody

in the world. But I don’t see any sense in dealing with Iraq. I don’t

like to starve children, but war is war; and we are in a state of

war with those people. We are bombing them probably today or tonight or tomorrow or whenever we are going to.

Mr. Wood, what do you mean by saying you are controlling

where the revenue goes? That thought occurred to me—I heard you

say that a moment ago. Where does the revenue go? I will come

back to you, Mr. Williams.

Mr. WOOD. As I indicated, the revenue goes into an escrow account that is only released for authorized purposes.

Mr. HALL. Now, this is food for oil.

Mr. BARTON. But it is really not food for oil. That is what is so

frustrating about this. They have collected somewhere between $5

and $6 billion and they have spent a little less than a billion on

food. So it is called food for oil, but it is really not food for oil.

Mr. WOOD. Let me correct what I said earlier because I was giving you the most recent statistics. Since the beginning of the program, a total of $2.75 billion has been used to purchase food. Over

$500 million has been used to purchase medicine and $400 million

48

for supplies in areas of water, sanitation, electricity, and education

projects.

Mr. BARTON. So that gets us up to about $3 billion, but a little

over $2.5 billion for food?

Mr. WOOD. And, again, don’t forget the oil-for-food program has

only been at the $5.2 billion level for a year or so.

Mr. BARTON. Right. I am going to give Mr. Hall additional time;

and I don’t want to dominate this, but that infuriates me. This

study that was done apparently was done with a great degree of

effort to find out what the true needs were, but you have doubled

the program; and the population of Iraq has not doubled in the last

year. I mean, I can draw no conclusion to that, sir, but that that

is just a pure political judgment on behalf of the bureaucrats in the

United Nations to appease Saddam Hussein. I may be wrong, and

the studies may show it different; but if the first study was an accurate study, the Iraqi population is not that fertile that they are

expanding the population so greatly that they need to double the

amount of flood and supplies that they need. But, Mr. Hall?

Mr. HALL. Go ahead and get your answer from him.

Mr. WOOD. Mr. Chairman, I think that the easiest example I can

give you is that OPEC has just cut back its sale of oil.

Mr. BARTON. Yes, they did. And Iraq did not and Iraq is a member of OPEC.

Mr. WOOD. This is following in December Baghdad’s call for the

overthrow of the regime of Saudi Arabia and the leadership in

some of the other Persian Gulf OPEC members.

Mr. BARTON. Which have the full faith and credit of the United

States of America to guarantee that this will not happen by military means.

Mr. WOOD. I understand. But the OPEC nations themselves believed it was better for them to cut back their oil sales than to seek

a reduction in the oil-for-food program. And the reason for that, we

believe, is a combination of humanitarian concern for people of Iraq

and the recognition that taking care of the humanitarian needs of

the people of Iraq is an absolute prerequisite to maintaining the integrity of sanctions implementation and to returning, as we hope

will occur soon, the weapons-of-mass-destruction inspectors and the

other elements of the policy for containing Iraq.

Mr. BARTON. Well, hopes are one thing, sir, but reality is another. And I don’t believe anybody on this subcommittee opposes

providing in some way food and medicine for the people of Iraq.

That is not the message we are sending. But it really does not appear, so far as this hearing is going along, that that is what is happening. And with all due respect, I don’t think appeasement works;

and I don’t think it works with Saddam Hussein, and I would disagree with the collective wisdom of the OPEC nations to think it

is okay to appease Saddam Hussein and let him produce as much

oil as he wants.

Mr. Hall, I have used almost your entire 5 minutes, so I will give

you another 5 minutes. We will give you an additional 2 or 3 minutes.

Mr. HALL. You are the Chairman. It makes a difference.

Mr. BARTON. I am just a little riled up about this.

49

Mr. HALL. To reclaim my 7 minutes—and you have covered some

of the ground I wanted to cover, and of course we have talked

about the economic advantages that the Iraqi government and Saddam Hussein has taken. I think, Mr. Hakes, you can tell us another advantage that he has taken. Our research and development

expert from Randall and Dewey, Dave Bole, is going to be testifying

in a little bit; but we have read his testimony and he has indicated

that not only do the Iraqis have this advantage, the two advantages that the Chairman drew out there, they have also made Iraq

the swing oil producer, have they not, in that whole part of the

country?

Mr. HAKES. Not as I understand that term.

Mr. HALL. Well, let me tell you how I understand the term. It

may be wrong. They sell the last barrel into the market. And

doesn’t that define the market price?

Mr. HAKES. Well, everybody that sells into the market is in a

sense selling the last barrel.

Mr. HALL. The last seller getting the most price for it.

Mr. HAKES. The swing producer, as I have normally seen it used,

is referred to Saudi Arabia who has the ability to raise and lower

production because they have more excess capacity than they use.

Mr. HALL. They have a bigger hole in their well than anybody

else.

Mr. HAKES. Right. For instance, a year ago before they made

these cuts, they still had the capacity to almost immediately increase production by 2 billion barrels; and they also have been

more willing to cut back. So they sort of have been the only swing

producer that is able to raise and lower. The Iraqis don’t have any

ability right now to go above the 2.5.

Mr. BARTON. But they do have the ability to go below 2.5.

Mr. HAKES. As does any producer.

Mr. BARTON. I mean, there is no structural impediment to the

Iraqis reducing their oil production if they wanted to.

Mr. HAKES. Right. Particularly the state-owned companies have

that option if they are willing to.

Mr. BARTON. And all the oil in Iraq is state owned.

Mr. HAKES. Right. I think the four or five largest companies in

the world right now are state-owned companies including Iraq.

Mr. HALL. Mr. Hakes, to where we are on the same line, his testimony will be—it says, ‘‘Let me explain what allows Iraq to become the swing producer.’’ I guess that is why we ran across that.

‘‘Currently many industry analysts estimate that worldwide oil productive capacity that is, production that could quickly be added to

the world market exceeds demand by only about 4 percent.’’ And

says, ‘‘This increase has allowed Iraq to become the world’s swing

producer, the producer that sells the last barrels into the market

and thereby defines the market for the entire market.’’ Is that not

your understanding of what a swing producer is?

Mr. HAKES. No.

Mr. HALL. Okay. I am sorry that I hadn’t set that out for you.

Mr. HAKES. I have heard that discussed, but I am not sure that

is the way it works.

50

Mr. HALL. That is a good thing to allude to. Call it whatever type

producer you want to; he in the position of selling the last and defining the market.

Mr. HAKES. The market is set by all producers and all buyers.

Mr. HALL. In diamonds or whatever.

Mr. BARTON. Mr. Hall, could you ask one more question and then

let us go to Mr. Shimkus. We will come back and give you additional time after the other three.

Mr. HALL. I would like to just ask a quick yes-or-no from Mr.

Wood. Are we the only Nation supporting the oil-for-food program?

Mr. WOOD. By no means, sir.

Mr. HALL. A number of other nations? With Iraq?

Mr. WOOD. Absolutely, sir. Both in the Security Council and

around the world.

Mr. HALL. You have answered. What would be the impact on our

foreign policy and our relations with our allies if the U.S. were to

successfully push for an end to the oil-for-food program?

Mr. WOOD. We believe that the sanctions, all of the programs

aimed at containment of Iraq, would be seriously eroded. While we

retain the ability within the Security Council to veto any legal

change in these programs, we believe that their observance by

other nations would erode quickly. We would face growing international pressure to lift sanctions. We would have less support for

a hard line on maintaining inspections of Iraq’s weapons-of-massdestruction programs. We believe that this would seriously weaken

our ability to take a tough line with Iraq while we are pursuing

the other track—the two other tracks, which are the enforcement

of the no-fly zones and our efforts to replace the regime of Saddam

Hussein.

Mr. HALL. Last question. Are you all talking to the oil producers

about the impact it has on them?

Mr. WOOD. Absolutely, sir. And I might add——

Mr. HALL. Are you listening to them?

Mr. WOOD. We are, sir. Oman was one of the original sponsors

in the United Nations of the first oil-for-food program proposal

back in the early 1990’s.

Mr. BARTON. Could I just—Mr. Hakes and Mr. Wood, before we

go to Mr. Shimkus, are either one of you aware of any other Nation

in the world that is permanently shutting in production that will

never come back as a result of this program? You say that the

other nations support the program. I am not aware of any other nation in the world that has the marginal-well situation like we have

in the United States that is being permanently lost because of this.

Are there other nations?

Mr. HAKES. I am not as familiar with—Canada might possibly

have some, but I would agree with the drift of your question that

the United States is in a rather unique position on this issue.

Mr. BARTON. I am told we have lost about 600,000 barrels a day

just within the last year. It is never going to come back.

Mr. HAKES. The December-to-December figures going to December 1998, we had lost about 500,000 barrels a day; and it is higher

than that now, I am sure; and there is also a leg effect because it

discourages new investments, and sometimes that doesn’t show up

in production losses that you otherwise would have had.

51

Mr. BARTON. So with the exception of Canada, when the deputy

under special assistant secretary talks about the rest of the world

supporting this program, it is really the domestic small oil and gas

producer in the United States that is supporting it by losing their

job and losing their resources. There is no other——

Mr. HAKES. The point, I think, is very valid that the small producers have a very limited ability to come back once they are shut

down. In other words, when the price goes down like this and then

the price goes back up, that won’t necessarily bring those—a higher

price won’t necessarily bring all of those producers back.

Mr. BARTON. I want to correct the record. It is the principal assistant deputy secretary. I am not trying to be facetious about that,

sir.

Mr. Shimkus.

Mr. SHIMKUS. Mr. Chairman, I yield my time to my colleague

from Oklahoma so he can catch his plane.

Mr. LARGENT. Thank you, Mr. Chairman. Mr. Wood, I am reading in your testimony that we got at 9:30 this morning. The second

paragraph says that the administration’s policy is to contain Saddam Hussein until he can be removed from power. It sounds to me

that it is the administration’s policy to sustain Saddam Hussein

until he can be removed from power, and I want to make a statement and get you to respond to it.

As I have studied history throughout the world, the most motivating thing—if you want to foment change in a country, hunger

is the most motivating factor to foment political change that we are

trying to see in Iraq. And yet we are moving in the opposite direction. Would you like to comment on that? I mean, I am striking at

the very fundamental policy decision that is being made.

And I want to say, too, just parenthetically here, that I understand that if we can see this change take place and we get a new

regime in there and Iraq comes back on with their oil production

and begins increasing their oil production, that we are in the same

boat. So what I am really talking about is a foreign policy decision

that currently is affecting independent producers; but if we are successful in our foreign policy, we still have the same problem that

we have to deal with, and I understand that. So don’t think that

I am saying—or anybody up here is saying that the problem that

we are having in Oklahoma is all because of our foreign policy. But

this foreign policy is important, and I am just thinking that we are

doing the exact opposite of what we need to be doing if our policy

goal is to remove Saddam Hussein from power.

Mr. WOOD. We certainly agree with you that this is a very important foreign policy, and, indeed, in fact there is no issue on which

the Secretary of State and our people in New York and others

spend more time.

It is not our assessment that withholding humanitarian assistance under the oil-for-food program would be a better way to drive

out Saddam Hussein. And I might add that it is not his assessment

either. He has not cooperated with this program. In spite of the

program, he has tried to keep food from his population. He has

tried to keep medicine from his population. That is why we received these press reports a month ago. He finds it more useful to

blame the world for the poverty and the malnutrition and the unVerDate 12-OCT-99 12:17 Oct 25, 1999 Jkt 010199 PO 00001 Frm 00054 Fmt 6633 Sfmt 6602 Z:\HSECOM\55644 txed01 PsN: txed01
52

happiness of his own people than to allow them to be adequately

nourished.

He has consistently failed to cooperate with the oil-for-food program. He sees it as a threat. He does not see it as a bolster for

his regime, and in this assessment, frankly, we agree with him.

Mr. BARTON. If he really felt that, he wouldn’t have to sell any

oil. If that were literally a true statement, he would refuse to let

his state-owned oil company sell any oil. So it can’t be true.

Mr. WOOD. During the life of the program, Saddam Hussein has

interrupted the flow of oil on several occasions for periods of more

than a month at a time. And, again, it is because his assessment

is that—we believe that his assessment is that the world will take

responsibility for his population even if he won’t. And that may extend, as it has in some cases, to proposals to lift sanctions.

Mr. LARGENT. So in this world, we literally cannot force Saddam

Hussein to do anything, including allow us to inspect weapons

sites. We cannot force him to not fly in the no-fly zone. But what

we can do, what we have been effective in doing is forcing food on

him. Is that what you are telling us? That is the one thing that

we have been effective in doing is forcing food on him when he

didn’t want it?

Mr. WOOD. I would have to say that I don’t think that he is

happy with what is happening in the no-fly zones.

Mr. LARGENT. Who distributes the food under this program?

Mr. WOOD. The Iraqi regime distributes it in the south under

U.N. monitoring, and the U.N. itself distributes it in the north.

Mr. LARGENT. And where in the pecking order does the Republican Guard fall in? Who gets fed first?

Mr. WOOD. Again, I think that they are—they tend to be less

malnourished than anybody else to begin with.

Mr. LARGENT. I think so. We are making them fat.

Mr. WOOD. I am not saying that it is the U.N. that is feeding

them. I am not saying that it is this program that is feeding them.

They have always been cared for better than the population at

large.

Mr. LARGENT. Thank you, Mr. Chairman.

Mr. BARTON. We have been everywhere liberal in the use of time.

I have consumed probably three times my 5 minutes, so if you have

some additional questions.

Mr. LARGENT. It just seems to me that the administration’s policy or our foreign policy in this issue right now is that we want to

overthrow this evil empire, but we don’t want to make anybody

mad doing it. I don’t understand that. That just really baffles me.

We are going to kill them with kindness.

Mr. HALL. Will the gentleman yield?

Mr. LARGENT. Yes, sir.

Mr. HALL. Does it ever occur to you that we won’t ask ourselves

the question of whatever happened to consorting with the enemy?

You know, they used to shoot you for that. I think it is a sorry policy, and I think this is a sorry program. And I think you are bringing it out very well. So give him 7 more minutes.

Mr. LARGENT. I will yield back, Mr. Chairman.

Mr. BARTON. Mr. Shimkus, do you want to reclaim original order

or do you want me to go to Mr. Burr?

53

Mr. SHIMKUS. I would rather go original order, unless Mr. Burr

has a pressing——

Mr. BARTON. Mr. Burr’s plane is not until 4:15.

Mr. SHIMKUS. I imagine mine is too, or close to it.

Mr. Wood, I am sorry that I missed the initial fireworks, so welcome. And we are learning a lot, and I appreciate you being here,

along with the other panelists. But it seems like you are getting

the brunt of the fire right now.

I am trying to follow up on a statement that you said that our

allies want this program and they are willing to curtail their own

production while allowing Saddam Hussein to produce more, both

on the food-to-oil program and through the black market, thus undercutting their prices on the world market. Our allies support this

policy?

Mr. WOOD. What I am saying is that we have not received approaches from OPEC nations, and in particular the Gulf OPEC nations, seeking to curtail the oil-for-food program. Just the opposite.

They have indicated strong support for the oil-for-food program.

Mr. BARTON. Would the gentleman yield on that?

Mr. SHIMKUS. I will.

Mr. BARTON. Surely you have got people in the State Department

that understand if we drive the American marginal producer out

of production, it helps every producer in the Middle East over time.

And Iraq is part of OPEC. So they are crying with crocodile tears

when they support this because every marginal well in Texas,

Oklahoma, Louisiana, Illinois, West Virginia, California, Colorado,

on and on and on that goes out of production is never coming back.

And their wells in the Middle East are there just waiting to resume

production. Surely you all understand that. Do you?

Mr. WOOD. Yes, I mean—I am certainly not an expert in our domestic oil industry, but it is obvious from the testimony here today,

and from your own comments, sir, that marginal wells once shut

down stay shut down.

Mr. SHIMKUS. Maybe that message ought to get back to the State

Department.

Mr. WOOD. It will.

Mr. SHIMKUS. Following up on a question I asked to my colleague, Wes, from Oklahoma—and you have kind of elaborated—

but you said an escrow—how do we know that the revenue from

the oil-for-food program is going for food only? Mr. Watkins said

that it is going to an Iraqi bank account. You mentioned an escrow.

What bank or banks is this money flowing to, and who controls the

account?

Mr. WOOD. I am not sure what—I am told that, I think, it is

Banque Nationale of Paris, one of the world’s largest and most reputable. Let me just say, though, that within the oil-for-food program there are a series of checks and maybe it would be useful if

I went through those.

A U.N. contractor monitors outflow of Iraqi oil through pipelines.

This does not mean that there is not a smuggling problem. I will

get to that in a second because we are trying to address that.

Then roughly 50 employees of another contractor, a Swiss company, are stationed at the four points of entry for products that are

allowed. And they are responsible for verifying the arrival of huVerDate 12-OCT-99 12:17 Oct 25, 1999 Jkt 010199 PO 00001 Frm 00056 Fmt 6633 Sfmt 6602 Z:\HSECOM\55644 txed01 PsN: txed01
54

manitarian goods. Within Iraq itself, the U.N. Office of the Iraq

Program has roughly 150 inspectors whose job it is to ensure that

the goods sent into Iraq under our oil for food reach their proper

destinations. There are 50 sector observers and 50 geographic observers and 20 of sort of a multidisciplinary unit.

That is how distribution within a particular southern part is

tracked. Every contract is approved—every contract is approved by

the sanctions committee, of which we are a member. We review

every contract. We approve every contract.

In addition, UNSCOM, the weapons-inspection agency, when it is

functioning—and I admit it is not functioning now—but when it is

functioning, they also receive reports of all imports into Iraq and

do their own analysis as to whether or not there is any diversion

away from the intended——

Mr. SHIMKUS. But that is not being done now, so there could be

diversions?

Mr. WOOD. And as a result, we on the sanctions committee are

being more scrupulous in the contracts that we are allowing to go

through. So there is an offset there. Maybe—that is the general

framework.

Mr. SHIMKUS. Okay. So you would take—so you would not accept

Congressman Watkins’ premise that there is no control of the

money and that the money is going totally for the needs of the food

and the medicine?

Mr. WOOD. Sir, I would never say totally. I would say with a

high degree of confidence, we are absolutely sure that the vast,

vast majority of this revenue is going for what it is——

Mr. SHIMKUS. Does State Department believe that money is fungible?

Mr. WOOD. Yes, sir.

Mr. SHIMKUS. In other words, that if this money is being used

to feed the populous and the medicine needs, then that is saving

revenue for the Iraqi government to fully feed the Guard and also

the people in high places and authority?

Mr. WOOD. That is true. However, Iraq is under the most sweeping sanctions regime in the history of the world. And it is not clear

where they will develop new hard currency in order to buy imports,

in order to do that.

Now, we have talked about the smuggling program; and this continues to be a problem. There has been smuggling of gas oil products through the Gulf; and we estimate that that has been reduced

from roughly 55,000 barrels a day a year ago to approximately

5,000 barrels per day now. And we have done this through a combination of third-party pressure on Iran, which is where the smuggling was destined; the bombing of the Basrah oil refinery which

was responsible for producing this oil; and through the activities of

the maritime interception force and other activities there. So there

is a dramatic decrease in that smuggling.

Trade through Turkey we also believe has decreased significantly

by about 50 percent. We estimate that the current trade is roughly

20,000 barrels per day compared to 45,000 barrels a day a year

ago. We are continuing to work hard with Turkey on reducing this.

So much for the good news. The bad news is that there seems

to be a growing illicit trade through Syria, and we are looking into

55

that; but I assure you that we take the smuggling problem seriously. We take—it is of particular concern because it is the way of

raising hard currency for use by the Iraqi regime, which is not

under our control. It is the principal way that they can raise hard

currency that is not under our control. And what they can buy with

hard currency are things that we don’t want them to buy.

Mr. SHIMKUS. I would love to follow this line of questioning more,

but I want to go to my last one. And this is a little bit more touchy

and generic.

How can we as a Nation continue to follow the line of the U.N.

position that gives us the authority to patrol the no-fly zone, to do

the oil-for-food program, when we are now engaged in activities in

Kosovo without any negotiation of the United Nations, no U.N. Security Council. Do you not think that we are now in a position of

not legitimizing our presence in that region under the U.N. when

we have totally disregarded U.N. negotiations in our current activities?

Mr. WOOD. I think I would make a couple of quick points. First,

our policy is to pursue U.S. objectives. And to the degree that the

U.N. assists us to do that, it is a valuable tool in the——

Mr. SHIMKUS. It is a U.N. no-fly zone. It is not a U.S. no-fly zone.

Mr. WOOD. The no-fly zone is carried out within the framework

of U.N. resolutions. They are not explicitly authorized by U.N. resolutions.

Mr. SHIMKUS. Is it a U.N. no-fly zone or a U.S. no-fly zone?

Mr. WOOD. Again, the no-fly zones were put in place following

the Gulf War after Saddam Hussein began to attack his own

people——

Mr. SHIMKUS. Who authorized it?

Mr. WOOD. It is not authorized explicitly in any U.N. resolution,

but it is within the framework of U.N. resolutions that calls upon

nations to assist—to help prevent Iraq from brutalizing its own

population. But there is nothing—but the pilots of the no-fly zones

don’t wear blue helmets. They don’t fly U.N. planes. There is no

U.N. chain of commands whatsoever. That is a green-hatted operation.

Mr. BARTON. What is a green hat?

Mr. WOOD. It is under the national chain of command.

Mr. SHIMKUS. So go ahead and continue with the answer, then.

Mr. WOOD. Again, we utilize the United Nations, as every nation

does——

Mr. SHIMKUS. No, we don’t. We haven’t in our recent activities

in Kosovo. We pick and choose when we need to use the U.N. and

when we do not.

Mr. WOOD. We certainly believe that our actions in Kosovo are

entirely in keeping with international law. There is, in fact, a vote

taking place just about now, I hope, in the Security Council on a

resolution to be introduced by Russia criticizing the NATO action.

And we believe that it will fail both for lack of votes and because

it will have no fewer than three vetoes on it. So we will have to

see.

Mr. BARTON. We will have to reclaim somewhat regular order so

that we can let Mr. Burr get a question in. Mr. Burr is recognized

for 5 minutes.

56

Mr. BURR. Thank you, Mr. Chairman. Mr. Wood, just keep that

mike next to you. I want to ask you about your testimony. Did you

really mean it when you said you are pleased to be here today?

Mr. WOOD. Absolutely, sir.

Mr. BURR. Did you write this testimony?

Mr. WOOD. No, sir.

Mr. BURR. When were you told that you were testifying in front

of this committee?

Mr. WOOD. Wednesday, sir.

Mr. BURR. Who told you?

Mr. WOOD. I was asked if I was available to do it.

Mr. BURR. Who asked you?

Mr. WOOD. Our normal legislative——

Mr. BURR. Name?

Mr. WOOD. I don’t think I have a name.

Mr. BURR. You don’t know who asked you?

Mr. WOOD. I can’t recall, sir.

Mr. BURR. Who would have approved it?

Mr. WOOD. My boss approved it.

Mr. BURR. Your boss is who?

Mr. WOOD. Assistant Secretary Welch.

Mr. BURR. Did he write your testimony?

Mr. WOOD. No.

Mr. BURR. Who wrote your testimony?

Mr. WOOD. It was written in our office.

Mr. BURR. Who did that?

Mr. WOOD. Some of the people behind me, but——

Mr. BURR. When did you read it?

Mr. WOOD [continuing]. I take full responsibility for it.

Mr. BURR. When did you read your testimony for the first time?

Mr. WOOD. Wednesday evening.

Mr. BURR. Did you have the ability to change your testimony?

Mr. WOOD. Yes, sir.

Mr. BURR. Did your boss sign off on your testimony?

Mr. WOOD. He reviewed it. He didn’t sign off on it.

Mr. BARTON. Who is your direct supervisor?

Mr. WOOD. Assistant Secretary Welch.

Mr. BURR. Is he the final sign-off on it, or did it have to go somewhere else?

Mr. WOOD. It had to be cleared fairly widely.

Mr. BURR. To what degree, as far as the hierarchy at State?

Mr. WOOD. Well, because it reflected—because the principal task

in writing it was to update the testimony that I think has been

mentioned here earlier that Under Secretary Pickering gave in the

Senate, there was a wide, wide clearance.

Mr. BARTON. Would the gentleman yield?

Mr. BURR. Let me make one statement, and I would be happy to

yield. Would you disagree with the statement that your testimony

was to support what the State Department’s policy is?

Mr. WOOD. Yes, sir, that is exactly what my testimony is for.

Mr. BARTON. I just want to follow up on this same line. We had

some concern, Mr. Wood—and we are not personally offended that

you are here. I think you are doing a good job in a difficult situation, so I want to let you know that. But we had a concern that

57

we were not getting the appropriate level of testifier that should

have been here.

That was expressed to me early in the week, and did I want to

call the Secretary of State and demand that there be a higher-level

official than yourself; and I said no, that the main thing was to get

the meat of the issue before the subcommittee. Of course, then

when we didn’t get testimony until this morning, that kind of inflamed opinion about that.

How many people in the State Department have direct impact on

this policy that Mr. Burr and I and every other member of the subcommittee is concerned about? Could you elaborate the chain of

command of the people who are directly involved in this policy?

Mr. WOOD. By ‘‘this policy,’’ you mean our policy toward Iraq?

Mr. BARTON. No, the great oil-for-food policy that you are trying

with some difficulty to defend.

Mr. WOOD. Starting with the Secretary of State. There are officials at the Under Secretary level—well, at the——

Mr. BARTON. I am with Mr. Burr on this one. We want names

of people. We want names and titles: Secretary Madeleine Albright,

the Secretary of State——

Mr. WOOD. Deputy Secretary of State Strobe Talbott, Under Secretary for Political Affairs Thomas Pickering, Under Secretary for

Economic Affairs Stuart Eizenstat, Assistant Secretary for Near

East/Middle East Affairs, Martin Indyk, Assistant Secretary for

International Organization Affairs, David Welch.

Mr. BARTON. That is six so far.

Mr. WOOD. There are also people in our intelligence——

Mr. BARTON. Give us the name of the person or at least the title.

I know the State Department is a massive bureaucracy, so I may

even get beyond your mental ability here.

Mr. WOOD. Getting beyond my mental ability is not a high

threshold.

Mr. BARTON. No, I think so you are an intelligent man.

Mr. WOOD. But perhaps I can cut this—can help by saying that

it is routine State Department practice—and I can’t speak for other

departments of the government—that officials at the Deputy Assistant Secretary level, my level, are often the testifiers on a variety of subjects. It is not our policy, however, to fail to provide testimony on a timely basis.

Mr. BARTON. Who is your direct report? I forgot.

Mr. WOOD. David Welch, assistant secretary.

Mr. BARTON. But you are the principal deputy assistant.

Mr. WOOD. That is right.

Mr. BARTON. Which would indicate that there is a deputy probably below you.

Mr. WOOD. That is right.

Mr. BARTON. Is it safe to say that you are the lowest level State

Department official that they could comfortably get away with

sending before this subcommittee?

Mr. WOOD. No, sir.

Mr. BARTON. No, sir? There is somebody lower than you?

Mr. WOOD. I hope so, sir.

Mr. BARTON. Okay. If we want to pursue this, though—and I

think we will. I have heard nothing yet to indicate that this is a

58

policy that the Congress should support with any enthusiasm. So

if we want to continue this, we should ask up to probably the

Under Secretary and just have a State Department panel so that

we get every player in the State Department that has put this policy together before this subcommittee.

Mr. WOOD. Well, I——

Mr. BARTON. And probably the U.N. Ambassador.

Mr. WOOD. We very much hope that everybody from the State

Department would speak with one voice on the policy. And I believe that I can adequately represent that voice.

Mr. BARTON. Oh, I think you are making the best of a bad deal

before this subcommittee.

Mr. WOOD. And at the same time, my initial statement that we

were genuinely grateful for this opportunity to testify before the

subcommittee, a subcommittee that you yourself pointed out we

don’t testify before very often——

Mr. BARTON. But you will.

Mr. WOOD. And we look forward to it, sir.

Mr. BARTON. There is a new beginning. We will recognize Mr.

Burr for another 5 minutes because I took 3 minutes and didn’t

even let you get started.

Mr. BURR. Mr. Wood, how long will it take for Saddam to be removed?

Mr. WOOD. Difficult to say, sir. Sooner the better.

Mr. BURR. Who will remove him?

Mr. WOOD. We are working—we, including our new Special Coordinator for Transition in Iraq, Mr. Frank Ricciardone, is working

with regional groups, with dissident groups.

Mr. BURR. Outside Iraq? Inside Iraq? Who will actually bring

him down?

Mr. WOOD. Don’t know.

Mr. BURR. We don’t know?

Mr. WOOD. Don’t know yet.

Mr. BURR. Will we?

Mr. WOOD. Yes, although not necessarily much before it actually

happens. I just don’t—this isn’t the kind of thing that lends itself

to speculation or to, really, public analysis. But it is certainly the

case that there are dissident groups outside of Iraq. There are

groups inside of Iraq that have been oppressed by Saddam Hussein. This includes the Kurds in the north, the Shiites in the south,

it includes numbers of groups. And we believe that every day and

every way Saddam Hussein is alienating his own population. This

is one of the reasons that we do not wish to provide him the additional lever of claiming that he is protecting his population.

Mr. BURR. So the State Department has determined that hunger

does not mobilize his people to be upset with him? Is that what you

are saying?

Mr. WOOD. Yes, and he has made that statement.

Mr. BURR. If he gives them the food, they will be angrier at him?

Mr. WOOD. He has concluded that with his control of the media

and other things, it is easier for him to blame the outside world

if his——

Mr. BURR. I am trying to determine what mobilizes his people,

because I think your whole policy is based on an overthrow from

59

within. And I guess I would ask you where have we used this policy before and it worked?

Mr. WOOD. I think that there are numbers of cases where we

have supported dissident groups, both inside and outside of countries, and it has produced an overthrow. I wouldn’t like to go into

specifics in this forum.

Mr. BARTON. I think that it is working really well in Cuba. I

think Fidel Castro came into being in 1959.

Mr. HALL. Haiti.

Mr. BARTON. Haiti. We have a number of sterling examples of

this policy.

Mr. BURR. Clearly, if we adopt the same definition for the term

‘‘removal’’ being death by old age, then we have quite a few years

that we would live with this policy.

Let me just make one comment and then I will quit, Mr. Chairman. Thomas Pickering testified in front of the Senate Foreign Relations Committee on March 17, a little over a week ago, I guess.

I don’t think there was anything real difficult in preparation for

you to testify. I think, in fact, there was intent at the State Department to make sure that we were as ill prepared for your testimony

as we possibly could be.

I will push next time a State Department official is here to

refuse that they testify. When we find out that we can get the

same information from other sources, maybe we will take that opportunity to grow a larger surplus by our reductions at the State

Department in personnel.

I am confident that this is not the last time somebody from the

State Department will be in front of this committee and many

other committees to try to defend this program, the policies that we

have got, and ultimately put all the policies of this State Department under scrutiny.

Mr. Chairman, I thank you and the ranking member for your

willingness to hold it; and I feel confident that next time, if we

don’t do it on the last day before a break, that we will have a full

subcommittee of members here to pursue this policy further. And

I yield back.

Mr. BARTON. The Chair is going to recognize himself for 5 minutes.

Mr. Williams, can you give me right now a verbal approximation,

and then within a week or so in writing, the number of wells in

Texas that have been shut in since the oil-for-food program began

in late 1996?

Mr. WILLIAMS. I will do that, Mr. Chairman. But since February

1998 through about February 1999, we have shut in about 2,200

wells in Texas; and I will provide that additional information.

Mr. BARTON. 2,200?

Mr. WILLIAMS. Right. And we have plugged about 9,500.

Mr. BARTON. Plugged about 9,500. Mr. Smith, can you again give

me an approximation now and within a week or so the numbers

for that same question in Oklahoma.

Mr. SMITH. Happy, to Mr. Chairman. Thank you. We have about

70,000 wells in Oklahoma that produce oil and some gas. As Congressman Watkins mentioned, most of those are marginal. We are

plugging wells right and left. I don’t know the number. I can get

60

it for you. Maybe Mr. Brown, who is a producer here with me, will

know. I am going to guess—and then I will substantiate my number later—that we have plugged since this oil-for-food program

started probably about 10 to 15,000 wells.

Mr. BARTON. 10 to 15,000 wells in Oklahoma?

Mr. SMITH. Yes, sir.

Mr. BARTON. So many more in Oklahoma than in Texas?

Mr. SMITH. I think so. Again, that is off the top of my head. I

will verify that.

Mr. BARTON. There are different terms for stopping production.

But the term ‘‘plug’’ means it is literally cemented in and you cannot resume production from that well.

Mr. SMITH. That is correct.

Mr. BARTON. So it is gone.

Mr. SMITH. That is correct.

Mr. BARTON. Mr. Hakes, I asked those two gentlemen because

they represent States. You represent the United States. Could you

give us your best approximation for domestically—the number of

wells that have been plugged and again, as soon as we can get the

exact number, get it to us for the record since this oil-for-food program began.

[The following was received for the record:]

The EIA estimates that as many as 33,000 oil and gas wells were plugged in 1998

in the United States. This estimate is based on two pieces of information and certain assumptions. The Interstate Off and Gas Compact Commission (IOGCC), in a

recent report entitled ‘‘A Battle for Survival?: The Real Story Behind Low Oil

Prices’’ (Updated Report—April 1999), reported the results of a survey of States that

showed that (excluding Texas) at least 48,000 oil and gas wells were abandoned or

idled in 1998. It is unlikely that as many as 50 percent of these wells were plugged.

Plugging costs can be high and operators generally try to avoid incurring them as

long as possible. On the other hand, it is noted that both Pennsylvania and Colorado

did report higher plugging percentages. Assuming, for the purpose of determining

a rough upper estimate, that 50 percent of the abandoned or idled wells were

plugged, the total wells plugged outside of Texas would be 24,000. For Texas, a precise number (8,951) of plugged wells was made available by the Texas Railroad

Commission. Combining the two estimates yields the 33,000 wells for the total

United States. While it was not possible to determine the exact distribution of total

plugged wells between off wells and gas wells, it is clear that the large majority of

these were oil wells.

Mr. HAKES. If you are using the term ‘‘plug’’ in the literal sense,

that would be data we would get from the States, but we would be

glad to assist in the preparation of that number for you.

Mr. BARTON. Well, give me an estimate. And I am not going to

hold you to a great degree of accuracy. I am just trying to get a

feel for how many wells we have lost forever since this program

began. And we have got 10 to 15,000 in Oklahoma and around

2,000 in Texas. So can you give us—fill in the blank for the rest

of the country?

Mr. HAKES. Well, I think those are the two largest States for

those kinds of wells, so you could extrapolate from that data and

say all the other States maybe it is twice that or something.

Mr. BARTON. So kind of a back-of-the-envelope, you would say 20

to 30,000 wells?

Mr. HAKES. I am extrapolating from their data. I would have to

go back and check.

Mr. BARTON. You can get us—to the extent such data is available, you can compile that and get it within the next 2 weeks?

61

Mr. HAKES. Yes, we will certainly do that.

Mr. BARTON. Mr. Smith?

Mr. SMITH. Mr. Chairman, just a correction. I misread Mr.

Hakes’ chart. I read it as January 1996 for the oil-for-food program

start date rather than 1997. I think I was probably high, but I will

get those for you.

Mr. BARTON. Okay. We are going to make a good faith effort to

either terminate this program or substantially change it. And in

order to do that, we need to have factual data that we can show

our friends at the State Department these losses have occurred.

And while there are other factors, we are not going to deny that

the Asian situation and the Caspian Sea and all of that, there is

a fairly substantial good correlation between this program starting

and the problems in the other area.

Mr. Wood, do you know how many barrels a day the Iraq Nation

needs just for internal consumption? And Mr. Hakes may know

that number.

Mr. HAKES. The number we use is about 550,000 barrels a day.

Mr. BARTON. 550?

Mr. HAKES. So the exports are roughly 2 million.

Mr. BARTON. I want to be sure. If they are producing 2.5 million

barrels or 2.6 million barrels a day, that is for export; and then on

top of that they are using half a million.

Mr. HAKES. I believe that is the production number.

Mr. BARTON. That is the total production number and not the export number?

Mr. HAKES. Yes, the exports are about 2 million, I believe.

Mr. BARTON. Okay. So is it the Department of Energy’s energy

information estimate that they are basically at maximum production right now?

Mr. HAKES. Yes, because of their difficulty getting spare parts

and capital investment. You know, I think if they had full access

to parts and capital investment, they could quickly get back to prewar levels; and I think just in terms of the physical potential there,

if you had full investment there, they could probably get up to,

maybe, 5, 6 million barrels. But right now they have limited access

to capital and parts.

Mr. BARTON. But given the infrastructure in place, we can assume that they are at maximum production and they are using half

a million barrels a day for internal consumption and then they are

exporting as much as they can?

Mr. HAKES. Right. Just to be a little bit more precise, we are estimating that they may go up 50,000 to 100,000 barrels a day over

the next year or so, so that there would be some addition. And I

would say that there are a couple of respected firms who think they

might be able to increase a little bit more than that. But somewhere in that range.

Mr. BARTON. Now, Mr. Wood, as this program was put together

at the State Department, and I guess the White House and in the

United Nations, my understanding is that Iraq has financial assets

that have been frozen in western banks since the invasion; is that

correct or not correct?

Mr. WOOD. That is correct, sir.

62

Mr. BARTON. Do you know the amount of those assets in terms

of dollars?

Mr. WOOD. I don’t think I do.

Mr. BARTON. Can you get that for us?

Mr. WOOD. We can look for it for the number, sir.

Mr. BARTON. Can you do more than look for it? Can you find it?

Mr. WOOD. We will get you a number, sir. My best understanding is that there are—that there are substantial claims by

Americans and by others against those frozen assets just for

your——

[The following was received for the record:]

Question. Into which bank are the revenues from sales of Iraqi oil under the Oilfor-Food program are deposited?

Answer. Revenues from sales of Iraqi oil under the Oil-for-Food program are deposited into an account at the New York branch of the Banque Nationale de Paris.

Iraq does not have access to the bank account, nor can Iraq change banks.

Question. What is the value of Iraqi frozen assets in the United States? Please

provide background on this matter as it relates to the Oil-for-Food program. Answer. Blocked Iraqi assets in the United States total between $1.2 and 1.3 billion. The asserted value of prewar claims against Iraq by U.S. citizens, corporations,

and the U.S. government totals approximately $5 billion.

In 1992, the U.N. Security Council adopted resolution 778 which required states

to transfer to the U.N. limited blocked assets representing the proceeds from the

sale of Iraqi oil paid after sanctions were imposed on Iraq on August 6, 1990 to fund

UNSCOM and the UN Compensation Commission. The USG transferred to the U.N.

a total of $211 million. Few other countries made such transfers.

The U.S. opposes making further transfers of blocked Iraqi assets to the U.N. because of the potential damage to the interests of U.S. claimants against Iraq.

Mr. BARTON. I understand. But here is my point. Instead of letting the Iraqis export oil, if we have assets that are in western

banks, why couldn’t we use those assets to buy the food and to

send it to the Iraqis and put a liability against future oil production when we have a new government in Iraq so that you still have

a contingent claim by the current claimants, but you don’t decimate

our domestic oil and gas industry in the short-term?

Use the money in the bank, buy them the food and the medical

equipment, send it over there, put a voucher in there, put a marker

in place. Then when we get a new government, then future oil revenues can go back into those funds, into those accounts that we

borrowed against or drawn against. I mean does that seem to be

a possible rational policy?

Mr. WOOD. I believe that such an idea has been considered. I

think that the lawyers tell us——

Mr. BARTON. Well, God help me if I have suggested something

that the lawyers might have a problem with.

Mr. WOOD. I think that the lawyers have some concerns about

substituting current claims against current assets for current

claims against future assets. But I will certainly ask the questions,

sir.

Mr. BARTON. Lawyers have concerns about the sun rising in the

east every morning. It may not come up tomorrow, so.

The gentleman from Texas is recognized for 5 minutes.

Mr. HALL. I am entitled to the same amount of time to talk about

the engineers. Joe is an engineer, the engineer of the year in Texas

the year before last, I think.

You know, as I have been listening—and I thank you for your

testimony—and questions that have been asked, and I don’t want

to ask any of you to comment on what I am about to say, but it

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seems like we are aiding the enemy. I don’t think there is any

question that we are aiding the enemy. It seems, while I don’t subscribe to anybody lying to a grand jury or anybody else, the Senate

committee, it seemed like this dwarfs Oliver North’s being charged

with aiding the Contras when they were our friends. And here we

are aiding a country that is absolutely our enemy, and we are feeding its children and we are doctoring them.

And while that maybe makes a lot of us feel good, we are putting

off the time that those same people are going to rise up and put

him out. That is the goal. That is why we are bombing Yugoslavia

today, to encourage the people to rise up and fight their own war.

Just to get the scenario in Baghdad, it is a sunny afternoon; and

Saddam looks up and sees a truck driving up and tells all of his

buddies there, Let’s tie our camels over in front of the Long

Branch. We have this truck coming in. I hate this stuff but we are

going to unload it. You have told us, Mr. Wood, that he doesn’t like

the program. That is the kind of scenario that could take place.

And then get back to this country and the oil hits here. All of us—

all the testimony I have heard is that this program is hurting our

domestic Nation’s oil industry. But it hits over here, and they say,

Well, we don’t like it. We don’t like this program. I know this committee doesn’t like the program. But let us unload it and put it in

the pipeline.

Two of you got bad deals there. I always thought somebody had

the best of a contract. You know, marriage isn’t anything but a contract; and I didn’t marry until I thought I had the best of the contract. Here it looks like they both got the worst of the contract.

Why are we putting up with this? Why are we continuing with

this? In February 1998 the U.N. secretary general criticized this

oil-for-food program basically for delays and inefficiency. And it

seems if this is hurting our Nation’s oil industry, at the same time

being criticized by the General Secretary of the U.N.; and Saddam

says he doesn’t want it, what would it take to kill a program like

this? Not to fund it? Let me ask a more pointed question: How

much money is in our budget to support this program?

Mr. WOOD. Mr. Hall, this program does not directly cost the

United States a nickel because it is using Iraq’s money exclusively.

Mr. HALL. The money that is in their banks over here?

Mr. BARTON. Are we are paying the unemployment claims for all

the displaced workers out of this program?

Mr. HALL. I will take all the help I can get. Thank you, Joe.

Mr. WOOD. I understand the point, but the fact is this uses the

proceeds from Iraqi oil sales to fund humanitarian supplies for Iraq

to ensure that those revenues are not used for weapons of mass destruction or other nefarious means; to fund, in fact, inspections

against weapons of mass destruction, which I admit are temporarily suspended and we are working hard to get them back into

place. And roughly a third of it goes to the U.N. compensation commission to pay the just claims of poor Kuwaitis, poor Saudis, poor

Americans, for losses that they suffered during the Gulf War.

Saddam Hussein doesn’t like this because he is only getting a

share of the total value of his oil revenues, because he is not controlling the share that he gets; and the share that he is not controlling is going to fund inspections of his weapons-of-mass-destruction

64

program; and it is going to feed his population so that he cannot

blame their unhappiness on the outside world.

This in our view is—this program is absolutely fundamental to

maintaining the solidarity of the international community behind

a continued tough line on Iraq. And as you know, we have been facing some problems in that regard. We think that oil for food is absolutely fundamental to maintaining that tough line.

When he was interviewed by David Frost, George Bush said that

his most important accomplishment was not winning the Gulf War;

it was forming the coalition that won the Gulf War. We are trying

to maintain that kind of coalition. We are trying to maintain that

kind of international consensus, in spite of the fact that a potentially very rich, potentially very powerful country is doing everything it can to get out of the box. And we are trying to keep them

in the box.

Mr. HALL. Well, I must admit we don’t have all the information

that you have at your disposal, and that is the purpose of these

hearings. And I want to reread the record myself.

At best, it seems to me that we are helping to keep Saddam in

charge over there by feeding his children and doctoring his people.

And if you have another part of your body that hasn’t been beat

on, if you will turn toward me, I will ask you some more questions.

But without that, I have had all the time I need, Mr. Chairman.

Mr. BARTON. I just have a few wrap-up questions for this panel.

And I don’t know if this would be Mr. Wood or Mr. Hakes, but

we understand that there are currently $380 million in spare-parts

contracts that have been signed with the Iraqi government for additional infrastructure improvement, but only $11 million worth of

that equipment has arrived in the country. If and when that equipment arrives, how much additional export or production capacity

does that give the Iraqi oil industry?

Mr. WOOD. I could begin to answer that question. I am not sure

what the incremental effect on Iraqi exports will be. But the

delay—I mean, we are now in the second 6 months in which up to

$300 million in each phase has been made available for the Iraqi

infrastructure improvements. The delay is the result of close scrutiny by the sanctions committee of the proposed contracts, making

sure that they go to the right things and they don’t go to the wrong

things.

For instance, we continue to keep on hold contracts that the

Iraqis want to use to improve the Basrah refinery, which is the one

that we bombed which was heavily implicated in illegal smuggling.

And I am not sure what, frankly, this rash of improvements in the

Iraqi infrastructure, what the marginal impact——

Mr. BARTON. Do you know, Mr. Hakes?

Mr. HAKES. Well, I think our analysts in arriving at their projection have assumed a sort of moderate speed in the arrival of these

parts. And, I believe, in my written testimony we say that there

is some uncertainty that the parts will arrive very quickly and

fully. We might raise our estimates a little bit if they increase

more—are delivered more slowly we might lower a little bit. But

we have sort of assumed that they would arrive at a moderate

pace.

65

Mr. BARTON. Okay. Well, you are going to get a letter next

week—the Secretary of State is going to get a letter. We are going

to ask that no contracts be signed. You are also going to be asked

to give all information that is not classified as to the contents of

those contracts. And I am going to sign that letter as subcommittee

chairman, and I am going to ask Mr. Hall and every other member

of the subcommittee to sign it. Whether I can get them all to sign

it, I don’t know. I see absolutely no sense in continuing to give the

Iraqis the ability to increase their production, even if it is marginal, while our industry is being decimated in the United States.

The other thing we are going to ask you, Mr. Wood, is we want

a complete itemization of all revenues that have been collected

under this program. We want a complete record of all disbursements that have been made under this program. We want an estimate of the expected revenues for the fiscal year that we are currently in and the fiscal year that will begin in October and an expected disbursement from those same funds. And we are going to

want that in the next 2 weeks. And we have got to get you the official request in writing for what I just itemized. I understand you

can’t act on anything until we make it official. But we are going

to take a very, very serious look at this program. And I am going

to do everything I can—and I mean everything—to either stop it

or at least change it so that we provide for the legitimate humanitarian needs of the Iraqi people, but we do it in a way that is different than is currently being done. And there are some things that

can be done differently through our food-for-peace program, using

the existing Iraqi assets that are in western banks. There are all

kinds of ways to help the humanitarian needs of the Iraqi people

that don’t involve, basically, letting Iraq produce as much oil as it

can and export as much as it can. I mean, that, to me is a flawed

policy; and it is a failed policy, and it is not in the national security

interest of the United States of America.

Does this panel wish any final comments before we go to the

third panel? Anybody? Well, gentlemen, we want to thank you for

your attendance. There will be additional questions for the record

in addition to the ones that I have itemized; but we do appreciate

it, and this is an important hearing of this subcommittee; and your

input has been very valuable, so you are excused.

Mr. HALL. And you might tell them that their long tenure at the

table will shorten the tenure of the next panel. You have done

some good for somebody.

Mr. BARTON. We would like to call forward our third and final

panel, but not the least important. Mr. Adam Sieminski, a principal and senior oil analyst from Baltimore, Maryland; we have Mr.

Tom Taylor, who is the regional Vice President for the Texas Independent Producers and Royalty Owners Association; we have Mr.

F.W. Pete Brown, co-owner of the Cimarron Production Company

in Oklahoma; and Mr. David Bole, who is in corporate research and

development, Randall and Dewey, Incorporated, in Houston, Texas;

and I believe we have Mr. Scott Anderson, who is the executive director of TIPRO who wishes to appear at the table with the TIPRO

witness.

Mr. ANDERSON. I will just sit right behind him.

66

Mr. BARTON. Gentlemen, your statements are in the record. We

want to thank you for getting your testimony in on time. It is good

to know the private sector pays more attention than some of our

public officials. We are going to start with Mr. Sieminski. How

close am I?

Mr. SIEMINSKI. That was very good, Mr. Barton. Thank you very

much.

Mr. BARTON. We will give each of you 5 minutes and then we will

have questions. Starting with you, sir.

STATEMENTS OF ADAM E. SIEMINSKI, PRINCIPAL AND SENIOR

OIL ANALYST, BT ALEX BROWN; TOM TAYLOR, REGIONAL

VICE PRESIDENT, TEXAS INDEPENDENT PRODUCERS AND

ROYALTY OWNERS ASSOCIATION; F.W. ‘‘PETE’’ BROWN, COOWNER, CIMARRON PRODUCTION COMPANY; DAVID L.

BOLE, CORPORATE RESEARCH AND DEVELOPMENT, RANDALL AND DEWEY, INC.

Mr. SIEMINSKI. Thank you, Mr. Barton. I appreciate the opportunity to come in and provide a statement on some of the factual

aspects associated with the Iraqi exports.

Let me first try to answer a question that you just asked, sir. What does $300 million worth of spare parts and equipment do for

production? Let me just take a quick crack at that.

U.N. personnel experts who were sent to Iraq said that production would fall somewhere between 4 to 8 percent a year if they did

not get $300 million in spare parts. So if we just said 5 percent or

6 percent, that would be somewhere between 125,000 barrels a day,

up to 150,000 barrels a day that, presumably, would be able to stay

on line with those funds coming in. And so that would—if we are now up to $600 million, I think we

could be talking about this possibility of 250,000 barrels a day of

oil that would be available to the Iraqis to export.

Let me, in light of, I think, that 7-minute rule, let me make

seven quick points. Again, putting the Iraqi oil exports into perspective, they were the greatest source of OPEC’s difficulty in

meeting their own compliance rule. Second point, exports have

gone up quite a bit. We went from about 1.5 million barrels a day

in 1998, and that number should hit 2.1 to 2.2 in 1999. That is a

little bit less than the growth that occurred between 1997 and

1998.

The third point I had in my written statement said that Iraq’s

exports were the second largest influence in 1998 in driving oil

prices lower. Listening to Mr. Hakes, I might want to revise that.

He said that, I believe, that the incremental loss of demand in Asia

was about a million barrels a day. And Iraq’s exports went up just

a little under 900,000. Mr. Hakes said that in his chart, he had the

incremental amount in Asia was about 850,000. If we took his

number, then Iraq was No. 1 in terms of its impact on the market

in 1998.

Fourth point. Production capacity in Iraq looks like it is stuck.

Looks like it is stuck at 2.7 million barrels a day. That means that

imports would presumably be capped at somewhere near 2.1. But

the Iraqis have managed to somehow keep production growing faster than the U.N. technical experts thought they could. And it was

67

only about a year ago that the U.N. said that exports would be limited to about 1.6 or 1.7 million barrels a day, and they have gotten

well over that level. So I don’t know how that is being accomplished, and that might be a question that you might want to ask

somebody.

Fifth point——

Mr. BARTON. Our staff actually had that in the prepared questions. So it will be asked for the record.

Mr. SIEMINSKI. The fifth point is that while taking the ceiling off

of the $5.265 billion ceiling actually could become more than just

a technical kind of thing very soon. Oil prices have already gone

up quite a bit since the beginning of the year. Iraq sold oil last

week for $12 a barrel. All they need is another $2 on top of that

$12 number that they got last year, and they will hit their cap.

And they will not do this during this fifth phase, but if you projected that $2 increment into the next phase which starts May 25,

they would actually collect, if they exported 2.1 million barrels a

day, $5.3 billion. And if they can export more than 2.1, that cap

could actually come into effect at a price $2 above current WTI.

Sixth point is kind of, I think, an interesting one and this is—

you are going to have to ask somebody else because I don’t know

the answer to this question, but I would love to know the answer

to it. The last two times that Iraq has gone to war—in late 1979

just before their invasion of Iran and then in 1990, in the first half

of 1990, just before the invasion of Kuwait—there was a sharp rise

in production in Iraq. And we have seen just recently another

sharp rise in production.

And I heard the comment made earlier that oil or funds are fungible. Even if the sources—with more revenue coming into Iraq

from these exports, that would give Saddam the ability to use his

own internal funds for possible mischief, and I am kind of wondering what this big increase that we have seen in production exports just in the past month or so really means.

Final point is one that I really wish that Deputy Secretary Wood

would have made and that is that if Iraq is allowed to rebuild its

facilities—and this would be a lot easier done if the overall sanctions were moved or if the oil-for-food program was changed in

some way, as there have been recommendations on the Security

Council to allow companies to go in and invest to help Iraq rebuild

its—and repair its equipment and facilities, I would think that Iraq

would be quite capable of getting up to 3.5 million barrels a day

of production pretty quickly, and all of that increment would be

available for export.

So I would conclude, Mr. Chairman, with sort of a kind of a recommendation, which is that one of the key focuses of this committee and the questions that I think you should pursue with the

State Department is how do we keep direct foreign investment by

other countries into the Iraqi oil industry limited during the period

that sanctions are on and Iraq is still misbehaving. And I thank

you for your time.

[The prepared statement of Adam E. Sieminski follows:]

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PREPARED STATEMENT OF ADAM E. SIEMINSKI, PRINCIPAL AND SENIOR OIL ANALYST,

BT ALEX. BROWN INCORPORATED

IRAQ’S OIL EXPORTS AND WORLD OIL MARKETS

Iraqi exports were a major reason for the drop in oil prices in 1998

The rise in Iraqi production from an average of 1.15 mmb/d in 1997 and 2.11

mmb/d in 1998, to about 2.5 mmb/d currently has been the greatest source of

OPEC’s difficulty in meeting quota compliance under agreements reached in March

and June of 1998. Iraq’s oil exports, which rose along with production, were a major

contributor to the oil price weakness of 1998 and early 1999. Two key factors played

a role in this situation. First, the UN’s Oil for Food Program sets a monetary (not

oil volume) target for humanitarian relief. If oil prices decline for any reason, the

amount of oil Iraq is allowed to sell under the program can rise. Low oil prices allowed Iraq to sell more barrels under the ‘old’ $2 billion per six months plan. Second, in early 1998 the UN raised the oil-for-food revenue ceiling to $5.265 billion

every 180 days.

Iraqi oil exports increased from 0.59 mmb/d in 1997 to 1.47 mmb/d in 1998

During the recent period of low oil prices, the level of exports from Iraq was limited only by Iraq’s wellhead production and pipeline/terminal capacities. A UN rule

requiring at least 50% of exports to transit via the 1.0 mmb/d capacity Ceyhan (Turkey) route is being ignored, since all export amounts over that level are now exiting

mainly via the Gulf port of Mina al-Bakr. Exports are currently averaging about 2.1

mmb/d and have exceeded 2.5 mmb/d for short periods of time since January 1999.

How the rise in Iraqi exports influenced the oil markets in 1998

There is little doubt that the rise in exports from Iraq, a 0.87 mmb/d increment

between 1998 and 1999, had a significant impact on the oil markets. Of course there

were other factors, but in our opinion, Iraq’s exports were the second largest influence pushing oil prices lower in 1998.

• The crisis in Asia reduced oil demand by 1.0 mmb/d against expectations

• Warm weather dropped demand by 0.5 mmb/d compared to ‘normal’

• Russian exports rose contra-seasonally by 0.2 mmb/d in 4Q 1998

• China curtailed oil imports (by about 0.3 mmb/d) in 2H 1998

• OPEC’s efforts to trim production in 1998 were neither timely nor sufficient

• OECD inventories rose some 200-300 mb above industry norms

Production history

Iraq’s oil production climbed from about 1.5 mmb/d in 1972 to an annual peak

of 3.5 mmb/d in 1979. In the last quarter of 1979, Iraq managed to produce 3.7

mmb/d. The Iran-Iraq war, which started in September 1980, lead to a significant

decline in export capacity and wellhead production. From a low of 1.0 mmb/d production in 1981-83, Iraq’s output climbed back to 3.5 mmb/d just before the invasion

of Kuwait in August 1990. In 1991-92 Iraq produced about 0.4 mmb/d (which is

probably a good estimate of actual internal consumption). More recently, Iraq’s internal use has appeared to be about 0.65 mmb/d, but this includes UN-approved exports of 0.1 mmb/d of products to Jordan, and probably reflects some level of smuggling.

The main physical constraint on exports is now wellhead capacity

Production capacity in Iraq appears to be limited to about 2.7 mmb/d. The UN

has been slow to approve imports of the equipment, expertise and capital required

to boost Iraq much beyond this level. Nevertheless, Iraqi engineers have surprised

the UN inspectors with their ability to keep output climbing. In March 1998 UN

technical experts estimated that Iraq’s wellhead production capability was unlikely

to exceed 2.2 mmb/d (mid-1998) or 2.4 mmb/d (start 1999). In fact, Iraq has managed to exceed these estimates by about 0.2 mmb/d.

Status of oil spare parts and equipment authorizations and repairs

In view of Iraq’s inability to take full advantage of the $5.3 billion oil-for-food allowance, in June 1998 the UN authorized Iraq to purchase up to $300 million in

spare parts and equipment to repair its oil facilities. Later in 1998, an additional

$300 million in purchase authority was granted. To date, UN’s Office for the Iraq

Programme has approved 395 contracts worth $237 million. Another $28 million in

contracts is on hold. UN Security Council members (including the US) have argued

that some of the requested equipment is either inappropriate or has military use

potential. Several members of the Security Council are arguing for more active inVerDate 12-OCT-99 12:17 Oct 25, 1999 Jkt 010199 PO 00001 Frm 00071 Fmt 6633 Sfmt 6621 Z:\HSECOM\55644 txed01 PsN: txed01
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volvement of outside companies in the needed repairs and expansion of Iraq’s oil infrastructure.

Near term production difficulties

The Iraqi oil Ministry, UN technical experts and outside consultants all seem to

agree that Iraq is experiencing production difficulties. According to a UN report,

production in the north has been lost because of water encroachment problems. In

the south, production water problems are coupled with pressure maintenance difficulties resulting from lack of water injection facilities. Some experts believe that

without a significant increase in investment, Iraq’s basic production capacity could

fall by 4-8% per year. Many believe that the recent rise in production is related to

very aggressive petroleum engineering practices—pushing output beyond normal

levels in order to maximize near-term production and exports. There have been

some reports that domestic use has been officially constrained as part of this policy.

With higher oil prices, a new volumetric constraint could come into force

During January and February, Iraq’s oil sold for about $9 per barrel, a $2 discount to Brent, and a $3+ discount to WTI. With Brent prices now at $14 and WTI

at $15, Iraq’s exports are likely selling at close to $12 per barrel. This raises an

interesting policy question if oil prices continue to rise. At a $14/bbl Iraqi sales

price, Iraq would hit the UN’s $5.3b ceiling at an export level of 2.1 mmb/d.

This potential limit to oil exports is more of an issue for the UN’s Phase 6 program, which starts May 25, and not for the current Phase 5, because low prices in

December-February make it highly unlikely that the $5.3b cumulative revenue ceiling would be achieved during the current Phase. The Clinton administration has

proposed removing the ceiling on oil exports, but still opposes allowing direct foreign

investment in the Iraqi oil industry—which may be necessary to significantly boost

Iraq’s production. Studies are underway now at the UN (with reports due in midApril) which are intended to review the status of the oil-for-food program.

Could there be an Iraqi-instigated interruption?

Although the US and Iraq are still at odds over weapons inspections, and Iraq

has experienced some erosion of its support in the UN Security Council, there have

been several new proposals advanced to alter the sanctions policy. Despite the US

proposal to remove the ceiling, the Iraqi regime does not appear to favor expansion

or indefinite continuation of the oil-for-food program. This suggests that some interruption in the program could occur when the current Phase 5 expires May 24. Such

an interruption does have precedent—in July 1997 and December 1997 the Iraqi regime temporarily halted exports. However, in those two situations, Iraq’s exports

were constrained by the earlier monetary limit (and thus Iraq was able to ‘make

up’ its lost production by physically increasing the level of exports. At this time that

option does not appear to be available to Iraq.

What about longer-term production and export capability?

With investment in both production and pipeline/terminal facilities, Iraq could

probably continue to increase its output and exports. Repairs to the Kirkuk-Ceyhan

pipeline could boost its capacity from the current 1.0-1.1 mmb/d level to its 1.5

mmb/d pre-Gulf war level. Iraq has had discussions with Syria about re-opening the

0.65 mmb/d capacity Banias line that was closed in 1982 during the Iran-Iraq war.

The IPSA pipeline through Saudi Arabia to the Red Sea could be opened if currently

unfriendly relations between the two governments were to improve.

Upstream production could rise significantly with access to outside capital and expertise

Iraqi official have claimed that 3.0-3.5 mmb/d of production capacity could be

reached fairly quickly once sanctions are removed. Iraq’s NIOC believes that this

can be accomplished by a development effort that includes: re-working and upgrading existing upstream facilities; attracting foreign investment for new fields; and establishing an E&P effort in Iraq’s Western desert region. In 1997, former Iraqi oil

minister al-Chalabi estimated that Iraq would require a least $5 billion of foreign

capital during the first two or three years after sanctions to lift production capacity

to 3.5 mmb/d. There does not seem to be any shortage of potential investors as seen

in the material prepared by the Energy Intelligence Group (attached as an exhibit),

although the incremental 2.8 mmb/d of production is estimated by EIG to cost about

$18 billion.

What is the most likely near-term impact on the oil markets?

Downside risk to oil prices: The UN allows more upstream investment, perhaps

due to a change of regime in Iraq, or a further softening in the US stance. Upside

70

potential: Iraq carries out its recurring threat to cease cooperation with oil-for-food

when it expires in May, or some form of conflict (with the US or internal) physically

interferes with exports. Most likely outcome: an extension of the status quo with no

monetary ceiling. This implies no interruption in exports, a likely gradual rise in

the overall level of production and exports, but no large-scale near-term expansion

of production.

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Mr. BARTON. Mr. Taylor, we will put your statement in the

record and delighted to hear from you. My understanding is that

you actually are an independent producer. Is that correct?

Mr. TAYLOR. I am trying to be.

Mr. BARTON. Trying to be. That is the right answer. Welcome to

the committee.

STATEMENT OF TOM TAYLOR

Mr. TAYLOR. I want to thank you for allowing me to be here to

testify, Mr. Chairman.

Yes, I am trying to be an oil producer in West Texas. I also am

the regional vice president for the Texas Independent Producers

and Royalty Owners Association, TIPRO, which I am representing

here today, consists of approximately 1,600 members with petroleum interests in the State of Texas making us the largest statewide group in our industry.

We are not here to advocate making life even more unbearable

for the Iraqi people. It would be unreasonable, as well as unrealistic, for Americans whose jobs depend on the American oil industry to expect our economic problems to be solved through a ‘‘beggar

thy neighbor’’ policy. We are having a humanitarian crisis out in

West Texas right now. We are plugging wells. These wells are not

shut in; they are plugging wells. Because we don’t have—we have

2 years in order to not plug wells. But in all due respect there

might have been an attorney or two here in the room. Landowners

who don’t get royalty checks to provide for their food are concerned.

They call their attorneys. They ask them why. The attorneys say

those wells are not producing. We have 90 days in most situations

to produce those wells. In the event we don’t produce those wells,

our leases are expired. Then we have 2 years to plug those wells.

By virtue of that, those wells become worthless; and the school

systems, as Commissioner Williams pointed out, are losing a tremendous amount of money. Up to 40 percent of our revenues to run

our school systems in West Texas are being lost because of this.

Our knowledge is limited about the Iraqi situation, but we know

that anyone who thinks the world oil market is a free market is

74

kidding themselves. War, threat of war, political instability, sanctions, government fiats—these are not exactly what one thinks of

when one thinks of a willing buyer and willing seller with each

other in a properly functioning marketplace. We know that Mr.

Wood and the U.S. policymakers like to tell themselves that our

Iraq policy is neutral in terms of effect on oil prices, but they are

kidding themselves once again. The sanctions policy, in particular

the oil-for-food program, represents significant government intervention into the world oil market and, as presently structured, has

a depressing effect on prices.

Finally, we know that low oil prices are bad for any program that

depends on revenues for oil, whether the program is a small drilling venture in West Texas, a major development such as that down

in the Caspian Sea, or the oil-for-food program in Iraq. If policymakers want to increase the amount of oil revenues available to

each of the suffering people in Iraq, the policy focus should be shifted from increasing production to increasing price in order to reach

whatever revenue target they may be seeking.

I will elaborate briefly. As has been discussed here, certainly

world events other than the Iraq situation have an impact on this.

As we discussed, the Asian energy demand, increasing oil production from OPEC, and recent warm winters have all contributed to

the current crisis. But increased Iraq production must also be recognized as a material influence on the price. As you have stated,

in our records 1.3 million barrels of exports is a direct reflection of

this. You have Saudi Arabia that is decreasing by 2 million barrels;

and, therefore, they are basically subsidizing the production from

Iraq. And as we discussed, there has been a 20 percent rise just

off of this speculation.

Now, before a reporter would take that and inflate that, oil prices

are back up. They have increased 20 percent from an all-time low,

which still causes an uneconomic situation as a producer. The surplus capacity dictates that producers reduce supply, yet our government is encouraging the United Nations to allow Iraq, a distressed

seller if there ever was one, to increase supply.

Basically, we are going to be the next 2 million barrels is what

we are afraid of as independent producers. We have lost almost

250,000 barrels in Texas alone. I think we have lost, as we stated

earlier, 600,000 barrels in the United States as independent producers, and we don’t have the luxury of turning those wells back

on like they do over there.

The effect of low oil prices in the U.S. has been staggering, as

we discussed. The charts prepared by the Independent Petroleum

Association is included as an appendices to my testimony, and this

will illustrate all too well. It shows the workover rigs, not the drilling rigs, but the workover rigs, which is a key indicator of the industry’s efforts to maintain production, has declined almost 50 percent. So we are not even able to be able to work over these wells,

because their economics, it doesn’t justify the expenditure.

Appendix 2 shows that oil and gas extraction employment has

fallen by over 50,000 jobs. In Texas I might also add unemployment claims in my industry quadrupled in 1998 and in 1999 it is

even worse. Low oil prices are troublesome for the Oil-For-Food

Program, and Appendix 3 outlines the difference in price and proVerDate 12-OCT-99 12:17 Oct 25, 1999 Jkt 010199 PO 00001 Frm 00077 Fmt 6633 Sfmt 6602 Z:\HSECOM\55644 txed01 PsN: txed01
75

duction scenarios facing this program. At current prices, Iraq will

raise over $3 billion during phase 5. So far, it is far short of the

$5 billion target. The table also shows that at current price average, Iraq will need to export 3 million barrels at the current price

to raise $5 billion. The Department of Energy Secretary Bill Richardson testified last week that Iraq appears unable to increase production to this level. So it appears Iraq will not raise $5 billion—

the $5.2 billion target price for the foreseeable future. Put simply,

the Oil-For-Food Program simply does not work in a world of $10

oil.

I will conclude with two suggestions for policymakers, and it

should be noted that it is important that these suggestions be pursued in concert. First, we suggest that the U.S. press the United

Nations to restructure the Oil-For-Food Program so that it no

longer gives Iraq an incentive to depress world oil prices. We submit that production increases measured in hundreds of thousands

of barrels per day would cause prices to fall further, and the OilFor-Food Program would still come up short. Put simply, humanitarian needs in Iraq will not be met in a world of $10 oil.

We believe that the way to restructure the Oil-For-Food Program

so that it no longer serves to depress oil prices is for the United

Nations to establish an oil quota for Iraq. The quota would be

equal to the number of barrels per day that can be reasonably expected to yield the revenues that are believed necessary. The production quota could be adjusted every 80 days as revenue targets

and oil price forecasts change. A potential quota table is attached

as Appendix 4. As you can see, a slight increase in the dollar

amount makes a significant difference.

This proposal may have some flaws and I present it only as a potential option. However, by maintaining Iraq’s production at a level

that bears some relation to market demand, we can eliminate the

downward pressure Iraq’s increased production has on price.

In summary, if the United Nations wants to increase the amount

of oil revenue available to ease the suffering of the Iraq population,

the policy focus should be shifted from increasing production to increasing price. What we are saying is give price a chance.

Our second suggestion is to couple the restructuring of the OilFor-Food Program with meaningful efforts to stabilize the price of

oil at levels that reflect its hidden environmental and military cost.

The United States can help achieve this through variable import

fees such as fees on tankers that move oil in environmentally sensitive coastal waters, fees designated to recoup some of our Nation’s enormous military cost devoted to protecting Middle East oil

supplies and/or fees that offset the advantage that imported oil currently enjoys over domestic production due to minimal environmental regulations of foreign production practices.

I close in saying that I would be honored to assist Mr. Woods in

explaining to the State Department the effect this has on the small

independent producer. I would like to take this opportunity to

thank you again, and we would be more than happy to answer any

questions.

[The prepared statement of Tom Taylor follows:]

76

PREPARED STATEMENT OF TOM TAYLOR, REGIONAL VICE PRESIDENT, TEXAS

INDEPENDENT PRODUCER AND ROYALTY OWNERS ASSOCIATION

Mr. Chairman and Members, my name is Tom Taylor from Abilene, Texas. I am

an oil producer and serve as a Regional Vice President for the Texas Independent

Producers and Royalty Owners Association (TIPRO). TIPRO, which I am representing here today, consists of 1600 members with petroleum interests in the

State of Texas, making us the largest statewide group in our industry.

We come to you today with a sense of humility. My association has no magic solution to the difficulties in Iraq, and I am not a foreign policy expert. It is tempting

to say that the experts don’t have the answers either, but we are not here to make

a wholesale indictment of Iraq policy.

Neither are we here to advocate making life even more unbearable for the Iraqi

people. It would be unreasonable, as well as unrealistic, for Americans whose jobs

depend on the domestic oil and gas industry to expect our economic problems to be

solved through a ‘‘beggar thy neighbor’’ policy. In other words, and we want to be

quite clear about this, Texas oil producers are not here to ask for elimination of the

oil-for-food program or even to suggest that Iraqi oil production levels should return

to those that prevailed a year or two ago.

While our knowledge about Iraq is limited, we do know a few things:

• We know that anyone who thinks the world oil market is a free market is kidding

themselves. War and threat of war, political instability and intrigue, sanctions

and governmental fiats—these are not exactly what one thinks of when one

thinks of willing buyers and willing sellers dealing with each other in a properly

functioning marketplace.

• We know that U.S. policymakers like to tell themselves that our Iraq policy is

neutral in terms of effects on oil prices, but they are kidding themselves once

again. The sanctions policy, in particular the oil-for-food program, represents

significant government intervention in the world oil market and, as presently

structured, has a depressing effect on prices.

• Finally, we know that low oil prices are bad for any program that depends on oil

revenues, whether the program is a small drilling venture in West Texas, a

major development such as that found in the Caspian Sea, or the oil-for-food

program in Iraq. If policymakers want to increase the amount of oil revenue

available to ease the suffering of the Iraqi people, the policy focus should be

shifted from increasing production to increasing price in order to reach whatever the revenue target may be.

I want to elaborate on the two latter points, that is, how the present design of

the oil-for-food program depresses prices and how higher oil prices would further

both the Iraq program and domestic energy production.

(1) The oil-for-food program, as presently structured, depresses world oil prices.

Certainly, world events other than what is taking place in Iraq have had an impact on oil prices. Reduced Asian energy demand, increased OPEC production and

recent warm winters have all contributed to the current price crisis. But, increased

Iraqi production must also be recognized as a material influence on prices. Iraq has

added at least 1.3 million barrels per day to the market since 1997—1.3 million barrels of new supply compared to a global surplus of approximately one to two million

barrels per day.

What kind of impact has this had? A big impact. To put the impact of 1.3 million

barrels in perspective, note that oil prices in recent weeks have risen over 20 percent merely upon OPEC’s declaration that it will reduce production by a total of

about 2 million barrels. Surplus capacity dictates that producers reduce supply. Yet

our government is encouraging the United Nations to allow Iraq, a distressed seller

if ever there was one, to increase supply.

The sanctions policy, if it is enforced as intended, gives Saddam only one way to

raise meaningful revenue—taking whatever is available to him under the oil-forfood program. Since the program is structured only in terms of revenue limits, with

no limits on the amount of Iraqi production, Saddam’s incentive is to produce whatever it takes to generate permitted revenue. And if the limits on the revenues were

simply removed, his incentive would be to produce even more, without regard to the

glut in the marketplace that motivates producers who are under less duress to curtail production.

(2) Low oil prices are bad for both U.S. producers and the oil-for-food program.

The effect of low oil prices in the U.S. has been staggering. Two charts prepared

by the Independent Petroleum Association of America (IPAA), included as appendices to my testimony, illustrate this all too well. Appendix One shows that the

77

workover rig count, a key indicator of the industry’s efforts to maintain production,

has declined dramatically; from 1,459 in December 1997 to 766 in January 1999.

Appendix Two shows that oil and gas extraction employment has also fallen from

339,000 employees in December 1997 to 288,000 in February 1999. In Texas, I

might add, unemployment claims from my industry quadrupled in 1998 and 1999

is even worse.

Low oil prices are also troublesome for the oil-for-food program. Appendix Three

outlines different price and production scenarios facing the program. According to

the United Nations, since the beginning of Phase V (which runs from November 26,

1998 to May 24, 1999) Iraq has so far exported an average of 1.9 million barrels

per day at $9.31 a barrel. At this price, Iraq will raise $3.18 billion during Phase

V—far short of the $5.26 billion target. The table also shows that at the current

average price, Iraq will need to export 3.1 million barrels of oil per day to raise $5.2

billion. Department of Energy Secretary Bill Richardson testified last week that

Iraq appears unable to increase production to this level, so it appears Iraq will not

raise the $5.26 billion target for the foreseeable future. The oil-for-food program

simply does not work in a world of $10 oil.

RECOMNENDATIONS AND CONCLUSION

I will conclude with two suggestions for policymakers, and it should be noted that

it is important that these suggestions be pursued in concert.

(1) Restructure the Oil-for-Food Program so it does not depress world oil prices.

First, we suggest that the U.S. press the United Nations to restructure the oilfor-food program so that it no longer gives Iraq an incentive to depress world oil

prices. TIPRO is concerned that to simply lift the ceiling on oil sales, as the Administration has recently proposed to the United Nations Security Council, would depress oil prices further. In a world of $10 oil, Iraq would need to produce almost

3 million barrels per day—which is almost half a million barrels per day more than

it produces currently—to generate $5.26 billion every 180 days, as the current ceiling allows. Given that a world oil surplus of perhaps 2 million barrels a day (half

of which can be attributed to increased production by Iraq) yields oil prices that are

only slightly above historic lows, what will happen if Iraq increases production by

a half million barrels per day in the next year?

We submit that production increases measured in hundreds of thousands of barrels per day would cause prices to fall further, and the oil-for-food program would

still come up short. Put simply, humanitarian needs in Iraq will not be met in a

world of $10 oil.

We believe that the way to restructure the oil-for-food program so that it no

longer serves to depress oil prices is for the United Nations to establish an oil quota

for Iraq. The quota would be equal to the number of barrels per day that can be

reasonably expected to yield the revenues that are believed necessary.

The production quota could be adjusted every 180 days as revenue targets and

oil price forecasts change. A potential quota table is attached as Appendix Four. For

example, if the forecast is that Iraq will receive an average of $12 per barrel during

the next United Nations reporting period, and $5.25 billion is the target revenue

for the period, the quota would only need to be 2.43 million barrels per day. If the

United Nations determines that more revenue is needed, $6 billion for example, the

quota for the period would be 2.78 million barrels per day. If the price of Iraqi crude

should rise to $16 per barrel, a 2.43 million barrels per day quota would provide

$7 billion of revenue in 180 days, should the United Nations want to provide that

much revenue to the program.

This proposal may have some flaws, and I present it only as a potential option.

However, by maintaining Iraq’s production at a level that bears some relation to

market demand, we can eliminate the downward pressure Iraqi increased production has on price.

In summary, if the United Nations wants to increase the amount of oil revenue

available to ease the suffering of the Iraqi population, the policy focus should be

shifted from increasing production, to increasing price, in order to reach the revenue

target.

(2) Seek to stabilize oil prices at reasonable levels.

Our second suggestion is to couple the restructuring of the oil-for-food program

with meaningful efforts to stabilize the price of oil at levels that reflect its hidden

environmental and military costs. The United States can help achieve this through

variable import fees, such as fees on tankers that move oil in environmentally sensitive coastal waters, fees designed to recoup some of our nation’s enormous military

costs devoted to protecting Middle Eastern oil supplies, and/or fees that offset the

78

advantage that imported oil currently enjoys over domestic production due to minimal environmental regulation of foreign production practices.

I appreciate the opportunity to be with you today and would be happy to try to

answer any questions.

79

80

APPENDIX THREE

Price and Production Scenarios Under Oil-for-Food

Total Revenues Derived from Iraqi Oil Sales

(Billions of Dollars Every 180 Days)

MMB/D

Dollars per barrel

9.31 10 11 12 13 14 15 16 17 18 19 20

5.0 ................... 8.38 9.00 9.90 10.80 11.70 12.60 13.50 14.40 15.30 16.20 17.10 18.00

4.5 ................... 7.54 8.10 8.91 9.72 10.53 11.34 12.15 12.96 13.77 14.58 15.39 16.20

4.0 ................... 6.70 7.20 7.92 8.64 9.36 10.08 10.80 11.52 12.24 12.96 13.68 14.40

3.5 ................... 5.87 6.30 6.93 7.56 8.19 8.82 9.45 10.08 10.71 11.34 11.97 12.60

3.1 ................... 1 5.25 5.63 6.20 6.76 7.32 7.89 8.45 9.01 9.58 10.14 10.70 11.27

2.5 ................... 4.19 4.50 4.95 5.40 5.85 6.30 6.75 7.20 7.65 8.10 8.55 9.00

2.0 ................... 3.35 3.60 3.96 4.32 4.68 5.04 5.40 5.76 6.12 6.48 6.84 7.20

1.9 ................... 2 3.18 3.42 3.76 4.10 4.45 4.79 5.13 5.47 5.81 6.16 6.50 6.84

1 According to the United Nations Office of the Iraq Programme Weekly Update for 13 to 19 March, since the beginning of Phase V, which

runs from November 26, 1998 to May 24, 1999, Iraq has exported an average of 1.9 mb/d at $9.31 a barrel. At this rate Iraq will raise

$3.18 billion during Phase V. 2 At the current average price, Iraq will need to export 3.13 million barrels of oil per day to raise 5.25 billion.

APPENDIX FOUR

Potential Iraq Production Quotas

(Million Barrels Per Day)

Total Revenue

($billion per 180

days)

Dollars per barrel

9.31 10 11 12 13 14 15 16 17 18 19 20

3.25 ................. 1.94 1.81 1.64 1.50 1.39 1.29 1.20 1.13 1.06 1.00 0.95 0.90

3.50 ................. 2.09 1.94 1.77 1.62 1.50 1.39 1.30 1.22 1.14 1.08 1.02 0.97

3.75 ................. 2.24 2.08 1.89 1.74 1.60 1.49 1.39 1.30 1.23 1.16 1.10 1.04

4.00 ................. 2.39 2.22 2.02 1.85 1.71 1.59 1.48 1.39 1.31 1.23 1.17 1.11

4.25 ................. 2.54 2.36 2.15 1.97 1.82 1.69 1.57 1.48 1.39 1.31 1.24 1.18

4.50 ................. 2.69 2.50 2.27 2.08 1.92 1.79 1.67 1.56 1.47 1.39 1.32 1.25

4.75 ................. 2.83 2.64 2.40 2.20 2.03 1.88 1.76 1.65 1.55 1.47 1.39 1.32

5.00 ................. 2.98 2.78 2.53 2.31 2.14 1.98 1.85 1.74 1.63 1.54 1.46 1.39

5.25 ................. 3.13 2.92 2.65 2.43 2.24 2.08 1.94 1.82 1.72 1.62 1.54 1.46

5.50 ................. 3.28 3.06 2.78 2.55 2.35 2.18 2.04 1.91 1.80 1.70 1.61 1.53

5.75 ................. 3.43 3.19 2.90 2.66 2.46 2.28 2.13 2.00 1.88 1.77 1.68 1.60

6.00 ................. 3.58 3.33 3.03 2.78 2.56 2.38 2.22 2.08 1.96 1.85 1.75 1.67

6.25 ................. 3.73 3.47 3.16 2.89 2.67 2.48 2.31 2.17 2.04 1.93 1.83 1.74

6.50 ................. 3.88 3.61 3.28 3.01 2.78 2.58 2.41 2.26 2.12 2.01 1.90 1.81

This chart reflects the number of barrels that Iraq would need to produce per day to reach a 180 day revenue target at a given price. As

the price of oil price or revenue target changes, the amount of oil Iraq would be allowed to produce in subsequent phases would change accordingly.

Mr. BARTON. We want to thank you, Mr. Taylor, for your testimony, and the appendices especially will be used as we pursue this.

Our friends in the State Department I don’t think have enough

personnel to do some of the basic math that you have done.

Mr. TAYLOR. Thank you, sir.

Mr. BARTON. We appreciate that.

Mr. Brown, we appreciate you being here on behalf of Congressman Largent. He recommended that you be asked to testify and we

appreciate you coming up. We will put your statement in the

record, and give you such time as you may consume to elaborate

on it. But try to do it within 5 to 7 minutes.

STATEMENT OF F.W. ‘‘PETE’’ BROWN

Mr. BROWN. Thank you, Mr. Chairman. Mr. Chairman and Representative Hall and members of the audience, I believe myself to

81

be a very typical independent oil and gas producer, not only in

Oklahoma, but throughout the entire Nation.

In 1998, 32 percent of the wells in which I own an interest lost

money due to low oil prices. In the month of December alone, that

same year, 57 percent of my wells were losing money for the same

reason. I accepted these losses in the hopes that oil prices would

rebound.

In the past 17 months, the price of oil has plummeted to levels

far below the lifting cost of independent producers throughout the

United States. To understand the reason for this drop, we first

must understand why exporting countries until recently have not

taken the initiative to curtail production.

First of all, it needs to be noted the world’s so-called oversupply

of crude oil is based on the ability of a country to produce oil versus

worldwide consumption. In order to maintain stability in the marketplace, those of us who import oil, like the United States, should

also want supply to exceed demand. Excess production capacity is

not actually produced. Aside from above ground storage, there is

very little ability to store large quantities of oil once it is produced.

Saudi Arabia, for example, is estimated to have the capability of

producing up to 10 million barrels of oil per day, and yet it actually

produces just a little over 8 million barrels of oil per day. This can

be misleading in that the ability to produce oil in the field does not

necessarily mean that it can be transported to terminals and loaded into tankers at the same rate.

Actually, no one really knows how much surplus production capacity exists in the world today. Some believe the world’s ability to

produce oil exceeds demand by about 3.5 million barrels a day, but

that compares to estimates of 10 million barrels a day of surplus

capacity in 1981, the year in which the price of oil reached $38 a

barrel. Today we are actually closer than ever before to a point

where demand will exceed the world’s ability to produce. Part of

the reason for this reduction in surplus production capacity is increased demand, but part of the reason is reduction of production.

Why, then, is the price of crude at such low levels? The price of

crude first started to drop when the Saudis began to lose market

share as a result of Venezuelan production. Venezuela began increasing exports about the same time that crude oil prices began

their downward spiral. As production increased in Venezuela, it

began to capture market share from Saudi Arabia. The Saudis had

two choices. They could curtail production even further, causing the

price to rise, or they could keep production levels the same, allowing the price to drop below Venezuela’s cost of production, which

was significantly higher than the Saudis.

This strategy discourages drilling in areas that have associated

high cost of drilling such as the North Sea, Siberia, deep offshore

drilling, the Caspian Sea, which is an area estimated to contain reserves equivalent to the Persian Gulf, and of course U.S. domestic

onshore production. In addition, it has had the side benefit to the

Saudis, that is, of shutting down much of the stripper production

in the United States. It is not the intention of the Saudis to maintain the low prices; rather, they want to create market volatility,

which has the affect of discouraging high drilling in high-cost regions.

82

Saudi Arabia, like many Middle Eastern countries, has social

costs associated with their crude production. Crude oil funds social

programs set up for the Saudi citizens such as free medical care,

no taxes, low-cost housing and many more programs that once established cannot be easily discontinued. In recent months, OPEC

has dropped production levels that would ordinarily be sufficient to

bolster the price of crude oil to 1997 levels. This has failed to

produce the desired results for very important reasons. Iraq has

been allowed to produce additional volumes of oil to offset the drop

in production, even while men and women of our armed forces are

in a shooting war with Iraq. Allowing Iraq to produce this oil has

had a devastating effect on U.S. independent producers and threatens to drop U.S. crude production as much as 1 to 2 million barrels

per day. The 4-week average of domestic crude oil production is already down 416,000 barrels a day from 1 year ago, according to figures published in the Oil and Gas Journal.

It is argued that it is necessary to allow the Iraqi government

to increase production so that they can have sufficient revenue to

feed their people. Yet, grain and food purchased with these funds

sits in warehouses undistributed. We also might want to consider

the fact that the Iraqi government has never provided their citizens

with free food, and probably has no intention of doing so now.

By allowing the sale of crude oil for humanitarian reasons, we

have, in effect, taken the pressure off the Iraqi government to provide for its own people. In doing so, we provide them the means

by which they can fund their continued production of biological and

chemical weapons. At the same time, we eliminate a valuable natural resource in this country which will ultimately give countries

with surplus oil production such as Iraq an enormous amount of

power in the not too distant future. If, in fact, we feel it necessary

to reward Iraqi’s noncompliance for humanitarian reasons by allowing overproduction of crude oil, steps should and must be taken

to protect our domestic producers.

The paramount tragedy here is allowing a viable, important industry to be systematically dismantled, causing the loss of thousands of jobs, as well as causing economic depression in oil producing States. All the while, our government continues to subsidize

foreign governments and ignores its own domestic oil and gas producers. By spending billions of dollars to ensure the free flow of oil

out of the Persian Gulf, my government and yours, in effect, is subsidizing my foreign competition.

Those of us in the oil and gas industry believe in a free market

economy. World crude oil production is far from a free market.

When foreign governments control the flow of oil, our own government has not only the right, but the obligation to protect its domestic industry. This can be accomplished by allowing the defense

equalization fee to be charged on crude oil from the Middle East.

Revenues from such a fee could be used to offset the cost of subsidizing their production and maintaining a military presence in

the Persian Gulf.

Another disadvantage we face as domestic producers is our environmental costs. The crude oil purchased from foreign countries is

subject to barely a fraction of our environmental regulations protections and the associated environmental costs in terms of dollars.

83

Thus, an environmental equalization fee would be appropriate to

level the playing field for domestic oil and gas producers. This fee

should be put in place regardless of price, as long as America continues to allow foreign governments to have a competitive advantage.

At normal prices, the wells in which I own an interest that are

daily losing money still have thousands of barrels of recoverable oil.

But as anyone, I can only lose money for so long. My wells that

are losing money must now be plugged and abandoned. I have no

choice. Once these wells are plugged, they will never be brought

back on, as the remaining reserves would not justify the additional

substantial investment required to do so.

If Congress fails to act, the United States of America stands to

lose a substantial portion of a precious national asset, as well as

turning over an even greater share of our future energy requirements to foreign governments that don’t have America’s best interests at heart.

Mr. Chairman, members of the subcommittee, we citizens of the

United States face a crisis that will have far-reaching consequences

if left unabated. I urge each of you on behalf of our domestic oil

and gas industry and our country to take action to curb production

from Iraq. The energy future of America now and for generations

to come is in your hands. It has been my honor to address you and

I thank you for the opportunity to be heard on this issue, and I

would be glad to answer any questions.

[The prepared statement of F.W. ‘‘Pete’’ Brown follows:]

PREPARED STATEMENT OF F.W. ‘‘PETE’’ BROWN, INDEPENDENT OIL AND GAS

PRODUCER

Mr. Chairman, members of the subcommittee and distinguished guests, thank you

for the opportunity to provide testimony on this vital issue. I come before you, as

a very typical and average independent oil & gas producer, not only in Oklahoma

but throughout the entire nation. In 1998 32% of the wells from which I receive production lost money due to low crude oil prices. By the month of December in 1998,

57% of my wells were losing money. I have continued to accept these losses in the

hope that crude oil prices would rebound.

In the past 17 months, the price of domestic crude oil has plummeted to levels

far below the average lifting cost for the majority of independent producers in the

United States. To understand the reason for this drop, one must first understand

why the oil exporting countries have not taken the initiative to curtail production.

First of all it should be noted that the world’s ‘‘so-called oversupply’’ of crude oil

is based on the ability of countries to produce oil versus worldwide consumption. In

order to maintain stability in the market place, those of us who rely on imports

should always want supply to exceed demand. Excess production capacity is not actually produced. Aside from above ground storage (782,955,000 bbls crude and refined product or roughly a 42 day supply according to the Oil & Gas Journal dated

March 22, 1999), there is very little ability to store large quantities of oil once it

is produced. Saudi Arabia, for example, is estimated to have the capability of producing up to 10 million barrels of oil per day and yet they actually produce a little

over 8 million barrels per day. This can be misleading in that the ability to produce

oil in the field does not necessarily mean that it can be transported to terminals

and loaded into tankers at the same rate.

Actually, no one really knows how much surplus production capacity exists in the

world today. Some believe the world’s ability to produce & market oil exceeds demand by about 3.5 million barrels per day compared to estimates of 10 million barrels per day of surplus production capability in 1981, a year in which crude oil

prices reached $38.00 per barrel. Today we are actually coming closer to the point

where demand will exceed the world’s ability to produce. Part of the reason for this

reduction in surplus production capacity is increased demand.

Why then is the price of crude at such low levels? The price of crude first started

to drop when the Saudis began to lose market share as a result of an increase in

84

Venezuelan production. Venezuela began increasing exports about the time that

crude oil prices began their downward spiral. As production increased in Venezuela,

it began to capture market share from Saudi Arabia. The Saudis had two choices;

they could curtail production even further, causing the price to rise, or they could

keep production levels the same, allowing the price to drop below Venezuela’s cost

of production, which was significantly higher than the Saudi’s. This strategy discourages drilling in areas that have associated high costs such as the North Sea,

Siberia, the Caspian Sea (an area estimated to contain reserves equivalent to the

Persian Gulf), deep offshore and U.S. domestic onshore. In addition, it has the side

benefit (to the Saudis) of shutting down much of the stripper production in the U.S.

It is not the intention of the Saudis to maintain such low prices, rather they want

to create market volatility, which has the effect of discouraging drilling in high cost

regions. Saudi Arabia, like many Middle East countries, has ‘‘social’’ cost associated

with their crude oil production. Crude oil funds these social programs, set up for

Saudi citizens, such as free medical care, no taxes, low cost housing and many more

programs that, once established, can not be easily discontinued.

In recent months, OPEC has dropped production to levels that would ordinarily

be sufficient to bolster the price of crude oil to 1997 levels. This has failed to

produce the desired results for one very important reason. Iraq has been allowed

to produce additional volumes of oil to offset the drop in prices, even while men and

women of our Armed Forces are engaged in a shooting war with Iraq. Allowing Iraq

to produce this oil has had a devastating effect on U.S. independent producers and

threatens to drop U.S. crude production as much as 1 to 2 million barrels per day.

The four-week average of domestic crude oil production is already down 416,000 barrels per day from one year ago according to figures published in the Oil & Gas Journal dated March 22, 1999. It is argued that it is necessary to allow the Iraqi government to increase production so that they can have sufficient revenue to feed their

people. Yet grain purchased with these funds sits in warehouses undistributed. We

might want to consider the fact that the Iraqi government has never provided its

citizens with free food, and probably has no intention of doing so now. By allowing

the sale of crude oil for humanitarian reasons, we in effect have taken the pressure

off the Iraqi government to provide for its own people. In doing so we provide them

the means by which they can fund their continued production of biological and

chemical weapons.

At the same time we eliminate a valuable natural resource in this country which

will ultimately give countries with surplus oil production, such as Iraq, an enormous

amount of power in the not too distant future. If in fact we feel it necessary to reward Iraqs non-compliance, for humanitarian reasons, by allowing overproduction of

crude oil, steps should and must be taken to protect our own domestic producers.

The paramount tragedy here is allowing a viable and important industry to be

systematically dismantled causing the loss of thousands of jobs, as well as causing

an economic depression in oil producing states. All the while our Government continues to subsidize foreign governments and ignores its own domestic oil and gas

producers. By spending billions of dollars to insure the free flow of oil from the Persian Gulf my government and yours, in effect, is subsidizing my foreign competition.

Those of us in the oil and gas industry believe in a free market economy. World

crude oil production is far from a free market. When foreign governments control

the flow of oil, our own government has not only the right, but also the obligation,

to protect its domestic industry. This can be accomplished by allowing a defense

equalization fee to be charged on crude oil from the Middle East. Revenues from

such a fee would be used to offset the cost of subsidizing their production by maintaining a military presence in the Persian Gulf.

Another disadvantage we face as domestic producers is our environmental cost.

The crude oil we purchase from foreign countries is subject to barely a fraction of

our environmental regulations and protections, and the associated environmental

cost in terms of dollars. Thus an environmental equalization fee would be appropriate to level the playing field for domestic producers. This fee should be put in

place, regardless of price, as long as America continues to allow foreign governments

have a competitive advantage.

At normal prices the wells in which I own an interest, and that are losing money

today, still have thousands of barrels of recoverable oil. But I, as anyone, can only

lose money for so long. My wells that are losing money must now be plugged and

abandoned. I have no choice. Once these wells are plugged they can never be

brought back on production, as the remaining reserves would not justify the substantial investment required to do so. If Congress fails to act, the United States of

America stands to lose a substantial portion of a precious national asset as well as

turning over an even greater share of our future energy requirements to foreign governments that don’t have America’s best interest at heart.

85

Mr. Chairman and members of the sub-committee, we, as citizens of the United

States, face a crisis that will have far reaching consequences if left unabated. I urge

each of you, on behalf of our domestic oil and gas industry and your country, to take

action to curb excess production from Iraq. The Energy future of America, now and

for generations to come, is in your hands.

It has been my honor to address you and I thank you for the opportunity to be

heard on this issue.

Mr. BARTON. Thank you. We want to hear from Mr. Bole. Mr.

Hall has a plane at 1:45, so Ralph, do you want to ask a question?

Mr. HALL. May I say something here? I am the loser by not getting to stay here and talk to you for another hour, because this is

the group I would listen to more than all the others put together,

because you are my folks, and your testimony means more to me

than any that I have heard or will hear. I think you can gather

from the things that the chairman has said and I have said—by

the way, you are not just talking to the two of us. This goes into

the record and it is read by certainly the committees and by the

members. So I thank you for your time. I will have some questions.

I have questions built around whether or not the State Department

has consulted with any of you or the domestic industry on this food

program, and you know, I am pretty sure they haven’t listened to

you, but I would like to know if they have even made any effort,

and that will be part of my questions. But I do have to be on a

plane in 34 minutes and I have to clear off my desk and put the

fire out and call the dogs and get out.

Mr. BARTON. Actually, he is leaving a little early. I have seen

Ralph make it in less than 10 minutes.

Mr. HALL. Well, they close the door on you now. But I thank you

very much. And Joe, thank you for holding the hearing.

Mr. BARTON. We appreciate you, Congressman Hall. Congressman Hall has agreed to sign some of the letters that I just talked

to the Deputy Assistant Secretary of State about, so we are going

to be working on this in a bipartisan way.

Mr. Bole, we are delighted to have you up from Houston. We will

put your testimony in the record again in its entirety and give you

5 to 7 minutes to elaborate on it.

STATEMENT OF DAVID L. BOLE

Mr. BOLE. Thank you, Mr. Chairman, and also my thanks to Mr.

Hall. My name is David Bole. I am Vice President of Corporate Research and Development for Randall and Dewey, Inc., a Houstonbased company that facilitates transactions in the upstream part of

the petroleum industry for all segments of the industry, major companies, large and small interests, both public and private. In this

business we have seen the disruptive effects of the current price

crisis not only on the stability of this critical portion of the industry, but in the direct loss of producers’ equity value. Today, I am

representing the Independent Petroleum Association of America.

IPAA submits that the current problems facing domestic producers

are related in large part to the abuse of the U.N. Oil-For-Food

sanctions program by Saddam Hussein.

The industry has faced low oil prices for more than a year, beginning with a combination of events: the collapse of Asian economies,

which we have heard a lot about this morning, a warmer than normal winter in the Northern Hemisphere, and OPEC’s decision to

86

increase production quotas. However, as 1998 progressed, key

OPEC countries and other significant non-OPEC countries curtailed production to try to diminish surplus inventories around the

world and stabilize oil prices at levels that permit profitable operation. As other countries cut production, the U.N. sanctions program created an opportunity for Iraq’s leaders to influence the

price of oil in ways that no one would have expected. The U.N.

sanctions structure was changed in two significant ways in early

1998. First, the Oil-For-Food Program has always been based on a

dollar amount rather than a volume allowance, and we have heard

a lot about that this morning. The dollar amount has increased to

$5.3 billion per 6 months, which we have talked about, an amount

at current prices that effectively allows Iraq to pump unlimited volumes.

Second, the $400 million every 6 months allocated to improve

Iraq’s oil production capacity allows them to increase their production. Thus, as other countries were making economic decisions to

reduce production as prices fell, Iraq was given a perverse incentive to increase production.

At the beginning of 1998, Iraq was exporting approximately

700,000 barrels of oil per day. By the beginning of 1999, it was exporting as much as 2.5 million barrels per day. In 1998, Iraq was

the only country to increase its oil production. This more than

threefold increase, coupled with OPEC’s decision to curtail production, has allowed Iraq to become the world’s swing producer. That

is, the producer that sells the last barrels into the market and

thereby defines the price for the entire market.

Let me explain what allows Iraq to become the swing producer.

Currently, many industry analysts estimate that worldwide oil productive capacity exceeds demand by only about 4 percent. As forecast demand increases at a rate of 1.5 to 2 percent per year, this

excess capacity will rapidly disappear. Current low oil prices have

decimated upstream capital development budgets by an estimated

40 percent. My good friend Pete here knows that. There is just not

enough money out there to continue drilling.

Simply put, without the expenditure of enormous development

funds, current capacity will not be expanded to keep pace with increasing demand. This is the situation we now face. As a result,

any country with exports matching the excess productive capacity,

has the ability to be the world’s swing producer. Iraq now supplies

about 3 percent of the world’s demand, and has the ability to dramatically influence prices by either cutting or increasing its production. As demand increases and excess capacity drops, the export

volume needed to drive prices will decrease. In the not too distant

future, if not already, Saddam Hussein will be in the position to

drive prices upward and punish consumer countries, perhaps when

sanctions are lifted and all the money from Iraqi oil sales goes to

him.

We submit that Iraq is using this position for its leader’s own political purposes. Saddam’s objectives differ from other oil producers.

We have heard a lot about that this morning. He wanted higher

oil prices when he invaded Kuwait, money he needed to build his

military forces. Now, he can’t spend money to buy arms. But, he

can, by keeping oil prices low, punish his enemies, first by reducing

87

the income to Saudi Arabia, Kuwait and all the exporting countries; and second, to increase market share by driving down prices

and causing critical U.S. production to be shut down and plugged

forever, and that hurts the guys sitting right here. Thus, while condemning the U.N. sanctions and thwarting efforts to deliver to his

people the humanitarian aid the sanctions purchase, Saddam is effectively manipulating the world oil markets for his own political

purposes. This is where we stand today, and that is why we are

here.

At issue, then, is what will happen next. Last week, the Secretary of Energy argued that Iraq’s ability to increase its production is limited and is not expected to go up measurably this year.

As a result, EIA believes that whatever effect Iraqi production has

had on prices has already occurred, because Iraq cannot increase

oil production much more over the next year or two.

While we agree with the Secretary that Iraqi production has impacted prices, the statement that Iraq cannot increase production

is a costly assumption that must be proven. Given that the current

sanctions program continues to fund additional improvements to

the oil export capabilities of Iraq, there is no certainty that exports

will not increase further. Clearly, today’s crude market is forcing

other major oil exporting nations to develop elaborate plans to limit

their production. The success of these efforts is limited by the ability of Iraq to add more oil to the market. If the current Oil-ForFood Program results in further Iraqi oil production increases, it

will allow Iraq to continue to hurt the other oil producing countries

and the strategically essential domestic production of the United

States. If it does, the U.N. sanctions will continue to be fatally

flawed at two levels. First, they will have failed in its primary mission to provide humanitarian aid to the Iraqi people. Second, they

will have handed Saddam Hussein the victory he lost in the Gulf

War.

For the United States these options reflect policies we must

change. They make no sense. The world fought a war to prevent

Saddam Hussein from controlling world oil prices. Now, we have,

however inadvertently, handed him this ability without a fight, and

we are handing him control of the future of our domestic resources,

an unbelievable policy choice. Current national policy on Iraq is

flawed. Today, domestic production is at risk, while tomorrow the

U.S. consumer may soon feel the shock of higher energy prices

brought on by the actions of a rogue nation, a policy that hurts producers and consumers alike.

Our domestic oil production resource is the true national strategic petroleum reserve. We must value that resource. With respect

to Iraq, we must recognize that its role in oil pricing may not have

been planned, but it is now significant and it is not benign. If we

fail to act in the short term, precious domestic resources will be

lost forever. As we have heard this morning, in the last year we

have lost nearly 600,000 barrels per day of domestic production,

which has reduced the U.S. crude production to a level that has not

been seen since 1950. Since 1986, when the last price free-fall crippled the industry, domestic oil production has dropped 2 million

barrels per day. We need to act now to prevent a similar consequence from the current price crisis.

88

We thank you for your interest, we thank you for your time

today, and God bless you for being on the side of the producers.

[The prepared statement of David L. Bole follows:]

PREPARED STATEMENT OF DAVID L. BOLE, VICE PRESIDENT, CORPORATE RESEARCH

AND DEVELOPMENT, RANDALL & DEWEY, INC.

Mr. Chairman, my name is David Bole. I am Vice President of Corporate Research and Development for Randall & Dewey, Inc., a Houston-based company that

facilitates transactions in the upstream part of the petroleum industry for all segments of the industry—major companies, large and small independents, both public

and private. In this business, we have seen the disruptive effects of the current

price crisis not only on the stability of this critical portion of the industry but in

the direct loss of producers’ equity value. Today, I am representing the Independent

Petroleum Association of America. IPAA submits that the current problems facing

domestic producers, and potentially significant future problems, are related in large

part to the abuse of the UN ‘‘oil for food’’ sanctions program by Saddam Hussein.

The industry has faced a low oil price crisis for more than a year, but today’s

problems are very different. Just over a year ago, the price crisis was started by

a combination of events—the collapse of Asian economies, a warmer than normal

winter in the Northern Hemisphere, and OPEC’s decision to increase production

quotas. The production most at risk was marginal oil wells in the United States—

wells that produce about 20 percent of America’s domestic production, an amount

equivalent to our imports from Saudi Arabia.

However, as 1998 progressed, key OPEC countries and other significant nonOPEC countries curtailed production to try to diminish surplus inventories around

the world and stabilize oil prices at levels that permit profitable operation. As other

countries cut production, the UN sanctions program created an opportunity for

Iraq’s leaders to influence the price of oil in ways that no one would have expected.

The UN sanctions structure was changed in two significant ways in early 1998.

First, the ‘‘oil-for-food’’ program has always been based on a dollar amount rather

than a volume allowance. The dollar amount was increased to $5.265 billion per six

months—an amount at current prices that effectively allows Iraq to pump unlimited

volumes. Second, $300 million every six months was allocated to improve Iraq’s oil

production capacity. Thus, as other countries were making the economic decisions

to reduce production as prices fell, Iraq was given a perverse incentive to increase

production.

And, increase it did. At the beginning of 1998 Iraq was exporting approximately

700,000 barrels of oil per day. By the beginning of 1999 it was exporting as much

as 2.5 million barrels per day. In 1998 Iraq was the only country to increase its production of oil. This increase has allowed Iraq to become the world’s swing producer—the producer that sells the last barrels into the market and thereby defines

the price for the entire market.

Let me explain what allows Iraq to become the swing producer. Currently, many

industry analysts estimate that worldwide oil productive capacity, that is production

that could quickly be added to the world market, exceeds demand by only about 4

percent. As demand increases at a rate of 1.5 to 2 percent per year, this excess capacity is rapidly disappearing. Current low oil prices have decimated upstream capital development budgets by an estimated 40 percent. Simply put, without the expenditure of enormous development funds current capacity will not be expanded to

keep pace with increasing demand. This is the situation we now face. As a result

any country with exports matching the excess productive capacity, has the ability

to be the world’s swing producer. Iraq now has about three percent of the world’s

demand and has the ability to dramatically influence prices by either cutting or increasing its production. As demand increases and excess capacity drops, the export

volume needed to drive prices will decrease. In the not too distant future—if not

already—Saddam Hussein will be in the position to drive prices upward and punish

consuming countries—perhaps when sanctions are lifted and all the money from

Iraqi oil sales goes to him.

We submit that Iraq is using this position for its leader’s own political purposes.

Saddam’s objectives differ from other oil producers. He wanted higher oil prices

when he invaded Kuwait—money he needed to build his military forces. Now, he

can’t spend money to buy arms. But, he can—by keeping oil prices low—punish his

enemies, first by reducing the income to Saudi Arabia, Kuwait, UAE, Iran, and all

the exporting countries; second, to increase market share by driving down prices

and causing critical U.S. production to be shutdown and plugged forever. Thus,

while condemning the UN sanctions and thwarting efforts to deliver to his people

89

the humanitarian aid the sanctions purchase, Saddam is effectively manipulating

the world oil markets for his own political purposes. This is where we stand today.

And that is why we are here.

At issue then is what will happen next. Last week, the Secretary of Energy argued that ‘‘Iraq’s ability to increase its production is limited and is not expected to

go up measurably this year. As a result, EIA believes that whatever effect Iraqi production has had on prices has already occurred, because Iraq cannot increase oil

production much more over the next year or two.’’ While we agree Iraqi production

has impacted prices, the statement that Iraq cannot increase production is a costly

assumption that must be proven. Given that the current sanctions program continues to fund additional improvements to the oil export capabilities of Iraq, there

is no certainty that exports will not increase further. In the middle of 1998 most

experts believed that Iraq could not reach the export levels it is currently sustaining. Clearly, today’s crude market is forcing other major oil exporting nations

to develop elaborate plans to manage their production, the success of these efforts

is limited by the ability of Iraq to add more oil to the market. If the current ‘‘oilfor-food’’ program results in further Iraqi oil production increases, it will allow Iraq

to continue to hurt the other oil producing countries—Saudi Arabia, Kuwait, Venezuela, Russia, Indonesia, Mexico, and the strategically essential domestic production of the United States. If it does, the UN sanctions will continue to be fatally

flawed at two levels. First, they will have failed in its primary mission to provide

humanitarian aid to the Iraqi people. Second, they will have handed Saddam Hussein the victory he lost in the Gulf War.

For the United States these options reflect policies we must change. They make

no sense. The world fought a war to prevent Saddam Hussein from controlling world

oil prices. Now, we have—however inadvertently—handed him this ability. And, we

are handing him control of the future of our domestic resources—an unbelievable

policy choice. Current national policy on Iraq is faulty. Today, domestic production

is at risk, while tomorrow the U.S. consumer may soon feel the shock of higher energy prices brought on by the actions of a rogue nation—a policy that hurts producers and consumers alike.

Our domestic oil production resource is our true national strategic petroleum reserve. We must value that resource. IPAA has presented an array of options for

Congress to address in response to the current price crisis. With respect to Iraq we

must recognize that its role in oil pricing may not have been planned, but it is now

significant and it is not benign. If we fail to act in the short term, precious domestic

resources will be lost forever. Then, in the longer term when Saddam shuts in production, we will not have the production needed to respond. In the past year we

have lost nearly 600,000 barrels per day of domestic production, which has reduced

the U.S. crude production to a level that has not been seen since 1950. Since 1986,

when the last price crisis crippled the industry, domestic oil production has dropped

by 2 million barrels per day. We need to act now to prevent a similar consequence

from the current price crisis.

Mr. BARTON. Thank you. Seeing no other member present, the

Chair is going to recognize himself for questions. And I am not

going to use the clock.

I am going to ask Mr. Hall’s question since he had to leave. Was

anybody at TIPRO or IPAA or any other producer, maybe the API,

consulted before this Oil-For-Food Program was put in place last

year? Does anybody know?

Mr. TAYLOR. Not that I am aware of.

Mr. BROWN. No.

Mr. BARTON. Mr. Sieminski, do you remember?

Mr. SIEMINSKI. Well, I do talk to people at the State Department

and elsewhere, but it seems to me that that program was being

driven mainly out of the United Nations and some of the issues

there I don’t think that that domestic oil consideration has gotten

a lot of attention as part of that program.

Mr. BARTON. As far as anybody on this panel knows, there was

no formal attempt by the State Department or the Energy Department or the United Nations directorate to contact the production

sector of the United States?

90

Mr. BOLE. Not at all.

Mr. BARTON. That is a fair statement.

Is there anybody on this panel that is opposed to providing in

some way food and medicine for the Iraqi people?

Mr. BOLE. No.

Mr. TAYLOR. No.

Mr. BROWN. No.

Mr. SIEMINSKI. Not at all.

Mr. BARTON. So we are not in opposition to at least the publicized purpose of the program, which is to provide for basic food,

nutrition and medicine and humanitarian programs.

Is it in the national interest for us not only to allow this production that is currently under way, but to give them spare parts to

increase production? Does anybody think that makes sense from a

national security standpoint, or even in the interests of the United

States standpoint?

Mr. BOLE. Well, it makes absolutely no sense to allow Iraq to increase production, while other OPEC nations are working in concert to lower production so that we have a viable supply of oil at

a reasonable price to continue development.

Mr. BARTON. Well, you all heard one of my final questions to the

gentleman from the State Department. Congressman Hall and I

are going to send a letter next week asking that they not go forward with the spare parts program while we review it. I would assume that you all would support that position that we, at a minimum, while we review the larger program, we at least stop the

ability to increase production in Iraq.

Mr. SIEMINSKI. Absolutely.

Mr. TAYLOR. Mr. Barton, I might even go a step further and ask

if you could somehow get through to them that a very minuscule

amount of that money would help restructure our own industry

here, and that they might consider the cost—it is bad enough that

Mr. Brown and I have to plug our wells. We lose the production,

and we have been taking a loss for quite a time on these. When

you decide to finally plug them on top of that, you get a golden ring

of about another $5,000 or $10,000 hit that you have to pay to plug

these wells in accordance with the environmental regulations. So

I would like for them to consider our industry here that you know,

maybe they would consider, since they are encouraging them to

dump all this oil on the market over this, for the humanitarian reasons over there, that they would consider the humanitarian reasons over here in the United States and possibly give us some of

that money for our plugging costs. Maybe that will make them realize just how much oil we are losing.

Mr. BARTON. Interestingly enough, we didn’t get—at least I

didn’t understand the State Department’s answer on how much

money had been collected, but I did understand that a large portion

that had been collected had not been spent for food. Its label is oil

for food, but in practical effect, they are paying reparations to the

Kuwaiti government and they are paying for the cost of the U.N.

bureaucracy, and they are paying for the cost of the inspections

which are not even going on, and he upped his ante from $900 million I think to about $2.5 billion for food, so I would guess about

half the money so far collected has gone for food. There are numerVerDate 12-OCT-99 12:17 Oct 25, 1999 Jkt 010199 PO 00001 Frm 00093 Fmt 6633 Sfmt 6602 Z:\HSECOM\55644 txed01 PsN: txed01
91

ous ways to get $2.5 billion worth of food to the Iraq people without

allowing the Iraqi government to produce oil.

Mr. TAYLOR. I have a tip from all the other oil producers. We

would like to get on that list of helping Kuwait and the other oil

countries that have gotten hurt.

Mr. BARTON. We are going to give you an opportunity, I think,

to consult with the State Department, and if you want to divert the

spare parts to west Texas, that is fine with me. My daughter is a

teacher at South Elementary in Midland, Texas, and she has seen

the negative effects of what has happened, so I don’t think it would

be a burden to reverse some of those parts.

Yes, sir.

Mr. SIEMINSKI. Mr. Barton, as bad as this Oil-For-Food Program

seems to you today, there are two ways that it could get worse. The

first one is if our policy of getting rid of Saddam Hussein were to

be successful and there were a new, let’s say, politically friendly regime in Iraq that somehow changed the political course over there

that would allow that country to come out from under sanctions,

and at that point they would be like every other producer. They

would produce whatever they could economically want to do.

Mr. BARTON. Well, they would be within the OPEC cartel.

Mr. SIEMINSKI. Right.

Mr. BARTON. Which although they are now, they are being given

a free ride apparently for political considerations within the Arab

world. The rest of the cartel is trying to limit production, but they

are not requesting even a proportionate cut of Iraqi production.

Mr. SIEMINSKI. I think the Iraqis are making the assumption

that their production was held down for so long that they have a

lot of catch-up to do before they are going to cooperate with their

other cartel members.

Mr. BARTON. Well, they can assume whatever they want. That

doesn’t mean the U.S. Congress——

Mr. SIEMINSKI. Has to give it to them.

The second way that I think that again is worth more questioning, that where things could get worse is there are proposals

that have been advanced on the Security Council to allow foreign

investment in the Iraqi industry, even as the full sanctions are still

on. There are a number of companies and countries that are eagerly awaiting the opportunity to go in and develop fields in Iraq,

and one way perhaps to get at the head of that line would be to

assist the Iraqis in rebuilding current facilities.

I think that you might want to look into the issue of how the OilFor-Food Program could be structured in such a way as to delay

that kind of activity, which I think would be detrimental to U.S.

foreign policy, certainly as long as that regime in Iraq is in place,

that there is a very definite danger that the level of Iraqi production exports could rise fairly dramatically and fairly quickly if companies were allowed to go in and make investments in Iraq, and

then again, you would be back to, there wouldn’t be any way—I

mean if the Oil-For-Food Program were to be revamped to allow for

that, it would be a considerably worse situation for domestic production here in the United States than we are looking at now.

Mr. BARTON. I understand that, and I don’t advocate this, but I

don’t buy the argument that you have to allow this program to conVerDate 12-OCT-99 12:17 Oct 25, 1999 Jkt 010199 PO 00001 Frm 00094 Fmt 6633 Sfmt 6602 Z:\HSECOM\55644 txed01 PsN: txed01
92

tinue in order to keep sanctions being enforced. Because—and

again I am not an advocate of this, so I don’t want this to be the

headline coming out of the hearing, but in a worst-case situation,

the United States Air Force could bomb the oil terminals. We can

enforce the ability not to let Iraq export oil very easily. Again, that

is not the purpose of this, but there are ways to prevent the oil

from being shipped, and we have the military ability to do that. We

don’t choose to act unilaterally, and I am not advocating that we

should, but I don’t buy the argument that we are somehow helpless

in the U.N. and the world community while our domestic industry

is decimated. Because it was pointed out in a question that I asked,

there is no other nation that is losing permanently domestic production because of this program except the United States and perhaps to a smaller extent Canada.

If we can get the State Department’s attention and the Energy

Department’s attention and the United Nations’ attention to review

this program, I assume that your trade associations would be willing to participate in a dialog about how to revamp it, is that correct?

Mr. BOLE. Yes, sir.

Mr. BARTON. There is not anybody that is opposed to that.

Mr. BOLE. Mr. Chairman, I just have one comment. Tom made

a good point here a minute ago about a little financial help to the

producers as our stripper and marginal production is made irrelevant by the sales of Iraq crude. A point of comparison is Wes Watkins’ marginal well tax credit bill is estimated to cost only $600

million over 10 years, compared to billions of dollars that we are

funneling into Iraq. And I think there are other measures that

could benefit the plight of the domestic producers when compared

in dollar amounts to others are insignificant, but significant to the

producer.

Mr. BARTON. Right. We know that, as a Nation, we are importing

more oil than we ever have. We know what the Iraqi oil production

is, and we know the number of barrels that they are exporting. We

didn’t ask the prior panel how much of that Iraqi oil is imported

into the United States. Now, I have been told that it is about

700,000 barrels a day of Iraqi oil into the United States. Is that

a number that anybody here is familiar with, or if that is the

wrong number, are any of you gentlemen able to tell us approximately how much Iraqi oil is coming into the United States?

Mr. TAYLOR. Maybe that is just a sheer coincidence of the 6 to

700,000 barrels we have lost as independent producers. That would

be a good number.

Mr. BARTON. I am not putting that on the record that that is a

valid number, but I have been told that. Mr. Sieminski, do you

know how much Iraqi oil we are importing?

Mr. SIEMINSKI. I don’t have that number available right now, but

I think you would get that really quick.

Mr. BARTON. Mr. Bole, do you——

Mr. BOLE. Yes. Our staff says that that number has ranged from

500, 600, 700,000 barrels and it varies on a month-to-month basis.

Mr. BARTON. So it is verifiable that not only are we importing

more oil than we ever have into this country, but that between

500,000 and 700,000 barrels per day is coming from Iraq.

93

Mr. BROWN. Mr. Chairman, added to Mr. Smith’s testimony are

some graphs indicating select imports to the United States which

indicates that in August Iraqi oil was in the range of 650,000 barrels, and that, from January, steadily increased upward. If you will

look at, I think it is this lower chart here. It is in Mr. Smith’s testimony.

Mr. BARTON. I have it right here in front of me.

Mr. BROWN. I will be glad to pass this up to you.

Mr. BARTON. No. We have it. We appreciate your offer to help the

chairman do his job, but I think I have it right here in front of me.

We are going to do a number of hearings on the domestic oil and

gas industry on this subcommittee this year. We are obviously

going to look at this issue very closely and very skeptically based

on what testimony we heard from the administration representative today.

Are there any other items? Mr. Bole, you mentioned the Watkins

bill. Are there any other items that would be of immediate benefit

that we should address in our hearings that you would like to put

on the agenda today?

Mr. BOLE. Yes, and it is not a specific item, it is more of a question. In listening to the testimony today and the interests of you

and the committee members, I am impressed by the agreement, the

majority agreement here that we, as a Nation, our oil and gas-producing States are in trouble, that the Iraqi policies and other

things are hurting us. But the question that I would like to have

answered, not today but perhaps in the future, is if you are not

from a producing oil and gas State, why should you care?

Mr. BARTON. Well, that is a dilemma that we have. If you are

from a producing State or a producing region, you see the negative

effect of low prices, and again, my daughter is a sixth grade social

studies teacher in Midland, Texas. She has lived out there this

year and she teaches in a lower-income school, and she has firsthand knowledge of people who have lost their jobs and who have

been thrown out of work and children who have had to go on food

stamps because their parents do not have a job. So it is a real problem. But the other side of these low oil prices is gasoline, and in

my part of Texas, just south of Dallas, for 75 cents a gallon, and

people get used to that.

Mr. BOLE. Yes, sir.

Mr. BARTON. Gas prices have gone back up a little bit in the last

couple of weeks to about 89 cents a gallon or 85 cents, and people

are complaining of price gouging. They get used to 75 cents, and

of course up here it is a little bit higher. So we do have to have

a very good answer to that.

The question why should Congressman Markey from Massachusetts or Congressman Pallone from New Jersey care as members

of the subcommittee what is happening, and the long-term answer

is national security and the best interests long term of the people

of the United States of America. But we are going to have to do

some research to make sure that we give a good short-term answer.

I agree with that.

We have had a good hearing today. Most of our members who

stayed for the hearing come from regions of the country that see

the negative side of this issue. But it is not going to be easy to conVerDate 12-OCT-99 12:17 Oct 25, 1999 Jkt 010199 PO 00001 Frm 00096 Fmt 6633 Sfmt 6602 Z:\HSECOM\55644 txed01 PsN: txed01
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vince a majority of the Congress and the Senate and the President

to make some of these changes that I think need to be made.

Mr. BOLE. Would it be appropriate to suggest a partial answer

to why they should care?

Mr. BARTON. You can—my plane doesn’t leave until 4:15. I am

going to have to take a personal convenience break at some time,

but I will listen as long as you want to talk.

Mr. BOLE. You have a great constituency, and I will be

uncharacteristically brief.

The oil and gas industry is no longer an oil and gas industry, it

is an energy industry. As you know, Congress is deregulating electricity.

Mr. BARTON. We are trying to.

Mr. BOLE. We are trying to.

Mr. BARTON. This same subcommittee.

Mr. BOLE. Absolutely. And so what we are looking at is a domestic energy industry which is made up of electricity, oil, gas and all

the other fuels. The utility business, and I have a background of

working for the utility companies, estimates that it is going to take

Pete and others to invest $180 billion over the next 10 years in domestic drilling to allow us to grow from a 21.5 TCF market to a

30 TCF market. There are 1,300 independent power projects on the

drawing boards; 1,150 are supposed to be powered by natural gas,

a 3-year backlog from General Electric and General Electric’s turbines to build the cogen plants.

Mr. BARTON. I am aware of them.

Mr. BOLE. The utility industry only has to invest $40 billion to

reconfigure the pipe to get this gas to the markets to fuel the

power plants. They are making 15 to 17 percent return on their investment. These guys are making no money on their investment.

As an industry, the Oil and Gas Journal 200 gets 6 percent return

on total capital.

Now, I don’t think it is going to happen that our industry is going to invest $180 billion for a 6 percent return to get from 21

to 30 TCF.

The second thing that has happened in our business is we do a

lot of transactions. We sell to Mobil, Exxon, Amoco and BP. We are

seeing the major companies divest properties in the United States.

Mr. BARTON. Right.

Mr. BOLE. We have seen the total amount of sales, property sales

in the 1990’s go from an average of $7 billion a year, 2 years ago,

$23 billion, last year, $82 billion. These properties are being sold

to the independents. Where are the independents going to get the

money to develop these properties and continue to drill them to

keep our production up to satisfy the total energy demands of the

U.S. if the price of oil is at $12 to $14, and gas is, you know, under

$2.

Mr. BARTON. What is a reasonable price that brings some stability, yet protects consumers against price spikes, if we could

somehow come up with a policy that kept oil prices within a certain

range, what would that range be, so that we would have reasonable

prices at the pump for our motorists, and yet enough revenue so

that we could do some of the things that Mr. Bole just talked

about?

95

Mr. BOLE. Well, I would stick my neck out and let the other guys

comment, but the number that seems to be most prevalent is oil

staying in the range of say $18 to $22 a barrel and gas closer to

$3 than $2.

Mr. BARTON. In MCF.

Mr. BOLE. In MCF, yes, sir.

Mr. BARTON. Do you agree with that, Mr. Brown?

Mr. BROWN. My company just did a study on that to find out

what would it take for us to go back out and drill for oil again. I

mean right now all we do is drill for gas. But to drill for oil it

would take $22 a barrel plus in a stable market. The problem is

the volatility in the market. And you have to understand that when

oil prices are low, gas prices are competitive with oil; in other

words, home heating oil versus natural gas. So gas gets pushed

down at the same time, and it just takes revenue out of our ability

to go out and drill for more oil. I am like a grocery store owner.

I mean I have to restock my shelves. I am going out of business

if I don’t drill for oil.

Mr. BARTON. Right. Mr. Taylor.

Mr. TAYLOR. I don’t know about Mr. Brown, but in our area, and

I am taking in quite a bit of Texas, our lifting costs are anywhere

from $12 to $15 a barrel, and that is not taking into consideration

if you have to pull a down hole pump or your rods part, your maintenance and repairs. One of the big fields in Texas, the Kelly Snyder field, that thing produces a tremendous amount of oil and lifting costs are at $15 per barrel.

Mr. BARTON. So we need kind of a floor at the $15 range and it would be nice to go to the $25, so kind of a $10 range.

Mr. TAYLOR. Of course we get nervous when the price gets over $20 a barrel, because this is what happens. I mean all of a sudden

we realize that we are basically the stepchildren of this booming

economy. Mr. Brown and I, I have four little kids I am trying to

raise, and I am trying to make a living, and if I can get $18 to $20

a barrel, you know, I think I can do it. But if I am making less

than $15 I am losing money.

Mr. BARTON. Do any of you know what the OPEC model is for,

what is their optimal target price that they shoot for in their 5-year

program?

Mr. BROWN. I asked Dr. Mankin, who is in charge of the Oklahoma Geological Survey, that very question and he said that OPEC

would probably shoot for something around $17 a barrel.

Mr. BARTON. Okay.

Mr. TAYLOR. It would equate to us to be $21. I think there is

maybe $3 between tanker charges, et cetera.

Mr. BARTON. How many wells, Mr. Taylor, that you have had an

interest in have had to be plugged in the last year? That you had

personal financial interest?

Mr. TAYLOR. Personal interest, I would say probably 28 to 32 percent, and then of the remaining wells that I have interest in, we

continue to lose money or we shut them in. But as far as wells that

have been plugged, I live on a small ranch south of Abilene, and

we had 12 wells out there and they all made a barrel or two a day.

And the company that was operating those wells turned them over

to the pumper. Because he couldn’t make any money, the pumper

96

just recently turned them over to a salvage company. So they

pulled the pumping units off of them. They haven’t plugged them

yet.

Mr. BARTON. Now, if we hadn’t had the collapse in prices, how

many more years would those wells have produced?

Mr. TAYLOR. They have been out there for approximately 18

years and they would produce for another 10 years. Once they get

down to a level of a barrel or 2 to 5 barrels a day, they will maintain that level. You have a low-fluid entry, but when you pump

them for a few hours, you turn them off, you nurse those wells, you

can pump them for another 10 years.

Mr. BARTON. There were substantial amounts of oil yet to be obtained if, in fact, we could have kept the wells flowing and the fact

that, you know, at one time west Texas, the actual price at the well

had gotten down to about $6.50 a barrel.

Mr. TAYLOR. That is correct.

Mr. BARTON. And nobody, I mean God couldn’t keep those wells

going at $6.50 a barrel for very long.

Mr. TAYLOR. In the event you have a landowner such as myself

that was encouraging that operator to go ahead and continue those

wells, I gave them an extension on the lease, they kept the wells

shut in, but when you do that for an extended amount of time, your

down hole pumps start corroding, your rods start corroding, so the

equipment starts rotting and you can’t keep them shut in for so

long.

Mr. BARTON. Mr. Brown, you said you are principally looking at

gas now, but have you had to plug some oil wells that you had an

interest in in the last year?

Mr. BROWN. In my testimony I talked about 57 percent of the

wells in December lost money, and one of my problems is getting

the operators to plug them. They don’t want to give them up, and

they know they are losing money, but they just think well, the

price, it is just around the corner, it is going to go back up and they

are going to start making money again, but we keep losing money

every month. And as I say, you can only lose money for so long.

So I think a lot of the wells that need to be plugged are yet to

be plugged. We have shut a lot of them in, but at some point in

time, like you said, your equipment starts to deteriorate and when

you try to start it back up, it means a sizable investment, so you

are better off plugging the well than spending the money trying to

put it back on production.

Mr. BARTON. I am going to conclude the hearing.

I want to thank you all for coming. The issues that we are going

to look at, we are going to continue to look at the Iraqi Oil-ForFood Program. We have a possibility to reauthorize the Strategic

Petroleum Reserve this year in this subcommittee, we are going to

look at that to use the petroleum stripper well production. I have

had one suggestion from an independent in Texas that we might

relax some of the antitrust rules that would allow small producers

to form co-ops in which they could pool their oil for transportation

at the refinery. That is not allowed under current antitrust laws.

If you have any other suggestions, a number of the tax issues are

not before this subcommittee’s jurisdiction. They go to the Ways

97

and Means, but Bill Archer of Texas and Wes Watkins of Oklahoma are very interested.

Did you want to put something else in the record, Mr. Chairman?

Mr. SMITH. Thank you. Mike Smith again. One thing I forgot to

mention in my testimony——

Mr. BARTON. We don’t normally have witnesses want to come

back.

Mr. SMITH. I know of at least one that doesn’t want to come back

that was on my panel. But there has been a lot of conversation

about the cost to produce a barrel of oil, and the Oklahoma Marginal Well Commission, which is a State agency in Oklahoma that

is in my cabinet jurisdiction, in concert with Oklahoma State University, spent about a year making an exhaustive study in Oklahoma on the true cost of producing a barrel of oil. And the average

well in Oklahoma costs about $14 a barrel simply in lifting costs.

That is electric, pumper, environmental costs. That does not include if you have rods part, or you have a pump problem or any

down hole problem. And no rework. It is strictly day-to-day production.

Mr. BARTON. Well, thank you. As I said at the top of the hearing,

this is the first, but it is not the last. We are going to be working

with the State Department on the specific issue, but we are going

to look at a wide range of issues in the domestic oil and gas industry, and your input will be appreciated as we continue these hearings.

This hearing is adjourned.

[Whereupon, at 1:50 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

UNITED STATES DEPARTMENT OF STATE

WASHINGTON, D.C. 20520

April 16, 1999

The Honorable JOE BARTON, Chairman,

Subcommittee on Energy and Power,

House of Representatives.

DEAR MR. CHAIRMAN, thank you for your letter of April 2 concerning the recent

testimony before the Subcommittee on Energy and Power by William B. Wood of the

Bureau of International Organization Affairs.

Your letter requested information on revenues and disbursements under the UN

Oil-for-Food program in Iraq, which is included in the attachments to this letter.

As the Oil-for-Food program runs in six month phases, some of the information is

presented by program phase. The material attached includes information on:

• actual Oil-for-Food sale revenues by phase;

• approved contracts from phases I-IV (12/96 to 11/98) and projected allocations in

phase V (11/98 to 5/99); and

• purchases of spare parts and equipment for the Iraqi oil infrastructure from

Phase IV, when the special set-aside of funds for this purpose began, to date.

With respect to these figures, it is worth noting that only two-thirds of the Iraqi

oil revenue is available for humanitarian purchases.

Of the remaining funds, thirty percent goes to the United Nations Compensation

Commission, which compensates those who suffered economic losses—including U.S.

citizens and corporations—as a result of the Iraqi invasion and occupation of Kuwait, and the remainder goes to fund UNSCOM disarmament activities in Iraq and

UN Oil-for-Food management expenses.

I hope you find this information useful. We appreciate the Subcommittee’s interest in the Oil-for-Food program, which is a critical element of our Iraq policy. The

program is crucial to maintaining Security Council and wider international support,

including the support of other oil-producing nations, for the UN sanctions which

contain Iraq’s ability to threaten its neighbors while we continue our efforts for regime change. The Oil-for-Food program helps meet the genuine humanitarian needs

98

of the Iraqi people and our support for it reinforces the message that the United

States is not against the people of Iraq-only the regime that is responsible for their

plight.

Sincerely,

BARBARA LARKIN

Assistant Secretary, Legislative Affairs

Attachments:

Tab 1: Oil-for-Food revenues

Tab 2: Oil-for-Food Contracts by phase

Tab 3: Contracts for oil spare parts and equipment

Oil-for-Food Oil Sale Revenues By Phase

Phase Approved Oil

Contracts

Barrels

(million)

$ Revenue

(million)

Ave Price

per Barrel

I (12/96-6/97) ................................................................................................ 51 121 $2150 $17.99

II (6/97-12/97) ............................................................................................... 34 127.3 $2125 $16.74

III (12/97-5/98) .............................................................................................. 52 183.9 $2092 $11.49

IV (5/98-11/98) .............................................................................................. 59 308.1 $3040 $9.36

V (11/98-5/99) ............................................................................................... 82 274.9 $983*

TOTAL ......................................................................................................... 278 1015 $10390**

*Sales through mid-April

**One third of this total is used for UNCC and UN Oil-for-Food management operations.

Oil-for-Food Contracts by Phase

[in millions of US dollars]

Sector

Phases I-IV

Approved

Contracts

Phase V

Projected

Allocations

Food ......................................................................................................................................................... 3797.12 1,026

Medicine & Health ................................................................................................................................... 744 240

Water & Sanitation .................................................................................................................................. 152.25 150

Electricity ................................................................................................................................................. 351.54 409

Agriculture ............................................................................................................................................... 273.70 180

Education ................................................................................................................................................. 115.99 100

Settlement Rehabilitation ........................................................................................................................ 41.10 40

Mines ....................................................................................................................................................... 2.99 9

Nutrition ................................................................................................................................................... 23.92 16

Infrastructure Support ............................................................................................................................. * 126

Oil ............................................................................................................................................................ 114.31 300

Total .................................................................................................................................................... 5616.92 2,596

*The UN did not report funding for this category

United Nations Office of the Iraq Programme

All Oil Spare Parts Contracts Approved as at 16 April 1999 under the terms of resolutions 1175 and 1210—funded under

Phases IV and V of the oil for food programme

Country Nature of Spares Contract Value

Denmark ................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $1,043,090

Spain ........................................ Pipeline Equip & Spares ............................................................................. $630,280

Germany ................................... Pipeline Equip & Spares ............................................................................. $189,349

Germany ................................... Pipeline Equip & Spares ............................................................................. $8,746,858

Belgium .................................... Pipeline Equip & Spares ............................................................................. $287,508

Denmark ................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $2,270,804

Denmark ................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $100,580

Denmark ................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $20,139

Russian Federation .................. Pipeline Equip & Spares ............................................................................. $976,191

Turkey ....................................... Pipeline Equip & Spares ............................................................................. $8,600,426

France ...................................... Pipeline Equip & Spares ............................................................................. $1,140,000

France ...................................... Pipeline Equip & Spares ............................................................................. $1,283,966

France ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $5,000,000

France ...................................... Pipeline Equip & Spares ............................................................................. $177,793

France ...................................... Pipeline Equip & Spares ............................................................................. $287,622

99

United Nations Office of the Iraq Programme—Continued

All Oil Spare Parts Contracts Approved as at 16 April 1999 under the terms of resolutions 1175 and 1210—funded under

Phases IV and V of the oil for food programme

Country Nature of Spares Contract Value

France ...................................... Pipeline Equip & Spares ............................................................................. $158,930

France ...................................... Pipeline Equip & Spares ............................................................................. $148,240

France ...................................... Pipeline Equip & Spares ............................................................................. $98,478

France ...................................... Pipeline Equip & Spares ............................................................................. $260,328

France ...................................... Pipeline Equip & Spares ............................................................................. $276,606

France ...................................... Pipeline Equip & Spares ............................................................................. $23,520

France ...................................... Pipeline Equip & Spares ............................................................................. $72,176

France ...................................... Pipeline Equip & Spares ............................................................................. $82,030

China ....................................... Tug Boats .................................................................................................... $9,350,000

Italy .......................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $2,885,039

Italy .......................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $221,100

Italy .......................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $1,036,000

China ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $4,338,000

The Netherlands ....................... Demulsifier .................................................................................................. $1,750,000

Turkey ....................................... Pipeline Equip & Spares ............................................................................. $580,000

Turkey ....................................... N/A ............................................................................................................... $226,500

China ....................................... Pipeline Equip & Spares ............................................................................. $456,000

Jordan ...................................... Pipeline Equip & Spares ............................................................................. $914,924

Jordan ...................................... Pipeline Equip & Spares ............................................................................. $914,924

Russian Federation .................. Pipeline Equip & Spares ............................................................................. $700,000

Denmark ................................... OIL SPARE PARTS ........................................................................................ $92,298

Denmark ................................... OIL SPARE PARTS ........................................................................................ $84,370

Denmark ................................... N/A ............................................................................................................... $193,349

Denmark ................................... N/A ............................................................................................................... $374,115

Turkey ....................................... OIL SPARE PARTS ........................................................................................ $555,606

Turkey ....................................... N/A ............................................................................................................... $919,260

France ...................................... Pipeline Equip & Spares ............................................................................. $32,960

Belgium .................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $45,323

France ...................................... Pipeline Equip & Spares ............................................................................. $16,692,147

France ...................................... Pipeline Equip & Spares ............................................................................. $132,288

Russian Federation .................. Pipeline Equip & Spares ............................................................................. $383,758

Russian Federation .................. PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $454,800

Russian Federation .................. PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $1,367,800

Belgium .................................... OIL SPARE PARTS ........................................................................................ $277,500

Russian Federation .................. STORAGE TANKS/SPARE PARTS ................................................................... $3,000,000

France ...................................... VALVE/PARTS ............................................................................................... $86,472

France ...................................... VALVE/PARTS ............................................................................................... $153,259

France ...................................... VALVE/PARTS ............................................................................................... $65,507

France ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $27,019

France ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $539,240

France ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $94,346

Russian Federation .................. PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $41,603

Russian Federation .................. PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $329,497

China ....................................... VALVE/PARTS ............................................................................................... $18,500

China ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $80,000

China ....................................... VALVE/PARTS ............................................................................................... $27,853

France ...................................... DEMULSIFIER ............................................................................................... $1,067,500

Singapore ................................. PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $3,270,000

Turkey ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $91,280

France ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $185,693

France ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $28,982

France ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $165,000

France ...................................... FIRE FIGHTING TRUCKS/SPARES ................................................................. $954,600

France ...................................... VEHICLE ....................................................................................................... $488,000

France ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $95,000

France ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $62,910

The Netherlands ....................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $50,357

Turkey ....................................... FIRE FIGHTING TRUCKS/SPARES ................................................................. $218,000

Spain ........................................ BATTERIES ................................................................................................... $949,980

China ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $945,800

China ....................................... OIL SPARE PARTS ........................................................................................ $133,000

France ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $322,839

100

United Nations Office of the Iraq Programme—Continued

All Oil Spare Parts Contracts Approved as at 16 April 1999 under the terms of resolutions 1175 and 1210—funded under

Phases IV and V of the oil for food programme

Country Nature of Spares Contract Value

Belgium .................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $23,000

Belgium .................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $118,500

UAE .......................................... DIESEL ENGINE MOTOR SPARE PARTS ........................................................ $7,496

UAE .......................................... CABLE .......................................................................................................... $26,500

UAE .......................................... COMPRESSOR .............................................................................................. $78,696

UAE .......................................... COMPRESSOR .............................................................................................. $62,511

Cyprus ...................................... BATTERY/ACCESSORIES ............................................................................... $191,440

UAE .......................................... OIL SPARE PARTS ........................................................................................ $173,969

UAE .......................................... OIL SPARE PARTS ........................................................................................ $119,670

UAE .......................................... OIL SPARE PARTS ........................................................................................ $203,500

Belgium .................................... OIL SPARE PARTS ........................................................................................ $347,605

Jordan ...................................... OIL SPARE PARTS ........................................................................................ $1,450,000

Jordan ...................................... OIL SPARE PARTS ........................................................................................ $166,491

Turkey ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $160,000

Russian Federation .................. PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $117,765

Jordan ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $271,585

Turkey ....................................... ELECTRICAL SPARE PARTS FOR OIL SECTOR ............................................. $336,951

Egypt ........................................ PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $97,834

Egypt ........................................ OIL SPARE PARTS ........................................................................................ $186,192

The United Kingdom ................ PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $413,991

Cyprus ...................................... BATTERY/ACCESSORIES ............................................................................... $270,686

Turkey ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $650,100

China ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $158,243

China ....................................... DRILL EQUIPMENT/SPARES .......................................................................... $189,872

Turkey ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $2,115,000

Turkey ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $173,000

Turkey ....................................... CESSPIT EQUIPMENT ................................................................................... $95,230

Belgium .................................... ROTATING MACHINE SPARES ....................................................................... $261,902

Italy .......................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $890,000

Jordan ...................................... AIR COMPRESSOR PARTS ............................................................................ $180,000

Russian Federation .................. PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $418,806

Russian Federation .................. PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $105,190

The United Kingdom ................ AIR COMPRESSOR PARTS ............................................................................ $176,940

The United Kingdom ................ PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $597,593

Jordan ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $58,148

France ...................................... OIL SPARES FOR WASTE WATER TREATMENT ............................................. $18,575

France ...................................... PUMP/PARTS ................................................................................................ $41,385

France ...................................... VALVES/PUMPS/PARTS FOR UNDERGROUND STORAGE ............................... $555,340

China ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $226,477

China ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $12,024

China ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $44,480

China ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $1,441,686

China ....................................... FERROCHROME LIGNOSULFONATE ............................................................... $25,024

China ....................................... OIL SPARE PARTS ........................................................................................ $155,000

France ...................................... OIL SPARE PARTS ........................................................................................ $178,132

France ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $1,200,000

Denmark ................................... PUMP/PARTS ................................................................................................ $676,000

The Netherlands ....................... OIL SPARE PARTS ........................................................................................ $209,032

The Netherlands ....................... PUMP/PARTS ................................................................................................ $177,264

The Netherlands ....................... PUMP/PARTS ................................................................................................ $137,847

UAE .......................................... OIL SPARE PARTS ........................................................................................ $73,752

Jordan ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $10,147

UAE .......................................... WASTE WATER EQUIPMENT PARTS .............................................................. $74,952

Jordan ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $120,000

France ...................................... OIL SPARE PARTS ........................................................................................ $273,176

France ...................................... OIL SPARE PARTS ........................................................................................ $360,473

Turkey ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $75,558

Switzerland .............................. PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $230,192

China ....................................... OIL SPARE PARTS ........................................................................................ $195,093

China ....................................... FORKLIFT ..................................................................................................... $188,000

China ....................................... CEMENT ....................................................................................................... $52,137

Russian Federation .................. PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $24,308

101

United Nations Office of the Iraq Programme—Continued

All Oil Spare Parts Contracts Approved as at 16 April 1999 under the terms of resolutions 1175 and 1210—funded under

Phases IV and V of the oil for food programme

Country Nature of Spares Contract Value

France ...................................... OIL SPARE PARTS ........................................................................................ $123,625

France ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $1,479,132

UAE .......................................... AIR CONDITIONER ........................................................................................ $44,250

Russian Federation .................. PASSENGER BOAT ........................................................................................ $2,650,000

France ...................................... PUMPS AND SPARE PARTS .......................................................................... $77,254

France ...................................... OIL SPARE PARTS ........................................................................................ $85,758

France ...................................... OIL SPARE PARTS ........................................................................................ $119,760

France ...................................... OIL SPARE PARTS ........................................................................................ $135,468

France ...................................... OIL SPARE PARTS ........................................................................................ $50,159

China ....................................... OIL SPARE PARTS ........................................................................................ $25,130

China ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $80,779

China ....................................... OIL SPARE PARTS ........................................................................................ $23,272

China ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $106,000

China ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $68,000

Bahrain .................................... ZINC SULPHATE ........................................................................................... $69,000

UAE .......................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $145,161

UAE .......................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $118,000

UAE .......................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $304,510

Jordan ...................................... OIL SPARE PARTS ........................................................................................ $103,765

Turkey ....................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $212,700

UAE .......................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $39,880

Russian Federation .................. OIL SPARE PARTS ........................................................................................ $162,723

The United Kingdom ................ OIL SPARE PARTS ........................................................................................ $41,987

France ...................................... OIL SPARE PARTS ........................................................................................ $620,000

Italy .......................................... OIL SPARE PARTS ........................................................................................ $75,960

Finland ..................................... OIL SPARE PARTS ........................................................................................ $123,643

France ...................................... MOTOR ......................................................................................................... $130,937

Italy .......................................... MOTOR ......................................................................................................... $376,100

Italy .......................................... OIL SPARE PARTS ........................................................................................ $71,731

Italy .......................................... OIL SPARE PARTS ........................................................................................ $61,436

Germany ................................... OIL SPARE PARTS ........................................................................................ $750,319

Jordan ...................................... OIL SPARE PARTS ........................................................................................ $32,634

Belgium .................................... FIRE FIGHTING CHEMICALS ......................................................................... $119,150

Russian Federation .................. TRANSFORMERS ........................................................................................... $195,400

UK ............................................ LABORATORY SUPPLIES ............................................................................... $18,658

Korea ........................................ FORKLIFTS ................................................................................................... $206,176

Finland ..................................... INSTRUMENTATION SPARES ......................................................................... $25,884

UAE .......................................... GENERATOR SPARE PARTS .......................................................................... $100,083

Cyprus ...................................... CABLE/SPARE PARTS ................................................................................... $110,000

Belgium .................................... FIRE FIGHTING CHEMICALS ......................................................................... $313,976

Belgium .................................... SAFETY & FIRE FIGHTING EQUIPMENT ........................................................ $29,494

Belgium .................................... SAFETY & FIRE FIGHTING EQUIPMENT ........................................................ $11,332

Belgium .................................... SAFETY & FIRE FIGHTING EQUIPMENT ........................................................ $60,479

Belgium .................................... SAFETY & FIRE FIGHTING EQUIPMENT ........................................................ $45,593

Belgium .................................... SAFETY & FIRE FIGHTING EQUIPMENT ........................................................ $150,952

Belgium .................................... SAFETY & FIRE FIGHTING EQUIPMENT ........................................................ $90,082

Belgium .................................... FIRE EXTINGUISHER .................................................................................... $173,938

France ...................................... Seals ............................................................................................................ $54,506

Sweden ..................................... GAS TURBINE SPARE PARTS ....................................................................... $123,743

Ireland ...................................... OIL SPARE PARTS ........................................................................................ $78,580

Ireland ...................................... OIL SPARE PARTS ........................................................................................ $251,772

Ireland ...................................... OIL SPARE PARTS ........................................................................................ $103,220

Ireland ...................................... OIL SPARE PARTS ........................................................................................ $119,729

Ireland ...................................... OIL SPARE PARTS ........................................................................................ $393,310

UAE .......................................... COMPRESSOR .............................................................................................. $161,000

UAE .......................................... GENERATOR SPARE PARTS .......................................................................... $50,142

China ....................................... ELECTRIC MOTORS ...................................................................................... $1,650

France ...................................... OIL SPARE PARTS ........................................................................................ $319,719

France ...................................... PUMP/PARTS ................................................................................................ $343,640

France ...................................... OIL SPARE PARTS ........................................................................................ $71,115

France ...................................... OIL SPARE PARTS ........................................................................................ $1,150,382

France ...................................... WATER PUMPING STATION PARTS ............................................................... $386,795

102

United Nations Office of the Iraq Programme—Continued

All Oil Spare Parts Contracts Approved as at 16 April 1999 under the terms of resolutions 1175 and 1210—funded under

Phases IV and V of the oil for food programme

Country Nature of Spares Contract Value

France ...................................... PUMPS AND SPARE PARTS .......................................................................... $412,079

France ...................................... OIL SPARE PARTS ........................................................................................ $54,768

France ...................................... OIL SPARE PARTS ........................................................................................ $105,324

France ...................................... INSTRUMENTATION SPARES ......................................................................... $130,569

France ...................................... VALVE/PARTS ............................................................................................... $325,096

Jordan ...................................... OIL SPARE PARTS ........................................................................................ $526,649

Jordan ...................................... AIR COMPRESSOR PARTS ............................................................................ $655,563

UAE .......................................... VEHICLE/SPARE PARTS ................................................................................ $750,000

UAE .......................................... VEHICLE ....................................................................................................... $1,404,000

UAE .......................................... AMBULANCE ................................................................................................ $54,000

UAE .......................................... OIL SPARE PARTS ........................................................................................ $619,788

Jordan ...................................... OIL SPARE PARTS ........................................................................................ $91,855

Jordan ...................................... INSTRUMENTATION SPARES ......................................................................... $56,949

Jordan ...................................... OIL SPARE PARTS ........................................................................................ $66,000

Italy .......................................... PUMPS AND SPARE PARTS .......................................................................... $53,524

Italy .......................................... CENTRIFUGE/SPARE PARTS ......................................................................... $115,989

Italy .......................................... ROTATING MACHINES .................................................................................. $123,343

Italy .......................................... INSTRUMENTATION SPARES ......................................................................... $140,185

Russian Federation .................. SEALS .......................................................................................................... $41,210

Russian Federation .................. GASKETS ...................................................................................................... $281,129

UAE .......................................... OIL SPARE PARTS ........................................................................................ $163,000

China ....................................... WORK VEHICLES .......................................................................................... $1,179,136

France ...................................... VALVE/PARTS ............................................................................................... $42,713

France ...................................... PUMPS AND SPARE PARTS .......................................................................... $40,346

France ...................................... AIR COMPRESSOR PARTS ............................................................................ $24,908

France ...................................... MOTOR ......................................................................................................... $14,270

Austria ..................................... PUMP/PARTS ................................................................................................ $221,459

Italy .......................................... FIELD INSTRUMENTATION/SPARE PARTS ..................................................... $163,242

China ....................................... FORKLIFT ..................................................................................................... $140,250

France ...................................... OIL SPARE PARTS ........................................................................................ $31,206

Germany ................................... OIL SPARE PARTS ........................................................................................ $508,011

France ...................................... OIL SPARE PARTS ........................................................................................ $167,885

UAE .......................................... VEHICLE/SPARE PARTS ................................................................................ $1,180,000

Belgium .................................... OIL SPARE PARTS ........................................................................................ $1,361,475

Cyprus ...................................... OIL SPARE PARTS ........................................................................................ $25,000

Italy .......................................... OIL SPARE PARTS ........................................................................................ $214,230

Belgium .................................... OIL SPARE PARTS ........................................................................................ $330,000

Belgium .................................... OIL SPARE PARTS ........................................................................................ $427,000

Egypt ........................................ BOILER TUBES ............................................................................................. $98,000

Switzerland .............................. MOTOR ......................................................................................................... $18,300

France* .................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $331,320

Turkey* ..................................... OIL SPARE PARTS ........................................................................................ $7,260

China* ..................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $43,716

China* ..................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $25,115

Jordan* .................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $61,666

France* .................................... FORKLIFT/SPARES ........................................................................................ $2,000,000

Jordan* .................................... OIL SPARE PARTS ........................................................................................ $74,602

France* .................................... OIL SPARE PARTS ........................................................................................ $53,462

Jordan* .................................... OIL SPARE PARTS ........................................................................................ $664,213

Jordan* .................................... OIL SPARE PARTS ........................................................................................ $68,000

France* .................................... VALVE/PARTS ............................................................................................... $755,650

France* .................................... CHEMICALS .................................................................................................. $78,810

France* .................................... GENERATING SETS AND PARTS ................................................................... $79,000

France* .................................... SPARE PARTS FOR COOLING TOWER .......................................................... $138,252

Italy* ........................................ CHEMICALS .................................................................................................. $122,033

France* .................................... OIL SPARE PARTS ........................................................................................ $112,227

China ....................................... OIL SPARE PARTS ........................................................................................ $1,180,000

Jordan* .................................... CONTROL INSTRUMENTATION ...................................................................... $99,363

UAE .......................................... PUMP/PARTS ................................................................................................ $41,152

Italy .......................................... OIL SPARE PARTS ........................................................................................ $297,035

UK ............................................ OIL SPARE PARTS ........................................................................................ $93,642

UK ............................................ OIL SPARE PARTS ........................................................................................ $8,387

103

United Nations Office of the Iraq Programme—Continued

All Oil Spare Parts Contracts Approved as at 16 April 1999 under the terms of resolutions 1175 and 1210—funded under

Phases IV and V of the oil for food programme

Country Nature of Spares Contract Value

UK ............................................ SPARE PARTS FOR GLYCOL PUMPS ............................................................ $184,494

Malaysia ................................... PIPELINE EQUIPMENT & SPARES (OIL ......................................................... $10,299,000

Malaysia ................................... OIL SPARE PARTS ........................................................................................ $5,406,000

France ...................................... ELECTRIC MOTORS ...................................................................................... $65,190

Russian Federation* ................ COMPRESSOR/PARTS ................................................................................... $383,944

France* .................................... OIL SPARES/PARTS FOR LPG FILLING PLANT .............................................. $191,104

Russian Federation* ................ OIL SPARE PARTS ........................................................................................ $298,000

Russian Federation* ................ PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $596,000

France* .................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $245,911

UAE* ........................................ PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $74,355

France* .................................... OIL SPARE PARTS ........................................................................................ $626,742

France* .................................... CENTRIFUGAL PUMPING SYSTEM ................................................................ $235,460

France* .................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $25,549

Jordan* .................................... PUMPS AND SPARE PARTS .......................................................................... $605,010

Jordan* .................................... PUMPS AND SPARE PARTS .......................................................................... $188,782

Jordan* .................................... COMPRESSOR/ACCESSORIES ....................................................................... $253,516

Egypt* ...................................... TRANSFORMERS .......................................................................................... $42,500

Jordan* .................................... OIL SPARE PARTS ........................................................................................ $212,105

Belgium* .................................. BEARING UNITS ........................................................................................... $58,463

Italy* ........................................ OIL SPARE PARTS ........................................................................................ $8,845

France* .................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $284,200

France* .................................... PUMP/PARTS ................................................................................................ $128,420

Italy* ........................................ OIL SPARE PARTS ........................................................................................ $312,500

Italy* ........................................ ROTATING MACHINES .................................................................................. $41,877

Belgium* .................................. BEARINGS .................................................................................................... $56,633

France* .................................... PUMP/PARTS ................................................................................................ $252,868

France* .................................... COMPRESSOR/PARTS; TURBINE SPARE PARTS ........................................... $1,295,895

France* .................................... CENTRIFUGAL PUMPING SYSTEM ................................................................ $138,850

France* .................................... EXCAVATORS & SPARE PARTS .................................................................... $408,160

France* .................................... OIL SPARE PARTS ........................................................................................ $29,419

Turkey* ..................................... OIL SPARE PARTS ........................................................................................ $223,150

Italy* ........................................ OIL SPARE PARTS ........................................................................................ $457,485

France* .................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $561,127

Turkey* ..................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $110,640

Turkey* ..................................... VEHICLE/SPARE PARTS ................................................................................ $65,983

UAE* ........................................ VALVE/PARTS ............................................................................................... $88,400

France* .................................... ROTATING MACHINE SPARES ....................................................................... $69,345

France* .................................... PUMP/PARTS ................................................................................................ $111,600

France ...................................... ELECTRIC MOTORS ...................................................................................... $65,190

Italy .......................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $49,792

France ...................................... OIL SPARE PARTS ........................................................................................ $146,560

France ...................................... OIL SPARE PARTS ........................................................................................ $228,760

France ...................................... ROTATING MACHINES .................................................................................. $109,431

France ...................................... VALVES & PIPE FITTINGS ............................................................................ $65,087

France ...................................... VALVE/PARTS ............................................................................................... $357,138

Italy .......................................... CHEMICALS .................................................................................................. $656,370

France ...................................... FLOW CONTROL VALVES .............................................................................. $654,301

France ...................................... OIL SPARE PARTS ........................................................................................ $350,065

Italy .......................................... CHEMICALS .................................................................................................. $24,000

Russian Federation .................. GAS TURBINE SPARE PARTS ....................................................................... $2,909,000

France* .................................... CENTRIFUGAL PUMPING SYSTEM ................................................................ $1,454,600

Italy* ........................................ OIL SPARE PARTS ........................................................................................ $2,492,260

France* .................................... CABLE .......................................................................................................... $18,000

Italy* ........................................ GAS TURBINE SPARE PARTS ....................................................................... $165,932

Italy* ........................................ ROTATING MACHINES .................................................................................. $210,059

UAE* ........................................ VALVE/PARTS ............................................................................................... $31,580

Russian Federation* ................ OIL SPARE PARTS ........................................................................................ $1,368,712

Italy* ........................................ PUMP/PARTS ................................................................................................ $304,500

Italy* ........................................ OIL SPARE PARTS ........................................................................................ $98,660

Korea* ...................................... EXCAVATORS & SPARE PARTS .................................................................... $294,000

France* .................................... OIL SPARE PARTS ........................................................................................ $568,578

UAE* ........................................ DRILL EQUIPMENT/SPARES .......................................................................... $867,082

104

United Nations Office of the Iraq Programme—Continued

All Oil Spare Parts Contracts Approved as at 16 April 1999 under the terms of resolutions 1175 and 1210—funded under

Phases IV and V of the oil for food programme

Country Nature of Spares Contract Value

France* .................................... OIL SPARE PARTS ........................................................................................ $284,372

UAE* ........................................ VEHICLE/SPARE PARTS$ .............................................................................. $880,112

France* .................................... OIL SPARE PARTS ........................................................................................ $6,725,937

Turkey* ..................................... REHABILITATION SPARE PARTS FOR IT ....................................................... $2118,000

China ....................................... CHEMICALS .................................................................................................. $16,618

Austria ..................................... OIL SPARE PARTS ........................................................................................ $52,122

Austria ..................................... OIL SPARE PARTS ........................................................................................ $53,510

Austria ..................................... PUMP/PARTS ................................................................................................ $11,562

Austria ..................................... OIL SPARE PARTS ........................................................................................ $14,499

Jordan ...................................... BATTERY CHARGER ..................................................................................... $10,824

Jordan ...................................... UPS .............................................................................................................. $42,509

Jordan ...................................... ELECTRICAL EQUIPMENT ............................................................................. $223,968

Italy .......................................... ELECTRICAL EQUIPMENT ............................................................................. $166,682

Lebanon ................................... TURBINE ...................................................................................................... $1,353,767

Italy* ........................................ OIL SPARE PARTS ........................................................................................ $253,000

Italy* ........................................ PUMP/PARTS ................................................................................................ $818,900

Italy* ........................................ OIL SPARE PARTS ........................................................................................ $238,298

Italy* ........................................ SWITCH GEAR .............................................................................................. $66,060

Italy* ........................................ OIL SPARE PARTS ........................................................................................ $38,770

Jordan* .................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $139,425

Turkey* ..................................... REHABILITATION SPARE PARTS FOR IT2 ..................................................... $5,880,656

Italy* ........................................ OIL SPARE PARTS ........................................................................................ $122,400

Italy* ........................................ SPARES FOR FUEL PUMP DISPENSERS ....................................................... $21,155

France* .................................... VEHICLE/SPARE PARTS ................................................................................ $576,278

France* .................................... VEHICLES/CREW-CAB .................................................................................. $257,244

France* .................................... PICK-UP TRUCKS & PARTS ......................................................................... $153,915

France* .................................... PICK-UP TRUCKS & PARTS ......................................................................... $407,518

China* ..................................... TRANSFORMERS .......................................................................................... $25,000

France* .................................... FORKLIFT/SPARES ........................................................................................ $227,748

Korea* ...................................... STREET LIGHTING BULBS ............................................................................ $364,400

The Netherlands* ..................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $55,126

The Netherlands* ..................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $46,300

France* .................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $303,361

France ...................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $3,645,424

Italy* ........................................ PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $3,800,999

Greece* .................................... OIL SPARES/NOZZLES FOR FUEL DISPENSERS ........................................... $16,446

France* .................................... OIL SPARES/LIGHTING FIXTURES ................................................................. $12,315

Turkey* ..................................... OIL SPARE PARTS ........................................................................................ $50,050

Italy* ........................................ OIL SPARE PARTS ........................................................................................ $694,300

France ...................................... PIPE FITTINGS .............................................................................................. $514,115

France ...................................... PARTS FOR LOADING ARMS ........................................................................ $422,966

Germany ................................... OIL SPARE PARTS ........................................................................................ $309,393

France ...................................... VEHICLE/SPARE PARTS ................................................................................ $839,183

France ...................................... SAFETY RELIEF VALVES ............................................................................... $58,761

Ireland ...................................... OIL SPARE PARTS ........................................................................................ $362,981

Jordan ...................................... MAINTENANCE ............................................................................................. $130,119

France ...................................... CHEMICALS .................................................................................................. $437,210

France ...................................... PIPE, CARBON STEEL .................................................................................. $521,693

Sweden ..................................... GAS TURBINE SPARE PARTS ....................................................................... $25,163

France ...................................... COMPLETE PUMPS WITH MOTORS ............................................................... $198,748

Turkey* ..................................... OIL SPARE PARTS ........................................................................................ $54,940

Russian Federation* ................ PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $330,900

Belgium* .................................. PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $38,000

Jordan* .................................... SPARE PARTS FOR DRILLING EQUIPMENT ................................................... $737,671

Austria* ................................... SAFETY & FIRE FIGHTING EQUIPMENT ........................................................ $118,779

France* .................................... GAS TURBINE SPARE PARTS ....................................................................... $15,083,472

France* .................................... PUMP/PARTS ................................................................................................ 230,511.52

UK ............................................ OIL SPARE PARTS ........................................................................................ $38,613

Germany ................................... GENERATING SETS AND PARTS ................................................................... $1,343,042

France* .................................... PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $68,850

France* .................................... WATER TREATMENT/SPARE PARTS .............................................................. $68,952

France ...................................... EQUIPMENT & MATERIALS-WET CRUDE PRODUCTION ................................ $6,105,691

105

United Nations Office of the Iraq Programme—Continued

All Oil Spare Parts Contracts Approved as at 16 April 1999 under the terms of resolutions 1175 and 1210—funded under

Phases IV and V of the oil for food programme

Country Nature of Spares Contract Value

UK ............................................ PIPELINE EQUIPMENT & SPARES (OIL) ....................................................... $45,961

UK ............................................ OIL SPARE PARTS ........................................................................................ $90,323

Italy .......................................... OIL SPARE PARTS ........................................................................................ $163,204

India* ....................................... CHEMICALS .................................................................................................. $119,017

Germany ................................... STEAM BOILER/PARTS ................................................................................. $582,840

Jordan ...................................... SPARE PARTS FOR ENGINES ....................................................................... $198,054

Italy .......................................... MEASURING & CONTROL INSTALLATION & SPARE PARTS .......................... $107,345

UK ............................................ PUMPS AND SPARE PARTS .......................................................................... $359,616

China* ..................................... PUMPS AND SPARE PARTS .......................................................................... $83,678

Finland* ................................... OIL SPARE PARTS ........................................................................................ $60,075

France ...................................... PUMP/PARTS ................................................................................................ $277,575

Jordan ...................................... SPARE PARTS FOR AIR COMPRESSOR ........................................................ $22,422

France ...................................... ELECTRIC MOTOR ........................................................................................ $57,621

France ...................................... ELECTRIC MOTOR ........................................................................................ $33,508

Portugal ................................... DESLUDING EQIPMENT ................................................................................ $329,664

France ...................................... VALVE/PARTS ............................................................................................... $143,199

Russian Federation .................. OIL SPARE PARTS ........................................................................................ $23,005

Jordan ...................................... CRANE ......................................................................................................... $594,000

Russian Federation .................. PIPE FITTINGS .............................................................................................. $125,173

Turkey* ..................................... TRANSFORMERS ........................................................................................... $104,000

Turkey ....................................... FIRE FIGHTING TRUCKS/SPARES ................................................................. $356,705

Belgium .................................... SOLAR GAS TURBINE ................................................................................... $926,852

Russian Federation* ................ SPARE PARTS FOR EXCITER ........................................................................ $500,020

France ...................................... OIL SPARE PARTS ........................................................................................ $181,750

Cyprus ...................................... BATTERY CHARGER ..................................................................................... $47,000

Russian Federation .................. INSTRUMENTATION ...................................................................................... $217,298

Russian Federation .................. OIL SPARE PARTS ........................................................................................ $432,000

Jordan ...................................... PUMPS,COMPRESSORS AND ROTARY MACHINES ........................................ $297,598

Turkey ....................................... AIR COMPRESSORS ..................................................................................... $301,148

China* ..................................... FILTERS ....................................................................................................... $44,748

Turkey ....................................... OIL SPARE PARTS ........................................................................................ $27,075

France ...................................... COMPRESSOR/PARTS ................................................................................... $559,386

Russian Federation .................. FIRE FIGHTING EQUIPMENT ......................................................................... $66,500

Italy .......................................... HEAT EXCHANGERS AND PARTS .................................................................. $2,270,780

Turkey ....................................... CABLE TERMINATIONS ................................................................................. $195,000

Syria ......................................... CABLE .......................................................................................................... $312,700

France ...................................... ELECTRIC MOTORS ...................................................................................... $15,803

Cyprus ...................................... OIL SPARE PARTS ........................................................................................ $383,825

France ...................................... PUMP/PARTS ................................................................................................ $92,065

France ...................................... ELECTRICAL AND CONTROL INSTRUMENTS ................................................. $62,821

France ...................................... ROTORK ACTUATORS & SPARES ................................................................. $215,323

France ...................................... OIL SPARE PARTS ........................................................................................ $293,280

Jordan ...................................... PUMPS AND SPARE PARTS .......................................................................... $889,681

Cyprus ...................................... BATTERIES ................................................................................................... $302,475

Portugal ................................... OIL ............................................................................................................... $223,750

*Released from hold