United States General Accounting Office

GAO Testimony

Before the Subcommittee on Military Readiness

Committee on National Security

United States House of Representatives

For Release on Delivery

Expected at

10:00 a.m., EDT

Wednesday

May 7, 1997

NAVAL PETROLEUM

RESERVES

Transfer Options for Naval

Oil Shale Reserves 1 and 3

Statement of Martin J. Fitzgerald

Associate General Counsel

GAO/T-OGC-97-42

Mr. Chairman, Mr. Sisisky, and Members of the Subcommittee:

We appreciate the opportunity to provide our views on the Department of

Energy’s recommendation to transfer Oil Shale Reserves 1 and 3 to the

Department of the Interior for leasing and surface management under the

Mineral Leasing Act of 1920 and the Federal Land Policy and Management

Act of 1976.

The Petroleum and Oil Shale Reserves were established by executive

orders in the early 1900’s when the government began setting aside large

sections of public lands favorable for hydrocarbon production. These

lands are located in California, Colorado, Utah and Wyoming. Although the

reserves were originally intended as a source of petroleum for the nation’s

military, the Naval Petroleum Reserves (NPR) are now produced primarily

for commercial purposes. By contrast, the Naval Oil Shale Reserves (NOSR)

have remained largely undeveloped.

NOSR-1 is located in western Colorado and has estimated oil shale

resources of about 2.5 billion barrels of shale oil. Extraction of this

resource may be technologically feasible, but it will require a high sales

price to make the recovery economically attractive. Additionally, in 1994

the U.S. Geological Survey estimated in excess of 500 billion cubic feet of

natural gas reserves that are continuous through the region in which

NOSR-1 is located. No natural gas, however, is produced at NOSR-1.

NOSR-3 stretches along the eastern and southern flanks of NOSR-1 and,

unlike NOSR-1, essentially is devoid of oil shale reserves within its

boundaries. However, DOE has conducted protective gas drilling and

production since 1985 to prevent depletion of government resources due

to gas production on adjacent lands. This production totaled

approximately 10 million cubic feet of gas per day during 1996. The gas

was sold competitively and generated approximately $3.1 million in

revenues for the federal government for Fiscal Year 1996.

As you know, section 3416 of the National Defense Authorization Act for

FY 1996, Public Law 104-106, required the Secretary of Energy to retain an

independent petroleum expert to conduct a study to determine which of

four options, or combination of options, would maximize the value to the

United States of the five Naval Petroleum and Oil Shale Reserves. The

Naval Petroleum Reserve at Elk Hills, which is to be sold, was specifically

excluded from the study.

Page 1 GAO/T-OGC-97-42
The four options specified in the Act for DOE’s consideration and

recommendation to the Congress are:

1. Retention and operation of the Naval Petroleum Reserves1

 by the

Secretary of Energy under chapter 641 of title 10 U.S.C. (commonly

referred to as the Naval Petroleum Reserve Law), the current statutory

authority for managing and operating the reserves.

2. Transfer of all or a part of the reserves to the jurisdiction of another

federal agency for continued administration under chapter 641 of title 10

of the U.S. Code.

3. Transfer of all or a part of the reserves to the Department of the Interior

for leasing in accordance with the Mineral Leasing Act (30 U.S.C. 181 et

seq.) and surface management in accordance with the Federal Land Policy

and Management Act (43 U.S.C. 1701 et seq.).

4. Sale of the interest of the United States in the reserves.

Based on DOE’s analysis of the consultant’s report, DOE is recommending to

the Congress that NOSR-1 and NOSR-3 be transferred to the Department of

Interior and leased under the Mineral Leasing Act.2

 Whether to enact

legislation in accordance with DOE’s recommendation is a matter of policy

for the Congress to determine and we have no position to offer with

respect to that determination. Our comments today are merely for the

purpose of apprising the Subcommittee of another available option as it

considers the DOE recommendation.

DOE assumes in its report that after Congress transfers NOSR-1 and NOSR-3 to

the Department of the Interior for leasing under the Mineral Leasing Act,

50 percent of the lease revenues will accrue to the state of Colorado. It is

our understanding that DOE has not yet provided to the Congress proposed

legislation mandated by section 3416 which would implement its

recommendations. Accordingly, we assume that DOE proposes to structure

the transfer in such a manner that NOSRs 1 and 3 would lose their identity

as Naval Oil Shale Reserves. This would result in the reserves losing the

unique status that they enjoy under current law whereby all of the receipts

from those reserves are and would continue to be retained by the

1

“Naval Petroleum Reserves” in Pub. L. 104-106 has the same definition it has in title 10 of the U.S.

code; it includes both the petroleum and oil shale reserves.

2

“Report and Recommendations on the Management and Disposition of the Naval Petroleum and Oil

Shale Reserves (Excluding Elk Hills),” issued by DOE March 1997.

Page 2 GAO/T-OGC-97-42
government. Instead, as envisioned by DOE, if NOSR-1 and NOSR-3 are

transferred to the Secretary of the Interior to be administered in the same

manner as the Secretary is obligated to administer other leases under the

Mineral Leasing Act of 1920, 50 percent of the lease revenues will be paid

over to the state of Colorado.

While DOE’s recommendation to transfer NOSR-1 and NOSR-3 to the Secretary

of the Interior is one option, there is another option which, with some

technical conforming statutory revisions, would allow the Secretary of

Energy to retain those reserves and operate them by leasing them in a

manner consistent with commercial practices. Revenues from such leases

would be paid into the miscellaneous receipts account of the Treasury and

all of the proceeds, not just 50 percent, would accrue to the U.S.

government.

The Secretary of Energy currently has authority to lease NOSR-1 and NOSR-3,

although there are some limitations on the use of that authority. In the

Mineral Leasing Act of 1920 and the Naval appropriations act for FY 1921,

such authority was originally reserved to the Secretary of the Navy. The

Secretary of the Navy’s authority for administration of and jurisdiction

over these reserves was subsequently transferred to the Secretary of

Energy on August 4, 1977, under the statute which established the

Department of Energy.

An exemption to authorize the United States to retain all of the proceeds

generated from the NPRs and NOSRs is delineated in the Mineral Leasing Act

of 1920. Moreover, when the Act was amended in 1981 to allow states to

receive 50 percent of revenues from minerals on lands acquired for

military purposes, the specific exception for these reserves was repeated.

As the House Armed Services Committee’s report on that legislation

indicated, the Interior Department supported this exception.

We have been advised by a DOE official that disposition of revenues from

various reserves over the years has been consistent with this position. As I

previously mentioned, protective drilling is performed at NOSR-3 by the DOE

resulting in revenues of $3.1 million for FY 96. According to DOE, all of

those revenues were deposited into the Treasury and retained by the

United States. In addition, NPR-2 in Buena Vista, California, was originally

leased by the Secretary of the Interior in 1923 and managed by Interior

until the late 1970’s when the Secretary of Energy assumed responsibility

for it. DOE officials told us that the U.S. government has retained all of the

proceeds from those leases since 1923.

Page 3 GAO/T-OGC-97-42
Mr. Chairman, that concludes my prepared remarks. I would be happy to

address any questions you might have.

Page 4 GAO/T-OGC-97-42
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