The United States Has Abundant
Natural Gas Resources:
It Lacks Only the Public Will to Develop Them
By
G. Warfield Hobbs IV
President, Division of Professional Affairs
American Association of Petroleum Geologists
Testimony Presented to the
UNITED STATES SENATE
COMMITTEE ON ENERGY AND NATURAL RESOURCES
July 26, 2000
Thank you, Mr. Chairman. My name is G. Warfield "Skip" Hobbs. I am an
independent petroleum geologist from New Canaan, Connecticut. I am also
President of the Division of Professional Affairs of the American
Association of Petroleum Geologists (AAPG), an international professional
organization composed of more than 29,000 geologists, including 22,000
petroleum geologists in the United States. We are the scientists whose job
it is to find the oil and natural gas, coal and other energy mineral
resources that our nation depends on to fuel its economy.
The AAPG, founded in Tulsa, Oklahoma in 1917, was chartered to serve
the geoscience profession through the identification and application of new
science and technology for the discovery and production of hydrocarbon
resources. The application of new exploration and development concepts and
technologies has led to more efficient practices that have lowered the cost
of produced energy, and significantly reduced the environmental consequences
of energy production. The membership of AAPG is proud of their contributions
in supplying the world with reliable and inexpensive energy, in developing
new ways to do that job better, and in the education of new geoscientists to
carry on the tradition.
I would also like to note that the AAPG is affiliated with the American
Geological Institute. The AGI is an umbrella organization headquartered in
Alexandria, Virginia that represents over 100,000 geoscience professionals.
I want to acknowledge their assistance in preparing this testimony.
You did hear me correctly. I am not from Texas, and I do not work for
"Big Oil". I am a bona fide New Englander - raised in Connecticut, and
educated at Yale College. This gives me a slightly different perspective
than most oil industry spokesmen. It is perhaps because I live in New
England, at the end of the energy supply line, that I especially welcome the
opportunity to testify here this morning.
Why We Have Convened Today
This hearing has been convened to address an issue that directly
impacts the continued economic well being and security of the United States.
Natural gas presently supplies about 25% of the nation's domestic
energy requirements. Last year, gas consumption in the United States was
approximately 22 Trillion cubic feet (TCF). According to the Department of
Energy Information Agency (EIA), proven domestic gas reserves as of December
31, 1999 were 164 trillion cubic feet (TCF). At a consumption rate of 22
TCF/year, proved reserves represent only a 7.4-year supply. Gas demand is
skyrocketing, particularly as a "clean" fuel for electric power generation.
Recent studies by the EIA, Gas Research Institute, and the National
Petroleum Council (NPC), indicate annual demand will grow to as much as 32
TCF over the next 15 to 20 years. In its 1999 study, the National Petroleum
Council projected annual demand to reach 29 TCF as early as 2010. At 32
TCF/year consumption, currently proven reserves represent only a five-year
supply.
Proven gas reserves in the United States have dropped 43% during the
past 30 years, from 290 TCF at year-end 1970, to only 164 TCF now. In a
report issued in late May, the EIA forecast that the nation's proved
reserves would decline a further 2% during 2000, due to increased demand,
and the very low drilling levels of the past few years.
This summer, instead of being injected at a normal seasonal rate into
local storage sites in the Northern States for winter use, natural gas is
firing electric power plants in the torrid Gulf Coast and Southwest to run
air conditioners. Storage levels are well below where they should be this
time of year. There may be no margin now for extended cold weather demand,
or any significant gas production or deliverability disruption next winter.
The dynamics of the current supply/demand equation for natural gas have
resulted in surging natural gas prices. Last year, the average NYMEX spot
price at the Henry Hub was $2.25/MMBTU. This year, the Henry Hub spot market
price has soared over $4.50/MMBTU. The NYMEX 12 and 24-month futures prices
indicate that industrial gas consumers and traders alike believe that strong
demand will continue to keep pressure on supply for the foreseeable future.
Some market analysts are predicting that a cold winter this year could
result in a gas price spike over $7.00/MMBTU. At current prices, residential
gas consumers can expect a $200 to $300 increase in their winter gas-heating
bill; and some can ill afford that cost.
The public must be made aware of the seriousness of the situation, and
prepared for significant price increases and possible regional gas
curtailments.
Gas Supply
The Senate Energy Committee's principal question today is, do we have
enough natural gas to meet future demand, and where will we get this gas?
As the spokesman for the geologists who assess the nation's fossil fuel
resources, I can unequivocally answer in the affirmative. Yes, the United
States has abundant natural gas resources to fuel the country well into the
21st Century.
It is my understanding that the Senate Energy Committee has received
copies of the most recent resource assessments of the US Geological Survey
(USGS), Minerals Management Service (MMS), EIA, and the National Petroleum
Council. The AAPG has not made a recent independent natural gas resource
assessment of its own. I would like to point out however, that many of the
geoscience professionals that prepared the resource reports for the
organizations just cited, are members of the AAPG. For example, the Director
of the United States Geological Survey, Chip Groat, is a long-standing, and
highly respected AAPG member. The AAPG Committee on Resource Evaluation was
formed specifically to assist the USGS and MMS in the assessment of the
undiscovered oil and gas resources of the United States. Our Resource
Committee has recommended and evaluated methodologies, identified experts
for each sedimentary basin, and has reviewed the resource estimates of the
USGS and MMS.
The 1999 National Petroleum Council (NPC) study concluded that the
United States has a remaining gas resource base in the Lower 48 States of
1,466 TCF. It should be noted that only 157 TCF, or just 10% of the
identified resource, is considered proven. There are an additional 313 TCF
in Alaska; however, this gas is useless without a pipeline to the Lower 48
markets. The total identified USA gas resource, including Alaska, is a
whopping 1,779 TCF. Even at 32 TCF/year consumption, there is more than a
50-year supply. Cumulative domestic production over the past hundred plus
years is estimated to be about 890 TCF.
Where is the Gas?
There are significant remaining known gas resources in the traditional
onshore gas producing areas of the Gulf Coast, West Texas and in the
Mid-Continent. However, these areas are now intensely drilled and blanketed
with 3-D seismic, and are not yielding the large new discoveries required to
replace the nation's depleting proven gas reserves. Major oil companies and
large independents are exiting onshore exploration and moving their
operations into the sparsely drilled waters of the Deep Gulf of Mexico, and
overseas.
Many small oil and gas companies, and the majority of the independent
prospect originators, many of whom are AAPG members, are having trouble
finding partners, as well as the capital, to drill the smaller reserve
exploratory prospects that remain in the traditional gas producing areas.
Higher oil and gas prices have significantly increased the drilling rig
count; however, over 90% of the current drilling activity is to develop
known reserves.
The AAPG concurs with the 1999 NPC report conclusion that the most
prospective areas for major new gas discoveries are on public lands in the
Rocky Mountain sedimentary basins, offshore in the Gulf of Mexico, in the
Eastern Gulf of Mexico, and on the Atlantic and Pacific OCS. Despite the
huge potential of these areas, Federal law presently prohibits exploration
on the Atlantic and Pacific OCS, and in the Eastern Gulf of Mexico. Access
to much of the remaining resource potential of the Rocky Mountain basins is
restricted or closed.
Exhibit 1 is a map from the NPC report that shows the resource
potential of the Lower 48 public lands that are closed and/or subject to
severe restrictions. The total estimated gas resource of these areas is 213
TCF, or a nine-year supply at current rates of gas consumption. It is likely
that with further exploration, these resource figures would increase
significantly.
The total area of the U.S. Federal offshore, including Alaska, to the
200-mile economic limit, is about 2 billion acres. Only 2 percent has been
leased. In its 1995 study, the Minerals Management Service assessed a mean
undiscovered recoverable resource of 46 billion barrels of oil and 268
trillion cubic feet of natural gas in the Federal OCS. This is 2.5 times the
offshore reserves found to date.
The NPC map does not include Alaska. In its 1995 National Oil and Gas
Assessment of Onshore Federal Lands, the USGS estimated that the Northern
Alaska province accounts for more than half of the of the undiscovered
conventional gas assessed on onshore Federal lands. As previously stated,
Alaska's total gas resources were cited in the NPC report as 313 TCF. This
represents a 14-year supply!
There is a huge domestic gas resource, yet access to much of this
remaining resource is either closed, or so restricted that development is
not economic.
Chevron Corporation, for example, has a 1 TCF dry gas discovery in the
Eastern Gulf offshore Florida. The company has been prohibited from
developing this giant gas field by federal and Florida State regulators.
Not included in the gas resource figures, is the potential of shallow
gas hydrates on the Outer Continental Shelf. Although we do not presently
have the technology to recover them, gas hydrates are another major future
potential energy resource. In its 1995 assessment of gas hydrate resources
for the Atlantic OCS, the USGS estimated a potential resource in the range
of 6,000 to over 100,000 TCF. These figures dwarf the NPC conventional
resource estimate. Coalbed methane, another unconventional gas resource,
which was included in the NPC study, has risen from nil to about 6% of
domestic gas supply over the past 15 years. I firmly believe that gas
hydrates will, like coal seam methane, also be commercialized, probably
within a decade.
The Need to Provide Access to Gas Resources on Public Lands
Natural gas is cited as a cleaner, more environmentally benign, energy
resource to fuel our economy. However, the public has not had the will to
permit access to the huge gas potential of its undeveloped public lands.
Additionally, a federal regulatory maze has been created that discourages
domestic petroleum exploration operations and investment.
As a result of more than a decade of US neglect in implementing a
comprehensive National Energy Supply Policy, and the environmental
protection priority of the public, gas demand has finally caught up with,
and probably overtaken, peak demand supply. This situation cannot be blamed
on "Big Oil and Gas", nor the distribution companies.
The United States cannot depend on gas imports from OPEC to meet rising
demand. Natural gas is a North American commodity that is locked into a
pipeline infrastructure. As much as 14% of supply will come from Canada over
the next 15 years. Imports from Mexico will be minimal. The 1999 NPC study
projected LNG imports of less than 1% of supply through 2015. Accordingly,
the United States must develop its own gas resources to meet future demand.
This requires access to the public lands that are deemed most prospective
for natural gas.
Conservation and renewable energy resources are cited by the opponents
of access to public lands as the solution to our energy requirements. They
are out of touch with reality. Energy conservation has been effective in
certain areas, particularly in regard to increased mileage per gallon for
automotive engines. Nevertheless, demand for transportation fuels continues
to rise. Despite DOE expenditures of over $9 billion since FY 1980 on solar
and other renewable energy research, these alternative energy resources
still provided only 0.08% of primary energy supply in 1999, exclusive of
traditional hydroelectric power (4.5%). Research must continue on alternate
energy resources. The fact is, however, that our economy will continue to
depend on fossil fuels for the majority of the nation's primary energy
requirements for many more decades.
Improving access to natural gas-prospective public lands, is the most
practical way to assure that the nation has the natural gas it requires to
fuel our economy, and to keep its citizens warm in the winter and cool in
the summer.
Environmentally Responsible Resource Development
It is the firm belief of the AAPG that development of the natural gas
resources in environmentally sensitive areas of the Rocky Mountains, the
North Slope of Alaska, the Eastern Gulf of Mexico, and the Pacific and
Atlantic OCS, can be done in an environmentally responsible manner, with no
lasting harm.
To illustrate that drilling and production can take place in a safe and
environmentally sensitive manner; we can look to the East Coast of Canada.
For more than thirty years, offshore exploration, and now production, have
calmly co-existed in the Canadian Maritimes with tourism and commercial
fishing, in a cooperative, and even supportive environment, for the
betterment of all concerned communities. More than 300 exploratory wells
have been drilled within the offshore outer continental shelf waters of the
Canadian Atlantic. At least 12 trillion cubic feet of natural gas and 2
billion barrels of oil have been discovered so far. More than 125,000
barrels of oil and 400 million cubic feet (MMcf) of natural gas are being
produced per day within the prime commercial fishing waters and the pristine
tourist coastlines of Eastern Canada. Much of this new gas is now flowing to
New England.
There is a major new deep Jurassic Age reef trend discovery offshore
Nova Scotia. If successfully delineated, this new field alone could add an
additional 400 MMcf/day gas production. Incidentally, a former executive
officer of the AAPG, a Canadian, originated the new gas discovery.
Petroleum geologists of the AAPG believe that the same types of oil and
gas accumulations that exist in the Eastern Canadian offshore, may extend
south along the U.S. Atlantic Coast, from George's Banks to the Carolina
Trough, a distance of almost 1,000 miles
The Canadians have also successfully developed and have been producing
natural gas from their portion of Lake Erie since the 1950's. The US portion
of Lake Erie has a thicker sedimentary section, and would likely be more
productive. New Yorkers could use the gas. United States law, however,
prohibits exploration in the Great Lakes.
Brazil is successfully exploiting its substantial Atlantic OCS
petroleum resources in an environmentally responsible manner. In doing so,
it has become the world leader in ultra-deep water production technology.
New technologies also now permit oil and gas development in a way that
minimizes onshore surface disruption in environmentally sensitive areas. The
British, for example, who are even more fussy about open spaces then we are,
agreed to develop the giant Wytch Farm Oil Field under Poole Harbour, smack
in the middle of the most heavily visited coastal zone of the South of
England. At the Wytch Farm development, long reach deviated wells are
drilled in a radial pattern from a camouflaged central well pad onshore, to
locations up to seven miles out into scenic Poole Bay.
Opponents to petroleum development cite old operating practices, and
prior environmental abuses, that are simply out of touch with modern
reality. Just like the Canadians, British, Brazilians, Norwegians, Qataris,
Thais, Australians, and many other petroleum producing nations, Americans
likewise can develop their offshore and onshore energy resources in
environmentally sensitive areas in a safe and rational manner. To believe
otherwise is simply inconsistent with what is being done every day all over
the world.
As someone who vacations on the New England coast, and loves to sail
and fish in Long Island Sound, and in the Gulf of Maine, I have a vested
interest in the environmental consequences of petroleum operations in the
Atlantic OCS. I can truthfully testify that I have no fears, and am
confident that the environmental risks of exploring for oil and gas offshore
New England are minimal, and acceptable. Experience in the Gulf of Mexico
has demonstrated the best fishing is actually right around the artificial
reefs created by offshore oil and gas production platforms.
GAS SUPPY POLICY RECOMMENDATIONS
OF THE AAPG
The petroleum industry can and will be able to provide the gas supplies
needed to maintain the economic stability and security of the United States.
However, to do so, the nation must address three critical issues. These are:
1) Improved access to public lands; 2) Reform of the regulatory process; and
3), Fairer tax treatment to stimulate capital formation and investment.
1. Public Lands Access
In regard to the public lands access issue, the AAPG recommends the
following:
* Lifting of the Moratorium on OCS Exploration and Development in areas
where it exists today.
* Opening of the Eastern Gulf and Atlantic Margin OCS to Area-wide Leasing.
* Reform of the Dept. of Interior Policy regarding access to public lands in
the Rockies.
* Opening the 1002 Area of the Arctic National Wildlife Refuge to
Exploration.
* Amendment of the Federal Antiquities Act to prevent its misuse in
restricting access to public lands.
* Balancing the needs of all stakeholders in shaping public lands policy.
* Assurance that there is no net loss of state and private land in creating
new land restrictions.
2. Regulatory Reform
Reforms are needed to streamline the federal petroleum regulatory and
permitting process to stimulate natural gas exploration and production.
Rules and regulations must be based on scientific reality, not on popular
environmental misconceptions. The practical economic impact of all
regulations must be considered. In this regard, the AAPG recommends the
following:
* Reform the Clean Water Act and Endangered Species Acts, especially those
sections that pertain to wetlands.
* Reform the procedures used by the Department of the Interior in managing
energy resources on public lands in the Rocky Mountain region and elsewhere.
* Limitation of the extensive delays of the permitting process.
* Limitation of the ability of the EPA to regulate drilling muds and
hydraulic frac fluids as "hazardous wastes".
3. Tax Reform
The independent petroleum industry has historically drilled over 80% of
the nation's oil and gas wells. However, over the past 15 years, low oil and
gas prices, changes in the tax code, and the attraction of alternative
higher yielding investment opportunities, has resulted in capital starvation
for independents. Petroleum exploration and production are extremely capital
intensive and high risk. In order to get the independents back to work
finding and developing the nation's gas resources; we must stimulate capital
formation.
Technology and dot.com stocks have peaked. With high gas prices,
investors in New York and elsewhere are now beginning to look for direct
investment opportunities in natural gas. However, most non-industry
investors are deterred by the liability exposure of a direct working
interest in a gas well. They would prefer to be limited partners, and be
rewarded through tax benefits for assuming exploration risk to drill for a
depleting asset.
The role of taxation is critically important to the development of oil
and gas resources. However, the U.S. Tax Code currently contains provisions
that serve as major disincentives to petroleum investment. While we
currently enjoy significant budget surpluses, Congress can afford to reform
the tax code.
The AAPG recommends the following tax reform legislation to stimulate
the investment needed to increase domestic natural gas supply.
* Restoration of the write-off of intangible drilling costs for the passive
investor. This tax deduction was eliminated by the Tax Reform Act of 1986,
and effectively wiped out the major source of drilling capital for small
independent oil and gas exploration companies. Billions of dollars of new
drilling capital would quickly become available to the industry through
restoration of the Intangible Drilling Cost (IDC) tax deduction for passive
limited partnership investors.
* Elimination of the onerous Alternative Minimum Tax.
* Allow expensing of delay rentals in the year incurred, not capitalizing
them as currently required.
*Allow expensing of geological and geophysical costs in the year when the
costs are incurred.
* Make permanent the suspension of the net income limit for percentage
depletion on marginal properties.
* Raise the depletion allowance provision to previous levels.
CONCLUSION
The United States has abundant natural gas resources. However, absent
access to these resources on public lands, and regulatory relief and tax
incentives to stimulate domestic petroleum exploration and development, the
nation will face a serious gas supply shortage.
The AAPG recommends that Congress focus its attention on the energy
issue without further delay. Presidential candidates also need to respond
realistically to the energy crunch, because high prices and supply
disruptions will be front-page news in November. Politicians must also
realize that kicking the petroleum industry in the shins and shaking fists
at OPEC, makes for good press, but is no solution to the pending natural gas
supply crunch.
A National Energy Policy that balances the interests of all
stakeholders, should be developed and implemented as quickly as possible. If
this is not done, and soon, some Americans will truly run the risk of
"freezing in the dark". Time is running out! The proverbial "doo doo" is
hitting the fan as we speak.
Thank you for giving the American Association of Petroleum Geologists
the opportunity to present to the Senate Committee on Energy and Natural
Resources, the views of the professionals whose job it is to find the
nation's natural gas resources. The full text of the Position Papers of the
AAPG on energy supply and public land withdrawal policy are attached as
exhibits to this testimony.
* * * *
About the Speaker:
G. Warfield "Skip" Hobbs is the Managing Partner of Ammonite Resources,
a petroleum consulting firm that Hobbs founded in 1982 in New Canaan,
Connecticut. He received his BS. Degree in Geology from Yale College in
1969, and an MSc. Degree in Petroleum Geology from the Royal School of
Mines, Imperial College, London. Prior to forming his consulting company,
Hobbs worked internationally as an exploration geologist for Texaco and
Amerada Hess. Mr. Hobbs was the 1993-1995 Secretary of the American
Association of Petroleum Geologists, and is the current president of the
AAPG Division of Professional Affairs.
Any questions or comments regarding this testimony can be directed to
SkipHobbs through his firm's website at: www.ammoniteresources.com.
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