DOCUiENT RESUME 00192 - [A10517241 [Improved Policies and Procedures for the Exploration and Development of Outer Continental Shelf Resources]. March 15, 1977. 10 pp. + 4 enclosures. Testiacnf before the Senate Committee on Energy and Natural Resources; by J. Dexter Peach, Deputy Director, Energy and dinerals Div, Contact: Energy and Minerals Div. Budget Function: Natural Resources, Envircnnent, and Energy: Energy (305). Congressional Relevance: Senate Committee on Energy and Natural Resources. A planned and systematic approach to the leasing of the Nation's Outer Continental Shelf (OCS) resources is needed if hydrocarbon production in frontier areas is to be maximized in a manner consistent with environmental and other values. A assessment of the first frontier sale (OCS Sale 35 off theGAO California coast) has demonstrated that (1) the Department Interiorls tract selection and evaluation prccess were not of reliable; (2) the bidding generally was not competitive; the prelease tract evaluation used by the Department in and (3) makLng accept/reject decisions on industry bids were based on inadequate data. The need for sufficient data is critical not only for selecting and valuing tracts to determine the fair market value for leased lands, but also for identifying where lease so that domestic oil and gas production can be increased to in the near future. The Department should undertake a systematic exploration program to collect data on previously unexplored frontier areas. Such an exploration would also improve the Department's revenue-estimating process and provide the Nation with a better knowledge of the total OCS resource potential. Department should also encourage private industry to conduct The the drilling and share the resulting information with the Department on a confidential basis. The Department should offer for lease sale only those areas for which it has sufficient information to identify the resources' location, estimated valuer and potential for development. (LDS) UNITED STATES GENERAL ACCOUNTING OFFICE WASHINGTON, D.C. FOR RELEASE ON DELIVERY EXPECTED AT 0 A.M. EST TUESIAY, MARCH 15, 1977 STATEMENT OF J. DEXTER PEACHE DEPUTY DIRECTOR, ENERGY AND MINERALS DIVISION BEFORi; COMMITTEE ON ENERGY AND NATURAL RESOURCES UNITED STATES SENATE We appreclate this opportunity to discuss the need for improved policies and procedures for the rational exploration and development of our Outer Continental Shelf (OCS) resources. The Nation is placing great reliance on the OCS leasing program for increasing our domestic oil and gas production to meet near term energy needs. Decisions on where to lease and at what rate will have a significant impact on progress toward the goal of decreasing our reliance on foreign -energy supplies. We believe that there is a need for a planned and systematic approach to OCS leasing if hydrocarbon production in frontier areas is to be maximized inoa manner consistent with environ- mental and other values. We have previously reported to the Congress in 1975 on the need for a more rational approach to OCS leasing and also on the need for adequate data to determine where and when to lease OCS resources. We have also undertaken a review which shows a need for more geological data for all energy resources inclzding OCS oil and gas. In tnis briefing, we will share with you the results of a recent GAO assessment of the first frontier sale--OCS Sale 35 off the California coast. We will relate the results of that effort to our previous studies of the OCS leasing program. 1/ Our most recent work focused on the tract selection and prelease evaluation procedures and how the development of budget revenue estimates were derived. It amply demonstrates that the problems we found in our earlier reviews have not been cor- rected. Our findings are relevant to certain key provis.ons of S. 9. For OCS Sale $35 we found that the Department of the Interior's tract selection and evaluation process was not reliable and that bidding generally was net competitive. Tracts were selected for leasing without obtaining adequate information to assess their resource potential and to meet the Department's then existing acreage goal of 10 million acres each year. Tracts believed to have little or no resource potential were added to the sale just to meet this former icre- age goal. In this sale, 231 tracts were offered for lease. Of the tracts offered: --55 percent were in water depths exceeding present technological capabilities to produce from platforms. l/"Outlook for Federal Goals to Accelerate Leasing of Oil and Gas Resources on the Outer Continental Shelf," (RED-75-343, March 19, 1975; and "Outer Continental. Shelf Oil and Gas De-velopmen,--Improvements Needed in Determining Where to Lease and at What Dollar Value," (RED-75-359, June 30, 1975). -- 22 percent were seictad solely to meet an acreage goal, even though the Department believed that these tracts had little resource development potential. -- 91 percent were rated "D" by the Geological Survey on a scale of "A" through "E". A "D" rating means inadequate data exists for determining resource potential. In later evaluations of these tracts, the presale values assigned by the Department indicated that 85 percent of the tracts contained either no resources or insufficient resources to make the tracts economically attractive. Further, the prelease tract evaluation used by the Department in making accept/reject decisions on industry bids also were made using inadequate date. A comparison of presale trac't values with the average accepted bids fo.- "D" rated tracts showed a variance ranging from 400 to 1,800 percent. Consequently, decisions to lease tracts were not reliable and could not reasonably assure that the public received a fair market value return for the resources leased. Prior to Sale Xar, the Department estimated that two-thirds of tile tracts offered would be leased. However, only 70 tracts out of the 231 offered, or about 30 percent, received bids and only 56, or about 24 percent, were eventually leased. The lack of comp icion and interest is further evidenced by the fact that 49 of the tracts bid on received only cne or two bids. 3- The need for sufficient data is critical not only for selecting and valuing tracts %o determine the fair market value for leased lands, but for identifying where to lease so that domestic oil and gas przduction can be increased in the near future. In spite of this need, the Department has been reluctant to undertake a systematic exploration program to collect data on previously unexplored frontier areas. Another problem resulting from inadequate data is the lack of reasonable OCS revenue estimates for budget purposes. Revenues received from leases are deposited in the U.S. Treasury; consetaently, the Government must predict how these sales will affect the Federal budget. We found that the Department's current revenue estimating process for OCS sales is based on inadequate informationi ofeten includes overly optimistic estimates, and relies on various errors to cancel each other out and yield a "reasonable" estimate. In Sale 35, the Department based its revenue prediction on a broad-brush, undetailed resource Fr imate for the sale area and an anticipated two-thirds leasing rate which did not materialize. This resulted in overestimating the results of Sale 35 by 5 times the actual Donus revenues received. Total revenues received were $417 million as compared to the $2.0 billion estimate used by OMB in the Federal budget. - 4 - Under the present leasing system, the Federal Government is frequently conmmitted to lease before it has sufficient information co make intelligent choices. Authorizing the Secretary of the Interior to conduct a systematic exploration program, on a selective basis, w11 result in more informed resource development decisionmaking. Such a program would provide trhe Nation with a better knowledge of the total OCS resource potential. Accurate oil and gas reserve data is needed to assess how long we can continue to rely on these traditional energy sources and how fast we need to move tu develop new and more extensive types of energy supplies. The issue of the accuracy of existing data is very controversial. A reasonable and systematic exploration program could play a key role in ending this controversy and give tne Nation a better insight into OCS reserves ano !esources -- the area which is now considered by many as the "last frontier" of domestic hydrocarbons. It can also provide Interior with a basis for setting priorities among the areas available for leasing within a planned schedule of sales designed to minimize leasing of nonproductive or speculative areas and maximize the potential for rapid production. It would give a better basis than now exists for evaluating resource development potential and potential environmental -5- impacts (both within and between geological areas) when con- sidered in conjunction with the results of available environ- mental information involving the same geologic areas. It would allow more reliable valuing of tracts to assure that the public receives a fair market value return for the lease offerings and aid in providing more reliable revenue estimates for budget purposes. The kinds of data resulting from such a program would significantly help to appraise the worth of prospective leases. This is especially important in the present situation where the pressure is toward early development. As more and more acreage is offered with lass and less reliable information about its potential resources, the conditions necessary to produce a truly competitive market tend to disappear and tend to encourage private speculation. As priviously mentioned, 70 percent of the tracts bid on in Sale 35 got only one or two bids. As it becomes more and more difficult to rely upon competitive forces to i.sure protection of the public interest, it becomes increasingly imperative that the presale evaluations be as accurate as possible. We recognize that many factors in the tract selection, valuation, and-revenue estimation process cannot be quantified with certainty, but we believe that the Federal Government can and must do much more to improve the process. Some of the improvements we are propos'nc could also be expected to result -6 - in more timely resource deVelopment. v;c are proposing the following actions. a geological -- The Secretary of the Interior should direct develop- exploration program which would provide for the ment and implementation of a systematic plan for appraising OCS oil and gas resources, including plan relected stratigraphic test drilling. The should identify the level of stratigraphic drilling necessary to provide a minimal level of data coverage protect for major OCS areas which would be necessary to the public interest. ..._ Department of the -- After the rlan has been develcped, Interior should encourage private industry to conduct the the drilling identified in the plan, subject co on developed information being snared with Interior a confidential basis. Exploration permits issued by the the Department for private drilling should provide "buy-in" opportunity for any bonafied potential bidder to the on the exploration by paying a pro-rata cost of drilling. After the extent of industry participation is known, the if any data gaps still exist, the Department of including Inte ior snould take the necessary actions, public financing of stratigraphic drilling to obtain the needed data. --7 --~~~~~~~~~~~~~~~~~~~~~~~~~~~ -- In Padition, after obtaining and evaluatir.g the above information, the Department should take the necessary steps to encourage industry to obtain further information after the tract selection process is completed. These additional activities should focus on the specific tracts selected and help develop reasonable sound information for presale evaluation purposes. The results again should be shared with Interior on a confidential basis. Exploration permits issued by the Department for private drilling should provide the opportunity for any bonafied potential bidder to "b~iy-Jn" on the exploration by paying a pro-rata cost of ":Th drilling. After the extent of industry participation has been reviewed and evaluated by Interior, if any significant data gaps exist, the DFL T=mht-, should take the necessary actions, including publicly financed stratigraphic drilling, to obtain data. -- The Department should offer for lease sale only those -areas for which it has c:3lected and analyzed sufficient information to adequately identify where the resource is, its estimated value, and its potential for development in the near future. This proposal is very much in line with the thrust of S. 9, specifically Section 206 which provides for an OCS leasing prograri that will identify size, timing, and -8- location )f leasing to meet national goals and to assure receipt of fai-. market value for the oil and gas owned by the Federal Gcyvernment. We believe that such a leasing pro- gram will provide for the timely and orderly development of OCS resources. Additionally, in a letter report (Attachment I), we recommended the Department review its policy o- restricting on-structure exploratory drilling. This cLrrent policy is an important factor when considering the limited information available for the unleased and unexplored frontier lands and the importance of discovering and developing new domestic oil and gas. Conducting on-structure tents could provide better and more reliable data and result iJ fewer off-structure tests being needed. Section 206 authorizes the Secretary of the Interior to seek applicants for exploratory drilling at least once in each frontier area. This would include core and test drilling for hydrocarbons in those areas and on geological structures which the Department considers as the best for hydrocarbon accumula- tion. We believe that the Secretary should encourage industry to the fullest extent possible to conduct this drilling. But, he also should be willing to have the Department undertake such drilling as may be necessary to provide the minimum resource information necessary for informed leasing decisions. - 9- S. 9 provieas the Secretary tne necessary authority to do this and to develop the type of program that can identify the most promising geologic structures for lease. Finally, although the 7nterior Department in commenting on a draft of our report cn OCS Sale 35, objected to our recom- mendations, testimony by Secretary Andrus kefore the House Select Committee on the Outer Continental Shelf last week indicated a willingness by the new Administratio,n to support OCS legislation which provides for an improved .:tplotatory program. Attachment II to this testimony contains our comments on a provision in S. 9 requiring action by the Comptrolle: General. That concludes my prepared statement. We would be pleased to answer any questions. - 10 - ATTACH'tEIN; I ATTACHENr;T I UNITED STATES GENERAL ACCOUNTING n"FICE 'WASHINGTON. D.C. 20o48 ENEROV AND MINERALS .AP, ' 1977 DIVISIOti B-11867. The Boncrable The Secre:ary of the Interior Dear Mr. Secretary: In recent vears, the General Accounting Office (GAO) has conddcted several reviews of the Department of the Interior's Outer Continental Shelf (OCS) oil and gas leasing program ,ointing out'the need for a systematic exploration plan including selective straticraphic drilling. In a June 30, 1975, report, "Outer Continental Shelf Oil and Gas DeveloDiment--Imp:ovements Needed In Da':erminina Where To Lease And At What Dollar Value," we pointed to numerous problems in selecting ane leasing tracts caused '.v the absence of adeaoiate resource inf.ormation necessary to protect the public interest. We recommended that the Department develop and implemert a systematic exploration plan, including selective stratigraphic test drilling for resource appraisal. The Department, in commenting on this report, said that GAO had not presented a criticsl analysis on the cost effectiveness of such a program and rtated the key unanswered question is whether the cost of an exploration program would increase in equal amounts the return to the Treasury. More receitly, we conducted an assessment of OCS Sale f35 off the Southern California coast and fov d -that the same problems continued to exist. In a draft report furnished the Department for comment we again recommended the Department direct a geological exploration program which would provide for the deveiloment anj imilementation of a systematic plan for appraising OCS oil and 'as resouruces. The Department, in its February 24, 1977, com,.:ents on t draft dis report, reiteratec the posture of the Drevilos Admirtstration that obtaininc additional data woild De costly and that GAO nac nt cprovided a benefit-cost analysis. EMD-77-29 ATTACHF.tNT 1 B-11 8 6 7 8 cost-benefit analysis cannot We believe that a responsible develops an appraisal. lan;to be done until the Department drilling needed identifies the levels of stratigraphicthe extent to whicn private assess the OCS; and determines such drilling. The benefits industry is willing to perform although difficult to 'uantify, of sta-tigraahic drilling, extent, by industry's willingness could be measured, to some a positive comprehensive to undertake such efforts under In any case, we believe program developed by the Department. to make such assessments, it is the Department's responsibility analysis. The fact the Department has includinga a cost-benefit such way negates our argument that not chosen to do so, in no we to the public interest. a program could He beneficialevidence, as discussed in our believe there is compelling the present system is inadequate report on OCS Sale-35, that to protect the public's interest. question of whether the We might also add that the program would exceed the return Federal cost of an exploration reason for having a systematic only to the Treasury is not the benefit would be the timely exploration program. Another OCS resources in meeting the and orderly development cc domestic energy sources. We naticnal coal of increased bene- analysis should consider to believe that any cost-benefit those accruing directly fits to be derived other than the Treasury. the knowledge of an OCS Another major factor affecting on exploratory drilling area is the Department's policyallows corehole and deep strati- on-sructurr. Current olicyvoff of the geologic structure s grapnic testing by industrydata, but prohibits such testing identified by tbh seismic on-structure. policy was implemented oecause Survey officials said this hazards of exploratory (1) of the possible environmental unsuccessful testing would be drilling on-structure and (2) receipts. This policy, however, likely to lower total bonus when coneijering the limited becomes an all important factor unleased and unexplored frontier iniormation available for thediscovering and developing new ..lancs and the importance of tests could ontetic oil arn oas. Conducting cn-structure fewer crovide better and more reliable data and result in off-structcre test_ being needed. - 2 - ATTACHMEN:T I B-118678 RECOMMENDATI OS We recommend the Department promptly conduct any necessary cost-benefit analysis of a systematic exploration program. In conjunction with this analysis, we recommend that the policy restricting exploratory drilling on-structure be studied. We would point out that no cost-benefit analysis can substitute for actual experience.-in the conduct of a federally, developed exploratory program such as we have recommended in the Sale 135 report. We believe that the Department should initiate such a program now, conduct the cost-benefit studies . simultaneously, and move expeditiously to answer unresolved questions based both on actual experience and studies. The evidence amassed over the past several years and presented in several GAO reports, including this most recent one clearly indicates to us, in any case, that a.major change is in order, not just more study. As you know, section 236 of the LeQislative Reorganization Act of 1970 requires the head of a Federal agency to submit a written statement on actions taken on our recommendations to the House and Senate Committees on Government Operations not later than 60 days after the date of the report and to the House and Senate Committees on Appropriations with the agency's first request for appropriations made more than 60 days after the date of the report. We would like to be informed of any action taken on our recommendations. If you wish, we would be glad to discuss this report with you or your staff. Sincerely yours, Monte Canfield, Director - 3 - ATTACHMENT II ATTACHMENT II GAO COMMENTS ON S. 9 PROVISION WHICH REQUIRES ACTION BY THE COMPTROLLER GENERAL A provision in S. 9 would assign certain functions to the Comptroller General. Section 401(a) would require the Secretary to report Lnnually on all shut-in oil and gas wells and wells flaring natural gas. The report must indicate the reason for the shut-in and flaring and actions the Secretary plans to take to require production or order cessation of the flaring. The Secretary would be required to submit the report to the Comptroller General. Section 401(b) would require, within 6 months of receipt of the Secretary's report, the Comptroller General to review and evaluate the methodology used by the Secretary in allowing the wells to be shut-in or to flare natural gas. The Comptroller General would be required to report thereon to the Congress. We have no problem with the requirement as written.
Improved Policies and Procedures for the Exploration and Development of Outer Continental Shelf Resources
Published by the Government Accountability Office on 1977-03-15.
Below is a raw (and likely hideous) rendition of the original report. (PDF)