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)

                          DOCUiENT RESUME
00192 - [A10517241
[Improved Policies and Procedures for the Exploration and
Development of Outer Continental Shelf Resources]. March
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

         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)
accept/reject decisions on industry bids were based on
inadequate data. The need for sufficient data is critical
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
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
identify the resources' location, estimated valuer and potential
for development. (LDS)
                    WASHINGTON, D.C.

                                              FOR RELEASE ON DELIVERY
                                              EXPECTED AT 0 A.M. EST
                                              TUESIAY, MARCH 15, 1977

                        STATEMENT OF
                       J. DEXTER PEACHE
                    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.

     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"

     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

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
        exploration program which would provide for the

       ment and implementation of a systematic plan for
       appraising OCS oil and gas resources, including
       relected stratigraphic test drilling. The
       should identify the level of stratigraphic drilling

       necessary to provide a minimal level of data coverage
       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 drilling identified in the plan, subject co
       developed information being snared with Interior

        a confidential basis.   Exploration permits issued by
        the Department for private drilling should provide
        opportunity for any bonafied potential bidder to
        on the exploration by paying a pro-rata cost of

        After the extent of industry participation is known,
        if any data gaps still exist, the Department of
        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

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

     Attachment II to this testimony contains our comments on

a provision in S. 9 requiring action by the Comptrolle:

     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


   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.

                                                            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
  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
                                         policy was implemented oecause
           Survey officials said this       hazards of exploratory
    (1) of the possible environmental  unsuccessful testing would
    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
    crovide better and more     reliable data and result in
     off-structcre test_ being needed.

                                     - 2 -
                                                    ATTACHMEN:T I


     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,

                               -   3 -
ATTACHMENT II                                      ATTACHMENT II

                     GAO COMMENTS ON S. 9

     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.