Skip to main content

Full text of "O.C.S. oversight of 1978 amendments : hearings before the Select Committee on the Outer Continental Shelf, House of Representatives, Ninety-sixth Congress, first session, on oversight on the Outer Continental Shelf Lands Act Amendments of 1978"

See other formats


O.CS. OVERSIGHT OF 1978 AMENDMENTS— PART 1 



HEARINGS 

BEFORE THE 

SELECT COMMITTEE ON THE OUTER 
CONTINENTAL SHELF 

HOUSE OF REPRESENTATIVES 

NINETY-SIXTH CONGKESS 

FIRST SESSION 
ON 

OVERSIGHT ON THE 

OUTER CONTINENTAL SHELF LANDS ACT 

AMENDMENTS OF 1978 



MARCH 8, 14, 20, MAY 7, 14, 1979 



Printed for the use of the Select Committee on 
the Outer Continental Shelf 




O.CS. OVERSIGHT OF 1978 AMENDMENTS— PART 1 



HEARINGS 

BEFORE THE 

SELECT COMMITTEE ON THE OUTER 
CONTINENTAL SHELF 

HOUSE OF REPRESENTATIVES 

NINETY-SIXTH CONGKESS 

FIRST SESSION 
ON 

OVERSIGHT ON THE 

OUTER CONTINENTAL SHELF LANDS ACT 

AMENDMENTS OF 1978 



MARCH 8, 14, 20, MAY 7, 14, 1979 



Printed for the use of the Select Committee on 
the Outer Continental Shelf 




/H.Oui'. O^tl^ 






U.S. GOVERNMENT PRINTING OFFICE 
49-118 WASHINGTON : 1979 



SELECT COMMITTEE ON THE OUTER CONTINENTAL SHELF 

JOHN M. MURPHY, New York, Chairman 



MORRIS K. UDALL, Arizona 
ABRAHAM KAZEN, Jr., Texas 
JOHN B. BREAUX, Louisiana 
GERRY E. STUDDS, Massachusetts 
WILLIAM J. HUGHES, New Jersey 
MARTIN A. RUSSO, Illinois 
GEORGE MILLER, California 
JOHN F. SEIBERLING, Ohio 
BO GINN, Georgia 
LEO C. ZEFERETTI, New York 
DAVID E. BONIOR, Michigan 



EDWIN B. FORSYTHE, New Jersey 
DON YOUNG, Alaska 
TRENT LOTT, Mississippi 
DAVID F. EMERY, Maine 
ROBERT L. LIVINGSTON, Louisiana 
JERRY LEWIS, California 



Carl L. Perian, Chief of Staff 

Lawrence J. O'Brien, Jr., Chief Counsel 

C. Grady Drago, Minority Counsel 

TiA Gregory, Chief Clerk 



(II) 



D 



5:) 



\0 



^ 



CONTENTS 



Hearings held — Page 

March 8, 1979 1 

March 14, 1979 271 

March 20, 1979 367 

May 7, 1979 609 

May 14, 1979 659 

Statement of — 

Beinecke, Frances, Atlantic Coast project, Natural Resources Defense 

Council 381,697 

Belsky, Martin H., Counsel, NOAA, Department of Commerce 54 

Cronk, Comdr. Peter, Manager, Outer Continental Shelf Project Branch, 

U.S. Coast Guard 346 

Eberle, James, Assistant Project Manager, Taylor Diving and Salvage Co., 

Inc 272 

Emery, Hon. David F., a Representative in Congress from the State of 

Maine 18 

Forsythe, Hon. Edwin B., a Representative in Congress from the State of 
New Jersey: 

Opening statement for May 7, 1979 609 

Opening statement for May 14, 1979 662 

Hill, Henry A., manager of operations CAGC marine region, North Ameri- 
can Explorations, Continental Oil Co 320 

Jones, Crandall D., manager, Alaska/Pacific Division, Exxon Co., U.S.A ... 333 

Kalter, Robert, Department of Energy 54, 650 

Kash, Dr. Don E., Chief, Conservation Division, U.S. Geological Survey, 

Department of the Interior 6 

Kelly, Paul L., senior vice president, corporate affairs, Zapata Corp 662 

Langenkamp, R. Dobie, Deputy Assistant Secretary, Resource Applica- 
tions, Department of Energy 54, 650 

Prepared statement 49, 650 

Langston, J. Donald, vice president, exploration department, Exxon Co., 

U.S.A 320 

Lande, Steve, assistant special trade representative. International Associ- 
ation of Bridge, Structural and Ornamental Iron Workers 712 

Lawbaugh, William M., director of legislation. International Association of 

Bridge, Structural, and Ornamental Iron Workers 404, 712 

Lawrence, George H., president, American Gas Association 272 

Prepared statement 316 

Lawton, Robert, Department of Energy 54, 650 

Loftis, John L., Jr., senior vice president, Exxon Co., U.S.A. on behalf of the 

American Petroleum Institute and the Western Oil & Gas Association... 611 
Lyons, John H., general president. International Association of Bridge, 

Structural, and Ornamental Iron Workers 404, 712 

Markey, Hon. John A., Mayor, city of New Bedford, Mass 511 

Murphy, Hon. John M., opening statement for OCS hearing of May 14, 

1979 660 

Powers, Al, Director, Office of Outer Continental Shelf Program Coordina- 
tion, Department of the Interior 6, 628 

Rhodes, Gerald, staff engineer, U.S. Geological Survey, Department of the 

Interior 6 

Robertson, Ms. Hope, Environmental Policy Center 370, 697 

Rogers, J. Wesley, vice president. Blocker Energy Corp 764 

Ross, Ms. Heather, Deputy Assistant Secretary, Policy, Budget, and Admin- 
istration, Department of the Interior 6, 628 

(III) 



IV 

Page 

Rothschild, Edwin, research director, Energy Action Educational Founda- 
tion 392 

Savit, Carl H., senior vice president, Western Geophysical Co., representing 

the National Ocean Industries Association 272 

Prepared statement 319 

Schiffin, Arthur, Branch Chief, Manufacturers Classification Branch, U.S. 

Customs Service 712 

Schubert, Capt. Frederick, Acting Chief, Office of Marine Environment and 

Systems, U.S. Coast Guard 346 

Sovas, Gregory, chief, OCS section. New York State Department of Envi- 
ronmental Conservation, on behalf of Gov. Hugh L. Carey and Commis- 
sioner Robert F. Flacke 417 

Truesdell, Don, Acting Assistant Director, Minerals Management Division, 

Bureau of Land Management, Department of the Interior 6, 628 

Wallace, Kenneth T., president, Taylor Diving & Salvage Co., Inc., repre- 
senting the Association of Diving Contractors 272 

Walsh, James P., Deputy Administrator, NOAA, Department of Com- 
merce 54 

Prepared statement 46 

Whiting, Basil, Deputy Assistant Secretary for Occupational Safety and 

Health, Department of Labor 54 

Prepared statement 48 

Wilson, Dan, consultant, Taylor Diving & Salvage Co., Inc 272 

Additional information supplied by — 
American Petroleum Institute: 

Comments and recommendations 440, 446 

Statement of L. C. Soileau re public hearings on proposed revision of 30 

CFR on March 5, 1979, Interior Department 470 

Article from the AFL-CIO News of February 17, 1979, entitled "U.S. Urged 

to Close Tariff Loophole on Offshore Oil Drilling Platforms" 762 

Article from Washington Post of: 

February 2, 1979, entitled, "Duty-Free Plan Could Benefit Big Texas 

Firm" 761 

March 2, 1979, entitled "Brown and Root Escapes Next Year's Import 

Duty on Oil Drill Platforms" 761 

Coast Guard: 

Regulations of commercial diving operations 364 

Report on Placid Oil Co. and Penrod's oil rigs 348 

Energy Department: 

'^Evaluation of Profit Share Leasing Systems," by S. W. Edwards 177 

"Evaluation of Royalty Provisions for OCS Leasing," by Wallace E. 

Tyner 120 

OCS oil and gas production goals for 1985, 1990, and 1995 etc 100 

Hill, Henry A.: 

Number of wells drilled per quarter, December 1970, chart 324 

Number of wells drilled per quarter, June 1973, graph 326 

Time between date of sale and mean date of first 3 years exploration 

drilling, graph 325 

"Why U.S. Independents Aren't Rushing Offshore," from Oil & Gas 

Journal, March 5, 1979 327 

Interior Department: 

Activities of diligence unit 40 

Applications for exploration of South Atlantic blocks 30 

Associated Gas Distributors, comments 493 

Bid acceptance 38 

Companies nominating in sale No. 52 26 

News release of June 19, 1979, re proposed 5-year OCS oil and gas 

leasing program 681 

President's energy message — enhance production from the OCS memo- 
randum dated April 12, 1979 629 

Response to Congressman Emery's query 35 

Iron Workers: "Offshore Drilling for Oil," from the Ironworker, October 

1977 409 

Kelly, Paul L., supplemental responses for the record 669, 696 



NOAA: Page 

Fiscal year 1980 budget recommendations, table 109 

"OCS Diver Research Program, Availability at Draft Plan," from the 

Federal Register 71 

"Prehminary Program Development Plan," draft 74 

Presidential documents 743 

Natural Resources Defense Council, Inc.: 

Advance notice for proposed rulemaking on OCS air emissions 383 

Interior Department's proposed 5-year leasing program 371 

Proposed rule on oil and gas sulphur operations in the OCS 386 

Wallace Kenneth W.: 

Articles from Ocean Science News of: 

January 29, 1979 279 

September 26, 1975 282 

October 3, 1975 283 

Federal agency contact OCS diving program 306 

Letter from Ray F. Marshall re diving procedures 283 

Program development plan for studies of underwater diving tech- 
niques and equipment, etc 286 

Communications submitted by — 

Anastasion, Steven N., director. Office of Ocean Engineering, NOAA, letter 
dated April 26, 1979, enclosing a draft report re underwater diving 

techniques 72 

Brown & Root, Inc., letter to chairman, GSP Committee, dated January 17, 

1979 415 

Busbee, Gov. George, letter dated Nov. 22, 1978 115 

Caramagno, Salvatore B.: 

Letter dated May 11, 1978 716 

Letter dated , , 739 

Chasen, R. E., letter dated: 

June 5, 1979, enclosing article 755 

August 6, 1979 responding to questions of committee 724 

Chasis, Sarah, letters dated: 

March 5, 1979 382 

March 14, 1979 383 

March 14, 1979, enclosing a statement 386 

DiBona, Charles J., letter to Chairman Murphy dated March 28, 1979, 

enclosing miscellaneous documents 435 

Eberle, W. D., letter to Hon. Russell B. Long dated Nov. 7, 1974 741 

Flug, James J., letter dated February 2, 1979 397 

Garvin, Peter F., letter to Chairman Murphy dated March 23, 1979, 

enclosing comments of Associated Gas Distributors 492 

Hayes, Adm. J. B., letter to Chairman Murphy dated April 2, 1979, with 

three enclosures 357 

Interior Department — 

Memo dated April 12, 1979, re President's energy message 629 

Kelly, Paul L., letter to Don E. Kash, dated May 17, 1979 671 

Knecht, Robert W., letter dated May 25, 1979, to Gov. Charles C. Finch .... 95 
Leonard, V. K., letter to Commandant, U.S. Coast Guard, dated January 18, 

1979, with attachments 482 

Lyons, John H., letter to: 

Forsjrthe, Hon. Edwin, dated March 24, 1979, enclosing from the 

"Ironworker" of October 1977 408 

Murphy, Chairman John M., letters dated: 

April 3, 1979 431 

December 5, 1978 732 

O'Brien, Lawrence, dated April 3, 1979 730 

Strauss, Ambassador Robert S., letter dated October 23, 1978, enclosing 

a petition 734 

Marshall, Ray F., letter to Hon. Brock Adams 283 

Martin, Paul E., letter to Transco Exploration Co., letter dated February 

22, 1979 30 

Mclsaac, George S., letter dated April 12, 1979, two documents 118 

Meierotto, Larry E., letter dated January 24, 1979 398 

Miller, James W., memo dated January 22, 1979 69 



VI 



y^iLf::l^j!^' '" ^'""™^" Murphy dated March 19. 1979. ^-' 

Rinkel^Murice O.. letter datedMarch's '1979 ■129 

"^'"K^^L^tl^t" '^ ^"^^ ASsdated: '"'< 

December 29, 1978 ... • 395 

fS^m'inLiirn^lJ^^SItf"*''''^-'^^^^^^^^ ''' 

'"aTda'^rSZtSn '!"" '° ^hataan Murph7e„d„si„g replytoniestiin^^ «« 



questions 

425 



M^''''^^1'oJ^^^' '« Chairman Murphy 

May 14, 1979, to Chairman Murphy 49 

^ 96 



OCS OVERSIGHT OF 1978 AMENDMENTS 



THURSDAY, MARCH 8, 1979 

House of Representatives, 
Select Committee on the Outer Continental Shelf, 

Washington, Lf.L. 

The committee met, pursuant to notice at 9-30 a.m., in room 
1334, Longworth House Office Buildmg, Hon. John M. Murphy. 

chairman, presiding. u„„v,oo cifnrlH*? Miller For- 

Present: Representatives Murphy, Hughes, btudds, Miner, ror 

sythe, and Young. . 

i^|^=,Jt•'^'a^^^/rr^l7Xector; Lawrence J. O'Brien. 
Ir chief cSel Tom Kitsos, counsel; Bud Drago minority coun- 
sei; Kate Z^er, Tom Tackaberry, Bob Shea, and Bill McGuire, 

TlS'cSlf^AN. The committee will come to order. 

Today the WS Committee will begin our second round of a 
pi Jnn:^ series of oversight hearings on *« /mple"ien ^lo^^^^^^ 
Public Law 95-372, The Outer Continental Shelf Lands Act Amena 

"CinTour'^DeciXr oversight hearings, the OCS Committee 
compiled a public record on the status of regulation iniplementa- 
?Z identified real and potential problem areas and focused on 
the concerns of industry, State, environmental and executive 
branch rep^esenULs. The oversight hearings were responsible 
for the DeDartment of the Interior preparing an implementation 
sch^ule fo? SrpubUc. Those preliminary oversight hearings also 
WgwShted the cSstoms issue regarding the import duty exemption 
for oil ries transported from lesser developed countries. 
T^esefnd othe? offshore oil issues have been m the forefront of 

%rFlbruary 20, 1979. in the case of Massachu^s ^Andn^^ 
fho TI<S Court of Appeals cited the work of the OCb Committee, 
Ind^rmiSed leLe sale No. 42 to proceed. In his decision. Judge 
Campbell noted the: 

. • • solemn raspons.bility to see that *e^Jf 'Jfe^^^S'oU * d grfrom *e 
unreasonably jeopardized by ?f':'';?s^<'S^^,''': '.° ."^ reject ConVi' -derly. 

the'nT u1s?e5!°E^ *rSftiV?o"Ko;^?h'ltntr^^^^^^ the vLious resources 
whenever they impinge upon one another. 

A<; the court's statement indicates. Government oversight ot ott- 
shore'd^velopmln^^^^^ clearly and necessarily a joint partnership 
between the Congress and the executive branch. 



(1) 



Just last week, President Carter exercised his authority under 
the Trade Act of 1974 and decided to subject offshore rigs con- 
structed in certain foreign countries to a 9y2-percent import duty. 
This decision followed efforts by a distinguished member of this 
committee — Mr. Miller of California and other committee mem- 
bers, to end the exemption which had permitted some U.S. compa- 
nies to build rigs with foreign labor while also avoiding payment of 
American duties. 

Within the last several days, a disastrous blowout on Placid Oil 
Co. Charlie Platform No. 17, in the Gulf of Mexico, has taken three 
lives with five employees still missing. This tragic turn of events 
exemplifies the need for rapid progress in implementing the provi- 
sions and safety requirements of the 1978 OCS amendments. 

Hardly a week passes without some reminder of the necessity to 
move forward on offshore oil development. As recent events in Iran 
vividly demonstrate, our oil and gas imports have become our 
lifelines, which can be severed at any moment by events beyond 
our control. Ten percent of our foreign oil comes from Iranian oil 
fields — now virtually shut down. Unlike these imports which are 
subjected to political whims, and can be cut off at any time, the 
production of domestic oil off our coasts is under our control. 

During the 4-year battle for OCS reform, I maintained, and still 
maintain — that timely and proper implementation of the OCS Act 
will not cause substantial delays in offshore development. The 
Interior Department held the same position and the executive 
branch has assured us all along that the implementation process 
was ready to be rapidly initiated upon enactment. 

While there has been a flurry of activity in the Federal Register 
to carry out the act since our December hearings, few major regu- 
lations have been promulgated in final form. 

We have already witnessed slippage in the implementation 
schedule, and the practical difficulties involved in carrying out the 
act becomes more apparent as each week passes. At our December 
oversight hearings regarding onstructure drilling, it was indicated 
that proposed regulations would be published within several weeks. 
In reality, that has translated into months 

December testimony also indicated that an interim study on the 
marine insurance industry was due by December 18. While work is 
underway, the necessary authority was delegated only last week, 
and it may be June before we see a final work product. 

The failure of the executive branch to activate the special pur- 
pose funds established by the act as swiftly as possible can only 
delay the leasing program and cripple the environmental safe- 
guards we so carefully provided for our fishermen, shoreline, 
beaches and other natural resources. 

For example, the 2-year study of obstructions on the OCS, a 
major feature of the fisherman's contingency fund, has been elimi- 
nated from the Department of Commerce funding request by 0MB. 
This is totally unacceptable. 

Furthermore, if the revenue sharing provisions that were placed 
in the act to enhance State and local participation in the OCS 
decisionmaking process are to have real meaning, adequate fund- 
ing is essential. If we really mean to assist the coastal States in 
ameliorating the adverse impacts of OCS activities, and if the 



coastal zone management program is to continue to be effective, 
the coastafei^rgy impact program must also be properly funded, 
'^r Tuld poTnt S;t that State^ndustry, and environmen al repre^ 
sentatives alike have continuously supported the contmuation of 
?heOCS Committee through the implementation Process. As you 
know I have introduced a resolution for just that purpose and that 
matter is now pending before the Rules Committee. It would be 
rforivabno ^disband the OCS Committee at this juncture and 
fraSt OCS jurisdiction in the House of Representatives _ 

Twe develip the 5-year leasing program that /ill affe^^^^^^ 
develonment for decades to come— we cannot afford a business as 
S^Tpproach. We must develop an ambitious agenda that will 
raDfdlv bring about some semblance of energy independence. 
As this wfek^ headlines vividly demonstrate, implementation of 

^fec^efarf TS^^T^^^^^^^ ominous predictions . of . cnl 

shorties suggest thit the supply crisis may be just be^nning^ 

On the other hand, the drive to increase oil and gas production 
cannot outweigh th^^ need to protect human lives on the Outer 
Shiental Shelf Nor can we overlook environmental concerns^ 

Mancing these interests while moving ahead as soon as possible 

^^OurStllfsT^^^^^^^ Heather Ross, Deputy Assist- 

an? SeSSLr;, ProVam'^Policy and Budget Admmistration of the 

''T:^^:^,f:o:i^^to yield to Hon. Edward Forsythe of New 
T^T-eov thp ranking minority member, at this time. 
'^Tr'^FoRS^HE fh?nk you, Mr. Chairman. I do have an opening 
.statement that I would like to make at this point. 

a!^ou know I voted against passage of the conference report on 
q q because I felt that miny provisions of the bill were duplicative, 
would SemountaTns of Federal redtape, and that the legislation 
Tuld cause de^ys in exploration and development by requiring the 
drafting of 25 to 40 sets of new regulations. 

I exDressed these concerns during the consideration of the le^s- 

XrTngX hea'rtngs in December, all of the representatives from 
tl,»nr^iite sector and from the States complamed m chorus that 

r^irrSslhe'd'^amng TJ lels^t 20 sets of new or revised 

Thfs'cTmmittee was charged when it -s -ated 'n 1975 with 

^X^n^o^l^n^aWd^i^S^n^^C^C^^ 

In September 1978, this committee, m response to the ™hes °* 

Sh>fund'Ie%nrthat is implementation. Mr. Chairman, you 
referred to this in your statement very adequately. 



When the 1953 act was signed into law, this Nation was a major 
exporter of energy. When the committee was estabUshed, we were 
importing approximately 29 percent of our domestic oil needs. Last 
year we imported approximately 50 percent of our needs. 

I believe that we have finally learned our lesson — that it is 
foolhardy to rely on the future goodwill and stability of foreign 
nations for oil needs. Positive steps must be taken to decrease this 
dependence on sources beyond our control. In spite of its faults, I 
believe Public Law 95-372 can make a significant contribution to 
this end if it is implemented without any further delays and in 
accordance with congressional intent. 

It took 4 years and two attempts at passage to create a law that 
would accelerate OCS energy activities, provide the environment, 
increase competition, and provide a fair return for the leasing of 
public energy resources. However, since the legislation was signed 
into law almost 6 months ago, only one standard and one regula- 
tion have been finalized. 

All of the 11 Federal departments and agencies that have respon- 
sibilities under the provisions of Public Law 95-372 were aware for 
at least 2 months what the provisions of the law would be. In 
addition, we were repeatedly informed by the departments that 
there would be no delays in implementation because many of the 
regulations were already promulgated due to authority under the 
1953 act, or being compiled in anticipation of passage of S. 9. 

The purpose of these hearings is to follow up the December 
hearings and to determine why there has been such a drawn out 
delay in proposing regulations. 

I, for one, have received numerous letters from various segments 
of our economy as well as hearing from some States, complaining 
that not only were there delays in implementation but that there 
seemed to be an effort to hold back on putting the new OCS 
program in effect. 

We should have learned a lesson from activities in Prudhoe Bay, 
the North Sea, and from exploration activities in the Baltimore 
Canyon. Exploring for oil and gas is a game of chance. In Prudhoe 
Bay, they were ready to stop drilling before hydrocarbons were 
found. The North Sea took numerous exploratory wells before 
there was a significant find. The Baltimore Canyon, never consid- 
ered a particularly rich source of hydrocarbons, appears to have a 
great deal of oil and gas resources, but not where it was first 
thought to be. Only more active exploration will finally determine 
the future of the canyon, as well as the entire OCS. 

In the past, the executive branch has expressed a desire to work 
closely with this committee in order that we can put together an 
effective program to accelerate the production of the considerable 
energy resources on the OCS, and it is in this spirit that we are 
meeting here today. 

Mr. Chairman, I believe Mr. Young has an opening statement. 

The Chairman. Does Mr. Hughes have an opening statement? 

Mr. Hughes. No, Mr. Chairman. I would defer at this time. 

The Chairman. Mr. Young. 

Mr. Young. Mr. Chairman, members of the committee, I will 
make my opening statement very brief, as I must attend another 
hearing dealing with oil and gas problems in onshore areas. How- 



ever I would like to touch on one or two problems that disturb me 
both as a member of this committee and as the Representative of 

the State of Alaska. , . , i j j t «^w. 

In the 95th Congress, this committee took the lead-and I com- 
Dliment the chairman for this-in passing a comprehensive set of 
amTndmente to the OCS Lands Act. Passage of these amendments 
foTlowed over three years of hard work. Through the legislative 
oro^rs tWs committee gave a mandate to the admmistration to 
Serateunde? proper procedure of law and with sound controls, 
SrexSoration and development of our off-shore oil and gas re- 
sourcS Unfortunately, the administration has taken actions, at 
loocf \n Alaska to stvmie that mandate. 

^t me ^ve you ^some examples. The three offshore areas m 
Ala^ka^haf have the best oil and gas potential are m the Beaufort 
Sea Norton Sound and Bristol Bay. Two of these are being recom- 
mended for marine sanctuary designation by the Department of 
Commerce Further, if the proposed marine sanctuary regulations 
^,^SS bv the Department of Commerce on February 5, 1975, 
^rP ivPr fmalLed we wiU not even be able to go fishing in these 
.f^nph less explore for and produce oil and gas. These peo- 
posfd r'^^a fon^Tve pr^^^^^ State of Alaska to take a 

u !i i^^u ^Tf itc, suDDort of marine sanctuaries. Let me put the 
SSttlon t Se I am not going to be supporting marine 
sa^tuaries if they have that kind of regulation proposed. 
?n addition development of the Bristol Bay basin may be fore- 

E^rgJ remaS ata r1ce"nt briefing, "we don't know" how to get 
*The recent crisis in Iran, the international commitment to lower 

rS^o^UC4"kowr!;: ^1 -§Ttt^J 

devefop these new sources of oil. The administration seems to be 
nrol°um resfrvl No 4in'S.%Ls, in spite of the fact that no 

'Tis' obviouf S m^eXt the administration does not want to find 
It IS o"™"' ""t™^ ^y,. charee of this comm ttee and our duty to 
thldfent oTth Un W StaS: to see that the mandate to explore 
t^^Td-eUop our Nat^n„-U and gas^r^^^^^^^^^^ 
a nVrpXl yTt^: S"of\"SW ani the committees 



of the Interior, we will get the administration moving in trying to 
solve the energy problems of this Nation. 

The Chairman. Thank you, Mr. Young. We appreciate those re- 
marks. 

Secretary Ross, would you identify the gentlemen assisting you 
today? 

STATEMENT OF MS. HEATHER ROSS, DEPUTY ASSISTANT SEC- 
RETARY, POLICY, BUDGET AND ADMINISTRATION, DEPART- 
MENT OF THE INTERIOR, ACCOMPANIED BY DR. DON E. 
KASH, CHIEF, CONSERVATION DIVISION, U.S. GEOLOGICAL 
SURVEY; GERALD RHODES, STAFF ENGINEER, U.S. GEOLOGI- 
CAL SURVEY; DON TRUESDELL, ACTING ASSISTANT DIREC- 
TOR, MINERALS MANAGEMENT DIVISION, BUREAU OF LAND 
MANAGEMENT; AND AL POWERS, DIRECTOR, OFFICE OF 
OUTER CONTINENTAL SHELF PROGRAM COORDINATION 

Ms. Ross. Yes, I will, Mr. Chairman. 

On my right is Don Truesdell; he is the Acting Assistant Direc- 
tor, Minerals Management Division in the Bureau of Land Man- 
agement; on my left is Alan Powers; he is the Director of OCS 
Program Coordination. 

Beyond him is Mr. Don Kash, who is Acting Chief of the Conser- 
vation Division of the U.S. Geological Survey, and with him is Mr. 
Gerald Rhodes, who works in the Survey. 

The Chairman. If you will proceed. 

Ms. Ross. Thank you, Mr. Chairman. 

It is a pleasure to be here today for the second oversight hear- 
ings to be held by this committee. The Department of the Interior 
appreciates the time and effort you are devoting to this important 
domestic oil and gas program. I thank you for the assistance you 
have given us, and continue to give us. 

Since the last time the committee met on this subject, the De- 
partment of the Interior has been busy implementing the provi- 
sions of the 1978 Amendments to the OCS Lands Act and maintain- 
ing the leasing schedule that was published in August. 

A great deal of effort has gone into the implementation of the 
amendments. Not only have efforts by the Department of the Inte- 
rior been extensive, but other departments, with specific authori- 
ties, have been hard at work as well. 

The Department of Commerce, for example, is well along in 
establishing the Fisherman's Contingency Fund, and the Coast 
Guard expects to meet the statutory deadline of March 17 for 
promulgation of final rules pertaining to the Oil Spill Pollution 
Fund. 

As to the Department of the Interior, most of the required 
changes in the regulations have now been published in the Federal 
Register for comment. A copy of the schedule which the Secretary 
of the Interior has set for these draft and final regulations has 
been provided to your staff. 

The Bureau of Land Management has published all regulation 
changes within its areas of responsibility to implement the provi- 
sions of the amendments. These regulations, found at 43 Code of 
Federal Regulations, part 3300, were proposed in February. Final 
rules are planned for June of this year. The Geological Survey has 



published two major regulation changes and additions, again, as a 

^itl^nnaTe^ensv^e changes in the ^.TjJ^ti^f.o^^^^ 
and development and production plans, 30 CFR 250.d4, were put) 
lished for comment. After reviewing and considermg written and 
oral comment on the proposed rules, we will prepare final rules 

which we expect to publish in May. dealine 

Another extensive change in regulations, 30 CFR 25Z, dealing 
with the oil and gas information program, was published for com- 
ment in January, and final rules are again planned for May. With 
^o exceptions, the remainder of the changes needed in the Geo- 
l^^ca? Siar^ey regulations are scheduled to be published for com- 
ment next week, with final regulations due in June. 

The two Exceptions are for provisions of the amendments where 

the department felt it needed public input before drafting proposed 

rules The first of these is air quality. . , x . ■ x 4. i 

The amendments require the Secretary of the Interior to control 

activitieHn the OCS which significantly affect the air quality of a 



An advance notice of Proposed Rulemaking was published in the 
Federal Sster in December 1978, asking for comment and infor- 
mation on Sveral aspects of air-pollution control. Over 40 respond- 
Sits suggested various interpretations of the statute and the meth- 
ods to be used for implementing its provisions. The regulations 
being drifted for publkation this month as proposed rules are 
based on the information we received and are designed to help 
Se that activities on the OCS will not impede the efforts on- 
csVinrp to achieve clean air standards. /- - i. 

The second Irea where we sought public input as a first step was 
belt available and safest technologies. Again we have asked for 
comment and suggestions on a number of points. We anticipate 
usSS Responses Tom industry, environmental groups, and others. 

One iSHem I wish to discuss is the 5-year leasing program. 

As re^ired^y the statute, we have begun to draft a leasing 
program which will control the timing and location oUea^e sa e 
for the 5-year period beginning m March 1980, 18 months atter 

'TommeL''ht'?een Solicited, and received, from industry, the 
StateT^nd loc^l government, environmental groups, P^vate par- 
Ues and other Federal agencies in response to a request published 

'"'tlt'r^LfTln^^?^^^^^^^ when and under what con- 

straints wS^voluminous and have now been analyzed. Proposals 
we?rdraftS for the Secretary's consideration and ^^^^^}^^J^^l' 
Son a draft proposed leasing program was prepared for his approv 
al When he approves it, the proposed program will be sent to the 
Governors of the coastal States for further comment. We expect 

that in a matter of days. .^ ^ , , . , . . • ^ 

TViit; iq where the activity stands at this time. . 

ThP Governors' responses will be taken into account pnor to 

Slished in the statute and have a final leasing program pub- 
lished by March 1980. 



8 

In summary, Mr. Chairman, we have been working hard to im- 
plement the provisions of the OCS Lands Act Amendments. At this 
point, 6 months after enactment of the amendments, virtually all 
rule changes have been drafted and are available, or will be availa- 
ble next week, for public comment. 

The two provisions which are on a different track have had 
advance notices of rulemaking published and are on schedule. The 
provisions of titles III and IV, the oil-spill and fisherman's funds, 
and for a 5-year leasing program, are on established schedules for 
implementation. We expect virtually all regulations to be in place 
in final form by the end of June — 10 months from enactment. 

This, we think, is an ambitious schedule for taking a major. 
Federal operating program and overhauling it. It is being done 
without any increase in resources but with a great increase in 
workload and productivity of the people involved. These are the 
same people who run the ongoing offshore oil and gas program, 
and they have been able to continue that program on its estab- 
lished schedule. This has allowed us to bring the new authorities 
and requirements of the amendments into place while continuing 
an important program in our national effort to develop needed 
domestic supplies of oil and gas. 

We think it is a good record, Mr. Chairman, and I would like 
now to answer any questions you may have. 

The Chairman. Thank you, Ms. Ross. 

Congressman Hughes? 

Mr. Hughes. Thank you, Mr. Chairman; and thank you, Secre- 
tary Ross. Welcome to the committee. 

It is my understanding from your testimony that the Interior has 
drafted proposed regulations which bear on the subject of the leas- 
ing plan, the 5-year plan, from which the target date of March 8 
has been determined for implementation. 

I wonder if as part of that plan the Interior is attempting to 
determine the other side of the balance sheet; that is, the ability of 
industry to assimilate leases over a 5-year period? 

In the past, we have leased acreage, hoping that industry would 
have the ability to assimilate those leases and develop expeditious- 
ly the tracks to determine whether hydrocarbons exist. 

In many instances, we have found that industry does not have 
the capital or the equipment. In other instances, they do explore 
expeditiously. Is that one of the components that the Department 
of the Interior is considering in a lease plan? 

Ms. Ross. Yes, sir, we are. 

Regulations governing the 5-year leasing program were pub- 
lished in final form before we began the process. They restate 
essentially the provisions of the act. 

One of the considerations is the ability of industry to explore and 
develop expeditiously. We have received a proposal for energy goals 
for the OCS from the Department of Energy; they explicitly ad- 
dress that question of capital and rig availability in their con- 
straint section. I expect they will be discussing this with you later 
on, but they point out that those are not constraints in achieving 
an optimum OCS schedule of the order of magnitude that they 
believe will meet our production goals. 



9 



Also, as you know, the Secretary of the Interior is very deter^ 
mined to have diligence in exploration and production and he 
stated that a number of times. . ,• xi ^ 1^0+ 

Mr Hughes. Yes. And I think the Secretary has, just m the last 
few years, done a tremendously good job in addressing that particu- 

^^WhaTspecifically is Interior doing to improve its capability to 
identify capital shortfalls or limitations on equipment^ 

Ms Ross We are looking to the economic analysis that was done 
by the Department of Energy for that and we have also gathere^^ 
information from industry ourselves, which we have prepared for 
ihe Secretary to consider in his 5-year leasing program decision; so 
that S provided by statute, we have gone out to the Parties who 
can p?o^dde hit information in the industry and collected it, their 
respon'rs to us, and analyzed it as part of the developmental 

^'S^^HUGHES. Are you relying on what industry submits to you or 

^ VsXsf ^f "^^a^^?^^^^ it with the Depart- 

"^Mr ""huShe? Do you presently have the computer capabiUty to 
m^e f determinati^on £ to what equipment, particularly rigs, is 
^vailableTrgiven time, and what is projected to be available m 

%sTor UVdo'nol have a computer-based capability for that at 
MS. ivobb. vveu reiving on a two-pronged approach. 

and dCTeloped If they are not, he will take them back. So that we 
^et fair market value when we lease it, if it is not explored and 
deletooe" we wiUreceive it back and we will offer it agam; but we 
arlntending That diligence requirements be observed so that if 
there is a problem with the availability, which we do not see, and 
ifvl thi. nonartment of Energy does not mdicate, it would be a 
^robtm of *rSs"try not beZ able to follow through on what 

" Mr^HuG^HES It seems to me that has been one of the major blind 
sD^s in our teas ng program. We have not looked, I think serious- 
ffat the othCT side of the sheet, I do not think we can deve op a 

1 „j^ifi/^«oi 5»r>rpnp-p We have over lb million acres prebeun^ 
tn^'on^ate owners^^^^^^ by major oil companies and one 

Ss wtt t%have^n addition to any^acrea^thf js^^^^^^^^ 
revXsome^yptTcomptit'ercapability in the Department of the 

'°f vjnne that Interior will take a look at that more seriously. 
L^ me sJ^tch for just a moment, if I may. to onstructure strati- 
graphic drilling. 



10 

As I understand it, regulations have been promulgated, noticed 
in the Record and are being analyzed at the present time; is that 
correct, the comments are being analyzed? 

Ms. Ross. Yes; that is correct. 

Mr. Hughes. One of the things that is proposed by Interior is an 
immediate release after a permit is granted and onstructure strati- 
graphic drilling takes place of any significant finds; a public re- 
lease; and I wonder if you could tell me the rationale behind that; 
if indeed, what we are trying to do is to encourage consortiums, 
prior to a lease sale, to explore onstructure, then I wonder if we 
are not defeating the purpose if we require them to make public 
any significant finds? 

Ms. Ross. That is a provision that is in the regulations that we 
currently have; that is, it is not something that we introduced for 
onstructure drilling. 

Mr. Hughes. I understand that. But I question the wisdom of it. I 
wonder if that is not defeating the purpose of permits for onstruc- 
ture stratigraphic drilling? 

Ms. Ross. We are concerned also that disclosure not be a basis 
for persons not being willing to undertake onstructure drilling; and 
to that end, as you probably noticed in the regulation, we have 
very substantial penalties that we provide for people who will buy 
into that information once a disclosure of a find has been made. 
The intention of that is to provide an incentive for any firms that 
may want to know what is there in case something is found, to buy 
in early, and to develop a consortium. It will be very costly later 
on. 

Mr. Hughes. Secretary Ross, I think that what you say is accu- 
rate, but I do not consider the disincentives that you have built in 
very major disincentives. 

As I understand your regulations, if you have 20 companies 
participating in a $10 million stratigraphic test, and they whack it 
up, it amounts to some $500,000 per firm, which is not a great deal 
of money to them; and yet if, a significant find is made and some 
company determines that it would be wise after the fact to buy in, 
they can buy in under those circumstances for $1 million. That is 
not much of a disincentive. I do not see that as much of a penalty. 

What I am saying to you is if we are trying to encourage indus- 
try to try onstructure stratigraphic drilling, then we have to pro- 
vide some incentives, some assurance, that their work product is 
protected! I would hope the Department of the Interior reviews 
that regulation, because I think it is self-defeating. 

Ms. Ross. We hope through onstructure drilling to get competi- 
tion. We hope to provide information for bidders. This disclosure 
would not be everjrthing that is in the well. It would simply be the 
statement, as we do presently on our COST wells, that a hydrocar- 
bon show has occurred; that will allow other people, if they wish, to 
pay the price to buy in and become more competitive in that sale. 

If we can provide them the information so that we can have the 
broadest possible competition and not get into the problem where 
everyone waits for that point; if we can insure that someone is 
going to form a consortium to start — and that is why we set up the 
financial penalties that we have — then we will have both worlds, 
the well and wide distribution to encourage bidding. 



11 



Mr Hughes. I understand what you are saying and I suppose it 
is mostly a value call. I just think that you will still have the 
competition we seek, and I am very supportive of onstructure 
stratigraphic drilling. I hope that it does provide additional inf^^^^ 
mation and help expedite as best we can the identification of areas 
that might contain hydrocarbons. . .u 4- rr.^ «f 

But I question whether or not we are going to get the type ot 
enthusiasm that we should be looking for if we do not provide some 
protection to those companies that do participate in a group test 
such as we are trying to encourage. I do not think that you have 
the built-in incentives that you think you have. 

I do not think $1 million to a major oil company is very much 
when you consider that almost half of it could be written off 

^""sTwhen you consider the tax consequences, you are not talking 
about a great deal of money, and if there is a public announcement 
of a si^ificant find, it would seem to that any major oil company 
?hat dSs not show great interest in participating after the fact is 
missing the boat. I do not think that you are going to provide the 
Scentfves that we hope we can provide in seeking onstructure 

''MsX's'^'wnppreciate that concern and will take that into 
very serious consideration in the final regulations that we prepare 
because we do want to see onstructure drilling. 

As yo^ know, we have that relationship now where a show is 
made'public and people do drill. Now, if it is not going to carry 
over to onstructure drilling, we will remedy that^ 

Mr. Hughes. Just one more question, Mr. Chairman. I know I 

""rCH^AlR^TN. The gentleman can take his time. It is a subject 
that we want to cover as completely as possible. 

fLT:i^.^t:\rA'^^"S'^^e mtenor «„ that issue 
and I hope you will give my concerns some consideration. 

?:J:- Hugh'^s. with regard to lease sale 49, the sale that took 
place just a couple of weeks ago, what is the present status of the 
Review of those bids, they came in, as I understand it at about $41 

""ms^'^'ross Yes. The sum of the high bid was a little over $41 
million As provided for by these amendments that we are discuss- 
Sg ?hat mS^^^^ been forwarded to the Justice Department. 
Thev are reviewing the competitive aspects of that sale. 

Mr Hughes. I realize that the Department of the Interior is 
reviewing those bids. Let me just express my own views as one 
member of thfs committee who also believes as strongly as anyone 
SiaT we have to get on with the business of exploring for oil and 
gas i^all areas and inventory as best we can what resources exist 

"^Tthiirthat lease sale 49 demonstrates one of the major flaws in 
our leasing policy; that particular sale, in my judgment was pre- 
mature I so advLd your department in months past that it was 
PemSure the industry did not have the ability to digest the 



1+9-118 0-79-2 



12 

information that was secured, from lease sale No. 40, and I think it 
indicates that the bidding was highly speculative. 

I do not think it is in the public interest that the Department of 
the Interior accept any of those bids. I would hope that my con- 
cerns are given every consideration, and I know I speak for other 
members of the committee who feel that $41 million almost 
amounts to a dribble. It was an unintended indictment of our 
present leasing policies. 

Thank you, Mr. Chairman. 

The Chairman. Mr. Forsythe? 

Mr. Forsythe. Mr. Chairman, I will yield at this point to Mr. 
Young, who has to leave. 

The Chairman. Mr. Young? 

Mr. Young. Thank you, Mr. Chairman. 

The Department is currently considering a joint sale and lease 
sale in Beaufort Sea. It is my understanding that there are a good 
number of procedural steps that must be taken before this sale is 
accomplished. 

Would you explain the status of the lease sale and what needs to 
be done before the sale and what are the problems that you are 
faced with? 

Ms. Ross. Yes. 

Congressman, that sale is tentatively scheduled for December of 
this year. It is a unique endeavor on our part to work with the 
State to offer these leases in a joint sale. 

What I would like to do is call on Carolita Kallaur, who is with 
me today, who can provide you with a few facts on where that 
stands. She works in the office of OCS program coordination, and is 
handling that sale for us. 

Ms. Kallaur. The draft environmental impact study will be 
published later this month, in March. We will be holding hearings 
in either late May or early July. We are working out arrangements 
with the State of Alaska and want to make sure that the Alaskan 
natives are able to attend hearings and that will determine wheth- 
er the hearings are held in either May or June. 

The Justice Department has received requests from the Depart- 
ment of the Interior to initiate litigation and this litigation needs 
to be initiated for the sale to go ahead, since the lands are in 
dispute 

Mr. Young. Point of clarification: In dispute with whom? I 
thought it was found that the State does in fact own those lands. 

Ms. Kallaur. No. That is not quite correct, sir. There is a 
portion of the sale that is in dispute between the State and the 
Federal Government and that is why we are proceeding with the 
joint sale under section 7 of the OCS Lands Act. 

Mr. Young. Right. 

Go ahead. 

Ms. Kallaur. There are weekly meetings in Alaska between 
State personnel and Department of the Interior personnel to dis- 
cuss various procedural matters, and the Washington office of Inte- 
rior is in close contact with the field offices and they have so far 
not identified any problems that cannot be resolved in the time 
frame that we have in the August 1977 schedule. 

Mr. Young. There are not going to be any delays? 



13 



Ms Kallaur. Not that we know at this time. It is a very envi- 
ronmentally sensitive area and there is a great deal of concern 
because of the bowhead whale and some conflict with the North 
Slope Borough, but we believe it can be resolved by December. 

Mr Young. Is there any difference of opinion between the ad- 
ministration and between your department, the Interior 

^ M^^kIlLur. I do not believe so, sir. We have received very 
strong statements of support for the sale. , . • ^ . • 

Mr Young. I am talking about within the administration. 

Ms' Kallaur. No. Secretary Andrus is very much behind the 
sale and he and Governor Hammond have discussed it on several 
occasions, and we all want to make sure that it can be held on 

"""Mr'^YouNG. Mr. Chairman, I hope that we keep track of this. I 
am not terribly enthused about the Beaufort Sea sale^ I will tell 
vou that now I happen to believe that we ought to have an on- 
Zre sale pit 4, next door, in the State of Alaska. If there are any 
delays, I hope, Ms. Ross, that you or yourself, young lady, will 
inform this committee that the delays are internal, that they are 
betwSn different branches of administration because I am looking 

''Ms^KlL^ut W'e know of no such delay and will advise you if 

^^Mr^YouNG. Mr. Chairman, I am just curious-at that table 
everyone sitting there, have any of you been involved m the oil 
TnduSry previously or in any aspect within the department of the 

""' Dr.'^KASH" Mr. Rhodes was with the oil industry prior to coming 

^'^Mf^RHODES I have been with the USGS for over 20 years 
Mr' YOUNG. I am not being mean, Mr. Chairman. I am just 
curious since we are dealing with a ticklish situatiom We passed 
the law and while I do not question their ability at all, I am just 
wondering if we have people involved in this crucial matter that 
m'ght be^nonobjective. I am hopeful that they at least have some 
hlsight into the problems that we are going to be facing in the 

ntTn^^jR^f S^^^^^^ some of the people in the Lower 

48 might want to expedite that. 

Mr Young I agree, Mr. Chairman. , • u • 

But we have tots of oil on land rather than offshore, which is 
eaSer to control. I just say let us have our cake and frosting too. 

The ChIirman. We would like to trade you one of our operas m 
New York for some of your oil. ij „^4- o 

Mr Young. If the administration has its way, we would get a 
better dea^ out of it, because you cannot get the oil out of the Stato. 

The Chairman. Mr. Forsythe? 

Mr Forsythe. Thank you, Mr. Chairman. 

SprrPtarv Ross you have already discussed with my colleague, 
M^HughJs, the' due diligence question and I would like to pose 
another question in that area. 



14 

One of the burning issues in the entire consideration of the 1978 
amendments, was the question of delays and speeding up OCS 
energy production. 

In a recent article in the Wall Street Journal, I was pleased to 
read that Secretary Andrus was going to apply due diligence re- 
quirements on all leases. 

Could you inform this committee on what would be considered in 
regulations on due diligence? When will the regulations be ready 
for comment and, since they are the responsibility of the Depart- 
ment of Energy, what type of communications have you had with 
the Department of Energy on this subject? 

Ms. Ross. Yes, Mr. Forsythe. I saved the article that you were 
referring to about the Secretary's remarks on diligence. 

We do not have regulations governing diligence. We have a re- 
quirement that people explore and proceed toward development 
expeditiously; that is what the Secretary is enforcing carefully and 
will continue to enforce carefully. It is being done on a basis of 
moving the leases along as quickly as possible, receiving plans and 
making judgments on that basis. 

Mr. Forsythe. Strictly based on the statute rather than any 
further definition by regulations is what you are telling me? 

Ms. Ross. I believe that is right. We do have lease materials that 
govern it. 

Is that correct? It is the lease material that governs, Mr. Trues- 
dell? 

Mr. Truesdell. Yes. 

Mr. Forsythe. All that is within the purview to spell out in the 
lease — could somebody comment on what is the pattern in the 
leases that you are now dealing with? 

Ms. Ross. The pattern? 

Mr. Forsythe. Of what you are spelling out in the leases in 
defining "due diligence"? You say "due diligence." This obviously, I 
think, can be a broad range of mandates that there be a rig on site 
in 90 days; there be XY and Z and so on. You say just "due 
diligence," and have no definition? It seems to me to leave it wide 
open to all kinds of problems that one lease is going to be requiring 
one set of due diligence, another lease something else, unless there 
is something that sets a pattern. 

Ms. Ross. There needs to be a consistent policy. We have not 
tried to specify timing in which something as problematic as OCS 
exploration will occur. What we have done is set an end-date 
time — at the end of 5 years, progress has to have been made 
satisfactorily. 

What we have done in the regulations that came out, that I 
mentioned earlier, we have put in a provision which is new, pro- 
posed for comment, that exploration plans for the OCS leases be 
filed by the end of 2 years; that would be a new provision and, if 
adopted, that would require lessees to tell us their plans earlier in 
the lease term. 

Mr. Forsythe. So that the exploration plans for that lease must 
be filed within 2 years of the awarding of the lease? 

Ms. Ross. When these regulations become final. 

Mr. Forsythe. If they actually become final. 

Ms. Ross. Yes 



15 

Mr. FoRSYTHE. And then beyond that it would mean purely an 
assessment at the end of the lease, the 5-year period, as to whether 
the work following the filing of the plan had been adequate? 

Ms. Ross. Had kept to the plan as had been prepared and ap- 
proved, yes. 

Mr. FoRSYTHE. That the plan is required to have a time schedule 
beyond the actual proposals, they are going to be so many wells 
and so many platforms and whatever that are involved in planning 
It would go into a time schedule that is required in the plan. 

Ms. Ross. A development and production plan would have that, 
yes. 

Mr. FoRSYTHE. Again, have you consulted with the Department 
of Energy in these matters dealing with due diligence? 

Ms. Ross. They have an authority under their Organization Act 
to write regulations for diligent development. 

Mr. FoRSYTHE. Then it will be between two different agencies 
and maybe having two different kinds of standards here. 

Ms. Ross. If regulations are written, they will be written by the 
Department of Energy and, of course, we would operate within 
them. 

Mr. FoRSYTHE. How will that affect the leases that you will have 
in the interim? Will there be an affect on those leases that may be 
made in the interim? 

Ms. Ross. Regulations when promulgated would apply to existing 
leases. 

Mr. FoRSYTHE. Therefore it could change the basis of the lease? 

Ms. Ross. That is true of all regulations; yes. They apply to 
existing leases in almost every case. 

Mr. FoRSYTHE. Thank you. 

I would like to again talk a little bit more about the Baltimore 
Canyon. 

I do also represent a bit of the coastline of New Jersey and, of 
course, Baltimore Canyon is of some interest to me also. 

Secretary Andrus explained that the lease was a disappointment 
and was due to the fact that sliding-scale royalties were used; is 
that correct? 

Ms. Ross. He pointed out that in that sale we had, on a portion 
of the tracts, a little over half of the tracts, used an alternative 
bidding system as had been provided in the actual requirements of 
the statute of this committee, and in fact 24 of the 44 tracts that 
were bid on were sliding-scale royalty tracts. 

Mr. FoRSYTHE. There was a difference in the bids of those tracts 
versus the nonsliding-scale tracts? 

Ms. Ross. There was approximately the same set of high bids on 
the two tracts but there was a slight increase in the average 
number of bids on the sliding-scale tracts. 

Mr. FoRSYTHE. A higher number of bids on the sliding scale than 
on the front end? 

Ms. Ross. Yes, on average. 

Mr. FoRSYTHE. It is my understanding that — my own informa- 
tion, having followed this rather closely for a number of years now 
that the Canyon was not ever considered really a high scource of 
hydrocarbon until the inquiries began. We now hear that there 



16 

may be a potential of high degrees of hydrocarbon, but they appear 
to be located where they were not expected. 

Is this a correct assessment at this point in time? 

Ms. Ross. I am not sure I heard you. You are still speaking of the 
Baltimore Canyon? 

Mr. FoRSYTHE. Yes. 

Ms. Ross. There is some evidence that the resources may be 
located farther seaward on the Continental Slope. Perhaps the 
Geological Survey could speak to that further, but I believe that is 
correct. 

Dr. Kash. Yes. There is indication similar to what Ms. Ross 
indicates. Once again, I would emphasize that prior to drilling, 
which leads to discovery, this remains a process that has a great 
deal of uncertainty and I think it is a mistake to push the argu- 
ment in either direction very far until we have had an opportunity 
to test the drilling. 

The Chairman. Would the gentleman yield at that point? 

Did not Mr. Oxley of Tenneco indicate that the most promising 
areas, in his opinion, were at about 3,000 feet. 

Dr. Kash. I do not recall reading that statement. But there is a 
good deal of opinion within the community that the promising 
areas are in deeper waters. 

The Chairman. And the question of the ability to drill in those 
deeper waters; the industry does have the technology to do that? 

Dr. Kash. Yes, exploratory drilling is no problem at all. 

The Chairman. Thank you. 

Mr. FoRSYTHE. Well, you are telling us again, which I think is 
really one of the bottom-line assets of this whole operation of the 
OCS, that optimism really is a slippery status until actually there 
is exploration that produces a commercial discovery; that the only 
way we do that is to lease and drill. 

Dr. Kash. Yes, sir. 

Mr. FoRSYTHE. And really that while onstructure drilling. Geo- 
logical Survey, all the other things may be a test in terms of 
interest; that is about as far as all of that can go. 

Dr. Kash. Yes. 

Now, once again, one needs to emphasize that the odds get better 
as we acquire more detail, more complete information; but you 
kind of cross the rubicon when you drill a well and find producible 
oil; things change pretty rationally. They go from orders of magni- 
tude to estimates to factors, I guess. 

Mr. FoRSYTHE. Another question. 

Do you feel the fact that 20-odd blocks, I believe maybe 24 blocks 
in the area of the COST well be removed from the sale, had a 
deflating effect on the sale, the Baltimore Canyon? 

Ms. Ross. I am not sure — had an inflating 

Mr. FoRSYTHE. Deflating effect. 

Ms. Ross. Deflating. 

If what you are saying turns out to be true about the possibility 
of hydrocarbons, they might be promising tracts. The problem is 
with the flow of sediment that the Survey found in their geophysi- 
cal testing. In their opinion, the tracts would not be suitable for 
the placement of structures, nor was there a place nearby where 
you could tap those. So that their advice at that time was that, as 



17 

promising as they might be and that is conjecture until we get 
there — that is not suitable for offering at this time. 

Mr. FoRSYTHE. The oil companies who were interested, did they 
agree with this assessment of the situation, that it should not be 
leased at this time in that area? 

Ms. Ross. I have not had a direct discussion myself with anyone 
in the industry on that topic. I do not know whether anyone in the 
Survey has or not. 

Dr. Kash. We of course have discussions in this area and a 
variety of forums. Our people are involved in professional confer- 
ences. I think it is fair to say that there is a general consensus that 
exists among professionals in this area as to where one can safely, 
given the state of technology, place platforms. We need to approach 
that very cautiously. 

To the best of my knowledge, there is no great difference of 
opinion on that. 

Ms. Ross. Mr. Forsythe, Don Truesdell points out to me that, as 
you may know, we have received several letters of protest from the 
industry about deleting the tracts and I think we are very sympa- 
thetic to that. An investment was made in the COST well, informa- 
tion was developed that would have been useful for evaluating and 
bidding on those tracts; and we would like to offer them; and in the 
future, when we have sales and COST wells or on-structure wells, 
we will do everything that we can to offer the acreage that we 
have evaluated unless we see a reason why we cannot; and in this 
case, we felt that we saw a reason. 

Mr. Forsythe. Is that a final situation as far as the tracts that 
are withdrawn; that if it does not look proper, to try further 
exploration in that area? 

Ms. Ross. That is not for any indefinite future, but for this sale 
decision. 

Mr. Forsythe. There will be continuing studies as to what the 
situation might be under new — I guess new information? 

Ms. Ross. We will certainly be trying to, as we are for a number 
of other conditions on the OCS, to put ourselves in a position where 
we can 

Mr. Truesdell. Sir, we had the same situation at the mouth of 
the Mississippi River 5 or 6 years ago with tracts, based on a 
situation not entirely analogous to this, but there was some simi- 
larity; based on the technical review that was done, plus geological 
studies, we have offered for lease most of those tracts 5 or 6 years 
ago. We hope that this could be done here. 

Mr. Forsythe. Mr. Chairman, I think I will pass for another 
round. 

The Chairman. Mr. O'Brien. 

Mr. O'Brien. Ms. Ross, do you think that recent international 
events necessitate a re-evaluation of OCS development? 

Ms. Ross. The operating concept of the OCS program now is to 
move as quickly as we can into this area. We need to do a fairly 
extensive planning process, again largely mandated by the amend- 
ments that we are discussing today, to get there, but that has 
always been the principle behind the August 1977 schedule. That 
remains the department's purpose; and so, yes, we need to move as 
quickly as we can and we are making an effort to do that. 



18 

Acceleration in the sense of collapsing some of those milestones 
would be very difficult for us to achieve given the way that they 
are set out in statute now. 

Mr. O'Brien. In that regard, how many lease sales per year does 
the 5-year leasing program that you have under development call 
for? 

Ms. Ross. We have presented a number of options to the Secre- 
tary and we are at the final stages of his decision. We expect 
approval from him very shortly, but that has not occurred yet; so I 
cannot describe to you what that proposal will contain. 

We are analyzing a range of options that go from six sales a 
year, which is what we determined we could achieve administra- 
tively, given the resources that we have now, to a somewhat lesser 
pace, in order to be a little more cautious about Alaska and certain 
other environmentally sensitive areas. 

So we are operating within that range. 

The Chairman. Mr. Emery? 

Mr. Emery. Thank you very much, Mr. Chairman. 

I do have an opening statement which I will submit for the 
record and spare us all the pain of listening to it. 

The Chairman. Without objection, your statement will be insert- 
ed into the record at this point. 

[The following was received for the record:] 

Statement by Hon. David F. Emery, a Representative in Congress From the 

State of Maine 

Mr. Chairman, I very much appreciate the courtesies extended to me today so 
that I may participate in this hearing to investigate the status of oil and gas 
development on the Outer Continental Shelf. 

As you may suspect, my past interests in alternative energy sources, as well as 
my personal experience of living in Maine, a state whose energy consumption and 
energy needs are extremely high, have led me to study the current status of 
offshore oil and gas development in this country. The results of my investigation 
relative to U.S. oil reserves and offshore energy production brought home to me the 
absolute necessity of exploring and developing our own outer continental shelf. 

According to the Department of Energy, the United States currently has only 4.6 
percent of all known world fuel reserves. It is estimated that this approximates only 
10.3 years of proven crude oil reserves. By contrast, however, U.S. offshore oil 
production to meet future petroleum demands represents only 10.3 percent of the 
total world offshore oil production, which by itself is only 19 percent of total world 
oil production. It is evident to me that U.S. demand will soon outpace available 
supply, unless we employ our resources in the direction of offshore energy develop- 
ment. 

Consider also the U.S.'s dependence on OPEC oil. We currently buy 70.3 percent 
of our total petroleum imports from OPEC nations. Given the recent events in Iran, 
we can safely assume that our dependence on OPEC could substantially increase. 
This increased reliance, however, places us at the mercy of the seller, witnessed by 
Venezuela's recent 15 percent price hike on industrial fuel oil. 

Our advanced technological and industrial society has made us a leader among 
world nations. It has made us one of the wealthiest, healthiest, and most stable 
societies ever known. In order for this situation to remain, however, it is obvious to 
me that we must meet the demands made by our highly industrial economy by 
exploring and developing our resources in a sound and prudent manner. 

We passed the Outer Continental Shelf Lands Act Amendments last Congress. Let 
us now give this law a chance to work by encouraging offshore energy development 
according to the demands of our environment and according to the real energy 
demands of our society. I feel that delay must stop. Instead, we must meet the 
challenge of current energy needs by exploring our own resources as far as possible. 

Thank you Mr. Chairman. I look forward to working with members of this Ad 
Hoc Subcommittee to encourage the development of our offshore energy resources 
in the months ahead. 



19 

Mr. Emery. Thank you very much. 

I am sort of here wearing two hats today, one as an official 
member of this committee, and my status is going to be in limbo 
until we determine the structural and jurisdictional problems that 
have delayed the ultimate extension of this committee this year 
and what form they will ultimately take. 

My second hat is chairman of the Republican Energy Task Force, 
which will deal with a variety of energy-related issues, including 
this one, which certainly is exceptionally important; and I would 
make a very quick observation that with the difficulties in Iran 
and with the ultimate increase in the cost of imported petroleums 
and with the tremendous dependence in this country on oil and 
gas, I think it is essential that we proceed with all deliberate speed 
to develop an Outer Continental Shelf oil and gas leasing policy 
that will allow us to utilize those energy resources as quickly as 
possible. Naturally with all the safety and energy mental guide- 
lines that are necessary to guarantee to do the job properly and 
well. 

With that statement, I would like to proceed with some questions 
that relate to this general line of questioning that we have had this 
morning. 

During the oversight hearings held in December, Congressman 
Mineta of California raised questions about lease sale 53. He stated 
that although the Department of the Interior regulatory guidelines 
were a criteria to be used, that it, impact leasing regulations, 
equitable area of risk in leasing, competing uses of the water and 
coastline, interest in oil and gas developers. State laws and re- 
source goals, environmental sensitivity to the area, and also avail- 
ability of information predictive of probable environmental impact, 
these are not being given equal weight by BLM. 

Now, we again have this question being raised as it pertains to 
lease sale 48 in California. I am curious, since the oil needs of 
California are currently being met in ample supply that criteria 
are being given consideration, and since needs in the East and 
Midwest are a great deal greater at this point, why is not more 
attention being given to additional and increased leasing activities 
in the Atlantic; and, secondly, how will the various criteria be 
weighted in reaching a decision on what areas are going to be 
offered for lease? 

In other words, really, how do you set your priorities? 

Ms. Ross. Shall I speak about the present schedule, which is the 
one on which sale 53 appears? 

Mr. Emery. If you would 

Ms. Ross. The basis for setting this schedule had a number of 
considerations as to timing between sales. There are generally 3 
years between sales, so that we have sales in the North, South, and 
mid-Atlantic coming along regularly at 3-year intervals, and that 
has been considered again for the 5-year program, along with a 
possible acceleration of that. 

We are interested in leasing in California because it is a proven 
oil and gas area. 

The sale 53 that you discussed we are in the midst now of a very 
extensive consultation and environmental evaluation process that 
will get us to a sale in February of 1981', according to this schedule. 



20 

after very extensive discussions with people in that State. I am not 
sure if I am being responsive exactly to your question. 

Mr. Emery. Well, the intent of my question is basically to deter- 
mine why things seem to be going more slowly generally on the 
east coast than on the west coast, when our greatest supply or oil 
supply difficulty happens to be on the east coast. 

We have had problems with transportation of oil from West to 
East, to get the clearances to transport oil from Alaska to the 
lower 48 and really the biggest supply problem that we have seems 
to be on the east coast or at least those of us who live on the east 
coast, especially New England, feel that way; so the intent of my 
question is to see what attitude the agencies have, and you have, 
toward moving east coast development along more rapidly so that 
we can get the resource. 

Ms. Ross. Let me speak to the schedule, then, which you may 
have a copy of. 

There is a North Atlantic sale that was scheduled for January of 
1978. We hope to have that sale this year, now that the first circuit 
has lifted the injunction, as the chairman mentioned. 

We had a sale in the South Atlantic later on in 1978. We then 
had a mid-Atlantic sale, which we have just held. Then the first 
southern California sale comes up, which is due in June. 

We go along — we had a scheduled Blake plateau sale, which 
turned out not to be an appropriate area for lease; that was in the 
South Atlantic. 

But as we go along, we have another North Atlantic sale which 
is scheduled for late 1980 and we have another South Atlantic sale 
that is scheduled for 1981 and a mid- Atlantic sale directly after 
that. 

So that as it turns out we have five east coast sales on the 
schedule and two California sales. So we are being ambitious on 
the east coast. 

Mr. Emery. What problems do you foresee with delays in east 
coast leasing? We have had problems in the past with delays and 
more delays, court cases, unforeseen difficulties, and just a series of 
things which have stretched out the leasing prospects over a period 
of time. 

Are you facing legal challenges from environmental groups — are 
you facing technical problems; are you finding difficulty with the 
drilling interests? Why have we had delays on the east coast in the 
past, and do you anticipate the schedule that you have just given 
us will hold true or do you anticipate that there will be more 
delays that you possibly might predict? 

Ms. Ross. I think we see some good points and some bad points. 
We have kept to everything on this schedule except in New Eng- 
land and that was the result of litigation. 

When the amendments were passed, the discussion was that 
there are times set out, planned for consultation, so that we will 
not find ourselves with people having to go to court to resolve their 
concerns about the sale. 

What has happened is that in the South Atlantic, we were able 
to have that sale, on schedule, in March of 1978. Similarly, in the 
mid-Atlantic, we had that sale on schedule, in February of 1979. 



21 

In both instances, we were able to work with the State, with 
other parties, and proceed; both of those sales are the first frontier 
sales to have occurred without legal challenge. We are optimistic 
that that is a record that we can continue. 

The North Atlantic is a different situation. We hope to resolve 
that. We have been disappointed. We did the same consultations; it 
did not work out the same way. We will try again. We hope to 
bring it off. 

Mr. Emery. Getting back to another part of the question that I 
originally had asked, I have listed eight different standards or 
criteria for determining priority for lease sales. 

Could you comment on why these different criteria are not being 
given equal weight by BLM? 

Can you comment on the importance of each one of those catego- 
ries and maybe you disagree with the contention that they are not 
being given equal weight; but how do you use standards, what 
terms, what do you think is most important in determining lease 
priorities? 

Ms. Ross. I think that the philosophy that we are following is the 
one that I mentioned before; if we can figure out a way to responsi- 
bly get oil and gas resources, we will try to do it, so that the 
driving force is where do we think the oil and gas is. Then we have 
to consider all these other important considerations, then we can 
go from there. 

The question that you asked about BLM's procedures, I would 
ask Mr. Truesdell to respond to. 

Mr. Truesdell. It is very difficult to weigh the eight items that 
you listed. How do you weigh the esthetic problem that would 
result from shoreline people objecting to seeing rigs in their view? 
It is difficult to weigh this. 

It is difficult to weigh perhaps long-term biological impact, very 
difficult. If it is a short-term situation, it can be weighted in 
dollars. 

I think I would have to say that weights are different at different 
times. The stage we are in with the central and northern Califor- 
nia program right now is, we are doing an intensive environmental 
analysis in the preparation of an impact statement. 

At the end of this, weighting will be different than what the 
weightings that were made when we originally selected the tracts 
were. 

As Ms. Ross says, the initial weighing is for hydrocarbon poten- 
tial. We look at other weighings as we go along. 

The Secretary then has the final weighing and this is a difficult 
decision. 

Mr. Emery. Just one final question — and I thank the chairman 
for his patience with the time. 

In the North Atlantic, and I expect, from a number of other 
people from around the country where there is a traditional fishing 
industry, I know many of my fishermen — and I have 17,000 in my 
district — express a continuing concern over the impact of drilling 
operations on the George's Bank or drilling operations anjrwhere 
else on the Outer Continental Shelf east of New England. 

Always in the back of my mind and in the minds of constituents 
is the ultimate conflict that may occur between people who drill for 



22 

oil and people who catch fish; and I wonder if you could comment 
on some of the standards that you might apply to that concern, and 
whether or not you have had any difficulty in that area in deter- 
mining lease sites? 

Ms. Ross. We understand that concern. I think that the record of 
the program in other fishery areas, like the Gulf of Mexico, has 
been a good one, but that is not the North Atlantic. 

The people there are facing something new and unknown and we 
have to work with them to try to make it clear what it is we are 
going to do and what the effects on them will be. 

I understand that we will have to be cautious and work closely 
with people to discuss with them some things that could be threat- 
ening. We have done a number of things. 

This committee has established a fisherman's gear fund; we have 
a requirement, which we are putting in the regulations, for the 
marking of equipment on oil and gas activities so that in combina- 
tion, if there were to be a conflict with fishermen, a fisherman 
would be able to determine who is at fault through the marking of 
equipment or, failing that, go to the fund for compensation. 

We are working on a renewal of the George's Bank sale there, 
which I expect would have the kind of stipulations that we had 
before. There were some special stipulations there, for training of 
oil and gas crews in fishery practices; we have requirements of 
shunting, biological stipulations, that will require special care to 
protect the fish population. We have the authority on placement of 
structures and drill ships, for example, to try to keep the conflict 
with fishing down and keep the number of obstructions in the area 
to a minimum. 

As Don, again, points out, the Secretary of the Interior withdrew 
in his final notice of sale, a number of tracts explicitly on the 
recommendations of the people of Massachusetts for the fishery 
conflict that they were concerned with. So we feel we have an 
ability to work in the Gulf of Mexico, and we hope to proceed with 
the same kind of success in the North Atlantic; but we realize that 
we have to bring people along; it is a new activity there. 

Mr. Emery. As long as the powers that be are mindful of the 
concerns and aware that there are two aspects; one of which is the 
possible destruction of fishermen's gear. 

The other aspect is not to disrupt the breeding grounds and 
traditional migratory habitat of the great species in that area. 

I want to thank you very much for your direct responses to my 
questions. 

Thank you. 

Mr. Hughes [presiding]. Mr. Studds? 

Mr. Studds. Thank you, Mr. Chairman. 

I do not know how to address you, lady and gentleman, or people. 

I want to say one thing in general first, precisely because I am 
going to ask a couple of questions that will indicate my rather 
strong unhappiness with recent developments. 

Generally, I think this Department of the Interior, under the 
new Secretary, has done an absolutely superb job, both generally 
with respect to your overall responsibilities and particularly with 
your administration of the Outer Continental Shelf program. I 
believe there has been superb cooperation, at least from the 



23 

moment that Secretary Andrus and his folks came in. I think you 
have been uniquely sensitive to the frontier areas that I represent 
and with the concerns of Mr. Emery, as you well know, which are 
enormous. I think you have done that very, very well. 

I have been telling my own constituency for over 2 years that the 
department is in good hands, since my years in Washmgton, and 
the hands of people who understand its basic mission, which is as a 
steward of the public resources and they have done it fairly. That 
is the subsequent context in which my anger will be expressed and 
I want to make it clear. 

Ms. Ross. We will await your further remarks. 

Mr. Hughes. Will the gentleman yield for just a moment? 

Mr. Studds. Yes, Mr. Chairman. 

Mr Hughes. I just observe that the gentleman from Massachu- 
setts is mellowing and taking a little longer to get to the "but. 

Mr Studds. I will get to it. Mellowing does come with age, Mr. 
Chairman You know what else comes with age in this institution. 

On January 22, I wrote a letter to Mr. Gregg. Have any of the— 
did any of the four of you see that letter, or the response that I got 
back from someone else? 

Mr. Truesdell. Yes. I wrote it. 

Mr. Studds. Aha. 

The other three of you are excused. 

I wrote a letter on January 22, asking for two things. 

First of all, I pointed out that, given the delay way off schedule 
of sale 42, that it might make sense to delay the initial call tor 
comments on lease sale 52 until we learned something from 42, 
which has been sidetracked, as you well know, by its fate in the 

court system. , ^ . ^. , 

It seemed to me only logical to ask for new nominations when we 
had some new information, which we would have had had you been 
able to proceed under your original schedule for 42, and presum- 
ably it is one of the reasons for the 2-year space which I under- 
stand you to say is between sales, which is to enable us to learn 
from experience, to know the second time from nominations more 
than we did the first time. I made that suggestion, that we wait 
until we learn something about oil and gas and how fishing and 
the industry, the oil industry, could coexist. . .• i 

Second, and I must say to you in all candor, I was not particular- 
Iv optimistic about the response that I would get. I did anticipate it 
coming in the English language, but that is rather minor I really 
did not anticipate an overwhelmingly positive response to that but, 
quite frankly, I did anticipate a positive response to my second 
request, which was that the department not solicit industry or 
public comment on tracts closer than 50 miles to shore 

We had received some assurances with respect to the first lease 
sale. I was stunned, quite frankly, by the refusal or failure of the 
department to give us such assurances with respect to lease sale 5Z. 
Mav I say to you I was stunned on the face of it, not only for the 
substance but more particularly what I consider political inepti- 
tude of the first order. I do not believe that you or I or anyone 
thinks that the oil industry believes that anything is going to be 
leased within 50 miles of shore. 
Do you agree with that? 



24 

Mr. Truesdell. The geological evidence that we have, shorewide 
of 50 miles, is very, very low in hydrocarbon potential. 

Mr. Studds. Did you get any comments from industry expressing 
interest in that area? 

Mr. Truesdell. I have not looked at them, sir. They just closed 
this last week and we have not reviewed them as yet. 

Mr. Studds. But generally you agree with me that it is highly 
unlikely that there will be high interest within 50 miles? 

Mr. Truesdell. Yes. 

Mr. Studds. Why unnecessarily cause the public alarm and con- 
cern that you caused by requesting comment on those tracts and by 
refusing a request not to do so? 

Let me read to you from the letter which I gather you wrote. It 
was signed by someone else, I do not know, an acting associate 
director. 

But you say: 

The purpose for the call for nominations and comments is not only for obtaining 
industry nominations but also for soliciting comments from other interests. It was 
primarily to receive such other comments that the area of the call for sale 52 
included tracts as close as 3 miles from shore. 

Now, what in the world are you trying to tell us? You want to go 
back and reassure us that no one up there wants to lease within 50 
miles? What other interests? 

Mr. Truesdell. That would mean interests that would not want 
leasing; that would have uses in the area. A fishing 

Mr. Studds. You mean you do not know the answer to that 
question? 

Mr. Truesdell. We want any new information that has devel- 
oped over 3 years. 

Mr. Studds. Do you want to be reassured that the fishermen do 
not want you to lease there? 

Mr. Truesdell. It is not a question of leasing there. It is a 
question of driving boats or air traffic 

Mr. Studds. That is not what we asked for comments on. You 
had whole tracts and you wanted to know whether the people were 
interested in drilling or not drilling there. 

Mr. Truesdell. I think we tried to make it broader. If you read 
the call for nominations, it said on a tract-by-tract basis if possible; 
we want general information concerning leasing in the area and 
this would be other uses. What they would not want, for example, 
ship traffic. 

Mr. Studds. May I suggest to you, sir, if you are going to lease 
outside of 50 miles, it is highly likely you are going to have traffic 
within 50 miles getting there. 

Mr. Truesdell. But this can be regulated. 

Mr. Studds. Are you trying to tell me that when you call for 
comments on these tracts, you did not want comments with regard 
to whether or not there ought to be drilling there? 

Mr. Truesdell. No. That was one of them. 

Mr. Studds. All right. 

So why do you not give us the assurance that you are not going 
to do that? 

Ms. Ross. May I respond to that? 

Mr. Studds. I wish somebody would. 



25 

Ms. Ross. One of the principles — I hate to use that word a lot, 
but they tend to guide us — they come from the administration and 
the Secretary that govern the schedules that we are under now — is 
that all areas will contribute to oil and gas in an equitable manner. 

Mr. Studds. What do you mean, the whole geographic area of the 
country? 

Ms. Ross. Yes. 

Mr. Studds. Nobody is talking about that. 

Ms. Ross. In some areas, for example, in Alaska and, in fact, in 
almost all areas but the Atlantic, we have leases that go right up 
to 3 miles. They are carrying that risk. It is a greater risk if 
something should happen of some harm to them. 

It is true that — my knowledge is in line with Don's, and I think 
the Survey would agree — that the hydrocarbon potential there is 
low but you have something on the record that indicates why we 
are making the decisions that we are making I think is very useful. 

It is an effort to indicate why we are doing what we are doing. 
We have questions about the Iranian crisis; we have questions 
about why, how can we accelerate; can we do more; and our answer 
in this area will be, we do not propose to lease that, I suspect based 
on both the hydrocarbon potential and the use. 

So now we have that, like in other areas, that we want to make 
sure that we have the public input that we need. 

Mr. Studds. You are running the risk of equalling the political 
insensitivity of the industry itself. 

With all due respect, it seems that — like you do not have a clue 
to what public opinion is and I cannot imagine, unless you have 
had your windows closed and phone off the hook, that you do not 
know what is going on. Some of us have tried to wage a battle up 
there to persuade people that it is possible to conduct offshore 
drilling responsibly and in a way that minimizes the risk to the 
fishing industry, which is infinitely more important to that region 
and this country for anybody who can see beyond their nose, for 
centuries, for what little gas and oil that we find in George's Bank. 

In this instance, we have seen little understanding of that in the 
administration. 

Given the fact that both of you admit that it is highly unlikely 
that we are going to lease in that area anyway, because there is 
not any oil and gas, what kind of political ineptitude leads you to 
do things that will provoke the anger that you see in me and the 
people that I represent? It is just plain dumb and it is unnecessary 
trouble. 

We are going to have enough trouble up there as it is, given 
Murphy's law — not the chairman — about things going wrong when 
they can, and there is no need on this Earth for us to be creating 
problems unnecessarily for ourselves. I look at your faces without 
much hope, but I will renew my plea to make this one of the 
problems that you do not face up there. 

I have a little more difficulty defending Secretary Andrus and 
this administration on this subject and a lot of what I have said 
about the sensitivity of the new administration now does not sound 
quite so convincing as it did up until last week when I reached this 
wonderfully — with all due respect to you, Mr. Truesdell — perhaps 
you can translate a sentence in here for me; you wrote it. 



26 

You say, "As you know, even if tracts are included in the envi- 
ronmental studies, it does not necessarily mean that the tracts will 
be offered for sale." This is the sentence that I would like you to 
put into English, if you can. "The Secretary's deletion of the 
number of tracts in sale 42 offers a pertinent example of refine- 
ments in decision." 

What does that mean? 

Mr. Truesdell. The last sentence or the first? 

Mr. Studds. The last. 

I am going to submit that to the "Mumbletypeg" this month, I 
think. 

Mr. Truesdell. That was intended to show that the process of 
evaluating tracts for eventual offering for lease is long and ex- 
tended and it results in several decision points and the final one 
that the Secretary makes when he decides to offer it to the market 
for sale, and the last sale 42, a number of facts — in fact, most of 
the near-shore tracts which some were very close to 50 miles off- 
shore, were removed by the Secretary at the last stage. 

Mr. Studds. I understand that. 

Mr. Truesdell. This is what we are trying to say. 

Mr. Studds. Let me ask you this. Perhaps you can respond 
positively to this. 

Would you undertake an examination of the industry's interests 
and would you inform us and the public as soon as possible that 
there is no interest in areas 50 miles offshore and, if that is the 
case, that no one wants to lease the darned thing; that you get rid 
of this darned problem? 

Mr. Truesdell. Yes. That could be — that will be done very quick- 
ly. This is what we do in our normal course of business with the 
adjoining States; and we will provide you with the same analysis. 

Mr. Studds. Can you do that prior to the formal tract selection? 

Mr. Truesdall. Yes, sir. 

[The information follows:] 

Companies Nominating in Sale No. 52 

1. Murphy Oil Corporation. 

2. Exxon Comapny U.S.A. 

3. Chevron U.S.A. Inc. 

4. Mobil Exploration and Producing Services Inc. 

5. Houston Oil and Minerals Corporation. 

6. Tenneco Oil Company. 

SUMMARY OF INDUSTRY NOMINATIONS 

Nominated: 

Total 594 tracts, comprising 3,381,750 acres (approximately). 
High {4-6 nominations), 30 tracts, comprising 172,800 acres (approximately). 
Medium (3 nominations), 41 tracts, comprising 236,160 acres (approximately). 
Low (1-2 nominations), 523 tracts, comprising 2,972,790 acres (approximately). 
Number of tracts nominated within 50 miles, 68 tracts (all low interest nomina- 
tions). 
Closest tracts to share, 25 miles. 

APPROXIMATE GEOGRAPHICAL STATISTICS (CALL AREA) 

Distances from share, 3-160 miles. 
Water Depths, 19-1,250 feet. 
Number of tracts in call, 3,028 
Total acres in call, 17,249,252 acres. 



27 

SALE 42 NOMINATION — SUMMARY 

19 companies nominated — nominated acreage: 
Total, 1,927 tracts, 10,100,000 acres (approximately). 
High (9-12 nomination), 153 track, 871,000 acres (approximately). 
Medium (6-8 nominations), 259 tracts, 1,300,000 acres (approximately). 
Low (3-5 nominations), 603 tracts, 3,400,000 acres (approximately). 
Very low (1-2 nominations), 914 tracts, 5,100,000 acres (approximately). 

Negative Comments and Nominations Received for Sale No. 52 

1. Representative Gerry Studds — Congressman from Massachusetts. 

2. Virginia R. Younger. 

3. Sierra Club. 

4. Conservation Law Foundation. 

5. Valerie R. Schurman. 

6. Cape Cod Planning and Economic Development Commission. 

7. Friends of the Earth. 

8. The Martha's Vineyard Commission. 

9. Nantucket Fisherman's Association. 

10. Nantucket Island Chamber of Commerce. 

11. William T. Howard (APA). 

12. Board of Selectmen — Nantucket 

13. Nantucket Planning and Economic Development Commission. 

14. Nantucket Civic League. 

15. Mayor and City Council — Gloucester, Massachusetts. 

16. East Hampton Town Daymen's Association. 

17. National Resource Defense Council Inc. 

18. Nantucket Land Council Reference Fund Inc. 

19. Wood's Hole Oceanographic Institute. 

20. Kenneth L. Cody. 

21. Ann Piatt (National Parks and Conservation Association). 

22. Town of Nantucket Conservation Commission. 

23. Committe for the Protection of Georges Bank. 

24. Council of American Master Mariners Inc. 

25. Rep. Howard C. Gaboon (Massachusetts House of Representatives). 

26. Neil J. Cocker. 

27. Gene B. Herman. 

28. County of Suffolk. 

29. State of New York Department of Environmental Conservation. 

30. Governor King — Commonwealth of Massachusetts. 

31. John Mansfield. 

32. State of New Hampshire — Office of State Planning. 

33. Tori Haring Smith. 

34. Gloucester Fisherman's Wives Association. 

35. Mid-Atlantic Regional Fisheries Council. 

36. Messers. Rieser and Spiller, WHOL. 

Major issues 

Effects of oil and gas leasing on fisheries (almost all comments), effects of oil spill 
on beach environs, (majority), 50 mile exclusion from Nantucket Island (25%), 30 
mile exclusion from Massachusetts beaches, concern for shipping safety. 

Mr. Studds. Now, let me ask you, the — the Appellate Court in 
Boston, as you well know, suggested the possibility or suggested, 
urged your department to look into the possibilities of marine 
sanctuaries in the George's Bank area. 

Do you intend to conduct such analyses prior to lease sale 42? 

Ms. Ross. We are discussing that with the Solicitor's office now. 
Our expectation is that we will. 

Mr. Studds. That you will make such an analysis? 

Ms. Ross. Yes. 

Mr. Studds. If we persist in having difficulties with the depart- 
ment like this, it could solve them in a hurry, the designation of 
that area as a marine sanctuary. 



49-118 0-79-3 



28 

Ms. Ross. That is not apparent until we know what the marine 
sanctuary proposal is. 

Mr. Studds. What is the proposed date for sale of lease 42 now? 

Ms. Ross There is no date. We will be analyzing the opinion that 
we will try to meet and for instance, the milestones that are set in 
the OCS amendments and the scheduling and telling the court as 
soon as we can. 

Mr. Studds. Will 52 be 2 years after that, according to the 
general pattern that you described earlier? 

Ms. Ross. The question on that is the question of the 5-year 
leasing program; in other words, that sale date would come after 
March 1980, and would be governed by the new program, which we 
expect to have out in proposed form very shortly. 

Mr. Studds. OK. 

Mr. Chairman, I know I have exceeded my time. I happen to 
chair the subcommittee, which has jurisdiction over these marine 
sanctuaries programs. A few more letters like this and I am going 
to take an intense interest in the marine prospect out there. I 
would hope that we could get a little more response when I think 
we ask perfectly legitimate questions. 

You do a disservice to your department when you unnecessarily 
create public concern — that we have no shortage of public concern 
in New England at this point. We do not need any more. 

Thank you, Mr. Chairman. 

Mr. Hughes. Mr. Forsythe? 

Mr. Forsythe. Thank you, Mr. Chairman. 

I have a few additional questions here that I would like to pose. 
This question is directed at Mr. Powers, if we may. It is a question 
by our colleague. Congressman Dave Treen, who will not be here 
this morning. 

This question concerns section 8(g) of the 1978 amendments. 

As part of Congress' efforts to increase coordination between 
State and Federal Governments, we provided for a consultation 
procedure to alleviate State concerns that Federal lessees would be 
draining petroleum from beneath State lands. 

Briefly, we provided for consultation to determine whether a 
common pool exists. Then the secretary proposes a division of 
revenues from the common pool and the State is given 90 days to 
accept or reject the proposed division. 

During our December oversight hearings, Louisiana's Secretary 
of Natural Resources, William Huls, filed a statement concerning 
lack of such consultation in sale 51. The issues he cited involved 
key questions of State financing, such as provision for collection of 
State severance taxes on that portion of the oil determined to be 
from the State's share of the common pool. 

In six of the seven cases he cited, the State was collecting a 
higher royalty from lessees on adjacent State tracts. 

Mr. Treen tells us that these seven tracts were withdrawn from 
sale 51 to be included in sale 58 in July 1979, but still no consulta- 
tion between your office and the State of Louisiana has taken 
place. 

With less than 4 months to the sale, will section 8(g) work in sale 
58? Will Louisiana's Governor have 90 days to accept or reject an 
offer made after consultation? Can it work in the future? 



29 

That is a long question and I apologize. 

Mr. Powers. I understand it. tt i j i.- * fP 

When we met, I recall saying that Secretary Huls and his statt 
and myself were in telephone contact shortly before the hearmg 
and would be afterwards, after the hearing. Since that time, 1 have 
had two or three conversations— I do not remember the exact 
number— with Secretary Huls' staff. But we have not yet initiated 
the type of consultation that we understand the amendments to 

'^^The^ason that we have not initiated that consultation is, frank- 
Iv because we are having some difficulty in meeting all the re- 
quirements of the act in regard to the development and release of 
certain kinds of information. , ,^ . ^ ^ f i^ ;;i 

It is true that we withdrew about half a dozen tracts from sale 51 
because we were not able to meet that particular requirement of 
the law in time for the sale, and we are currently hopeful ot 
offering those tracts in sale 58 if, in fact, we are able to meet the 
requirements of the act. We have not intended to run a short fuse, 
so to speak, on the State of Louisiana, and skip any of the process, 
skip any of the steps. 

Mr. FoRSYTHE. But that is . , , .. r ^-L. n 

Mr Powers. We have recently received a letter from the Gover- 
nor and he stated that, in fact, that I had not initiated the consul- 
tation that had been promised earlier, and in fact I have not, 
because I have not had anything positive to say yet; but as soon as 
we are in a position to do that, we certainly will. 

Mr. FoRSYTHE. Obviously, that 90-day period of July sales is 
getting very close. 

Mr. Powers. Yes, sir. 

My calendar looks the same as yours. 

Mr. FoRSYTHE. Thank you. , . . iv/r o ^ 

My other question is; there have been complaints, Ms. Secretary, 
concerning the lack of drilling in the 1976 South At antic sale area. 

I would like to know how many exploration plans have been 
accepted and what is their status? 

Ms. Ross. In the South Atlantic sale? 

Mr. FoRSYTHE. Yes. n J.^ ^ 

Ms. Ross. I would ask the Survey if they are aware of that now 
or if not, we could provide it for the record. 

br Kash. Yes, Mr. Congressman; we are processing two exp ora- 
tion plans at the present time. We expect to have two rigs drilling 

in the South Atlantic area. , . i v u 4-v,^ fo/>f 

The slowdown in that area, as I understand has been the fact 

that companies are involved and waiting for the necessary rigs to 

"" Mr ^ FORSYTHE^ To extend that question perhaps a little more 
pointedly, I understand that there have been numerous attempts to 
Submit applications for exploration plans ^^^ ^hey W^^^^^^ 
accepted. Instead, the companies are being told that their plans 
must be cleared with all of the other agencies before DOI will even 

Would you comment on this situation? mi ^ • 4. 

Dr. Kash. I really cannot comment on that. That is not my 

understanding. 



30 

I will check into it and provide you with an answer. 
[The following was received for the record:] 

Applications for Exploration of South Atlantic Blocks 

No companies have been advised that their exploration plans would not be accept- 
ed until all other required Federal permits were secured. Seven plans have been 
received from three companies. Five of the plans from two companies were deter- 
mined to be complete and were distributed for State review. The other two plans 
were determined to be incomplete and the company was advised of that determina- 
tion 15 days after the plan was received. The company was also advised as to why 
the plan was determined to be incomplete. See letter below. 

U.S. Department of the Interior, 

Geological Survey, 
St Simons Island, Ga., February 22, 1979. 
(Attention of Mr. H. L. Bettis) 
Transco Exploration Co., 
Houston, Tex. 

Dear Mr. Bettis: In conjunction with your visit to the South Atlantic District 
office on February 7, 1979, you delivered copies of your proposed Exploration Plan 
and Environmental Report (ER) for South Atlantic OCS Blocks 1003 and 1005 
(Brunswick NH 17-2 Area). The Plans of Exploration and Environmental Reports 
were submitted for review in compliance with 30 CFR 250.34. 

Based upon a preliminary review of the information submitted, I have determined 
that your proposed Exploration Plan and Environmental Reports are incomplete for 
reasons explained below. I am therefore returning all of the information submitted 
with the exception of several file copies retained for our records. 

The following is a listing of the major reasons your Environmental Report is 
being returned as "incomplete" before being forwarded to the affected States and 
Federal agencies for review and comment. However, in order to avoid further 
confusion in the event that a revised ER is submitted and forwarded to the affected 
States for review, I consider other portions of your submittal to contain "minimal 
information." Thus, Transco should be prepared to furnish other information or to 
revise your ER again if comments from these States and other Federal agencies 
indicate that your ER does not contain sufficient "... site specific information 
available at the time of plan submission to the extent that such information is 
accurate, current, and applicable to the geographic area covered by the proposed 
exploration plan." (Source: NTL 78-1) 

1. (Block 1003 ER, page 3). — "There are no major shallow geologic structures 
within the block." This statement must be substantiated. Notice to Lessees (NTL) 
78-2 clearly states that data from preliminary conducted on leases in the Atlantic 
OCS must be interpreted by "... a professional competent in the appropriate field" 
a summary report complete with the author's name and signature shall be submit- 
ted to the Geological Survey. No such report is evident. 

2. (Block 1003 ER, page 10). — Your discussion on Sensitive Areas fails to mention 
the presence or absence of hard bottom areas on the lease area even though 
discussions on page 33 indicate that no such areas were detected. 

A summary report is required by 78-2 for interpretation of this nature. No such 
report is evident. 

3. (Block 1003 ER, page 11). — The discussion on Archeological and Cultural consid- 
erations contains a statement that "No man-made obstructions, cultural sites, or 
anomalous magnetic conditions were observed" after conducting a high resolution 
marine survey of the "project area". 

Again, a summary report is required by NTL 78-2 for interpretations of this 
nature. No such report is evident. 

4. (Block 1003 ER, page 12). — The statement on freshwater aquifers implies that 
acquifers underlying the lease area play an important role in the water needs of 
various coastal communities. 

Although a thorough discussion on freshwater aquifers is certainly vital to any 
ER prepared for the South Atlantic, the implication that aquifers underlying the 
lease area are utilized in supplying freshwater to coastal communities is considered 
misleading and inaccurate. 

5. General. — a. There is no summary report included for the unexploded ordnance 
(munitions) survey as required by NTL 78-2. 

b. No recognition is given to the location of the primary fishing areas for shrimp 
and crab in the discussions on pages 6-9. 

c. The Florida Manatee should be recognized as endangered. 



31 

In general, the same comments also refer to the ER for Block 1005. 

Additional comments are: (1) The discussion of the Contingency Plan for Oil Spills 
refers the reader to Appendix C, which is non-existent; (2) The complete copy of 
Decca Surveys' investigation of the suspected "hard bottom" area has not been 
submitted to the USGS as you state on page 34. 

As stated in our telephone conversation on this subject on February ^0, 1979, we 
hope to discuss these and other problems concerning your ER with you and repre- 
sentative of your contractor on March 5, 1979, in a meeting in this office. 

Paul E. Martin, 
District Supervisor, South Atlantic District. 

Mr. FoRSYTHE. I wish you would because if in fact there is a 
bureaucratic delay built in here somehow, one that is inipeding 
this movement at a time when we are trying to push for diligence 
on these leases, it seems to me we are indulging in a self-defeatmg 

process. . ^, ^ ^ r^u 

Dr. Kash. I checked with our representatives on the status ot the 
development in that area yesterday and the information that I 
received does not indicate that that is the problem. I will double 
check it and provide you with the information. 

Mr. FoRSYTHE. Thank you. 

Mr. Hughes. Thank you, Mr. Forsythe. 

Secretary Ross, if I could just take you back for a moment to a 
q-uestion that was asked by our counsel, Mr. O'Brien, he asked how 
many lease sales were contemplated in a 5-year plan, and you 
responded I believe that at least in 1980 the projection was for six 
lease sales in a year. 

Did I understand you correctly? 

Ms. Ross. What I indicated— what I meant to indicate was that 
there is a package of possibilities, options that have been presented 
to the Secretary that would range in the area from four sales to six 
sales a year in different locations in the Gulf of Mexico and in 
frontier areas. He is making his choice from within that range and 
when he does make the choice, his proposal will be sent to the 
Governor before coming to the Congress and the package that he 
used to make the decision will also be sent; so it will be apparent 

what he considered. . i .. i j 

Mr Hughes. What concerns me is the suggestion that we would 
be setting an inflexible number of lease sales in a given year, 
because it seems to me that is one of the problems that Mr. Studds 
touched on it just briefly— I also touched on it somewhat— the 
periodic sale of acreage just to comport to a schedule. 

I do not know that we can determine with any degree of accura- 
cy all the variables; very few contemplated the litigation that took 
a year as to lease sale 40; few contemplated the amount of time 
that George's Bank litigation took; indicating that we are going to 
have a certain number of lease sales, smacks of just leasing for the 
sake of leasing; and I would hope that that is not how we are 

approaching the 5-year plan. , . ^ ^ t a ^.u 4- 

Ms. Ross. I think you have a good point, Congessman. I used that 

as a summary statistic. But that was not the objective. 
There were all of the other things that the act requires us to 

consider and, in a rather summary way, I characterized it that 

way, but it is misleading to do it that way, and I think you are 

right. 



32 

Mr. Hughes. Mr. Studds also indicated that in his letter, at one 
point, it was requested that there be a delay. That was one aspect 
of his two-part letter, because of the litigation and the inability to 
make another analysis of just exactly what tracts should be offered 
in George's Bank. 

I made the same argument to the Department of the Interior a 
year ago, after the litigation was concluded relative to lease sale 
40, arguing that once again circumstances intervened and that 
perhaps we ought to take another look. 

I made the same argument with regard to the lease sale that just 
took place in February, lease sale 49, because lease sale 49 did not 
take into account the fact that we didn't have much of a pause 
between sales because of the litigation. 

I'm not so sure we had enough time to analyze the results from 
lease sale 40. 

Now, would it not make sense to have some built-in flexibility so 
that we could have sufficient time between lease sales to give 
industry and the Department of the Interior and others that have 
a role, time to analyze the results before we move on to leasing 
additional acreage in that area, that particular region? 

Ms. Ross. That is a good criterion to use, and we have tried to 
reflect it in the schedule and also in the proposal for the 5-year 
plan. 

What is involved here is one of the difficult balancing judgments 
that the Secretary is called on to make, which Don Truesdell 
mentioned. 

We intend to schedule the leases in such a way that, among 
other things, that information is available. When we get it set up, 
we face the question in sale 52, as we did in sale 49, about whether 
we proceed and the balancing there is what is the value of the 
extra information? You will never know everything that is out 
there until you get it all out of the ground, but in each stage, as 
Dr. Kash said, you learn a little more. What is the value of that 
information, and how do you weigh that against the value to the 
country in determining what is there and extracting it, if it is 
commercial. And of course, as we all know, the values on that 
second part of the balance pan are just tremendous. 

I was asked to calculate what it costs us to wait for the Depart- 
ment of Justice to tell us their competitive review— it was in the 
area of $5 or $6 million just to wait 30 days; that is, not to get the 
bids accepted and the money in the bank. That is money, but it is a 
measure of the value of the sale to the country, the value of our 
sale that is returned to the Treasury. So it is a difficult judgment. 

We think the information is valuable; that is why we have gone 
to on-structure and set these schedules with this spacing; but when 
we come up against this and say, is it worth it to put off the 
realization of the benefits that might be there, it is a difficult 
judgment and so far, the Secretary has wanted to proceed; that is, 
he has felt comfortable with the information. I cannot project the 
future, but it is a difficult judgment. 

Mr. Hughes. Well, the Secretary has been very determined in 
complying with arbitrary lease sales that have been set down and 
that is irrespective of intervening circumstances; and it has been 
suggested by some industry officials that there was not sufficient 



33 

time to analyze the drilling that is taking place now in the mid- 
Atlantic prior to the February lease sale, lease sale 49, particularly 
when you consider it was back in December, I believe, that the 
COST well, off structure, found significant show of hydrocar- 
bons , . . ^ X- 

Ms. Ross. Well, the industry position, that is very interesting, 
because they press us very strongly to keep on schedule. They say 
they planned for it; they want it to be reliable. They like it to be 
active, aggressive, but above all else, their information to us, if you 
set it down— we are doing our exploration, our geophysical work; 
we are making investments; we are developing capital to put up 
and bid; do not change that sale on us. There are a lot of voices in 

the industry. , . . ., • j ^ 

Mr. Hughes. There are a lot of factors that go into the industry 
decision, many of which we are aware of and I am sure many that 

we are not aware of. x- j i.u 

Obviously, the profit motive is the overriding motive and the 
industry has to determine what their capital availability is, what is 
available now, and in the future. There are a whole host of factors 
that go into the determination as to whether they are going to bid 
in a given area; and it is not always related to the seismic and 
geophysical information that they have available to them. 

I am not so sure that the present policy with regard to holding 
firm on a lease sale, because industry feels very strongly about it, 
is altogether relevant. I think that you, the Department of the 
Interior, have to determine what is in the public interest; I think it 
is important to have some degree of certainty for the industry so 
that the industry can plan; so that they can plan their entry into 
the capital market, so that they can plan their procurement, so 
that they can determine what their priorities are. But, the overrid- 
ing interest is the public interest. 

I am not so sure that we have the right mix as yet, and 1 do not 
think that we have to hold to an arbitrary standard at the present 
time because we do not have in place yet a 5-year plan. 

Let me ask another question. 

Do we have seismic and geophysical information for all the acre- 
age that was offered in the February lease sale 49? 

Ms. Ross. I would ask the Survey that. 

Dr. Kash. Yes; we do have. 

Mr Hughes. One of the criticisms from the General Accounting 
Office directed to lease sale 40 was that roughly 25 percent of the 
acreage offered had no seismic or geophysical information whatso- 
ever collected. . ^ i • i • r 

You are telling me that we had seismic and geophysical informa- 
tion on all the tracts that were offered, lease sale 49? 

Dr. Kash. Yes, sir, it is incomprehensible to me that— we have it. 

Mr. Hughes. You have it? 

Dr. Kash. Yes. ^ , j.„„ . . . ,. 

Mr Hughes. You indicated that one of the difficulties in the 
South Atlantic was that companies had difficulty getting jack-up 
rigs for that area. When did that lease sale take place in the South 
Atlantic? 

Dr. Kash. March 1978. 



34 

Mr. Hughes. March of 1978? Well, it is obvious that the avail- 
ability of rigs, jacked-up rigs and otherwise, is fluid. 

Dr. Kash. That is correct. 

Mr. Hughes. And in the past, I found that Interior has not paid 
very much attention, as much as they should, anyway, to equip- 
ment availability I am just hopeful that in the months ahead we 
will pay a lot more attention to capital needs and availability and 
equipment needs and availability, because obviously it has such a 
very direct relationship on our policy, I am just hopeful that even 
though we will have an accelerated leasing program, that we will 
have a program that will also take into account the industry's 
ability to explore and develop the acreage that already exists in 
their portfolios as well as what we are going to be making availa- 
ble to them. 

Mr. Emery? 

Mr. Emery. Thank you very much, Mr. Chairman. 

A few minutes ago you discussed some of the aspects of the 
leasing schedule. According to the time schedule in Public Law 95- 
372, the 5-year leasing schedule is due to be published. 

What is the status of that 5-year leasing schedule? Have we 
made the recommendations and when will it be available? 

Ms. Ross. We have done the work in the Department governing 
the procedures that will get us to the program. We have requested 
comment from the various parties that we were required to consult 
with. 

Mr. Emery. Who are some of those? 

Ms. Ross. With State and local governments, with the industry, 
environmental groups, with other Federal agencies. 

Mr. Emery. Which other Federal agencies? 

Ms. Ross. With the Attorney General, with the Secretary of 
Commerce on Coastal Zone Management. Are there others? 

Mr. Powers. With the Departments of Energy, Justice, EPA, 
CEQ, Defense. 

Ms. Ross. We have done that consultation and received material 
from a number of those groups and have prepared proposals for the 
Secretary. He has given us some guidance. 

On the basis of that, we are putting that into a final form. If he 
says, yes, that is what I meant, it will go to the governors, we think 
very shortly in a day or two. 

Mr. Emery. Can you outline some of those recommendations for 
lease schedule for us? 

Ms. Ross. I do not know where his approval is going to come out. 
That is, we have not received it yet. So I cannot tell you what that 
content will be. I do not know it for sure, no. 

Mr. Emery. We understand that the recommendation is going to 
be maybe five or six lease sales a year, possibly even less, and that 
does not really appear to be an accelerated program. We under- 
stand that the recommendation will be five or six lease sales a year 
offered for sale. The record over the last 10 years shows that when 
smaller tracts are offered the result is better. In fact, we have some 
figures that indicate that when the sale category is between 
478,000 and 700,000 acres, actually the larger percentage of the 
acreage offered is leased. When in fact the acreage approach is 1 
million acres, the percentage of the area available, that is finally 



35 

leased, is reduced and to be specific, approximately one-third of the 
acreage of a 1-million acre tract is leased, whereas nearly two- 
thirds of that in a smaller group. 

Would you comment on that? 

Ms. Ross. That is a very interesting finding. I have seen that as 
part of the production goals, but I have not had a chance to 
analyze them. Obviously, there are a lot of other considerations 
than the size of the offering in what is taken up by the industry. So 
I would want to look pretty closely at what lies behind these 
summary statistics, but it is an interesting result. 

I think you could ask yourself the question: Would you have 
leased more if some of these larger sales had been smaller? 

Would the industry have felt the same acreage was as interesting 
if you had not offered as much? 

I do not know, but it is interesting. They found an interesting 
relationship here which we will certainly discuss with them. 

Mr. Emery. It appears to me that after looking over some of the 
figures, looking at some maps, that it makes sense. Take the Balti- 
more Canyon area, that is a heck of a large area stretching from 
the Carolinas clear to New York, and no one really knows what is 
under that bottom without doing some expensive drilling. Now, it 
makes a lot of sense to me that if large tracts are leased in a 
relatively small area of the canyon, then all you are going to know 
after drilling and leasing that area is what lies in one relatively 
isolated portion. Whereas if a variety of smaller tracts were leased 
over that area, it would be like shooting a shotgun. The idea is you 
know a little bit about the area. 

How is the company going to react? Are they going to be inter- 
ested in drilling in an area where they definitely know something 
because there have been other tracts explored in that particular 
area, or are they going to be interested in examining other parts of 
the bottom that have not been tested or examined? 

That is a question that has to be analyzed, but the figures seem 
to indicate over the last 10 years, and I am sure they will need to 
be examined further; that they seem to indicate that the greater 
success and the greater interest is demonstrated when smaller 
tracts are available and they are spread out a little bit more. 

I would appreciate comment or analysis from your people. 

Ms. Ross. We will look at that. 

[The information follows:] 

Response to Mr. Emery's Query 

We have examined data on OCS lease sales over the past three years to determine 
the factors that most influence the percent of the tracts offered that are leased. 

Although there is some indication that offering more acreage results in leasing 
lower percentages, this relationship is not the dominant one, especially in the range 
from 300,000 acres to 1,500,000 acres per sale. In most cases in which larger 
offerings have resulted on lower percentages leased, the decrease has not been 
sufficient to result in leasing of fewer tracts in absolute terms. 

The resource prospects appear to have a stronger and more consistent effect on 
the percentage leased than the size of the offerings. Sales with good prospects, as 
measured by more intense bidding, also tend to result in higher percentage of 
offerings leased. For example, lease sales near developed areas of the Gulf of Mexico 
generally have better prospects, draw more interest, and produce higher percent- 
ages leased. 

Ms. Ross. I would make one comment on the distinction between 
the Gulf of Mexico and frontier areas. 



36 

The Gulf of Mexico is a known producing area, widely leased. We 
tend to offer tracts that are widely dispersed. They tend to get a lot 
of interest because they're known to be producing. If you were to 
control for the Gulf of Mexico in here, you might see interesting 
results. We would like to look at it and tell you what we thought 
after considering the points about the gulf and the other areas. Of 
course, the interest in the lease reflects the geology and you would 
have to control for prospectiveness of the areas — so there are a 
number of other things that you want to look at, but we will do 
that. 

Mr. Emery. The further comment that I will make is that we 
also have information that the schedule will include two or three 
tracts in the Gulf of Mexico as a part of the five or six tracts a year 
that are to be leased. Now that would leave three or four tracts a 
year for other parts of the country where we really do not know 
an)rwhere as near as much as we do about the gulf. Given the fact 
that three Presidents and various Members of Congress, several 
administrations, Secretaries of Interior and a variety of responsible 
people in the government over the last 10 years or so, representing 
several different political philosophies, I might add, have called for 
an accelerated program, it occurs to me that if we are leasing in 
areas that we know something about and not putting our best foot 
forward in areas that need to be explored, then this really does not 
appear to be an accelerated program, at all, especially if it is not 
too responsive to the concerns that the country is now facing with 
the need to develop domestic resources. 

I throw that out as an observation, and I feel that it would do 
well for you to look at that. 

Ms. Ross. We have looked at that in the 5-year program. 

Mr. Emery. Thank you very much. 

Mr. Hughes. Mr. O'Brien. 

Mr. O'Brien. Secretary Ross, what would be the effect on the 
OCS leasing program if we created a Department of Natural Re- 
sources within the administration? 

Ms. Ross. I think that remains to be seen. I understand that 
there is a proposal now and I understand the elements of it; that is, 
the major agencies that would be a part of it, but what the internal 
structure would be is not decided, and that would be, I would 
think, the important bearing on the question of how the program 
would operate. 

Mr. O'Brien. With respect to the formulation of the regulations, 
there has been some speculation in the press as to the action of 
staff members of the Environmental Protection Agency regarding 
the involvement of the inflation fighters in the administration and 
their regulatory process. 

Has there been any involvement by Mr. Kahn and his team in 
the formulation of OCS regulations and if not, will there be? 

Ms. Ross There has not been. I do not know of any basis for there 
being one at this point. 

We are doing our job under Executive Order 12044 to make sure 
that the regulations that we put in place are no more burdensome 
than to carry out the statute, and we have not had any inquiries 
that I am aware of. 



37 

Have you gentlemen? No? We do not expect any because the 
regulations that we are promulgating are not major cost imposing 
regulations in the sense of either delay or in the sense of direct 
cost to the private sector. 

Mr. O'Brien. Under section 15 of the act, two reports are re- 
quired to be submitted to Congress by the Secretary of the Interior 
within 6 months of the end of each fiscal year. One on the OCS 
activities for the past year and recommendations for improvement. 

The second on recommendations for promoting competition in 
OCS leasing. In connection with the second one, there are to be 
consultations with the Attorney General. 

How are those studies coming? Has work commenced on those 
yet? 

Ms. Ross. Work has begun on the first report on the OCS activi- 
ties. We are going to have to get started on the other report. 

There was some question about what fiscal year, since the act 
passed within days of the end of the fiscal year, but we have 
determined, I believe — I may have to correct this, but I believe we 
have determined that we ought to prepare one on the fiscal year 
preceding enactment and having made that decision, we'll proceed 
to do that. 

Mr. O'Brien. Thank you, Mr. Chairman. 

Mr. Hughes. Any of the members have any other questions? 

I just have one more. Secretary Ross. 

In the development of the 5-year plan, is the Department of the 
Interior taking into account that if indeed over a period of 5 years 
we are going to have certain constraints, financial and otherwise 
on the part of the industry in exploring, developing, hydrocarbons, 
that we are going to want to encourage the industry to in some 
instances have a well-balanced plan; that is, if we bring on line 
areas where there is high probability of hydrocarbons. 

For instance, if we have a shortage during that 5-year period of 
equipment and we cannot meet all our needs in all areas, just 
because the industry would be spread too thin are we going to try 
to determine a well-balanced plan so that we are not pulling rigs 
off of areas with high potential, to place them in areas with rela- 
tively low potential? 

Ms. Ross. The reason that we have gone out there is that other 
things equal, we are going to the areas that are high potential, so 
that that is a criterion for the program. 

I would mention once again that — and I think you will be talking 
with the Department of Energy — that they have a rather extensive 
chapter in these production goals. They provided us in draft form-— 
that speaks to the question of constraints, and they discuss rig 
availability and capital. They end up suggesting that perhaps seven 
sales a year, as many as seven sales a year, could be conducted and 
they do not appear to find any capital constraints or rig availabil- 
ity constraints controlling that. So if we are operating within that 
range, and if the analysis that they perform is something that we 
can rely on and we have it now for review, that would be perhaps 
responsive to your wish. 

Mr. Hughes. Thank you. 

One final question. Is the Interior Department reviewing the due 
diligence requirement? 



38 

For instance, the Chevron lease in the Santa Barbara Channel, 
which apparently has been resolved, is an example of a company 
that has waited for the full 5-year term before anything was done. 

I recall that there was an extension granted last November or 
December, but a rig was supposed to be placed on the tract in 
February. Is there any effort to try to redesign the due diligence 
requirement provisions in the lease so that there will be certain 
benchmarks that companies will have to follow so that they are not 
only looking at the due diligence requirement at the expiration of 
the lease but during the term of the lease? 

Ms. Ross. As I mentioned, the draft regulations that we have out 
on exploration plans do have a proposal that they be filed within 2 
years of the date of the lease; that would be such a benchmark. 

I think that we would be very cautious about going in a major 
way to telling operators how to conduct activities in something 
that is as quixotic as exploration. Where what you find determines 
whether you will drill another well and where there are consider- 
ations about subcontractors. As you know, for the groups of equip- 
ment and people and capital that is brought together here, it is 
very extensive. I think we are looking at it, but we would be 
cautious about setting a whole set of rigid guidelines. 

Mr. Hughes. Would you submit for the record the basis for your 
present procedure for determing whether bids should be accepted 
or rejected? 

You did testify about a year or a year and a half ago on that 
subject and I understand there have been some changes in the 
process of analyzing bids to determine whether it is in the public 
interest to accept or reject, and I am wondering, if we could receive 
that for the record. Without objection, so ordered. 

Ms. Ross. We can provide that. 

[The following was received for the record:] 

Bid Acceptance 

After a sale, each high bid is compared against two values: 

1. The mean of the range values (MROVK—The MROV is the Geological Survey's 
estimate of the value of the tract. The estimate is prepared using a computer 
simulation model which includes assumptions about geological, engineering and 
economic factors. The model used by the Geological Survey generates from 500 to 
2,000 values on each tract based on variations in input parameters. The arithmetic 
mean of all the values is the MROV. 

2. The discounted mean of the range of values (DMROV).— The DMROV is the 
MROV, discounted at 10 percent annually for 2 years. Thus, the DMROV is always 
less than the MROV. If a high bid on a tract is rejected, it is considered that in most 
circumstances it will not be possible to reoffer the tract for sale for about 2 years. 
The MROV is discounted to reflect the present value of the loss of revenue to the 
government for such a delay in receipts. 

If a high bid is equal to or exceeds the DMROV, the lease is normally awarded to 
the bidder. If the high bid is lower than the DMROV, it is put to a third test. 

3. Average evaluation of the tract (AEOTl— The AEOT is a mechanism whereby 
the estimates of the value of the tract by bidders, as expressed by the amount of 
their bids, and the number of bidders competing for the tract, are considered. The 
AEOT is computed by summing all bids on the tract and the MROV, and dividing 
the sum by the number of bids plus one. In this way the MROV is treated as if it 
were another bid. The reason the AEOT is calculated is because in some instances, 
if there is a sufficient number of bids on a tract, there may be a weight of evidence 
that the Geological Survey's estimate of value, as reflected in the MROV, is in 
disagreement with other knowledgeable estimators of the tract's value, as expressed 
by their bids. In such cases the value other estimators have put on the tract is 
useful information and should be considered in determining whether the high 
bidder should be awarded the lease. In most recent cases, the lease has been 



39 

awarded to the high bidder if the high bid is lower than the DMROV, but more 
than marginally higher than the AEOT, and if there are three or four bids or more 
on the tract. 

After a sale, all high bids are printed on a matrix along with the MROV, 
DMROV, and AEOT. This matrix is reviewed by the Secretary, recommendations on 
bid acceptance are made to him by his advisers, and the Secretary decides on which 
high bids to accept or reject. 

Mr. Miller. Will the gentleman yield? 

Mr. Hughes. I will be happy to. 

Mr. Miller. On the previous question of diligence, what guide- 
lines are placed now for a company to understand what their 
rights and obligations are going to be at the end of that lease, 
whether it be renewed or terminated, based upon diligence? 

Ms. Ross. I think that I would ask the survey, who implements 
that, to discuss the rules that they are operating under. I believe 
that they now have delegated authority to make those determina- 
tions. 

Dr. Kash. Yes, it is the position of the Department at the present 
time — it has been stated by the Secretary, it is his expectation that 
major exploration will be taking place during the primary term of 
the lease. The operating rules at the present time are that a lease 
will be extended if in fact drilling is taking place at the end of the 
primary term and if drilling continues with no more than a lapse 
of 90 days between the drilling of one well and the beginning of the 
next, there are no formal diligence regulations by the Department 
of the Interior or the geological survey. 

Mr. Miller. But the understood agreement is that I must drill 
on my lease some time prior to the end of the lease? 

Dr. Kash. That is correct. That has been the Secretary's state- 
ment and that has been the basis of his decision with regard to 
some of the units in California. 

Mr. Miller. To what extent does that philosophy go to the 
question of proci ' .ion? 

Dr. Kash. Well, you raise a very good question. 

Diligence really needs to be thought of, it seems to me, in two 
categories. 

One has to do with exploration, the other has to do with the 
production. Approximately a year and a half ago the Secretary put 
into the geological survey's budget additional manpower and 
money to establish a production diligence program within the geo- 
logical survey. That is most evident in the Gulf of Mexico where we 
have a distinct unit, which is in the business of looking after 
diligent production; that includes monitoring, investigating, looking 
after shut-in wells, investigating the possibility of additional drill- 
ing, that sort of thing. 

It is now in place and operating; that unit is investigating on a 
sequential basis, various fields in the Gulf of Mexico and I think is 
beginning to operate successfully in that area. 

Mr. Miller. What is the results of that? Have they told people to 
step-up production or to improve their capacity to produce or 

Dr. Kash. I have asked that question and the process is one that 
has to be underlined as a process. There appear to be two things 
that have happened. 

One is the establishment of the diligence unit, appears to have 
been something duly noted by the industry in anticipation of this 



40 

particular focus on production diligence. I believe that we have 
seen something of an anticipated reaction on the part of the indus- 
try. 

The second thing is 

Mr. Miller. I assume that anticipated reaction is increase in 
production? 

Dr. Kash. That is correct. The other portion of it is that almost 
all of the specific activities that take place on producing leases in 
the Gulf of Mexico require that permits be issued for shutting in 
wells, or carrying out almost every function, and this diligence unit 
reviews this and in general it is a process of discussion. The people 
working in that unit tell me that there has been additional produc- 
tion as the result of that process. But it is very seldom that it 
comes to a major case with regard to the overall development of 
the field, because that is not really the way in which we process 
the activities. 

Mr. Miller. Thank you for your answer. 

I just wonder, Mr. Chairman, if it might not be worthwhile if 
that unit could provide for this committee a summary of their 
activities and what they feel they have accomplished and what 
they anticipate? I think it would be very helpful to us to know. 

I do not expect a 3-year study but just a summary of what has 
taken place since they have come into existence and I would 
assume that their best expertise would be in the gulf. 

Dr. Kash. That is correct. 

Mr. Miller. But also what they anticipate in terms, as we bring 
more areas into leasehold arrangement, what they anticipate in 
the future, whether it has been worthwhile. 

Mr. Hughes. Secretary Ross, could that information be fur- 
nished? 

Ms. Ross. I expect it could. 

Mr. Hughes. Without objection, it will be entered for the record. 

[The following was received for the record:] 

Activities of Diugence Unit 

/. Enhanced recovery of oil and gas. — Pursuant to the provisions of section 15 of 
OCS Order No. 11, operators of Federal OCS oil and gas leases in the Gulf of Mexico 
are required to submit a plan for timely initiation of enhanced oil and gas recovery 
operations. Those plans to increase ultimate recovery under sound engineering and 
economic principles are required to be submitted with each annual Maximum 
Efficient Rate (MER) review. In the absence of an enhanced recovery plan, operators 
are required to submit a statement explaining why enhanced recovery operations 
are not feasible. 

The Diligence Section is presently reviewing these plans and statements to identi- 
fy reservoirs which require further analysis. 

Reservoirs requiring further analysis will be studied the Diligence Section. If it is 
determined that an enhanced recovery project should be initiated, the operator will 
be required to initiate enhanced recovery operations or to show cause why he should 
not commence such activity. When it is determined that a proposed enhanced 
recovery project should be modified, the operator is required to modify the conduct 
of the project accordingly. 

The activities under this portion of the diligence program should result in in- 
creased ultimate recovery of oil and gas. This increase in ultimate recovery should 
be reflected in the rate of production from the reservoirs which are subject to an 
enhanced recovery program. 

Currently, there are 269 active supplementary (enhanced) recovery projects in the 
Gulf of Mexico. Most are attic oil recovery projects which are useful in recovering 
updip oil in the relatively small steeply dipping reservoirs which are prevalent in 
the Gulf The progress of these projects is monitored monthly. 



41 

Operator's submit their annual reviews of the MER and production for each year 
on or before September 1. The Rate Control Section reviews these submittals from a 
conservation viewpoint prior to approval or disapproval. The Reserves Section has 
prepared and maintains reserves to production (R/P) ratios, utilizing data submitted 
in support of MER; and Maximum Production Rates (MPR). These ratios are main- 
tained by field and reservoir, for 72 oil fields (375 reservoirs) and 69 gas fields (195 
reservoirs). Those fields account for approximately 85 percent of the production 
from the Gulf of Mexico. MER limitations on gas reservoirs imposed by OCS Order 
No. 11 have been removed requiring operators to produce gas reservoirs at the 
safest maximum production rate economically feasible. 

Those fields and reservoirs exhibiting reserves to Production rations which appear 
to be to great are identified for further study by the Diligence Section. 

2. Field studies. — As of March 1, 1979 five field studies involving approximately 
390 oil and gas reservoirs had been completed. Of the three other field studies in 
progress, one was 85 percent complete. 

One of the completed field studies verified that there appeared to be no additional 
potential for increasing production. The field was over 70 percent depleted of its oil 
and gas reserves and we were unable to indentify any additional development or 
enhanced recovery operations that might result in increased producing capability or 
ultimate recovery. 

One of the completed studies identified several possibilities for increasing produc- 
tion capability. At the time of the study, the production capability of the field was 
approximately 529 MMCF per day. In January 1979, the productive capacity was 
602 MMCF per day, as determined from required well tests. This increase was 
attained primarily through required additional development, i.e., eight workovers 
and recommendations, and the drilling of three additional development wells. The 
field study also was instrumental in identifying the need for a deep test exploratory 
well and additional compressor capacity to maintain maximum deliverability. The 
deep test is scheduled to be commenced in April 1979, and installation of the 
additional compressor capacity is expected to be completed by the end of April 1979. 

The results of three of the completed studies are currently being reviewed and the 
indentity of any operations considered feasible to increase production will be for- 
warded to the Chief, Conservation Division. Tentatively, it appears that these field 
studies will indentify workover and recompletion operations together with addition- 
al drilling operations and increased compressor capacity as means to increase ulti- 
mate recovery and production capacity. One of the three fields is still actively 
developed but, in compliance with our request, the operator filed an amended Plan 
of Development in March 1978 calling for additional drilling operations. Our over- 
sight activities in this case prompted the operator to reassess the current develop- 
ment and production plans with regard to increased ultimate recovery and to an 
accellerated increase in production capability. Where an operator accellerates from 
newly perforated reservoirs does not usually result in an increase in the current 
total daily field production rate. However, the increased does significantly offset the 
decline in the daily production rate being experienced in the older producing reser- 
voirs. 

One of the unfinished studies is about 85 percent completed and is being actively 
pursued by a special task force. Although this is probably the largest and most 
complex field in the Gulf of Mexico, the study should be completed in two to three 
months. 

The other two studies are in varying stages of completion but are relatively 
inactive at the present time due to the need to reassign personnel to more pressing 
priority projects. Work on these studies will be resumed as soon as personnel 
become available. 

At this time, we do not plan to perform a sophisticated study of each and every oil 
and gas reservoir in the OCS Gulf of Mexico. However, during the process of 
conducting reservoir studies for other purposes, such as estimation of reserves and 
MER determinations, our geologists and engineers indentify oil and gas fields and 
reservoirs which appear to have potential for increased production capability. They 
will also be able to identify oil and gas reservoirs and fields, which have little or no 
potential for increased ultimate recovery or production capacity. We intend to 
concentrate on those fields and reservoirs which preliminary analyses indicate have 
the greatest potential for increased production capability. 

In fiscal year 1979, we plan to complete the three full-scale field studies involving 
about 200 oil and gas reservoirs that are currently in progress and to initiate six 
additional field studies. The six additional studies will involve about 400 separate oil 
and gas reservoirs. Our initial estimate of 14 field studies for fiscal year 1979 had to 
be reduced to six as a result of our having to reassign personnel from this program 



42 

to implement a new high priority program required by the Natural Gas Policy Act 
(NGPA). 

In fiscal year 1980, we will finish any studies not completed in fiscal year 1979 
and initiate 10 additional field studies, involving about 700 oil and gas reservoirs. 
The number that can be completed is dependent upon when we can return person- 
nel to these projects. However, under current and estimated future conditions of 
personnel availability, we plan to complete in fiscal year 1980 seven of those studies 
initiated in fiscal year 1980. 

In fiscal year 1981, we will finish those field studies that are not completed in 
fiscal year 1980 and initiate 10 additional, involving about 700 oil and gas reser- 
voirs. 

We have made no specific projections of output beyond fiscal year 1981 but expect 
to continue field studies at the rate of about 12 per year until all significant fields 
and reservoirs have been reviewed. It is estimated that this work will continue 
through about fiscal year 1984 to complete what we consider significant fields at the 
time. This projection, however, is subject to change based on rates of depletion and 
the development of new field discoveries. 

(3) Gas flaring.— At the time OCS Order No. 11 was modified to formally control 
the venting and flaring of natural gas produced with oil (oil-well gas) July 1974, 
approximately 12 percent of all gas produced in association with oil was being 
flared. This flaring of oil-well gas resulted from emergency and other situations; 
which required that the produced gas be vented or flared or the production of the 
associated oil be shut-in. Non emergency situations included those where the com- 
pression facilities were not available to facilitate beneficial use of the gas then being 
vented or flared. 

In October 1974, there were 35 oil-well gas flare situations that were classified as 
nonemergency. Those flaring situations were investigated to determine the feasibil- 
ity of installing compression facilities and eliminating the flaring of oil-well gas. As 
of December 1978, there were only 12 locations where oil-well gas was being vented 
or flared for extended pjeriods with the approval of the Oil and Gas Supervisor, a 
reduction of 65 percent. 

In March 1975, further guidelines which related to the flaring of oil-well gas were 
established and the portion of oil-well gas flared was reduced to about five percent 
of total oil-well gas produced. The percent of oil-well gas flared fluctuates from 
month to month. Since October 1977, the average percent of oil-well gas flared has 
been 4.85 percent. Attached is a table showing the volume of oil-well gas flared and 
the percentage of produced oil-well gas which was flared each month since October 
1977. The listing stops with the month of December 1978. Total produced oil-well gas 
in December 1978 was 30,794,831 MCF or 8.26 percent of all gas (oil-well and gas- 
well gas) produced in that month. The total volume of oil-well gas which was flared 
amounted to 0.37 percent of the total volume of gas produced in December 1978. 

We closely monitor temporary emergency flaring of oil-well gas. We will continue 
our concerted effort to reduce the total amount of oil-well gas flared during each 
emergency to a minimum. We will continue our critical review of the reasons for 
extended gas flaring situations with the view to eliminate all unnecessary gas 
flaring. 

FLARED 

Percent ol 
Total oil-well total oil-well 

Month and year gas flared (MCF) gas produced 

October 1977 

November 1977 

December 1977 

January 1978 

February 1978 

March 1978 

April 1978 

May 1978 

June 1978 

July 1978 

August 1978 

September 1978 

October 1978 



2,103,137 


6.89 


1,512,618 


4.90 


1,469,774 


4.56 


1,680,098 


5.67 


1,329,689 


4.91 


1,498,131 


4.60 


1,274,862 


4.30 


1,441,916 


4.56 


1,488,995 


4.71 


1,198,267 


4.41 


1,498,647 


4.78 


1,377,275 


4.75 


1,513,223 


4.79 



43 

FLARED— Continued 





Month and year 


Total oil-well 
gas flared (MCF) 


Percent of 
total oil-well 
gas produced 


November 1978 




1,295,408 


4.30 


December 1978 




1,489,973 


4.84 











4- Reporting and monitoring of shut-in wells. — A shut-in well report has been 
developed to fulfill the requirements of the OCS Lands Act Amendments of 1978. 
This report includes the status of all restorable shut-in wells that have previously 
produced and new wells that are completed but waiting on installation of surface 
equipment. The report includes, for each well, the reason the well is in a nonproduc- 
ing status, the action or type of work required to place the well into a producing 
status, and the date that work to place the well on production is expected to start. 

Operators submit their best estimate of the date that corrective action will be 
initiated to place each shut-in well on production. Timely performance of the 
remedial operations will be reasonably required. Production will be required if the 
workover is successful. Many workover operations are not successful, however, and 
an operator may choose to attempt a more complicated major workover prior to 
abandoning the well. All such actions are continuously monitored by the USGS to 
assure continued progress toward the restoration or commencement of production. 

Presently, the shut-in well status records are updated monthly. District personnel 
in each District verify the shut-in status of wells through field checks and reviews of 
field records in conjunction with routine platform inspections. This field verification 
program was implemented in December 1978, and the status of shut-in wells are 
being verified at the rate of approximately 400 wells per month. The wells restored 
to production and removed from the list of shut-in wells, and those shut-in and 
added to the list of shut-in wells during a month are also monitored. An average of 
175 wells are placed on production each month by: (1) Restoration of production by 
workover operations; (2) restoration of production by the recompletion of a well in a 
different zone; (3) a new well completion. Approximately 75 percent of the wells 
placed on production each month are wells that are restored to production by 
reworking the existing producing zone. An average of 184 previously producing 
wells are added to the list of shut-in wells each month. The following is a listing by 
month of the rate at which producing wells are going off production and the rate at 
which shut-in wells are being restored to production: 



Month 



Year 





Wells placed 
on production 
eacti month 
by new or 
recompletion 


Wells shut-in 
having pro- 
duced tne pre- 
vious month 


1977 




136 




213 


1977 




108 




168 


1977 




159 




172 


1977 




205 




140 


1977 




202 




234 


1977 




189 




180 


1977 




157 




199 


1977 




158 




126 


1977 




130 




216 


1978 




165 




199 


1978 




150 




199 


1978 




163 




163 


1978 




199 




207 


1978 




216 




185 


1978 




246 




167 


1978 




165 




198 


1978 




184 




181 


1978 




197 




201 


1978 




175 




181 



April 

May 

June 

July 

August 

September . 

October 

November .. 
December .. 

January 

February.... 

March 

April 

May 

June 

July 

August 

September . 
October 



1+9-118 



79-1+ 



44 





Month 


Year 


Wells placed 
on production 
each month 
by new or 
recompletion 


Wells shut-in 
having pro- 
duced tne pre- 
vious month 


November 

December 




1978 

1978 


194 
191 


180 

155 



In the future, a list of all wells scheduled to be reworked during a calendar 
quarter will be generated on a quarterly basis. The projected workover activities of 
each operator will be monitored to assure that timely progress toward the restora- 
tion of wells to production is maintained. Reports will also be generated listing all 
shut-in wells in an active or inactive drilling status, shut-in wells with no future 
utility, and shut-in wells without future utility but which may have a potential for 
additional production from another zone. All these reports will be used in the 
continuous monitoring of the status, or changes in status, of shut-in wells and in 
monitoring projected target dates for work to restore wells to production. Wells 
reported as having no future utility will continue to be monitored as to possible 
potential utility which may have previously been overlooked, and wells in drilling 
status will be monitored to insure they are completed and placed on production as 
rapidly as possible. 

5. Suspensions of production plans of exploraton and plans of development and 
production. — We have reviewed 92 applicatons for Suspensions of Production and 39 
application for revisions of existing Suspensions of Production during the past 6 
months. Such reviews include a thorough analysis of the operator's plans for future 
activities, recommendation for revisions of those plans and proposed schedules for 
accomplished, identification of various options available to decision makers, and the 
development of a recommendation for action. 

During that time, we have reviewed, from a diligence point of view, 78 lease Plans 
of Exploration, 27 lease Plans of Development and Production, and 81 unit Plans of 
Operations and development. These reviews consist of a comparison of the explora- 
tion and/or development and production activities planned by the operator with 
what is known by USGS about the potential oil and gas producing characteristics of 
the geologic structure. This comparison is made for the purpose of assuring prompt 
and efficient lease exploration and development. We identify unleased tracts offset- 
ting the leases and unit areas covered by the plan that may have potential for 
future leasing. 

The strict review accorded applications for Suspensions of Production, Plans of 
Exploration, and Plans of Development and Production have resulted in operators 
planning their activities much earlier in the life of a lease and, as a result, the 
period of time between lease acquisition and the commencement of production 
should be significantly shortened. 

Operations are planned, commenced, and continued on a more accelerated sched- 
ule and where possible, concurrently performed. For example, nine of the unit plans 
we reviewed were initially disapproved because the proposed development was not 
considered adequate. Seven of the nine plans were amended to our satisfaction, one 
unit agreement was terminated, and termination is being proposed in the other 
case. We will continue to analyze and make recommendations with regard to each 
application received for Suspension of Production, Plan of Exploration, and Plan of 
Development and Production from the point of view of prompt and efficient explora- 
tion and development. We estimate that we will review, analyze, and process ap- 
proximately 180 applications for Suspensions of Production or revisions thereto, 400 
lease Plans of Exploration and Plans of Development and Production, and 160 unit 
Plans of Operations and Development each year. 

Mr. Hughes. Mr. Forsythe. 

Mr. Forsythe. I have one additional question, Mr. Chairman. 

Geothermal, as I understand it, is the only regulation that has 
been promulgated to date. As you know this is going to be of 
substantial interest in the gulf. How do we feel that the environ- 
mental consideration in Public Law 95-372 can adequately apply to 
this, since the facility for electricity will have to be built in the 
gulf? 

Ms. Ross. You are speaking of geothermal in the gulf? 

Mr. Forsythe. Yes, in the gulf. 



45 

Ms. Ross. But offshore. 

Mr. Truesdell. We have just modified the regulations in con- 
formance with the new act, as you point out, to permit us to issue 
geothermal leases; but going beyond into the step that you men- 
tioned, we have not looked at it yet. There is a kind of a futuristic 
program, but we are putting the regulatory mechanism in place so 
that we can issue geothermal leases. 

Mr. FoRSYTHE. Do you have any prime prospects for leases in this 
area again? 

Mr. Truesdell. There has been several conferences in the Gulf 
of Mexico recently. Maybe USGS could respond to the potential as 
they see it. 

Dr. Kash. There are two things going on. The USGS has a 
program which is investigating geothermal resources in the Gulf of 
Mexico, and we are also cooperating with the Department of 
Energy. The Department of Energy, of course, is interested in the 
development of the economically viable technologies for utilizing 
geothermal resources. It is my impression that at this stage of the 
game no one believes it is economically attractive to move to the 
point of development of geothermal resources on the Outer Conti- 
nental Shelf. 

Now, I would note one thing, and you may have had part of your 
intent being that some of the geothermal resources in the Gulf of 
Mexico are thought to have substantial amount of gas, of methane 
in them; and, again, the Department of Energy has a program that 
is being carried on in connection with that, but it still is very much 
at the research and development stage, and I know of no evidence 
of any groups in the private sector wishing to buy leases. 

Mr. Forsythe. Well, you mentioned the gas and this is the first 
that we have heard about it in connection with the situation. So 
you could be in a situation of having combination of geothermal 
and gas and that would have to come back under your leasing 
program, for a hydrocarbon lease, would it not? 

Dr. Kash. That is correct. 

Mr. Forsythe. OK, thank you. 

Mr. Hughes. Thank you, Mr. Forsythe. 

And do my colleagues have any further questions? 

If not, I want to thank the panel: Secretary Ross, Dr. Kash, Mr. 
Truesdell and Mr. Powers. We appreciate very much your respon- 
siveness and your patience and at this point we will recognize the 
next panel. 

Thank you so much. 

Mr. Hughes, I would request Mr. Walsh, Mr. Whiting, and Mr. 
Langenkamp to come forward. We are going to ask you to appear 
as a panel. 

Mr. Walsh is deputy administrator. National Oceanic and Atmos- 
pheric Administration, Department of Commerce; Mr. Whiting is 
deputy assistant secretary. Occupational Safety and Health Admin- 
istration; and Mr. Langenkamp is the deputy assistant secretary. 
Oil, Natural Gas and Shale Resources, Department of Energy. 

We have copies of your statements, which without objection, we 
will receive as part of the record. I wonder if we can ask you to 
summarize as best you can, your statements, so that we can get 
into the questioning at the earliest possible time. 



46 

We will start first with you, Mr. Walsh, as our leadoff witness. 
[The following was received for the record:] 

Testimony of James P. Walsh, Deputy Administrator, National Oceanic and 
Atmospheric Administration of the Department of Commerce 

Mr. Chairman, members of the select committee, I am pleased to appear before 
you today to discuss NOAA's implementation to date of the Outer Continental Shelf 
Lands Act Amendments of 1978, Pub. L. 95-372 (the "OCS Amendments"). 

I know that you had requested the Secretary of Commerce to personally appear. 
However, her schedule would not permit her to accept your kind invitation, and I 
have been asked to represent her views. 

When I testified before the Committee on December 7, 1978, I described how the 
OCS Amendments change or add to NOAA's direct program responsibilities. Since 
that date, NOAA has taken a number of actions to live up to those responsibilities 
and has been granted additional duties under the Oil Spill Title of the OSC Amend- 
ments. I would like to briefly describe our actions and then answer any questions 
you may have. 

Coastal Zone Management 

First, I would like to mention NOAA's efforts to implement Title V of the OCS 
Amendments — amending the Coastal Zone Management Act. 

The OCS Amendments significantly modify the Coastal Energy Impact Program 
("CEIP") established under section 308 of the Coastal Zone Management Act of 1972. 
Both the formula grants provision (section 308(b)) and the planning grants provision 
(section 308(c)) have been amended, as has been the Federal consistency require- 
ment set out in section 307. 

In response to the amendments to the Coastal Energy Impact Program, revised 
proposed regulations were published in the Federal Register on January 15, 1979, 
and the comment period closed on March 3, 1979. A number of comments were 
received, and these are being evaluated in preparation of final regulations. Final 
regulations should be published in April of this year. 

Most of the changes to the program, and thus the regulations, were those mandat- 
ed by the statute, such as the 2 percent minimum share and the 37 Va percent 
ceiling, the changes in the formula, and other related changes. At the same time, a 
number of administrative changes were proposed to simplify and improve program 
operations. So far, these changes have been generally non-controversial and we 
expect the program to go forward on schedule. 

Concerning preliminary allotments of the 1979 formula grants under Section 
308(b), on the basis of the criteria in the statute and regulations, only Hawaii, 
Maine and New Hampshire were found not to be states affected by OCS oil and gas 
activities. Pennsylvania funds were held aside pending a determination whether it 
is eligible to receive CEIP funds in light of the status of its coastal zone managment 
program. Of the remaining 20 states, Alaska, Florida, Georgia, Louisiana, and Texas 
were the only ones to receive more than 2 percent share provided for in the 1978 
amendments. 

NOAA has also proceeded with the implementation of the OCS State Participa- 
tion Grants provision provided under Section 308(c)(2). A Technical Paper was 
released for comments on December 14, 1978, and the development of proposed 
regulations was begun on the basis of that Paper and the responses received from 
the states and other interested parties. The proposed regulations will be published 
in the Federal Register within the next few weeks. 

Mr. Chairman, I am aware that you have written the Secretary about funds for 
these state grants and I have brought with me her response, and a statement 
explaining the Department's present position. 

As you know, the fiscal year 1979 and fiscal year 1980 Administration Budgets do 
not include funds for those grants. In light of the time required to establish the 
grant program, we do not believe that fiscal year 1979 funding would be of great 
use. Applications for funds could not be received or evaluated until the final 
regulations are adopted, so fiscal year 1980 would be upon us before funds could be 
distributed. NOAA and the Department of Commerce are continuing to explore 
appropriate means for funding this program in fiscal year 1980. 

To summarize, the matter is under review by the Department and several ideas 
have been considered. At the present time, we are considering a reprogramming of 
CEIP money to be used to fund these grants. However, this must be approved by 
0MB and both the Senate and House Appropriations Committees. Mr. Chairman, I 
would now also like to provide for the record the Secretary's letter and the Depart- 
ment's comments. 



47 

Offshore oil spill fund 

When I testified on December 7, 1978, I indicated NOAA's interest in assisting in 
implementing the Oil Spill Fund provision by having trustee responsibility for 
certain natural resources. 

Under Section 303(b)(3), the President "as trustee for natural resources over 
which the Federal Government has sovereign rights or exercises exclusive manage- 
ment authority" may assert claim for funds which shall be "available for use to 
restore, rehabilitate, or acquire the equivalent of such natural resources. Under 
Executive Order 12123, published in the Federal Register on February 28, 1979, 
NOAA is delegated the authority of the President to assert claims for resources 
subject to its jurisdiction. To implement this responsibility, the Office of Resource 
Coordination and Assesstment in the Office of Coastal Zone Management has begun 
exploring the legal and institutional elements of this activity and has prepared 
comments, which were submitted by NOAA on the Coast on the Coast Guard's 
regulations for the administration of the oil spill pollution fund. Measuring the 
value of natural resources damaged or destroyed by activities under the fund's 
jurisdiction is a complex and difficult one, but the full implementation of this 
trusteeship responsibility is vital to the long run wellbeing of our marine environ- 
ment. 

The fishermen 's contingency fund 

As you may know, we have held a series of workshops on implementation of title 
IV of the OCS Amendments, which estgablishes a Fishermen's Contingency Fund. 
Four workshops were held: In New Orleans, Louisiana, on February 9; in Boston, 
Massachusetts, on February 13, in Anchorage, Alaska, on February 21; and in Los 
Angeles, California, on February 23. 

Prior to these workshops, we published an "advance notice of proposed rulemak- 
ing in the Federal Register, describing the issues that we thought would be ad- 
dressed. Fishermen, oil and gas industry representatives, state governments, and 
interested citizens all presented testimony and other information at the workshops. 
We now have a clearer understanding of the various points of view, and we are 
attempting to resolve them as quickly as possible and to issue proposed regulations 
for the Fund. We agree with Congressman Breaux, as detailed in his letter to the 
Administrator, that whenever possible, the regulations should be clear, concise, and 
understandable to the fisherman. 

I would like to highlight a view of the issues raised and discussed at these 
workshops and that effects we are making to resolve conflicting interpretations of 
the legislative changes. Perhaps the greatest concern to the fisherman at the 
hearing is the placing of the burden of proof on a claimant to show OCS-related 
damages. Under the OCS Amendments, only damanges resulting from OCS explora- 
tion, development and production are eligible for recovery from the Fund. Title IV 
also provides that the fisherman is to show that the injury to his gear or vessel is 
OCS related. On the other hand the Fund provides that there is to be a presumption 
in favor of recovery if the fishermen can show: (1) That his vessel was being used for 
fishing in an area affected by OCS activities; (2) that he made a prompt (5 days) 
report on the location of the item causing the damage, and the nature of the 
damage; (3) that there was no record on charts or in a Notice to Mariners that the 
item causing the damages was listed in such area; and (4) that there was no proper 
surface marker or buoy attached to the item causing the damage. 

At the workshops, fishermen argued that forcing them to meet strict burden of 
proof requirements would cause extensive delays because of the need to investigate 
the causes of the damage and also would result in great costs because of the need to 
hire expert divers and other personnel to positively identify a submerged object. Oil 
company representatives, on the other hand, used a strict burden of proof so as to 
avoid unjustified claims and awards. 

We are presently exploring alternatives to resolve the burden of proof problem to 
resolve some of these conflicting concerns. 

Another issue raised at the workshops was the need for NOAA services to fisher- 
men in handling and processing claims. We believe the ideal situation would be to 
have a NOAA employee, from the National Marine Fisheries Service, available 
locally to help the fishermen prepare, file and process claims either against the 
Fund. However, program budgetary and personnel constraints may preclude our 
providing such an employee. If an employee is available, we would concentrate our 
efforts in the Gulf area, because most OCS exploration and development activities 
are presently located in the Gulf of Mexico. However, as activities increased in 
other OCS areas, it may be possible to supply additional personnel, for the Atlantic, 
Pacific, or Alaska areas. 



48 

Another issue raised at the workshop was the number of area accounts. After 
preliminary analysis, we believe at the present time that there should be a number 
of area accounts in the Gulf of Mexico — again because there is substantial activity 
occurring there now. We also believe that there should now be at least one account 
for the Atlantic and one account for the Pacific. Again, as activities increase, and 
the possibility of claims also increases, it might be appropriate to increase the 
number of area accounts in these areas. 

One problem that was easily resolved was the necessity for a fisherman to report 
his damage within five days of occurrence or knowledge. Some fishermen indicated 
that requiring them to return to shore to report such damage would interfere with 
their fishing activities. A consensus was developed that the five-day report required 
to gain the statutory presumption of validity could be made by radio telephone with 
a written confirmation as soon as possible thereafter. 

One possible means to eliminate regulatory burden, hearings, and costs on the 
fishermen and the oil industry would be to establish a process for "out-of-court" 
settlements. Unfortunately, the OCS Lands Act Amendments are basically silent on 
this possibility. We believe it might be appropriate that the hearing examiner or 
administrative law judge have the discretion to resolve matters, through pre-hear- 
ing settlements, between fishermen, oil and gas representatives, and/or the Fund. 
We are exploring this possibility. 

Another problem is the enforceability of a finding by the administrative law judge 
that a particular oil company is responsible for the damage. It is not clear whether 
Title IV allows the Fund, or a fisherman, to secure payment from the owner of an 
obstruction once there has been a determination by the administrative law judge 
that the owner is responsible for damage to the fisherman's gear or vessel. We are 
presently exploring how such a finding by the administrative law judge could be 
enforced — either through further administrative proceedings, or federal court 
action. 

Of course, there are other, more minor, issues to be resolved, but I am confident 
that these and the more substantive issues will in fact be resolved and that imple- 
mentation of Title IV will be timely made. I would like to thank the Members of the 
Committee who helped us set up these workshops and who participated, with their 
staffs, in highlighting the concerns of the fishermen, industry, and state and local 
governments. 

This concludes my remarks and of course, I would be glad to answer any ques- 
tions. 



Statement of Basil Whiting, Deputy Assistant Secretary for Occupational 

Safety and Health 

Mr. Chairman (and members of the Select Committee): I am pleased to be here 
today to assist your oversight activities with respect to the implementation of the 
Outer Continental Shelf Lands Act Amendments of 1978. I can inform you that 
OSHA has made considerable progress in carrying out the tasks the amendments 
have assigned to it. 

In my testimony before this committee on December 7 of last year, I discussed two 
areas where OSHA would be making contributions to the implementation of the 
amendments. The first area is our role in aiding the two studies which examine the 
adequacy of existing safety and health regulations on the OCS. At the time of my 
last testimony, we had sent to the heads of the appropriate agencies and depart- 
ments our recommendations for what the 21(e) study of diving regulations should 
include. Since then, our technical representative has been actively involved in the 
interagency committee coordinating the 21(e) study. On the whole we have been 
pleased with the responses of the Departments of Commerce and Transportation to 
our recommendations. The committee has thus far incorporated virtually all the 
projects designed to reveal methods for increasing the level of health and safety 
divers can be afforded. We are confident that the 21(e) study will make a valuable 
contribution to the health and safety of divers on the OCS. 

The second area where OSHA is making contributions to the OCS effort is in 
clarifying its working relations with the Coast Guard. I reported in December that 
work has begun on a Memorandum of Understanding concerning OCS jurisdiction. 
Further discussions between OSHA and Coast Guard staffs have produced a new 
draft which better reflects the statutory authorities of the two agencies. We at 
OSHA are in the process of preparing what we hope will be our final staff com- 
ments on the MOU. There are still some technical issues to be discussed and 
resolved. We hope to clear these matters up quickly so that the MOU can be signed. 

In addition to working out the MOU, OSHA is taking steps to bring consistency to 
the regulations affecting health and safety on the OCS. In the near future, OSHA 



49 

will publish proposed rules incorporating into our diving standard certain provisions 
from Coast Guard's standard dealing with equipment performance and design. This 
is an area which our original standard does not regulate. Using Coast Guard's 
equipment regulations as a model for our own will result in greater uniformity 
between the standards. 

In conclusion, Mr. Chairman, we at OSHA are quite pleased with the cooperation 
we have received from the Coast Guard and the other agencies involed in imple- 
menting the OCS Land Act Amendments. The advice we have given has been well 
received and seriously considered; our discussions with Coast Guard on jurisdiction- 
al issues have been devoted to finding the best way of accommodating the two 
agencies' authorities; and we expect to resolve the differences between the OSHA 
and Coast Guard diving standards through frank discussions of the technical mat- 
ters in questions and joint solicitation of the opinions and knowledge of experts 
outside of the government. I would now be pleased to respond to any questions you 
may have. 



U.S. Department of Labor, 
Occupational Safety and Health Administration, 

Washington, D.C., March U, 1979. 

Hon. John Murphy, 

Chairman, Ad Hoc Committee on the Outer Continental Shelf, 

House of Representatives, Washington, D.C. 

Dear Mr. Chairman: In the March 8 hearings held by the Ad Hoc Committee on 
the Outer Continental Shelf, you requested that we bring you up to date on the 
Occupational Safety and Health Administration's investigation of the recent tragedy 
in the Gulf of Mexico. As you know, Penrod Company's Rig 30 caught fire March 5. 
Five companies are involved with the rig: Penrod, Placid Oil Company, General 
Marine Caterers, Dialogue Company, and Tri-state Oil Company. Eight people have 
died, six Penrod employees and one each from Dialogue and Tri-state. 

The on-site part of our investigation has been completed. Penrod granted us 
access to the rig; the Geological Survey provided our inspectors with transportation 
to and from the rig. In conducting the on-site investigation, we worked closely with 
both the Geological Survey and the Coast Guard. 

Our investigation on shore has not gone so smoothly. Penrod has advised its 
employees through its attorney not to cooperate with our investigation, and we have 
thus far been unable to obtain statements from any employees. We will take all 
steps necessary to secure employee statements on the disaster. The Coast Guard 
convened its investigatory hearings March 12, and we are observing those hearings. 

At the moment, we have no information on the cause of the explosion or possible 
violations of OSHA standards. When such information is available for release, we 
will be sure to inform you. 
Sincerely, 

Basil J. Whiting, 
Deputy Assistant Secretary. 



Statement of R. Dobie Langenkamp, Deputy Assistant Secretary, Resource 
Appucations, Department of Energy 

I appreciate the opportunity to appear before this Select Committee to discuss 
Outer Continental Shelf issues. In December 1978 we testified before this Committee 
and at that time discussed the functions that were transferred to the Department of 
Energy (DOE) from the Department of the Interior (DOI) under the DOE Organiza- 
tion Act. We also outlined the status of our regulations and the studies then under 
way. I would like to take this opportunity to bring you up to date on our activities 
as they relate to the Outer Continental Shelf. 

We have just completed and forwarded to DOI for their review a report to 
Congress with respect to OCS bidding systems. In the report, we provide an analysis 
of the bidding systems used during the fiscal year 1978 and systems expected to be 
used for lease sales in fiscal year 1979. This report is in compliance with section 
205(a) of the OCS Lands Act Amendments of 1978, which specifies that within six 
months after the end of each fiscal year the report is to be submitted by the 
Secretary of Energy. 

Although the OCS Amendments Act became law less than one month before the 
end of FY 1978, we are submitting the report for fiscal year 1978 to indicate what 
action was taken on new bidding systems during the year. It was during this period 



50 

that the sliding scale royalty system was introduced. This system, which has not 
been used in five OCS lease sales, was discussed in our December 1978 testimony. 

Regulations 

We have completed the first phase of drafting regulations for bidding systems 
authorized by the OCS Lands Act Amendments. The systems included are the cash 
bonus, royalty bid and the sliding scale royalty bidding. These regulations have been 
forwarded to DOI for their review. 

We have also completed drafting a regulation to establish a cash bonus bid /fixed 
profit share bidding system as authorized by the OCS Lands Act Amendments. This 
regulation has required extensive economic analysis and a through investigation of 
accounting approaches and procedures. It was forwarded to DOI last week for the 
informal consultation as required by the DOE Organization Act. 

A third regulation has been completed which will permit a modification of the 
current Outer Continental Shelf (OCS) lease bidding process to permit sequential 
bidding, i.e., the tracts offered for lease will be separated into groups and offered for 
sale at separate time-periods (no less than one day apart) instead of all at once as is 
now the practice. This leasing approch will enable bidders to concentrate financial 
resources on a smaller number of tracts and to adjust bidding strategy between each 
bidding period. 

We have also completed a regulation for the taking and disposition of Federal 
royalty oil. The regulation applies to both the OCS and onshore leases and provides 
for the sale of royalty oil to eligible refiners and the public. This regulation has 
been reviewed by DOI and is now being prepared for proposed rulemaking. 

It is our belief these regulations will foster competition for OCS leases by estab- 
lishing bidding systems and bidding processes that should either reduce the case 
bonus or enable companies with budget constraints to bid on more tracts per OCS 
lease sale. 

Production goals 

The DOE has just completed a draft study on production goals for the OCS. These 
goals were developed in accordance with the Memorandum of Understanding (MOU) 
between DOE and DOI signed in September 1978. The MOU directs DOE to estab- 
lish energy production goals on a resource by resource basis with projections hori- 
zons of five, ten and fifteen years in the future. 

The OCS production goals were developed to guide DOI in preparing the five-year 
leasing program specified in the OCS Lands Act Amendments. The goals project the 
level of production that may be expected in the years 1985, 1990, and 1995. These 
projections are based upon estimates of future production from exising leases, from 
lease sales currently scheduled to occur during the 1979-81 time period and from 
lease schedules that we have analyzed for the 1982-85 time period. 

The analysis is based on data on resource estimates, and assumptions about the 
relationship between leased acreage and new field discoveries, resource prices and 
production costs. It was carried out by deriving sale schedules which were optimized 
in terms of economic value, alone. Production potential of unexplored OCS acreages 
continues to be uncertain. For example, estimates of OCS undiscovered recoverable 
resources by the U.S. Geological Survey and industry range from 26 to 36 billion 
barrels of oil and 101 to 115 trillion cubic feet of natural gas. In conducting its 
analysis, DOE used the statistical mean of Geological Survey estimates published in 
1975, of 26 billion barrels of oil and 107 trillion cubic feet of gas. Again, it should be 
recognized that these resource estimates vary substantially from other sources both 
as to total magnitude and regional distribution. Other assumptions are shown at 
Table I. 

Assuming average resource and yield values. Table II displays the production goal 
results at two price levels ($18.50 and $23.85 per barrel). Production from the 
current leasing schedule, ending in 1981, increases from 1985 to 1990 but decreases 
from 1990 to 1995. Maximum production from leases issued in the 1979-81 period 
occurs in 1991. For our 1982-85 schedules, associated production increases over all 
three production forecast periods, with maximum production occurring in 1994. The 
current schedule calls for five sales in 1979, four in 1980, and six in 1981. The 
results for the 1982-85 time period are based on an assumption of seven sales per 
year, a number which results from DOE's analysis of leasing constraints and admin- 
istrative feasibility. In a moment, I will discuss our analysis of alternative sale 
frequencies. 

On a daily basis, the seven sale per year assumption results in average production 
goals for oil at the $23.85 price of .742, 1.671 and 1.759 million barrels in 1985, 1990 
and 1995, respectively. The corresponding goals for natural gas at a $4.50 per MCF 
price are 10.052, 8.880 and 5.277 billion cubic feet in 1985, 1990 and 1995, respective- 
ly. At the $18.50 price these daily production figures are reduced to .742, 1.556 and 



51 

1.318 million barrels in 1985, 1990 and 1995, respectively. Comparable natural gas 
goals at a $3.50 per MCF price level are 10.041, 8.704 and 5.151 billion cubic feet in 
1985, 1990 and 1995, respectively (see table II). 

Sensitivity analysis 

While the production goals analysis assumes seven lease sales per year, an effort 
has been made to judge the sensitivity of oil and gas production from an optimized 
1982-85 lease schedule to the number of lease sales. To accomplish this, lease 
schedules were derived assuming four, five and six sales per year as opposed to 
seven. Table III summarizes the key results of this analysis using seven sales per 
year at resource prices of $23.85/bbl and $4.50/MCF as a point of reference. Reduc- 
ing the number of sales from seven to six per year but maintaining three sales per 
year in the Gulf of Mexico, results in two less sales in Alaska and in the Pacific. 
This causes projected oil production to fall by 14.8 percent and projected gas produc- 
tion to drop by less than 1 percent. This is as expected because of the high gas 
potential in the Gulf of Mexico. Lowering the frequency of Gulf sales from three to 
two per year reduces only the number of total Gulf sales (from 12 to 8). The result, 
then, is only a 4 percent decrease in oil production but a rather substantial 13 
percent reduction in gas production. When only five sales per year are allowed and 
Gulf sales are again limited to two per year, the number of sales drops by four in 
the Gulf, two in the Pacific and two in Alaska. The net production impact of these 
changes is to decrease oil production by 17 percent and gas production by 14 
percent. Further reducing the number of annual sales to four results in a 41 percent 
reduction in oil production and a 19 percent decline in gas production. 

These results clearly demonstrate that reducing the number of Gulf sales from 
three to two per year and/or decreasing the number of sales from seven to six, five 
or four per year has a negative impact on the expected production of oil and/or 
natural gas. 

In addition to the significance of the number of sales to further production, the 
amount of acreage offered for lease in each sale may be important. For DOE's 
analysis, it was assumed that for sales in the Gulf of Mexico and the Pacific 600,000 
acres would be offered, those in the Atlantic 800,000 acres and in the frontier of 
Alaska 1,000,000 acres. Historical experience, as summarized in table IV, indicates 
that as the acreage offered increases, the percentage actually leased may decline. 
The amount actually leased has tended, on average, to be greater for sales with 
offerings of 600,000-800,000 acres than for 1,000,000 acres. Since production is linked 
to the amount of acreage evaluated by industry, sale size (particularly in non/ 
frontier provinces) and sale frequency may both influence future production. We are 
continuing to study the apparent relationship of sale size to the amount of acreage 
leased in an effort to determine whether there is a connection between these 
elements. 

Because of the uncertainty regarding many of the other assumptions incorporated 
in DOE's analysis, the economic value and production obtained from optimal lease 
schedules and the composition of these schedules were analyzed for their sensitivity 
to four resource price levels ($14.50, $18.50, $23.85 and $31 per barrel), three re- 
source estimates (high, medium and low) for each area, three yield levels (high, 
medium and low) and two objective functions (maximize total economic value and 
maximize total production). 

Increasing prices and resource estimates caused the economic value and produc- 
tion under all lease schedules to increase. However, both value and production were 
relatively insensitive to the choice of yield levels and objective functions. Switching 
from maximizing economic value to maximizing production caused an increase in 
production and a decrease in economic value which averaged less than 4 percent. 
Alterations in yield levels caused economic value and production to vary by less 
than 9 to 15 percent, respectively. Based on these findings, it was concluded that 
recommendations on production goals and the associated lease schedules would be 
based on maximizing economic value. 

Sensitivity of lease schedules to resource prices, resource estimates and yield 
functions was also examined. Lease schedules resulting from DOE's analysis show 
that the distribution of sales over OCS regions (Atlantic, Pacific, Gulf of Mexico and 
Alaska) and individual OSC provinces in insensitive to variations in the yield level 
and to the overall level of resource estimates by province but sensitive to resource 
prices. As resource prices are increased, the percentage of sales allocated by the 
model to the Alaskan region increases while it decreases in the Atlantic region and, 
to some extent, in the Pacific region. The sensitivity of the 1982-85 lease schedules 
to price is most pronounced between the two intermediate price levels ($18.50 and 
$23.85). 

Table I.— Key Variables Used to Establish OCS Energy Production Goals 

Resource Levels (3): 



52 

Low: 50 percent of USGS mean conditional resource estimate. 
Mean: USGS mean conditional resource estimate. 
High: 200 percent USGS mean conditional resource estimate. 
Price Levels (4): 



Oil landed 
(per barrel) 



Natural gas 
(well head) (mcf) 



Low 

Medium low... 
Medium high . 



$14.50 


$2.60 


18.50 


3.50 


23.85 


4.50 


31.00 


5.85 



Hydrocarbon yield functions (3): 

Low: 62 percent of resource discovered in the first 15 percent of acreage evaluat- 
ed. 

Medium: 76 percent of resource discovered in the first 15 percent of acreage 
evaluated. 

High: 85 percent of resource discovered in the first 15 percent of acreage evaluat- 
ed. 

Objective function (2), maximize economic value and maximize production. 

Acreage Offered per Sale (in acres): 

Gulf of Mexico 600,000 Atlantic 800,000 

Pacific 600,000 Alaska 1,000,000 

The draft production goals have been sent to DOI and the Governors of the 
coastal states for comment. In June 1979, after comments are received and evaluat- 
ed, a final report will be released. 

This concludes my prepared statement. I will be pleased to answer any questions. 

Relative Cost Factors: 



Exploration 



Development 



Operating 



Gulf of Mexico, South Atlantic, South Pacific... 
Central Atlantic, North Pacific, Central Pacific . 

North Atlantic, Gulf of Alaska 

Bering Sea,' Beaufort Sea 

Chukchi Sea 



1.0 


1.0 


1.0 


2.2 


1.9 


1.3 


2.4 


2.8 


1.6 


5.0 


3.7 


1.9 


6.0 


4.6 


2.2 



■ Excludes Zhemchug— St. George. 

Sale constraints 

Province: No more than three per year in central and western Gulf of Mexico; no 
more than one every other year in all other provinces. 
Region: Gulf of Mexico and Atlantic — No more than three per year. 
Pacific and Alaska — No more than two per year. 
Nation: Seven per year. 



53 

TABLE II.— OCS OIL AND GAS PRODUCTION GOALS FOR 1985, 1990, AND 1995 ASSUMING MEAN RESOURCE AND 
YIELD LEVELS FOR THE MEDIUM LOW AND MEDIUM HIGH PRICE LEVELS 



Medium low price 

Estimated 

Source of production 1977 1985 1990 

Oil production; > 

Existing leases 2 304 257 198 

Scheduled 1979 to 1981 => 14 287 

Expected 1982 to 1985 ^ 86 

Total 304 271 571 

Gas production: ^ 

Existing leases 3,737 3,543 2,365 

Scheduled 1979 to 1981 ^ 122 446 

Expected 1982 to 1985* 367 

Total 3,737 3,665 3,177 

■ Annual production in millions of barrels. 

'USGSmost likely estimate. 

3 The current schedule provides for 5 sales in 1979, 4 in 1980, and 6 in 1981. 

* Assuming 7 sales per year during the 1982-85 time period. 

'Annual production in million of cubic feet. 



Medium high price 



1995 



1985 



97 
198 
186 



257 

14 





481 



271 



1990 



1995 



198 

318 

94 



97 
222 
323 



610 



642 



1,186 


3,543 


2,364 


1,186 


240 


126 


471 


258 


454 





377 


482 



1,880 3,669 3,212 1,926 



TABLE lll.-EXPECTED CUMULATIVE OIL AND GAS PRODUCTION ASSOCIATED WITH DIFFERENT 1982-85 

OPTIMIZED LEASE SCHEDULES 

[Annual sale freguencies] 





7, 3 GOM 


6, 3 GOM 


6, 2 GOM 


5, 2 GOM 


4, 2 GOU 


Region: 












Gulf of Mexico (GOM) 


12 


12 


8 


8 


8 


Atlantic 


4 


4 


4 


4 


4 


Pacific 


4 


2 


4 


2 


1 


Alaska 


8 


6 


8 


6 


3 


Production: 












Oil level (million barrels) 


2,729 


2,325 


2,612 


2,225 


1,169 


Percent difference from 7 per year 





-14.80 


-4.29 


-17.37 


-40.67 


Gas level (bcf) 


4,768 


4,739 


4,142 


4,111 


3,872 


Percent difference from 7 per year 





-.98 


-13.46 


-14.10 


-19.10 


Production (daily) oil (thousand barrels): 












1985 

















1990 


257.5 


230.4 


230.5 


204.7 


191.1 


1995 


884.9 


752.6 


859.4 


744.2 


534.5 


Gas (millions of cubic feet): 












1985 

















1990 


1.03 


1.03 


0.81 


0.81 


0.73 


1995 


1.32 


1.31 


1.22 


1.22 


1.12 



54 

TABLE IV.— OCS ACREAGE LEASED VERSUS ACREAGE OFFERED, 1967-78 



Sale category Number of Number of Acres Acres Percent 

(tliousand acres) sales tracts leased offered leased 

400 to 700 9 1,081 3,258,401 5,230,618 62 

701 to 900 4 614 1,624,487 3,242,434 50 

900 plus 11 2,993 5,160,220 15,257,813 34 



STATEMENT OF BUD WALSH, DEPUTY ADMINISTRATOR, NA- 
TIONAL OCEANIC AND ATMOSPHERIC ADMINISTRATION, DE- 
PARTMENT OF COMMERCE, ACCOMPANIED BY MARTIN H. 
BELSKY, COUNSEL, NOAA; AND BASIL WHITING, DEPUTY AS- 
SISTANT SECRETARY, OCCUPATIONAL SAFETY AND HEALTH 
ADMINISTRATION, DEPARTMENT OF LABOR; AND R. DOBIE 
LANGENKAMP, DEPUTY ASSISTANT SECRETARY, OIL, NATU- 
RAL GAS AND SHALE RESOURCES, DEPARTMENT OF 
ENERGY, ACCOMPANIED BY ROBERT KALTER AND ROBERT 
LAWTON, DEPARTMENT OF ENERGY 

Mr. Walsh. Thank you, Mr. Chairman. 

I might mention for the record that I am accompanied at the 
table here today with representative of our Office of General Coun- 
sel, Mr. Martin H. Belsky. 

Mr. Studds. Who? 

Mr. Hughes. We want to welcome Mr. Belsky back to the com- 
mittee. He is an old face and I might add he was a good one here. 

Mr. Walsh. Let me begin by sajdng that I once again am pleased 
to appear in this committee room. It is my third appearance in 
about 5 days. 

I know that the chairman of the committee had personally invit- 
ed the Secretary of Commerce to appear. Unfortunately, her sched- 
ule would not permit her to be here today and I have been asked to 
represent the Department of Commerce today. 

I testified before this committee on December 7, 1978, and gener- 
ally described how the OCS amendments affected the responsibil- 
ities of the National Oceanic and Atmospheric Administration and 
what we are doing to implement those responsibilities. Since that 
time, we have been attempting to comply with the requirements of 
the act and move diligently to put into place whatever regulations 
are required. 

As you know, the changes in the OCS Lands Act amendments 
affect the Coastal Zone Management Act program, particularly as 
it relates to the coastal energy impact program. We have published 
proposed regulations to implement those changes which relate to 
the availability of funds, and the conditions under which funds are 
provided. These regulations have been in the Federal Register and 
have already been commented upon by various groups and individ- 
uals as well as the States. 

We are approaching the phase in which we will put these regula- 
tions into final effect and that should be shortly. 

One of the issues that has come up under the coastal energy 
impact program, which the chairman of the committee asked me to 
address quite specifically, relates to the provision on OCS State 



55 

participation grants. When I testified last December, I indicated 
that the President's budget had not yet been released and therefore 
I could provide no specific information with regard to whether that 
provision would be funded. I must inform the committee today that 
the budget request does not provide funds for the OCS grants. 

The record will show that the National Oceanic and Atmospheric 
Administration did request these funds. The Department, however, 
decided not to forward that request to the Office of Management 
and Budget, and there is a letter that has been sent to the chair- 
man from Andrew Manatos, who is the assistant secretary for 
Congressional Affairs, which has an attachment which describes 
the reasons for this budgetary decision. 

I would direct your attention to that and I will briefly read the 
rationale. 

Mr. Hughes. Is that coming by regular mail, Mr. Walsh? 

Mr. Walsh. It should be in the file. We have copies of that letter 
available. We made it available to the committee. It should be in 
the members' package, I am told. 

Mr. Hughes. We do not have a letter, but I am sure — it just 
arrived. 

Mr. Walsh. The brief statement is included in your package, I 
understand, entitled: 

Department of Commerce Discussion of Departmental Consideration of Outer 
Continental Shelf State participation Grants Funding for the House Ad Hoc Com- 
mittee on the Outer Continental Shelf. 

The rationale behind the low ranking was as follows: A 1979 supplemental could 
not be effectively utilized because funding would not be received until very late in 
the fiscal year, and because regulations and program operational requirements 
would not be in place in time to utilize the funds if available. Second, the 1980 
amendment was not— that is the amendment for provision in the 1980 budget as 
opposed to a 1979 supplement— was not forwarded because of the need to support 
the President's policy of fiscal restraint, unanswered questions as to the States' 
financial needs and the possibility of reprograming existing funds for the prograni. 
Third, large carryover balances exist in the Coastal Energy Impact fund appropri- 
ation, and use of these funds for the OCS State Participation Grant program could 
be an alternative to requesting new funding if assistance is required by the States in 
1980. 

In addition, Mr. Chairman, I would note the Secretary is present- 
ly reviewing a letter in response to a letter from the chairman 
regarding this provision. 

Let me turn now to the second major part of our responsibilities 
under the OCS Lands Act amendment— the offshore oil spill fund. 
When I testified on December 7, 1978, we noted that we had an 
interest in implementing the oil spill provision relating to being 
trustee— having public trustee responsibility for natural resources. 
Just recently there was a notice in the Federal Register announc- 
ing Executive Order 12123 which delegates to NO A A power to 
assert claims for damages to natural resources subject to our juris- 
diction. 

Next, let me turn to the fishermen contingency fund. We have 
already undertaken a series of workshops to discuss with the fish- 
ermen the implementation of this provision. We held workshops in 
New Orleans, in Boston, in Anchorage, and in Los Angeles. Prior to 
these workshops, we decided to issue an advanced notice of pro- 
posed rulemaking to alert the fishermen to the issues that would 
be considered during those workshops. 



56 

I would point out, Mr. Chairman, that we are still in the early 
processes of rulemaking and as yet we have not reached or made 
any final policy decisions with regard to the issues that are raised. 
We realize that the committee would perhaps like a firmer idea of 
exactly how we are going to come out in this rulemaking process. I 
might mention that there are some issues that have been raised 
that are of concern to the fishermen. One of the issues is burden of 
proof. The burden of proof provision has become a problem because 
meeting it has been identified as potential difficulty for the fisher- 
men. We realize that in the statute there is a provision relating to 
the burden of proof and to establishing a presumption. 

Another issue raised by the fishermen is the handling and proc- 
essing of claims. It has been suggested that the National Marine 
Fishery Service provide very active support in assisting the fisher- 
men with regard to the preparation of the submission of claims. 
We, of course, are reviewing that in our program considerations. 
Budget and personnel must be taken into account in making our 
final decision. 

Another issue raised is the area accounts. After preliminary 
analysis, we believe at the present time that there should be a 
number of area accounts in the Gulf of Mexico, and that there will 
be at least one account for the Atlantic and one account for the 
Pacific. Again, this is under consideration and we have made no 
final decision. 

Another problem that we have identified is the necessity for a 
fisherman to report his damage, and some fishermen have said it is 
a burden in order to return to shore. We have suggested a possible 
solution to that problem also. 

In addition, there are some issues with respect to out-of-court 
settlements, and the question of enforceability of a finding by the 
administrative law judge. We are at the present time evaluating 
our comments so that we might be prepared when and if, when we 
come to the decision points on these particular questions. We do 
anticipate that we will have regulations in place sometime in June. 

That completes my statement, Mr. Chairman. 

Mr. Hughes. Thank you, Mr. Walsh. 

If my colleagues are in accord, we will hear from the other 
panelists and then ask questions of the panel. 

Mr. Whiting? 

Mr. Whiting. Thank you, Mr. Chairman. 

I testified last December and reviewed with the committee 
OSHA's progress in working with the other agencies that have 
safety and health responsibilities on the OCS. 

In that testimony, I discussed mainly two areas of activity. The 
first activity was our role in aiding the two studies that are man- 
dated in section 21 of the OCS legislation. The section 21(e) study 
concerns diving; the section 21(a) study calls for a review of the 
adequacy of safety and health regulations that affect operations on 
the OCS. 

I noted last time that we had sent to the heads of the Depart- 
ments of Commerce and Transportation our recommendations for 
what ought to be included in the diving study under section 21(e). 
Since then, our technical representative has been involved in the 
interagency committee set up to implement this study. On the 



57 

whole, we have been pleased with the response of the Departments 
of Commerce and Transportation to our recommendations. They 
have incorporated all the projects that we have suggested for meth- 
ods of increasing safety and health for divers on the shelf. 

Concerning the larger study mandated by section 21(a), we have 
designated Dr. Jerry Purswell, director of Safety Standards Devel- 
opment, to be our point of contact for the study. He has already 
been in touch with the Coast Guard on matters related to the 
study. 

The second general activity is determining our relations with the 
Coast Guard vis-a-vis the applicability of standards to worksites on 
the Shelf and coordinating inspections and other investigations 
pursuant to those standards. 

In December, I reported that we had begun work with the Coast 
Guard on a memorandum of understanding relating to the OCS. 
The committee may recall that I also indicated that this program 
to cooperate and coordinate with the Coast Guard in relation to the 
OCS was part of a much larger and longstanding effort of coopera- 
tion between OSHA and the Coast Guard. So we already had a 
basis upon which to build our relationship, and I can report that 
things are moving smoothly. We are pleased with the relationship 
with the Coast Guard, and we anticipate no serious problems in 
completing the memorandum of understanding. 

We intend to continue to assist the Coast Guard in its process of 
adopting those of our standards applicable to OCS working condi- 
tions. The first of these projects is well along toward completion. 

We also intend to take our own action to bring our diving stand- 
ards into conformity with the Coast Guard's. We anticipate that 
the Coast Guard will also take action to change their diving stand- 
ards. In this way, the industry will not feel that it is regulated by 
two different standards from two different locations. 

Generally speaking, I think the modest but important role of 
OSHA in relation to these amendments is proceeding well. I would 
like to close with a specific subject that I know is of interest to 
Chairman Murphy, and that is the recent tragedy that occurred off 
the Gulf Coast 2 days ago. 

There was an explosion and fire on a platform owned by Penrod 
Drilling Co. and leased by the Placid Oil Co. of Dallas. The explo- 
sion occurred at around 6 p.m.; the rig is about 45 miles off shore. 
There are now casualties totaling four known dead and four miss- 
ing. 

The fire continued for some time. I am told that as of last night 
the fire was out, but that flammable gases are still escaping and 
that the responsible corporations have engaged the well-known Red 
Adair to cap the well. Once the well is capped, the agencies con- 
cerned with investigating this tragedy can get onto the platform 
and conduct their investigations. 

OSHA has already conducted an opening conference with the 
company. The company is willing to carry us out to the site. We 
have been in touch with the Coast Guard— the Coast Guard has 
asked our cooperation in this matter — and we have also been in 
touch with the Geological Survey. The compliance officer we have 
assigned to this case has experience in this type of operation. 



58 

This particular explosion shows the importance of the commit- 
tee's concern with assuring the safety and health of workers on the 
OCS. These disasters do happen. 

I also think that your continuing oversight has emphasized to 
the three agencies involved the need to coordinate their efforts. 
Once the final MOU with the Coast Guard is in place, the stand- 
ards setting activities will continue apace. 

Mr. Hughes. Thank you, Mr. Whiting. 

Mr. Langenkamp? 

Mr. Langenkamp. Thank you, Mr. Chairman. 

This is my first appearance before this committee and it is an 
honor to be here. 

I have with me Robert Kalter and Bob Lawton of the Office of 
Leasing Policy Development, the Department of Energy. 

Let me first say that speaking for the Department of Energy, we 
agree with the chairman's leasing summarization. We think that it 
is imperative that this committee and all of us at the table view 
the OCS situation in light of the current energy situation; and we 
are extremely concerned about the supply situation in this country, 
as has been indicated by Secretary Schlesinger on a number of 
occasions. 

The Department of Energy, in connection with the act that we 
are considering today, has completed the first phase of drafting 
regulations for the bidding systems authorized by the Act. These 
systems include the cash bonus, the royalty bid and the sliding- 
scale royalty bidding. These regulations have been forwarded to the 
Department of the Interior for their review, and discussions are 
ongoing at this time. 

We have also completed drafting of a regulation to establish a 
cash-bonus bid/ fixed profit share bidding system which has also 
been transmitted to the Department of the Interior. 

The third regulation has been completed which will permit a 
modification of the current Outer Continental Shelf lease bidding 
process to permit sequential bidding. The tracts offered for lease 
would be separated into groups and offered for sale at separate 
time periods, no less than one day apart, instead of all at once as is 
now the practice. This approach would enable bidders to concen- 
trate financial resources on a smaller number of tracts and to 
adjust bidding strategy between each bidding period. 

We have also completed a regulation for the taking and disposi- 
tion of Federal royalty oil. In addition to these regulations which 
have been drafted by the Department of Energy, the Department of 
Energy has prepared and transmitted to pertinent Governors and 
to the Department of the Interior, the Department of Energy pro- 
duction goals for the OCS. Heather Ross, the Deputy Assistant 
Secretary of the Interior, made reference to these earlier. 

These production goals were developed to guide the Department 
of the Interior, pursuant to an MOU, Memorandum of Understand- 
ing, that exists between the Department of the Interior and the 
Department of Energy. These goals were to guide the DOI in pre- 
paring the 5-year leasing program specified in the OCS Lands Act 
amendments. This was the leasing schedule that was also referred 
to earlier. 



59 

The production goals are lengthy; they are complex, but they 
have within them a number of interesting conclusions. 

The subject has been raised by Mr. Forsythe, and by Mr. Hughes, 
and by others, regarding the capability of the industry to respond 
to an accelerated lease schedule. We would direct your attention in 
these production goals to the rather lengthy section that discusses 
the manpower, the materiel, aspects of the industry's capacity for 
responding to an accelerated lease schedule. 

It is our conclusion that a seven-sale per year schedule is within 
the competency of industry and is within the ability of industry 
and also within the level of various possibilities regarding adminis- 
trative constraints. 

As the committee is aware, the current schedule calls for five 
sales in 1979; four in 1980 and six in 1981. We would then supple- 
ment this with the seven-sale per year schedule. 

Another interesting aspect of the production goals is the differ- 
ence in production that you get if you delete or add sales in the 
Gulf of Mexico. As the production goals would indicate, that by 
adding sales in the Gulf of Mexico, the ultimate recovery of gas 
would increase, vis-a-vis oil. 

Mr. Chairman, I would submit our statement for the record and 
we are ready to answer any questions that you might have. 

Mr. Hughes. Without objection, your statement and the state- 
ment of Mr. Whiting and Mr. Walsh will be received for the record. 

Mr. Studds? 

Mr. Studds. Thank you very much, Mr. Chairman. 

I have some questions with regard to the fishing gear fund for 
NOAA. 

I must say that I am a bit disturbed, as I read the testimony and 
as I listened to some of what you said, but Mr. Treen and I were 
the original authors, as you probably know, of this title of the act. 
Mr. Belsky had considerable input; he was present at all times and, 
as a matter of fact, the Department of Commerce, as I recall, had a 
major hand in drafting the final compromise language. It is there- 
fore particularly surprising to me to find the Department of Com- 
merce has difficulty understanding the language. 

Let me ask you, first of all, when will the proposed regulations 
be published? 

Mr. Walsh. We have not established a date when they will be 
ready, but I understand that they are in the early process of being 
prepared. 

Mr. Studds. I know they are in the process of being prepared 

Mr. Walsh. That means that we are still reviewing all of the 
input that we have gotten from the workshops and we are trying to 
cast that into the language necessary. 

Mr. Studds. Could you even guess when they might be posted, 
the regulations published? 

Mr. Walsh. I suspect it is within the next 3 weeks. 

Mr. Studds. That is what I want to know. Generally within the 
next 3 weeks or so? 

I understand that there has been some discussion with respect to 
the replacement value of the fishing gear. I understand that some- 
one suggested somewhere — I can just imagine who — that depreciat- 
ed replacement costs ought to be considered rather than actual 



U9-118 0-79 



60 

replacement value of gear losses. Is such a thing being discussed at 
all? 

Mr. Walsh. Yes. That is one of the issues that has been raised. 

Mr. Studds. By whom? 

Mr. Walsh. I believe that the question has been raised by the oil 
and gas industry. 

Mr. Studds. By the oil and gas industry? Marvelous. 

Mr. Belsky, do you recall the consideration of this issue by the 
conference committee and the explicit rejection of it by the Con- 
gress, of the question of whether or not we would deal with depre- 
ciated replacement costs? I believe it was the Senator from Oklaho- 
ma that raised the question and I objected to any depreciated 
costs 

Mr. Bedsky. The phrase used in the conference committee was 
"actual value." That was the discussion, and the discussion was not 
on depreciated cost. That is correct. 

Mr. Studds. I believe I recall the Senator from Oklahoma ques- 
tioned me about used fishing gear. I remember taking a little 
umbrage in the suggestion that we would be dealing with used gear 
in the fleets up there, but the conference categorically rejected any 
such thing. 

How could it possibly be considered an issue by the Department 
at this moment? 

Mr. Walsh. Well, it was raised at the workshop. 

Mr. Studds. I do not care if it was raised or not. This is the law, 
whether the oil industry likes it or not. 

Does the oil industry have a right to suggest a revision of the 
law? 

Mr. Walsh. Again, it is a matter of the interpretation of the 
words of the statute as well as the legislative history. 

Mr. Studds. Excuse me one second. 

Those are my words that you are interpreting. 

Mr. Walsh. Yes. I realize that you are impatient with the regula- 
tory process and you would like us to state categorically, right now, 
that we are this way or that way. 

Mr. Studds. No. The Congress has stated categorically this way. 
You for many years were on the other side of this, I think I heard 
you previously testifying about people downtown telling you what 
you meant by what you wrote. Here is a classic example of this. 

We wrote this. We made it explicitly clear what we meant and 
now you are discussing that you are going to interpret what we 
meant. 

Mr. Walsh. The language of the statute is replacement value of 
the fishing gear with respect to the way the claim is filed. 

Mr. Studds. I have it in front of me. 

Where do you get "depreciated"? 

Mr. Walsh. The question is whether it is actual or depreciated. 

Mr. Studds. No. It says "replacement value." 

Mr. Walsh. It says "replacement value," and if the words of the 
statute are clear, the statute is binding. If it is not clear, then we 
turn to the legislative history. It is clearly not clear on the face of 
the statute, and therefore we will turn to the legislative history 
and make an analysis. 



61 

Mr. Studds. I just offered you some of the legislative history. 
You are talking to the legislative history. 

Mr. Walsh. I understand that. And I also have some understand- 
ing of how often that may not — in terms of strict legal interpreta- 
tion — have gotten into the record in sufficient quantity as to show 
general agreement that that is the intent of Congress. We will 
research that. I understand that is the case that we had with many 
statutes and I feel that, while we sit down and talk these things 
over, often they do not get into the statute and therefore, based on 
the legal rules of interpretation, this is a question. I am only 
raising it as an issue. I do not necessarily disagree with you. 

Mr. Studds. Fortunately for you, your very own counsel, sitting 
beside you, was chief counsel of the committee and confirmed what 
I told you. How much more research do you need? 

Mr. Walsh. Well, I realize that — I do not want to make a firm 
and final decision until such time as we have had the regulatory 
process completed. 

Mr. Studds. No. I certainly would not want to rush you into 
anything. Maybe we have a little more history that can help you. I 
hate to think how many lawyers and how much this will cost in 
this. 

Mr. Walsh. Hopefully, it will not be too long. 

Mr. Studds. I trust there is nothing else that the oil industry is 
upset about in the law; we would make an effort to interpret it if 
there is. 

The next thing that disturbs me, there has been discussion in 
your statement — and you may have skipped over it 

Do you propose to establish only one area account for the Atlan- 
tic and one for the Pacific? 

Mr. Walsh. What we are requesting from the Congress is a 
supplemental appropriation for this fund of $600,000. We must 
distribute that around the various areas, but what we have stated 
that, given the present level of oil and gas activity in an area, that 
that is the place where we will probably put the principal amounts 
of money in accounts. It does not mean that next year, when we 
get more funds, we will not open up other accounts. This is only 
our initial estimate of where we plan to put the money. 

Mr. Studds. Let me repeat the question. 

Are you planning just one in the Atlantic and one in the Pacific? 

Mr. Walsh. At the present time, we are, perhaps one in the 
Atlantic and one in the Pacific. 

Mr. Studds. I find that incredible. Obviously, the intention of the 
Congress was to establish area accounts so that permanent resident 
leaseholders whose equipment is responsible for the damage, would 
be those contributing to the fund. I cannot believe that you are 
suggesting that an oil company, operating, say, in the Baltimore 
Canyon, is going to consider themselves responsible for damages by 
someone in George's Bank, totally different leaseholder. 

Mr. Walsh. As I understand it, this is merely a projection of 
where we think likely damages are going to accrue. It does not 
have any affect on whether people get their money or not. It is an 
Administrative decision where we will locate accounts. Those re- 
sponsible people will be liable wherever the account is located. 



62 

Mr. Studds. You are going to have the wrong people hable, quite 
possibly. 

Mr. Walsh. It may turn out that we will get a lot more damage 
in the Pacific and it may turn out 

Mr. Studds. That is not what I mean. Within the area. 

If I am operating in Alaska and I do not have any operations in 
Santa Barbara, why am I liable for it? That is what you are 
proposing. 

Mr. Walsh. Well, as I understand the statute, the assessment is 
one issue; that is to say, someone will be held liable, and the second 
issue is what accounts are set to get the money out? That does not 
mean that money will not be available if there is no account in a 
particular plan. We are just making the guess as to where damage 
is likely to be. If circumstances prove it is different, then we will 
move our accounts around, but it certainly does not affect whether 
somebody is assessed for being liable. It is just an administrative 
guess as to where it is likely to come. 

Mr. Studds. Obviously, there is going to be trouble on all three 
coasts. 

Mr. Walsh. We just have to make some planning decision. 

Mr. Studds. One in the Atlantic and one in the Pacific? And how 
many in the gulf? 

Mr. Walsh. We estimate probably five area accounts which are 
divided by the Geological Survey District in the gulf. 

Mr. Studds. Five in the gulf? 

Mr. Walsh. Yes. 

Mr. Studds. I gather that you are considering, from your testi- 
mony, a mechanism to consider cases that are obvious in their 
merit in a way which would speed up the long hearing process? 

Mr. Walsh. That is right. 

Mr. Studds. The question of the burden of proof disturbs me. 

As I read the statute — I will refrain for a moment in saying that 
we wrote the statute. Section 404 sets forth four criteria for the 
burden of proof. It reads, "With respect to any claim for damages 
filed pursuant to this title, there shall be,"— not "there may be" — 
or the Department of Commerce may contemplate as to whether 
there ought to be, or whether the industry would approve of it — 
"there shall be," this is the law, a presumption that such claim is 
valid if the complaint establishes that one, two, three, four 
criteria." 

You devote three pages of your testimony as to what additional 
criteria there may be. I do not understand that. 

Mr. Walsh. First, let me start by addressing the provision that 
relates to the burden of proof. 

While it is clear that once a fisherman has established these four 
criteria, there is a presumption which automatically attaches to his 
claim. It is also true that within those provisions, there are certain 
factual determinations that are required. 

For example, under item 2, which is probably the one of most 
concern here, a report on the location ojf the equipment, tool con- 
tainer, or other item. Now, how close must the location be? Within 
a square mile, 10 miles? The path in which he had fished for the 
last 2 days? In addition, it speaks about the location of the materi- 



63 

al, equipment, tools, container, or other item. Does that mean that 
he has to tell what item it is? 

Mr. Studds. No. It does not say "identification." It says "loca- 
tion." 

Mr. Walsh. Location. It seems to say that there is something else 
as well as the location. 

Mr. Studds. It does not say something else as well as the 
location. It says the location of — it is remarkably clear English, 
even for the Congress, I would suggest. Let me read from your 
testimony. 

"Oil company representatives on the other hand use a strict 
burden of proof." 

I do not care what they use. This is what the law says. 

Mr. Walsh. But the question is, does the fisherman have to show 
it was at that longitude or this latitude or this location? He has a 
problem because he has certain gear, LORAN C, which is not 
effective in positioning himself within a mile. So we are trying to 
resolve these factual questions. 

We do not wish to go against the intent of Congress. 

Mr. Studds. Somebody is trying hard. 

Mr. Walsh. As I say, these are workshops in which issues were 
raised. 

Mr. Studds. Fair enough. 

Mr. Walsh. We have not yet resolved those issues. It is quite 
likely that we will agree with you in our ultimate outcome, but you 
have to remember that we are out in the field raising issues in 
advance of the notice of preliminary rulemaking. When the pro- 
posed rules are completed, it then comes up through our system. I 
review them and at that point the policy decision issues and ques- 
tions will be raised. They have not been raised to that level yet, 
and I do not want people out in the field making final determina- 
tions on this as yet, and we have not had enough time to really 
assess and evaluate every question that has come up so that I can 
make a decision on this witness stand. 

Mr. Studds. You say "We are presently resolving alternatives to 
the burden-of-proof problem." 

What problem? 

Mr. Walsh. We have a problem if the fishermen are unable to . 
prove those four points. 

Mr. Studds. There is nothing to be proved. 

Mr. Walsh. If he does not establish the elements of the presump- 
tion, there may be questions. He may of course still make a claim. 

Mr. Studds. Are you talking only about situations in which a 
fisherman is unable to establish the four criteria of burden of 
proof? 

Mr. Walsh. That is so generally, yes. 

Mr. Studds. Why did you not say so? That is totally different. 

Your testimony suggests in all cases you have a burden of proof. 

Mr. Walsh. My testimony is quite vague because I do not want 
to make a decision and prejudice the outcome of the. regulatory 
process. 

Mr. Studds. You used to speak simply and straightforwardly. 

Mr. Walsh. They really ruined my mind. It was so much simpler 
before. 



64 

Mr. Studds. Let me make sure that I can understand what you 
just sort of said. 

Do I understand you to say that with respect to those situations 
in which a fisherman is able to estabUsh the four criteria provided 
for in the statute, burden of proof, that there is no problem? The 
only question that arises is where a fisherman is unable to estab- 
lish those four, but still wishes to establish a claim? 

Mr. Walsh. That seems to be the question that the statute 
raises. It talks about situations in which there is a presumption. It 
does not talk about situations where there is no presumption pres- 
ent. But in theory, it provides for compensation as well. 

Mr. Studds. Is that a guess? 

Mr. Walsh. That is a guess. I like to be clear on the record. 

Mr. Studds. I appreciate it. I am so stunned that I do not know 
what to say. I appreciate that. 

I must say I have to agree with you also that your testimony is 
vague. 

Mr. Walsh. Honesty is the best policy. 

Mr. Studds. Yes, and there is not much precedent for that, I 
agree with you. You know what Mark Twain said? Always do right. 
This will gratify some people and astonish the rest. 

I appreciate that. 

Mr. Walsh. I am learning every time I come before this commit- 
tee, especially for you. 

Mr. Studds. Well, thank you. You ought to get out of there. It is 
doing things to your thinking. It is not healthy at all. 

Is there anything else that you could do or say that would make 
us feel any better or should I stop immediately? 

Mr. Belsky, would you like to answer that question? 

Mr. Walsh. One other thing that has been raised — Congressman 
Breaux has written us a letter with regard to the question of 
whether regulations and material on this should be written for the 
Harvard Law School graduate or the fishermen. 

Mr. Studds. The more intelligent Harvard Law School graduates 
are becoming fishermen. 

Mr. Walsh. I understand. Maybe that is what we should do. Crab 
fishing in Alaska looks very good now. 

We are preparing as much material as we can so that the fisher- 
man has the simplest, most direct method for making claims and 
the best understanding of how he must go about obtaining compen- 
sation if he indeed observes it under the act. 

Mr. Studds. I agree with Congressman Breaux on that point. 
Thank you very much. Thank you for your patience, Mr. Chair- 
man. I apologize for imposing such a long time. 

Mr. Hughes. Thank you, Mr. Studds. 

Mr. Forsythe? 

Mr. Forsythe. Thank you, Mr. Chairman. 

Bud, I am going to pose a couple of questions that Mr. Treen 
wanted responses from you on. Mr. Treen asked that I question you 
concerning section 21(e) which gives NOAA responsibilities for 
studying underwater diving techniques. He has been told that 
NOAA has developed a plan of study after seven meetings here in 
Washington. 



65 

He would like to know who was consulted in developing the plan 
of study? Were representatives of the diving industry asked to 
submit suggestions for problem areas to be studied? What statisti- 
cal bases did NOAA use in determining the subject matter to be 
addressed in the study? 

Mr. Walsh. If I might, could I answer that for the record, Mr. 
Forsythe? 

Mr. Forsythe. Sure, fine. 

[The following was received for the record:] 



66 




UNITED STATES DEPARTMENT OF COMMERCE 
National Oceanic and Atmospheric Administration 

Washington, DC. 90230 

OFFICE OF THE ADMINISTRATOR 



April 12, 1979 



Honorable John M. Murphy 
U.S. House of Representatives 
Washington, D.C. 20515 

Dear Chairman Murphy : 

Thank you for your letter of April 5, asking that 
the National Oceanic and Atmospheric Administration 
(NOAA) respond to the comments made by Mr. Kenneth W. 
Wallace on behalf of the Association of Diving Contractors 
regarding NOAA's implementation of section 21(e) of 
Outer Continental Shelf Lands Act Amendments. 

NOAA's diving program was begun in 1971. It was 
designed specifically to serve NOAA's needs rather than 
those of non-federal and commercial divers, and it has 
been oriented almost exclusively toward protecting the 
health and safety of NOAA divers and improving their 
effectiveness in support of NOAA's marine science and 
technical objectives. Since its inception, funding for 
the diving program has averaged about $250,000 a year, 
including salaries, overhead expenses, equipment purchases, 
facilities, and research. 

Although the amount of money spent on diving research 
as such h-\s been small, data obtained from some of these 
efforts, such as research related to vertical excursions 
during a saturation dive, have been of value to American 
commercial diving companies operating in the North Sea. 
In addition, the NOAA Diving Manual, published in 1975, 
currently is used as a text in commercial diving schools. 

About 400 divers have been certified under the NOAA 
program. At any given time, approximately half are 
actively engaged in diving operations in support of 
fisheries research and development, oceanography, ship 
maintenance and repair, and marine ecological studies. 
NOAA divers make approximately 6,000 dives each year. 
The total record includes about 40,000 dives since 1971. 



67 



-2- 



In addition, NOAA has managed programs involving 
approximately 3,000 person/days of saturation diving 
since 1972, and many advanced diving programs involving 
lockout submersibles , one atmosphere submersibles , and 
undersea habitats. During this experience there have been 
two fatal accidents. We are continually tightening our 
regulations to make our program the safest possible. 

With the passage of the OCS Lands Act Amendment of 
1978, NOAA was mandated, in section 21(e), to conduct 
studies of underwater diving techniques and equipment 
suitable for protection of human safety and improvement 
of diver performance beyond the then-existing NOAA program. 
We have begun that effort and are seeking to carry out the 
Congressional mandate. 

Congress and NOAA are fully aware that extensive 
diving research has already been conducted, primarily by 
the Navy and the National Institutes of Health. Thus, 
these agencies, as well as the U.S. Coast Guard, were 
included as members of NOAA's planning committee for 
section 21(e). In addition, we are striving to develop 
a close working relationship with the diving industry. 
In this way, we hope to avoid duplicating work which has 
already been completed or is underway, and to facilitate 
the application of results from existing research to 
operational requirements. New research will be under- 
taken only as important deficiencies are identified. 

NOAA is addressing its responsibility under section 
21(e) by preparing a program development plan. Early in 
this process, on November 22, 1978, representatives of 
NOAA, Coast Guard, and the National Institute of Safety 
and Health met with Mr. James Eberle, the federal agency 
affairs representative of the Association of Diving 
Contractors, to explain that NOAA would prepare a pre- 
liminary draft plan which would be made available to 
industry for review and comment. A second presentation 
describing the approach being taken and the opportunity 
for industry comment was made on February 5, 1979, at the 
annual meeting of the Association of Diving Contractors. 
More than 500 people attended the presentation. 

NOAA staff completed a preliminary working draft 
plan on January 22, 1979, and that working draft had 
been circulated to other federal agencies for review at 
the time of your oversight hearing on March 14, 1979. 
The review had not been completed and changes requested 
by other federal agencies had not yet been incorporated. 



68 



From the beginning of this process it has been 
NOAA's intention to seek connnents and recommendations 
from the diving industry. This intent is clearly stated 
in the preliminary working draft and in the cover letter 
which transmitted the working draft to federal reviewers. 
A copy of the cover letter is attached. 

We expect revision of this first working draft to 
be completed this month. At that time, the availability 
of the working draft will be announced in the Federal 
Register and about 400 copies will be distributed to the 
commercial diving industry and other interested parties 
to solicit their input. A copy of this working draft will 
also be made available to you at that time. In addition, 
an open forum is scheduled on May 29, 1979, to discuss 
the working draft and any changes which may be recommended 
by industry. At that time, industry representatives will 
be encouraged to assist in the preparation of a final 
program development plan. 

In closing, Mr. Chairman, I should note that NOAA 
has no regulatory authority over commercial diving. We 
have been directed by Congress to study certain areas of 
diving that might benefit from government research and 
development. We earnestly desire to work with the diving 
industry, to avoid duplication of effort, and to carry 
out Congressional intent. 

If we can be of any further assistance in this matter, 
please let me know. 



Sincerely, 




/^^iZi£ 



James P. Walsh 
Deputy Administrator 



Attachment 



69 




January 22, 1979 



UWITED STATES DEPARTfVIclMT OF COWirvlHRCE 
niationnl Oceanic nnd Atmospheric Administration 

Roekviii". .-.•aryland 20852 



DiAFl 



TO: Federal agency reviewers of the draft Program Development Plan for 
Studies of Underwater Diving Techniques and Equipment Suitable for 
Protection of Human Safety and Improvement of Diver Performance 



This draft plan has been prepared by MOAA with continued guidance and assis- 
tance of representatives from NIOSH, Coast Guard and the Mavy. Please regard 
it as a draft! Your comments and criticisms are earnestly sought so that 
the resulting program will be as responsive as possible to the needs of the 
offshore diving industry. Obviously, however, the results and gains to be 
made from this program will be beneficial to a.ll segments of the diving 
community. 

I call your attention to the schedule on page 20. As shown, it is requested 
that you complete your review by February 16, at which time v/e will meet in 
this room at" 0900 so you will have the chance to submit your written comments 
and to further discuss the program. 

The modified plan (based on your review) will be made available to the 
private sector in early March to permit interested individuals and organiza- 
tions to comment. You will, of course, receive copies prior to its release. 

An open forum (symposia) will be held on May 11 to afford the opportunity for 
members of the private sector to submit their comments and discuss the program. 

The participation of the private sector in the development of this plan is 
considered to be absolutely critical. Priorities will be established, the 
management plan expanded, and budgetary information prepared following the 
public forum on May 11. 

The OCS Act presents an opportunity to improve the already significant coopera- 
tion among the various segments of the national diving community. Your 
assistance will be greatly appreciated. 



y^w^ > W^jZ^^ 



7 

v/James U. Miller 



70 




UNITED STATES DEPARTMENT OF COMMERCE 
National Oceanic and Atmospheric Administration 

Washington. DC. 20230 

OFFICE OF THE ADMINISTRATOR 



May 3, 1979 



Honorable John M. Murphy 
U.S. House of Representatives 
Washington, D.C. 20515 

Dear Chairman Murphy: 

In my letter to you on April 12 discussing NOAA's 
implementation of section 21(e) of the Outer Continental 
Shelf Lands Act Amendments I advised you that a working 
draft of a preliminary program development plan would be 
available soon. This document is now available and was 
announced in the Federal Register on April 26. I am 
enclosing a copy for your information. 



As noted in the cover letter which ac 
draft, comments are being sought from all 
persons in the diving community. To facil 
cation between the Federal Government and 
sector, a public forum will be held May 29 
written and/or oral comments on the draft, 
scheduled to immediately preceed the annua 
Undersea Medical Society in Key Biscayne, 
the meetings, an ad hoc advisory group of 
non-government representatives will be ass 
NOAA in preparation of the final program d 



companies the 
concerned 
itate communi- 
the private 
to receive 
The forum is 
1 meeting of the 
Florida. Following 
government and 
embled to assist 
evelopment plan. 



If I can provide any additional information, please 
let me know. 



Enclosure 



Sincerely, 




f.i^M- 



James P. Walsh 
Deputy Administrator 



71 

[From the Federal Register, Vol. 44, No. 82, Thursday, Apr. 26, 1979, Notices] 

Outer Continental Shelf Diver Research Program; Availabiuty at Draft 

Plan 

Agency: National Oceanic and Atmospheric Administration/Commerce. 

Action: Notice of availability of the draft plan for the Outer Continental Shelf 
Diver Research Program. Notice of a public forum to receive comments and review 
the above plan. 

Summary: In response to the recently passed Outer Continental Shelf (OCS) Lands 
Act Amendments of 1978 Section 21(e), a preliminary draft of a diver research 
program plan has been developed by NOAA with the assistance of other federal 
agencies. To ensure that this program is responsive to the needs of the OCS diving 
industry, comments from the private sector are being sought. 

Date: The public forum will be held on May 29, 1979 at the Key Biscayne Hotel 
and Villas, Key Biscayne, Florida. The meeting will take place in the Santa Marta 
Room from 9:00 a.m. to 4:00 p.m. 

Addresses: Copies of the draft Diver Research Program Plan and further informa- 
tion about the public forum, can be obtained by contacting Dr. James W. Miller, 
Deputy Director, Manned Undersea Science and Technology, Office of Ocean Engi- 
neering, NOAA, 6010 Executive Boulevard, Rockville, MD 20852, Phone (301) 4430- 
8391. 

Supplementary Information: It is considered essential that representatives from 
the national diving community participate in the development of this program. 
Interested parties are encouraged to obtain copies of the draft plan and to attend 
the public forum on May 29. 

James W. Miller, 
Deputy Director, Manned Undersea Science and Technology. 

[FR Doc. 79-12840 Filed 4-25-79; 8:45 am] Billing Code 3510-12-M 



72 





Ur\!ITED STATES DEPARTMEIMT OF COIVIMERCE 
rOatJonal Oceanic and Atmospheric Administration 

Ffoci-vplle. Marylana 20BS-2 



April 26, 1979 



To V/hom It May Concern: 

On September 18, 1978, the Outer Continental Shelf Lands Act Amend- 
ments of 1978 was signed into lav; as Public Law 95-372. Section 21(g) 
of Section 208 of Title II of this Act tasks the Secretary of Commerce 
with the responsibility to "conduct studies of underwater diving techniques 
and equipment suitable for protection of human safety and improvement of 
diver performance." This responsibility was assigned to NOAA by the 
Secretary of Commerce on February 13, 1979. In order to fulfill this 
responsibility, NOAA, with the assistance of representatives of seven 
other Federal agencies, has prepared the attached preliminary draft of a 
plan which identifies suggested areas of study. No decisions have been 
made as to the final content of the program at this time. 

♦ 

Prior to making any final programmatic decisions, it is 
essential that comments and advice be received; not only from the academic 
community and private industry but from all concerned entities, to ensure 
that studies undertaken will contribute to improvements in human safety 
and the performance of divers involved in offshore diving in the Outer 
Continental Shelf regions. Accordingly, comments on this draft plan are 
being sought from all concerned persons in the diving community. In par- 
ticular, comments are encouraged with respect to the general objectives 
and research and development programs cited. Responses should identify 
important requirements which are not addressed as well as commenting on 
those that are. Suggestions pertaining to the relative priority of 
programs, those cited as well as recommended new studies, will be welcomed. 
The studies which become part of the final plan will be prioritized 
based on the needs of the diving community. 

To facilitate communication between the Federal Government and the 
private sector, a public forum will be held on May 29, 1979, at which 
time interested persons may attend for the purpose of submitting written 
and/or oral comments on this draft plan. The meeting will take place 
from 9 a.m. to 4 p.m. in the Santa Karta Room, Key Biscayne Hotel and 
Villas, Key Biscayne, Florida. This 1-day meeting immediately precedes 
the Annual Meeting of the Undersea Medical Society which has set aside 
half of the first day (May 30) to address "Challenges of Modern Commercial 
Diving." 



73 

An ad hoc advisory group v/ill be established ^subsequent to this 
meeting, composed of representatives of both Federal and non-Federal 
organizations, to assist in the preparation of the final program plan. 
The final plan will be used as the basis for obtaining program and 
budget support. NOAA viev/s the tasks assigned in Section 21(e) of the 
Act as an opportunity for a collaborative effort between the Federal 
Government and the private sector to further improve our ability to obtain 
energy resources from the ocean. The assistance and expertise of individuals 
in the private sector is regarded as a critical element in the development 
of this program to ensure that it will be responsive to the need to protect 
human safety and improve diver performance in OCS diving. Your help will be 
appreciated. 

All correspondence and comments should be forwarded to 
Dr. James W. Miller, Deputy Director, Manned Undersea Science & Technology, 
Office of Ocean Engineering, NOAA - 0E3, 6010 Executive Blvd. Rockville, 
MD 20852, or presented at the Miami meeting on May 29. 

Sincerely, 



Steven N.' Anastasion 



Director, Office of Ocean Engineering 



74 



April 16, 1979 



•.>.,-.■ v.^-. : : PRELIMINARY PROGRAM DEVELOPMENT PLAN ' ^ ' —•■ 

for 

Studies of Underwater Diving Techniques and Equipment 

Suitable for PrC^t(|^a^.cf?»R3;ian Safety and 

I ifip ro veme t^'4i^^^^* Fjf r f rina nee 



Outer Continental Shelf Lands Act Amendments of 1978 

Section 21(e) of Section 208 of Title II 

■...'...•...■..• .. . . Public Law 95-372 
. ....... -.•■•••;;■■•-■■- -jpp^g^^g J. ^g^ 1978 :■'■'■■'" .; -^t^rv": 



75 



1 Table Of Contents 

Executive Summary (to be added later) OR'^i.FT 
I. Purpose ,• 

II. Background 
III. Organization and Participants 

IV. Approach "■'"■ 

V. Program Management 

VI. General Objectives 

A. Procedures 

B. Equipment ..... ..... .... 

C. Training ■ • - ' '■■■■'■''■'■■■- ■■■ ■ 

D. Biomedical and Diver Performance 
VII. Research and Development Programs 

A. Procedures 
;•■■:>';. -^ B. Equipment • - ■-:•:;-•; ^;.-^\ . - 

C. Training 

D. Biomedical and Diver Performance 
VIII. Implementation of Results 

IX. Schedule 



49-118 0-79 



76 



1. Purpose 

The Outer Continental Shelf Lands Act Amendments of 1978 v/as signed into 
law "to establish a policy for the management of oil and natural gas in 
the Outer Continental Shelf ;-iOpj;^rqi:eci,^e marine and coastal environment; 
to amend the Outer Continenttjj^EgvlWi^s Act; and for other purposes." 

The "Outer Continental Shelf" as used in th 
the continental margin lying beyond state b 
jurisdiction. The continental margin consi 
the continental slope, and the continental 
margin is the land (continent) on one side, 
other (see Figure below). A more specific 
Continental Shelf (OCS) is difficult becaus 
term continental shelf is inconsistent with 
i.e, variations in the state jurisdiction ( 
while others have 3 marine league limits), 
and classification of shelf resources. 



is Act means that portion of 
oundaries within U.S. federal 
sts of the continental shelf, 
rise. Bounding the continental 

and the deep seabed on the 
definition of the Outer 
e the legal meaning of the 

the general scientific meaning, 
some states have 3 mile limits 
depth of water, and location 









V, 


State* 1 

Control I Feder»I Conifoi 


LAND 


V lerrttotial | 


OCEAN 




~~\^ 




Conimenut Shell 


Continenul 
Slope 


\ 








Continenul 


Oe.p 
S<ibFd 




AMtouT^ moit li#"« tofliro" •! l.m.iwi lo 3 m-Wt f loiil* •"J Itm ft*.f row 


lOl 



The purposes of the Act are to: 

(1) Establish policies and procedures for managing the oil and 
... , natural gas resources of the Outer Continental Shelf which are intended 
to result in expedited exploration and development of the Outer 
Continental Shelf in order to achieve national economic and energy 
policy goals, assure national security, reduce dependence on foreign 
sources, and maintain a favorable balance of payments in world trade; 

{2) Preserve, protect, and develop oil and natural gas resources 
in the Outer Continental Shelf in a manner which is consistent with the 
need to (A) make such resources available to meet the Nation's energy 
needs as rapidly as possible, (B) balance orderly energy resource develop- 
ment with protection of the human, marine, and coastal environments. 



77 



(C) insure the public a fair and equitable return on the resources of 
the Outer Continental Shp^f-<;en/+ (jHemreservp and maintain free enter- 
prise competition; L/L'v/'^uL U 

(3) Encourage development of new and improved technology for 
energy resource production v;hich v/ill eliminate or minimize risk of 
damage to the human, marine, and coastal environment; 

(4) Provide States, and through States, local governments, which 
are impacted by Outer Continental Shelf oil and gas exploration, develop- 
ment, and production v/ith comprehensive assistance in order to anticipate 
and plan for such impact, and thereby to assure adequate protection of the 
human environment; 

(5) Assure that States, and through States, local governments, 
have timely access to information regarding activities on the Outer 
Continental Shelf, and opportunity to review and comment on decisions 
relating to such activities, in order to anticipate, ameliorate, and 
plan for the impacts of such activities; 

(6) Assure that States, and through States, local governments, 
which are directly affected by exploration, development and production 
of oil and natural gas are provided an opportunity to participate in 
policy and planning decisions relating to management of the resources 
of the Outer Continental Shelf; • 

(7) Kinimize or eliminate conflicts between the exploration, 
development, and production of oil and natural gas, and the recovery 
of other resources such as fish and shellfish; 

(8) Establish an oilspill liability fund to pay for the prompt 
removal of any oil spilled or discharged as a result of activities 

on the Outer Continental Shelf and for any damages to public or 
private interests caused by such spills or discharges; 

(9) Insure that the extent of oil and natural gas resources of 
the Outer Continental Shelf is assessed at the earliest practicable 
time; and 

(10) Establish a fisherman's contingency fund to pay for 
damages to commercial fishing vessels and gear due to Outer Continental 
Shelf activities. 

Section 21 of the Act establishes procedures for study, review, coordination 
and, if necessary, revision of safety regulations to promote safety and 
health in the exploration, development, and production of the minerals of 
the Outer Continental Shelf. Section 21(e) states: 



-2- 



78 



The Secretary of Commerce, in cooperation v/ith the Secretary 
of the Department in which the Coast Guard i,$ operating, and 
the Director of the National Institute for Occupational Safety 
and Health, shall conduct studies of underwater diving tech- 
niques and equipment suitable for protection of human safety 
and improvement of diver performance. Such studies shall 
include, but not be limited to, decompression and excursion 
table development and improvement and all aspects of diver 
physiological restraints e^&<y)Uicfe«<&,gear for exposure to 
hostile environments. r Jh^/W H P 

This Program Development Plan (PPP) is being developed specifically in .. 
response to Section 21(e) of the Act. With the assistance of the other 
designated agencies, the Department of Commerce (NOAA) is developing a 
study program designed to increase diver effectiveness, improve operational 
safety, and reduce those safety and health hazards associated with diving 
operations on the Outer Continental Shelf. In addition to obtaining 
assistance from other federal agencies, NOAA will solicit comm.ents and 
recommendations from the private sector to ensure that any resulting 
research efforts will be responsive and of value to diving safety and 
performance. 

II. Background 

The vast majority of all U.S. commercial diving activities prior to 1960 
v/ere conducted in shallow waters (i.e., the inland waters, harbors, and 
sheltered coastal waters) for construction, repair, and salvage work. 
Inland and harbor diving is limited in depth by geography as v/ell as by 
the work to be performed. The majority of inland and harbor diving occurs 
at depths less than 100 feet of seawater (fsw). 

The first offshore drilling platform was in the Ellwood Field, off Santa 
Barbara, California, in 1924. The next offshore development occurred in 
1947 when a 1,200 ton structure was erected in 20 feet of water in the 
Gulf of Kexico. 

By 1970 energy requirements and developing technolog>' resulted in the 
installation of a 7,000 ton platform in 373 feet of water in the Gulf of 
Mexico. In January 1978 there v/ere 354 manned platforms, 2168 fixed 

r+ ^..r'*-,,^^^ ^f =11 *,,^^^ lOnn - 1.. ,_J 4. 1- l.ir L -• 1 - 



and 150 mobile offshore drilling units exist in the Gulf of Mexico under 
the jurisdiction of the U.S. Coast Guard and the Department of Interior. 

Since 1960, commercial diving activities have utilized several breathing 
mixtures, in addition to air, to permit work at greater depths. The offshore 
diver does not have, because of geography, as severe a depth limitation 
as does the inland and harbor diver and may work at depths in excess of 

-3- 



79 



1,000 fsw, with the majority of the diving activity occuring between the 
surface and a depth of 500 fsw. Technology has advanced sufficiently to 
enable working dives at depths in excess of 1,000 fsw. Divers are utilized 
extensively in most phases of the offshore energy industry -- exploration, 
construction, production, pipeline transportation, and maintenance. 

and the .current trend in offshore oil 
~i^s can be anticipated. 



Based on national energy need^__^apd t]ie curr 
exploration, deeper and longer v/oB; rng Si |e 



At present there is wide diversity in the quality, quantity, and direction 
of research being applied to the needs of the divers working on the Outer 
Continental Shelf. The U.S. Navy has had and continues to have, an 
important role in the development of equipment and procedures designed to 
support manned underwater activities. U.S. Navy activities, however, are 
limited to military missions and Navy research efforts are thus primarily 
directed to their operational requirements. 

Surface supplied (umbilical) diving is more common than scuba (self- 
contained) diving for Outer Continental Shelf commercial operations. 
This method involves supplying the diver with a breathing medium, either 
air or mixed-gas, through a hose, and other necessary life support 
measures, as required, from a remote source located at the surface. 
Surface supplied diving allows monitoring of the working diver, who is 
tethered, and in communication with the surface control station. 

When a dive is lengthy or particularly deep, the use of a diving bell may 
be appropriate. A diving bell is a device which allows the diver to be 
transported to and from the underwater worksite. 

Hixed-gas diving is carried out with a breathing medium consisting of 
oxygen and an inert gas or gases such as helium or nitrogen. In Outer 
Continental Shelf and offshore mixed-gas diving, a helium and oxygen 
mixture is most commonly used. Commercial mixed-gas operations usually 
involve surface supplied diving and may utilize a closed bell and saturation 
diving techniques. 

In saturation diving, the body tissues become saturated with the inert 
gas or gases in the breathing medium. Saturation diving is used in 
situations where the diver will be exposed for long periods of time to 
elevated (high ambient) pressure conditions. The advantage of saturation 
diving is that once the body tissues become saturated with the inert gas 
or gases at any given depth, no additional decompression is needed 
regardless of the length of time of the diver's exposure to the elevated 
pressure. 

III. Organization and Participants 

In accordance with Section 21 of Section 208, of Title II, paragraph (e) 
of the Act, the draft plan for this program has been developed by the 
three lead agencies, National Oceanic and Atmospheric Administration 
(NOAA), Coast Guard, and the National Institute for Occupational Safety 



80 



and Health (NIOSH), with 1;he assfstance of the Navy, the Occupational 
Safety and Health Administration fOSMA), National Heart, Lung and Dlood 
Institute, the Department of thejlnterirwvand the Department of Energy. 

This draft has resulted from a series of meetings v/ith representatives 
from the above agencies and should be regarded as a preliminary draft only. 

A final plan could not be developed properly without the cooperation and 
contribution from the commercial diving and academic communities. Their 
representatives, therefore, will be given an opportunity to review this 
preliminary draft and will be invited to participate in a public forum on 
May 29, 1979, sponsored by NOAA, the Coast Guard, and the NIOSH, with the 
assistance of the Undersea Medical Society and the Marine Technology 
Society. This forum will afford the non-federal community an opportunity 
to discuss and modify the program so that it will be optimally responsive 
to the intent of the Act. Subsequent to the public forum, assistance 
will be sought from individuals representing both government and non- 
government organizations for preparation of the final plan to further 
ensure that the research areas selected will be of direct benefit to the 
offshore diving community. With respect to the diving industry, it is 
hoped that information will be provided from management, the working 
diver, and from specialized technicians. Contributions from such sources 
should prove invaluable in developing a balanced program. 

IV. Approach 

The overall goal of this program is to "conduct studies of underwater 
diving techniques and equipment suitable for protection of human safety 
and improvement of diver performance." The development of the program 
and its implementation will be done with the participation of both federal 
and non-federal organizations as described above. Although individual 
research projects have not been selected, some basic premises have been 
agreed upon by the representatives of the responsible federal agencies. 
These are as follows: 

- Every effort will be made to utilize information from both national 
and international sources in the planning and implementation of this 
program. 

- The program will be responsive to the needs of the working and 
scientific diver on the OCS. 

- The program will be national in scope. 

- Where research facilities are required, existing facilities will be 
utilized whenever possible. 

- Federal and non-federal facilities will be used as appropriate. 

- Funds will not be sought for the purpose of constructing new hyper- 
baric facilities 

- Funds will be made available to federal and non-federal organizations 
to aid in solving selected immediate and long-range needs. 

- Proprietary information, so identified, will be safeguarded. 

-5- 



81 



V. Program Management 

The Department of Commerce (fJOAA) has been identified in the Act [Section 
21(e)] as the lead agency for the development and implementation of this 
program in cooperation with the IJIOSM and Coast Guard. In accordance 
with Section 21(f), NOAA has sought and obtained the assistance of the 
five federal agencies listed in Part II of this draft plan. The involved 
agencies 



are. depicted graph icaiJY^eJ-ow^M 



National Oceanic and Atmospheric Administration 



U.S. Coast Guard 



NIOSH 



U.S. Navy 



OSHA 



DOE 



DO I 



NIH 



The program will be managed 
representatives from the abo 
academic communities. While 
participating agencies (UOAA 
a technical and policy guida 
agencies will primarily be i 
expressed in this initial pi 
those from NOAA, should not 
respective agencies. The fi 
an official agency review in 



by NOAA with the continued assistance of 
ve mentioned agencies and from the diving and 
the representatives of the principle 
, NIOSH, and Coast Guard) will serve in both 
nee role, the participation of the other 
n the form of technical advisors. The views 
an by the agency representatives other than 
be construed as official positions of their 
nal planning document will, however, undergo 
itiated by the Department of Commerce. 



An ad hoc advisory group will be formed, composed of federal agency 
representatives and individuals representing the diving industry, the 
academic community, and organized labor. The responsibilities of this ad 
hoc group will include, but not be limited to, providing guidance on 
structuring and re-structuring the program, assigning program priorities, 
and reviewing the progress of projects undertaken. 

NOAA will serve as the program focus both for funding and coordination. 
It is anticipated that research and development programs will be implemented 
primarily through grants and contracts with non-federal organizations, 
and through transfer of funds amongst federal agencies where appropriate. 



VI. 



General Objectives 



The following four objectives are categories into which proposed programs 
have been placed. Elements of each category are required to ensure 



82 



a balanced program. Research and development efforts v/ill be coordinated 
closely among those organizations already engaged in supporting these 
areas, such as NOAA, the U.S. Navy, the fiational Institutes of Health 
(NIH), private foundations, and industrial organizations. The order in 
which the objectives are presented in this preliminary draft is not 
intended to imply a priority and should not be construed as such. 

A. Procedures L^ i:\i/i-*^*t li 

Emphasis v/i 1 1 be on the responsiveness of routine procedures in the 
event of an emergency or life-threatening situation. The type of 
equipment used will have an important relationship to the procedures 
involved. Procedural research addressed will relate primarily to 
those factors concerned with the safety and health of divers. 

- Example areas of concern are: communications, diving bell 
recompression chamber mating, evacuation of offshore plat- 
forms, medical procedures, and designation of responsi- 
bilities during emergencies. 

B. Equipment 

V/ithin the present context, equipment is defined as that which is 
supportive of diving operations from a medical and operational safety 
standpoint. The diving industry has made great strides in developing 
personal support equipment such as diving helmets, regulators, 
umbilical hoses, and thermal control systems, and is continuing such 
efforts as required by diving operations. Because pf high costs 
and extended time lags it is more difficult, however, for industry 
to support the development of basic technology and criteria for 
standardization leading to long range improvement in equipment systems. 
Federal support, therefore, should be used for those programs identified 
by industry, which will have direct operational benefits but are not 
necessarily responsive to immediate day-to-day problems. 

C. Training 

The procedures for selecting and training divers and support personnel 
should be designed not only to provide qualified individuals but also 
to anticipate future skill requirements. Considering the rapid 
technological advances being made in the field of diving, it is 
essential that training and retraining programs be developed that 
respond rapidly to such advances with respect to both equipment and 
procedures. 

Areas in which training is required include divers, tenders, 
specialist support personnel, hyperbaric physicians, emergency 
medical technician/divers, and diving supervisors. 



83 



D. Biomedical and Diver tPerformanp^'?-^ 

Extensive research has been performed over the years in the field of 
hyperbaric medicine. The primary sources for support of this research 
have been the U.S. Navy and the National Institutes of Health v/ith 
limited support coming from the National Science Foundation, fllOSH, 
NOAA, the U.S. Air Force, NASA, and private industry. Recognizing 
the existence of the above mentioned research programs, particularly 
those of the Navy and NIH, no attempt will be made to initiate en 
extensive basic biomedical research program in response to Section 
21(e) of the Act. Emphasis ivill be placed on filling specific gaps 
in present knov^ledge, conducting critical studies, addressing long 
range health problems, and applying the results of prior research 
and making it available to interested parties. 

In 1974, NIOSH formed a Federal Diving Task Force in an effort to 
coordinate the national diving community and to establish priorities 
for its principal needs v/ith respect to occupational safety and health. 
One of the results of the Task Force activity was the "National Plan 
for the Safety and Health of Divers in their Quest for Subsea Energy." 
This plan, which was developed vn'th the participation of the diving 
industry, was published by the Undersea Medical Society in January 1976. 
Since that time Federal diving regulations were promulgated by OSHA 
in July 1977, which became effective October 20, 1977, and by the 
Coast Guard in November 1978, which became effective February 1, 
1979. The "National Plan" primarily addressed biomedical considera- 
tions and will be used as a reference document for those considera- 
tions during the development of the current PDP. Special workshops 
will be held, when appropriate, and literature searches made using 
the bibliographic resources of the Undersea Kedical Society prior 
to intiating new research programs. These procedures should result 
in the identification of critical problem areas and minimize duplica- 
tion of research or development efforts. 

VI 1. Research and Development Programs 

The following research and development programs do not in any way reflect 
an exhaustive list. They dre based on recommendations by nur.ierous 
individuals and on previous documents and articles. The programs are not 
listed in order of priority. Priorities will be established with assistance 
of the ad hoc advisory group following consideration of comments and 
reviews by both federal and non-federal organizations. 

A. Procedures Program 

Experience in the North Sea has shOwn the need for a capability to 
evacuate diving and non-diving personnel from offshore platforms 



-8- 



84 



in the event of emergencies. If a diver is under pressure during an 
etrergency requiring evacuation, the situation is complicated furtlier. 
It may be necessary to provide a system capaLile of keeping a diver 
under pressure continuously during transit from an offshore location 
to a treatment center on shore. Such a system requires standard mating 
flanges, procedures, and closely coordinated communication and 
transportation. A study is needed to identify the necessary elements 
in this system for operations on the U.S. continental shelves. 
This program should not require research and development but will 
require close cooperation amongst the Coast Guard, the diving industry, 
equipri'ent manufacturers, and those organizations operating shore- 
based hyperbaric treatment facilities. There are sufficient facilities 
existing on shore, however, so that construction of nev/ treatment 
facilities should not be necessary, ["^i'"^" A [t^'i'' 

B. Equipment Program 

As stated in Section VI-B, the emphasis here v/ill be on the safety 
and operational aspects of equipment support systems rather than on 
the development or refinement of personal equipment items. Examples 
of such studies are: 

Environmental Effects - the long range effects of adverse 
elements of the marine environment such as salt water, 
pollutants, wave action, and oil on life support systems 
components. 

Performance Standards - A review of equipment performance 

standards. 

Equipment Interface - The requirements for interfacing equipment 
coniponents such as diving bells, recompression chambers, and 
their relation to emergency evacuation procedures. 

Handl ing Gear - This program will involve the review of basic 
criteria and the recommendations for safe load requirements 
for primary and backup handling systems. The capabilities 
of systems used to lower and raise divers, bells and other 
underwater equipment will be evaluated including electro-hydraulic, 
air, mechanical and other systems with respect to extreme heat 
and cold, viscosity of fluids and oils in extreme temperatures, 
and the effects of external pressure on system components. 

Breathing gas systems - Review existing standards and recommended 
minimum safe requirements for design, cleaning, inspection, gas 
filtration, nianifol di ng, and filling of breathing gas containers. 
The wide differences among standards which now exist create 
difficulty in achieving uniform safety practices. 

CO? Scrubber Systems - The state-of-the-art of CO2 absorbent 
methods needs to be reviewed to determine how operational 

-9- 



85 



efficiency and duration of scrubber systems can be increased. 
Possible approaches include a fresh looV at cannister design 
v/ith respect to flow chaf-acteristics, temperature, humidity, 
and capacity; and the exprninatjon^[of -possible nev/ absorbent 
material s. 

Closed Cycle Rebreather and Push Pull Breathing Systems '- Exten- 
sive work has been done over the past 10 years on the development 
of mixed gas rebreathers. The U.S. Navy, utilizing technology 
developed by industry as v/ell as its ov;n, has developed end 
tested a push-pull rebreathing system which not only is suitable 
for operating out of diving bells to a depth of 1,000 feet, 
but which also conserves expensive helium. While this system 
has been designed to meet Uavy requirements, the offshore 
diving industry should benefit directly with an appropriate 
transfer of technology. Accordingly it is proposed to initiate 
a small effort to implement this technology transfer from the 
Navy to the diving industry. 

Supervisory Control Station for Diving Operations - Offshore 
diving operations are becoming increasingly complex and 
sophisticated with the use of open and closed diving bells, 
diver-lockout submersibles, decompression chambers, remotely 
controlled vehicles, and one-atmosphere diving systems. 
Because of the increase in system complexity and depth of 
operation, consideration should be given to the development 
of an integrated operational control station which takes full 
advantage of current electronic and computer technology. A 
properly designed system would permit the operations supervisor 
to maintain cognizance and be continually updated on the status 
of even the most complex systems. This would permit the antici- 
pation of system malfunction, monitoring of the divers, coordination 
of support personnel, and emergency and abort procedures including 
decompression and treatment schedules. While the technology is 
readily available, an intitial effort is needed to identify the 
parameters to be included, to develop the general aproach, system 
configuration, and operational characteristics. 

C. Training Program 

Curricula 

- Specialist Training: The complexity of technology in the field 
of diving is increasing continually. On the assumption that this 
trend will continue, there will be a need for specialized training 
for divers and diver support personnel. The selection of topics 
for training will be made in cooperation with the ad hoc advisory 
group. The role of federal government will be to assist in the 
development of the curricula and the establishment of the training 
programs but actual training will be carried out by non-federal 
organizations. 

-10- 



86 



- Emergency Medical Technician (Diving) EM.td: As in other areas, 
the need for emergency medical training is increasing in the field 
of diving. Because of the impractical ity of providing physicians 
on offshore facilities, there is a need to train selected diving 
personnel in the emergency medical care of diving casualties. 
While one or two organizations do offer such training, there 

is a need to develop criteria for established curricula resulting 
in a certifiable course that is recognized by the Department 
of Transportation on the same basis as other specialized courses 
in emergency medical care. In addition to providing basic 
training, it is important to establish a procedure to allow 
for retraining (refresher coupsesj yto .ensure the utilization 
of the most current techniqufes,'.6f e.Tierqency medical care and 
the maintenance of skills. "-"- ^"^ "- *- 

- Diving Physicians: An expansion of the current NOAA/Navy/ 
Undersea Medical Society program for training physicians in 
diving medicine, v/ith a goal of training and qualifying about 
150 physicians over a five year initial period. Federal support 
should continue throughout this initial period, after v;hich 

the responsibility for maintenance at this level should be 
assumed by non-federal organizations. 

- Training of Research Personnel: Development of a program to 
train scientists and engineers in the techniques of deep water 
diving and the use of the equipment involved. Such a program 
would be carried out with the cooperation of commercial diving 
training organizations. The investigations mandated under 
Section 20 of this Act requires that there exist a cadre of 
scientists and engineers capable of conducting underwater 
research programs on the DCS. 

D. Biomedical Program 

This program has both applied and basic elements. The dual goals 
of providing answers to immediate problems plus the study of 
specific basic medical issues should assure the systematic improve- 
ment of diver effectiveness and at the same time minimize health 
hazards. It is recognized that the role of the diver is shifting 
as technology advances, and that in some instances there will 
continue to be engineering solutions to what historically have been 
biomedical problems, e.g., the one atmosphere diving system and/or 
remotely controlled manipulators. The following proposed programs 
fall into two general categories: Those of an applied nature 
addressing such topical areas as accident management, medical 
standards, and practical problems facing the diver; and those 
addressing more basic research in diving medicine and physiologv. 
It is particularly in the latter areas that extra care. will be"' 
taken to avoid duplicating ongoing research programs. It is the 
intent of NOAA to encourage basic research in areas where research 
gaps exist. In areas where research is already proceeding, efforts 

-11- 



87 



v/ill be made to utilize and/or perhaps supplement existing programs as 

specific requirements dictate. ' 'i '■"[', -,. ' ~ '.' 

The use of the ad hoc advisory committee to help monitor this program 
will be of particular value because representatives of those 
organizations supporting most current diving research will be members. 

Examples of recommended applied biomedical programs are: 

- Diving Accident t'.anagenent - NOAA, in cooperation with the 
Undersea Hedical Society, is in the process of establishing 

a national diving accident network. This netv/ork should permit 
the expeditious handling of diving accident victims using 
existing emergency evacuation systems and treatment centers. 
The use of an accident investigation team will facilitate the 
acquisition and dissemination of accident related information. 
A problem needing specific attention in this regard involves 
the proper examination of diving accident fatalities. The 
true cause of death in a pressure-related accident may 
inadvertently be obscured by a medical examiner who is not 
familiar with hyperbaric physiology. For this reason, the 
broad dissemination of information relating to the proper 
autopsy procedures in such cases is important. It is proposed 
therefore to develop a system for medical examiners, which 
provides the requisite medical expertise on the handling of 
diving casualties. 

- Medical Criteria Standards - The growth of national diving 

activities has been accompanied by an increase in diving 
related medical problems. Medical aspects of diving is a 
subject area that is not covered well in most medical school 
instruction since these problems are not seen much, if at all, 
in the general practice of medicine. Interested physicians 
can easily acquire the knowledge of the general aspects of 
diving medicine sufficient to treat common diving complaints 
or to recognize the need for consultation with an expert 
specializing in complex diving medical problems. It would be 
useful to patients and medical practitioners alike if the 
incidence of more common medical problen^s of diving were 
identified and standard guidelines were established for the 
provision of medical care to divers and for the conduct of 
medical and paramedical instruction in general diving medicine. 
The results of this study will be fed into existing physician 
and Emergency Medical Technician Diving (EKTd) training pro- 
grams. 

An additional drea needing investigation involves identifying 
individual differences with respect to tolerance to increased 
atmospheric pressures and the effects of such increases on 
performance. If such differences can be clearly delineated, 



-12- 



88 



it may be possible to refine. phy_sTCdl examination procedures 
with the goal of improving'the q'jiilitV of diver selection. 

- Epidemiological Study - This would be a broad study to determine 
long range health problems associated with diving, factors 
associated with pressure-related accidents, effectiveness of 
different decompression sickness treatment regimes, and 

causes of fatal diving accidents. Such a study not only 
would aid in improving diver safety and health, but would 
aid in the acquisition of ectuaricl data and provide- inforrra- 
tion to assist in the selection of future research areas. 

- National Diving Data Center - Establishment and maintenance of 
a National Diving Data Center to collect, analyze, and dissemi- 
nate data obtained from the national diving accident netv.'ork, 
university data centers, treatment centers and federal agencies 
concerned with the safety and health of divers. The data 
assembled would be related to decom.pression schedules, treat- 
ment of diving casualties, and diving accidents. 

- Air/Nitrogen-Oxygen Saturation Diving - Recent investigations 
have shown that it is possible to use air and nitrogen-oxygen 
breathing mixtures in situations which heretofore v/ere thought 
to require more exotic and expensive breathing gases. Extended 
bottom times can be obtained at depths up to 250 fsw when divers 
saturate on air or nitrogen-oxygen mixtures at depths frcr- 
50-100 fsw. Additional research is needed, hov/ever, to develop 
repetitive dive schedules, decompression procedures, and the 
procedures for using helium-oxygen as a breathing gas when 
making excursion dives from a saturation breathing mixture of 
air or nitrogen-oxygen. 

- Helium-Oxygen Diving - Although helium-oxygen breathing mixtures 
have been in use for many years, the significant increase in 
diving depths is continuing to require new research. For 
example, studies are needed to further refine and improve the 
safety and efficiency of excursion diving from saturation on 
helium-oxygen breathing mixtures. Specifically, information 

is needed on optimizing compression rate and decompression 
profiles. In addition, there is a need for improvement of 
helium-oxygen diving procedures for diving to depths of 150- 
600 fsw and to increase bottom times significantly beyond their 
current limits at all depths. 

- Thermal Problems in Diving - Diving in winter, northern lati- 
tudes, in deep water, or when using helium, can produce severe 
thermal problems when the diver is not protected adequately. 
Chilling, even if not severe enough to threaten life, will 
produce loss of dexterity and sense of touch in the hands. 



-13- 



89 



making it difficult for a diver to do useful v/ork or in some 
instances to control divino ertuipment. The ability to think 
clearly and short-term memory jtl so hiay be affected seriously 

by cold. A combined approach should be pursued to further 
develop protective garments that v/ill permit divers to v/ork safely 
and efficiently underv/ater in all depths and locations. 

Areas requiring study include: establishing thermal tolerance 
levels; improving m.ethods of monitoring the diver's thermal 
state; developing improved insulation and self-contained pcv/er 
sources and to define the relationships between body heat loss 
and perforn.ance. 

Kicrobiol ogy - T^icrobiol ogical hazards with respect to diving 
fall into three general categories: the effects of increased 
atmospheric pressure on the behavior of microorganisms; the 
possible effects of increased pressure on the human immune 
response; and infections from pathogenic organisms found in 
sea v/ater. Research is needed to define the consequences of 
these variables for diving. Specific areas in which research 
is needed include: the effects of hyperbaric conditions on the 
permeability of chemicals in microbial processes, microbial 
metabolism of organic and inorganic compounds, enzyme activity 
and protein synthesis. 

Research is also needed related to infectious and immuno- 
logical procedures in connection with problems stemming 
from living in close xonfi nement such as in pressure chambers 
or undersea habitats. 

With respect to the third category, there has been increasing 
recognition of the health risks to divers operating in polluted 
waters. In order to assess the risks involved, as we VI as 
the efficacy of decontamination procedures currently employed 
aboard vessels and offshore platforms, it is necessary to carry 
out microbiological studies that include both microbial ecology 
and medical microbiology, so that the incidence, seasonal and 
spatial distribution, persistence, and pathogenicity of the 
microorganisms found in polluted estuarine and marine water 
and sediment be determined. 

Medical and Surgical Treatment Under Hyperbaric Pressure - 
Medical or surgical treatment within a diving chamber under 
pressure may be unavoidable. Even emergency decompression for 
transfer to a medical center for necessary treatment may involve 
more delay than is permissible under some circumstances. In 
preparing to deal with a hyperbaric medical crises, the physician 
must be aware of the constraints of the chamber and of the lack 
of medical precedents and guidelines. Are the dosages of 
common pharmaceutical agents, antibiotics or anesthetics, for 

-14- 



90 



example altered by high-pressure? The reversal of anesthetic 
effects by high pressure is a \/ell known but poorly understood 
phenoir.cnon. Thought must be given to diagnostic tests and 
procedures that will v/ork in the chamber, to the selection of 
anesthetic approaches and surgical procedures, to the retjuire^''^ 
nient for communication equipment adequate to provide expert 
consultation to the medical personnel at pressure within 
the chamber, and to the conduct of nursing and life-supporting 
procedures while the patient is being decompressed before 
transfer to medical treatment centers. A compendium of such 
information and procedures would be invaluable to (1) those 
who are called upon to render emergency medical or surgical 
treatment in the chamber and (2) those v/ho have responsibility 
for the medical care of v/orkers in the diving industry end for 
the advance preparations necepsary'-to'-nial-.e such emergency 
procedures successful. t.-y LSc^-^ii L 

- Delayed Treatment of Decompression Sickne ss - In instances 
in which there is a significant delay between the onset of 
decompression sickenss and recompression, standard treatment 
procedures may not be effective. Such instances can result 
from operating in a remote location, failure of a recompression 
cham.ber to function properly, or transportation difficulties. 

Studies are needed to determine the best pre-recompression 
treatment procedures, i.e., adjunctive drug therapy, admini- 
stration of oxygen, intravenous fluid therapy, to oevelop 
alternative treatment procedures when the standard procedures 
fail to alleviate symptoms of decompression sickness end to 
establish treatment flow diagrams, a-nd related emergency care 
enroute to the treatment facility. 

The following programs are examples of studies of a more basic 
nature. These problems have been the subject of much research in 
the past. Before undertaking new research efforts in these areas, 
the advice of experts in the field would be sought in order to 
avoid duplication of efforts and to facilitate the selection of 
specific gaps in our knowlege that need to be filled. 

- Mechanism of Oxygen Toxicity and its Prevention - Since the 
partial pressure of oxygen is a function of both proportion 

and absolute pressure (depth), protection against the variations 
of oxygen pressure becomes an. increasing problem with deeper 
diving, as the percentage of oxygen in the breathing mixture 
must become smaller and smaller. On the other hand if 
protection against oxygen toxicity, could be developed there 
are applications for reducing decompression time or for 
improving the effectiveness of recompression therapy m which 
the utilization of high pressures of oxygen would have definite 
advantages. There is a need to conduct investigations into 
the effects of oxygen under pressure, both in the basic 

-15- 



91 



research areas of the biochemical mechanisms of oxygen toxicity 
and its prevention and in the more applied/developments of 
testing compounds or diving procedures which enhance diving 
capabilities v/hile avoiding oxygen' toxicity. 

Sudden Loss of Consciousness of Divers - There have been a 
number of unexplained cases of loss of consciousness of divers 
during operational diving, some of which have resulted in 
death. The underlying mechanisms may involve physiological 
responses to hyperbaric conditions or variables associated with 
the partial pressures of the gases being breathed. If such 
deaths are to be prevented in the future, a better understanding 
of the physiological mechanisms is needed, especially with 
respect to cerebral function. 

Cardio-Respiratory Effects of Hyperbaric Exposures - The need 
to breathe compressed gases in diving to compensate for 
increased hydraulic pressure is the source of problems of 
decompression sickness and of the requirment for decompression 
schedules. 

The difficulty in ventilating with dense gases and of expanding 
the lungs against water pressure affects CO2 removal from the 
body and through that the body's acid-base balance. Differences 
in' hydrostatic pressures in diving force body fluids into the 
lung cavity where they affect both ventilation and circulation. 
A knowledge of the dynamic effects and interactions of these 
cardio-respiratory responses is probably basic to a complete 
understanding of almost every biomedical change in diving. 
Every advance in diving technology, development of new diving 
gas mixtures, new underwater breathing apparatus, extension 
of depth capabilities or prolongation of time at present 
diving depths will require a re-evaluation of how such changes 
in the conditions or environment of diving will impact on the 
diver's safety and health. An understanding of these processes 
might point the v/ay to safe engineering or operational 
exploitation of new possibilities in diving. An integrated 
program of investigation into the responses of the cardio- 
respiratory system to diving conditions is essential to the 
success of any biomedical research program in diving. 

Formation of Bubbles - Studies are needed of the exact 
mechanism for formation of bubbles in the diver's body and the 
relationship between general bubble formation and the specific 
initiation of decompression sickness. The formulation of 
decompression schedules to avoid decompression sickness is a 
pragmatic and inexact process just as is the formulation of 
recompression therapies to best treat the diver injured by 
decompression sickness or air embol ism. Being inexact, the 
procedures often are inefficient or ineffective and fail to 
protect the health and safety of divers concerned. 

-16- 



H9-118 0-79-7 



92 



New technologies in bioengineering and computer sciences have 
provided a beginning insight into the dynamic processes 
involved in inert gas functions within the body and in the 
formation and resolution of bubbles in living tissue. 
Investigations are needed into such factors as the difference 
between various inert gases, or combinations of them, which 
might be used in diving breathing mixtures. 

Furtlier progress in these' Ynvestigati'ons is fundamental to 
our understanding of the scientific basis for human diving. 
The information generated can serve as bioengineering data 
for accurate and efficient computer modeling of decompression 
procedures and also can lead to improved recompression 
therapies based upon a fuller understanding of the generation 
of decompression injury and of the best means to restore 
normal function after such injury. 

High Pressure Nervous Syndrome - When vertebrates, including 
man, dre exposed to pressures greater than 15 ATA, either in 
the dry hyperbaric environment of a pressure chamber or by 
the hydrostatic pressure of actual submersion, signs and 
symptoms appear which include tremors of the extremities, 
more severe myoclonic jerking, fatigue, and ultimately 
convulsions. In association with these characteristics, 
there are changes in the electrical activity of the brain 
and, at times, nausea, dizziness, and vertigo. 

In humans the above signs and symptoms compromise the High 
Pressure Nervous Syndrome (HPNS); they are affected by the 
rate of compression as well as by the hydrostatic pressure 
attained. At depths greater than 1500 fsw, even with very 
long compression times signs and symptoms of HPNS remain 
which may affect the performance, health, and safety of the 
deep diver. 

Once the taxonomy and signs and symptoms of HPNS have been 
identified, it is of importance to determine the best methods 
or profiles for compressing divers to great depths. This may 
involve testing and applying such factors as selection of 
personnel, compression profile, accommodation and adaptation, 
adjustment of temperature, and the use of nitrogen or various 
anesthetics to modify HPNS. 

Dysbaric Osteonecrosis - Dysbaric Osteonecrosis refers to 
destructive changes in the relative density of the affected 
bone. These changes are not of infectious origin, and thev 
have been noted in niany conditions such as chronic alcohoTism, 
pancreatitis, sickle-cell anemia, in patients using systemic 
steroids, and in caisson workers and divers. 



■17- 



93 



Despite the steady increase in published information, important 
facts about the cause, course, and prevalence of osteonecrosis 
are still unknov/n. Differences in compression/decompression 
exposures, inert gases, types of work, and traditional practices 
all appear to influence the' occurrence of this condition. 

The medico-legal aspects of this disease need to be established. 
Understanding the differences betv/een compressed air workers 
and divers, in terms both of anatomical sites and prevalence, 
may clarify the problem somewhat. 

In addition, experimental, clinical, and epidemiological 
research is needed to enhance our ability ot treat and prevent 
this condition. 

- Audio-Vestibular Injuries in Diving - Injury to the inner ear 
of the diver has serious and often permanent effect on the 
ability to hear or to maintain normal balance and equilibrium 
(not to mention the acute but extremely distressing sympto.T.s 
of nause, vomiting, and vertigo). These injuries are presumed 
to be the result of decompression sickness of a special type. 
The phenomenon is now recognized in association with rapid 
ascents in very deep diving. Investigations of the genesis 
of decompression bubbles in the anatomically protected organs 
of the inner esr, and of the mechanism of injury in such 
decompression accidents involving the audio- vestibul ar system 
may turn out to be extremely fruitful for the understanding 
of the general mechanisms of inert gas transfer within the 
body. That understanding may be necessary for the development 
of successful computer modelling of decompression schedules 
and of the rate of outgassing of the inert portion of diving 
breathing mixtures from the body of the diver. 

VIII. Implementation of Results 

The results of this program will be in ihe form of one or more of the 
following: scientific and technical recommendations for reports, new 
diving procedures, new or modified procedures for the treatment and 
emergency care of diving casualties, and new or modified equipment. In 
addition, the information obtained should increase our understanding of 
some of the basic mechanisms pertaining to hyperbaric physiology. 

The implementation of the results into practice should be greatly 
facilitated because of the active participation of the diving industry 
throughout the development of the program plan and the conduct of the 
work itself through grants and contracts. Further, because of the emphasis 
on balancing applied research and the application of existing data to 
current problems, with studying selected basic issues, direct benefits 
should accrue immediately to the working diver. Examples of such benefits 
are: safer and more efficient diving practices, improved equipment. 



-18- 



94 



reduction in operational costs and perhaps a. better understanding of 
diving by the non-diving public' ^ ■ :'■ , <. ; 

IX. Schedule 

January. 17 Completion of preliminary draft by lead agencies 

January 22 Meeting of other Federal agencies to present and 
discuss draft 

February 5 Announcement of the PDP procedures and status at 
the International Diving Symposium, Nev/ Orleans 

February 16 Second interagency meeting to discuss and receive 
comments from other federal agencies 

April 16 Completion of Revised draft PDP 

April 26 Announcement of plan in the Federal Register 

April 25 Draft PDP mailed out to academic and industrial 

community and to all other interested parties for 
comment 

Hay 29 Comments received from the public sector and 

discussed during a public forum in Miami, FL 

June-August Completion of final plan with assistance of 

representatives of both Federal and non-Federal 
organizations. 



95 

Mr. FoRSYTHE. One of the focuses of our hearing this morning 
has been on the seeming inability of agencies to meet congression- 
ally imposed deadlines. Our colleague David Treen has asked me to 
question you about NOAA's experience in complymg with a dead- 
line set in the Coastal Zone Management Act Amendments of 1976. 
On page 32 of the conference report on that legislation the 
managers stated: 

The conferees expect the Secretary to make the necessary determinations for 
extending lateral seaward boundaries in a timely manner, and to publish such 
determinations within 270 days after the date of enactment of this subsection. 

Mr. Treen tells us that the Louisiana-Mississippi boundary has 
not been determined despite the fact that oral hearings on that 

subject were held last May. \ , ^ o «7u 

How many boundaries have been extended by now.'' When you 
anticipate determining a seaward lateral boundary between Louisi- 
ana and Mississippi? , ., . r. .i. j t 

Mr. Walsh. I would also like to supply that for the record. In 
general though, there are a series of boundary disputes that are 
still unresolved. You mentioned the one there. This are also other 
disputes that I will respond to. 

[The following was received for the record:] 

National Oceanic and Atmospheric Administration, 

. . • Washington, D.C., May 25, 1979. 

Hon. Charles C. Finch, 
Governor of Mississippi, 
Jackson, Miss. 

Dear Governor Finch: As you know, section 308(b) of the Coastal Zone Manage- 
ment Act of 1972, as amended, provides for the annual calculation of allotments to 
each coastal state of the formula grant portion of financial assistance available to 
such states under the Coastal Energy Impact Program (CEIP) Since a portion of 
such formula grants are based upon specified outer Continental Shelf activities 
adjacent to each state, the Act also provides for establishing CEIP delimitation lines 
between the states, extending through the Continental Shelf, so as to determine on 
which state's side of the line such specified activities occur. , , j r- j 

If a lateral seaward boundary between two states has not been clearly detined or 
fixed by agreement or judicial decision, the Act requires that I (hy delegation from 
the Secretary of Commerce) establish that CEIP line according to the applicable 
principles of law. As of the present time, there has been no such agreement or 
judicial decision establishing a lateral seaward boundary between Mississippi and 

Thus for an extended period we have been involved in receiving information from 
the affected states, and conducting a careful analysis, pertaining to the applicable 
principles of law which guide me in establishing such line, if this becomes necessary 
due to the continued lack of agreement between your states. I apologize tor the 
substantial time which has been required for our analysis. This has been essentially 
due to the fact that present line is the first one that we have so addressed, ihe 
delay has resulted from substantial and unexpected problems which we have en- 
countered in the process, some of which were caused by the unique complexities 
related to this particular line, and some of which applied generically to all ^ihVi' 
lines but were encountered in the course of this first effort. I appreciate the 
assistance, courtesy and patience displayed by representatives of your state as we 

I now have completed an analysis of the materials available to me, including a 
report containing analysis and recommendations from a panel of expert consultants 
with whom we have contracted for assistance. Pursuant to may comments at the 
close of oral presentations last year on behalf of your states, I would like to convey 
to you the specific area within which I would establish a Mississippi/Louisiana 
CEIP delimitation line according to the applicable principles of law. 

Based upon my analysis, I have concluded that the applicable principles of law 
would call for the establishment of a line which is west of an equidistant line 
between Mississippi and Louisiana and east of a line approximating the southeaster- 
ly thrust of the Mississippi River Delta from the eastern jetty of South Pass on that 



96 

delta. I have had such lines portrayed on the enclosed chart, to assist you in 
visualizing the area I have selected.' 

As I have indicated before, we still prefer that the states agree on CEIP delimita- 
tion lines. Be advising you of the defined area within which I would establish a line 
if I must do so, I hope to provide a more concreate basis for discussion and 
agreement between Mississippi and Louisiana. In this regard, I would like to point 
out that we would be willing to accept for CEIP purposes an agreement on propor- 
tional sharing of CEIP formula grant funds within a specified area without the 
necessity for agreement on a single line. Our willingness to do so is based on the 
belief that it may aid in accomplishing our basic prurpose, which ultimately is the 
rational distribution of CEIP formula grant funds. Perhaps Mississippi would find 
this form of agreement more acceptable or feasible than Eigreement on a single line. 
If your states, upon reconsideration, wish to seek agreement at this point, I strongly 
encourage you to do so. I will allow you 2 weeks from receipt of this letter to decide 
if you desire the further pursuit of an agreement with Louisiana. If your states do 
not elect to pursue such course, then I will review all the information presented and 
establish a CEIP delimitation line. 

I look forward to your response to my proposal. We would be happy to answer any 
question you may have about the procedures. 
Sincerely yours, 

Robert W. Knecht, 
Assistant Administrator. 

Mr. FoRSYTHE. Congressman Treen asked that I question you 
about the number of diving fatalities experienced on the OCS after 
implementation of OSHA's diving standards. 

John J. McAniff, director of the National Underwater Data 
Center at the University of Rhode Island has stated that there 
were at least three OCS diving fatalities associated with offshore 
construction in 1978, after OSHA standards were implemented, but 
no more than nine in the preceding 8-year period, 1970-77. 

How do you account for the apparent increase in fatalities? 

Mr. Whiting. I would have to look at the particular cases. An 
absolute increase in the number of fatalities, is meaningless with- 
out information on actual hours of exposure. We would have to 
look at the total base of industrial activity on the OCS and com- 
pute the rate at which diving fatalities occurred in order to arrive 
at any reasonable explantation. 

Mr. FoRSYTHE. Do you want to look at the situation and respond 
for the record? 

Mr. Whiting. Yes, sir. 

Mr. FoRSYTHE. I would appreciate that. 

[The following was received for the record:] 

U.S. Department of Labor, 
Occupational Safety and Health Administration, 

Washington, D.C., May U, 1979. 

Hon. John M. Murphy, 

Chairman, Ad Hoc Committee on the Outer Continental Shelf, 

House of Representatives, Washington, D.C. 

Dear Mr. Chairman: Enclosed is the edited transcript of my March 7, 1979, 
appearance before your Committee. During my testimony, I indicated to Congress- 
man Treen that I would provide comments from the Occupational Safety and 
Health Administration concerning National Underwater Data Center figures which 
indicated an increase in the absolute number of deaths among divers on the outer 
continental shelf. 

To date we have been unable to obtain a copy of these data for our review and 
analysis. We reported this fact to a member of your Committee staff in an April 23, 
1979, telephone conversation. In that conversation it was agreed that we would not 
delay in providing OSHA's edited transcript, and that we would submit our analysis 
of the NUDC data as soon as possible. 



Enclosure: Placed in the files of the committee. 



97 

We appreciate your Committee's efforts in helping to ensure that workers on the 
outer continental shelf are provided with safe and healthful working conditions. 
Please call if we can be of further assistance to you. 
Sincerely, 

Basil Whiting, 
Deputy Assistant Secretary. 

Mr. FoRSYTHE. Mr. Langenkamp, I guess you really answered 
this one. Your recommendations on the 5-year leasing plan are 
that there should be seven lease sales per year to meet the produc- 
tion goals as you have outlined in your production study? 

Mr. Langenkamp. Yes. 

Mr. FoRSYTHE. In those seven lease sales, how many do you 
recommend in the gulf? 

Mr. Langenkamp. We are recommending three annually. If you 
will turn to table 3 on our testimony, we summarize some of those 
results. 

Do you have the results on that, Mr. Chairman? 

Mr. Hughes. I think the gentleman has it now. I understand the 
testimony was late in arriving because 0MB was rewriting it for 
you. 

Mr. Langenkamp. Not substantially. 

Mr. Hughes. I would expect you to say that any way. 

Mr. Langenkamp. Congressman Forsythe, if you will turn to 
page 14, you will see a summary and you note there that we have 
in the first column the seven-sale scenario and down below the 
quantity of oil and gas that are projected, 2.729 billion barrels 
resulting from those sales and 4.276 trillion cubic feet of gas. You 
will see by — this is just an extrapolation from the projection goals 
but you will see that by dropping to six sales, and retaining three 
sales in the gulf, we drop 14 percent in the probable oil recovery. 
We drop very little in regard to the gas recovery but if we drop 
from seven sales to six sales and reduce the gulf sales, from three 
to two, then you have a 4-percent decline in the oil recovery and a 
13-percent decline in the oil and gas recovery. We would stress that 
the resource figures which we have based all of this computer 
modeling on and so forth, are USGS figures. There are other fig- 
ures around but we felt that the USGS figures were the proper 
ones to use. 

Mr. Forsythe. Well, thank you. And you will make that a part of 
the record so that we can have all of that information. 

In the area of regulation for due diligence standards which we 
discussed at some length with the Department of the Interior, 
aren't these regulations within your legal authority? 

Mr. Langenkamp. Yes, that is correct. 

Mr. Forsythe. Has DOI consulted with you in this matter? 

Mr. Langenkamp. Well, at the present time as I understand it, 
Congressman, we are conducting a study in anticipation of regula- 
tions on the due diligence. 

Mr. Forsythe. You are conducting a study? 

Mr. Langenkamp. The Department of Energy. 

Mr. Forsythe. You are preparing to implement due diligence 
mandates? 

Mr. Langenkamp. That is correct. 

Mr. Forsythe. When is this going to come together? 



98 

Mr. Langenkamp. Well, I think before the end of the fiscal year 
we will have regulations on due diligence. We have emphasized the 
regulations in the area of bidding systems in the OCS production 
goals rather than diligence regulations, in these initial months 
after the passage of the act. 

Mr. FoRSYTHE. Certainly, I would think that with the concern the 
Nation has as does your Secretary, for our entire energy problem, 
the whole question of implementation becomes more crucial every 
passing day. 

This committee does have a strong interest in this area and I 
certainly urge the administration and every agency involved that 
we do not find things delayed between agencies as we go down the 
road. 

You say you have completed your proposal on the alternate 
bidding system? 

Mr. Langenkamp. Yes, that is correct. 

Mr. FoRSYTHE. Have they been published for comment? 

Mr. Langenkamp. No, they have not. They are presently under 
review at the Department of Interior. 

Mr. FoRSYTHE. How long has that been going on? 

Mr. Langenkamp. Well, it varied. There has been dialog between 
Energy and the Department of the Interior since the act was 
passed and I think that our informal and formal procedures re- 
garding these regulations are about to come to a conclusion, but 
they have not yet. 

Mr. FoRSYTHE. So actually you are saying that since the act was 
passed this dialog has been continuing? The normal process of 
submitting prepared regulations for review has taken place. I guess 
we did not pinpoint that and I guess it would vary with each 
specific new bid system, right? 

Mr. Langenkamp. Well, we made an informal submission to the 
Department of the Interior on the OCS bidding systems in Novem- 
ber, I mean in September, and since that time we have been — I do 
not make a great deal of distinction between the formal and infor- 
mal system. We are attempting to work cooperatively with the 
Department of the Interior and the relationship has been one 
characterized by give and take and as far as I am concerned, I 
think we are in the process of resolving the matter of these regula- 
tions in the very near future. 

Mr. FoRSYTHE. The word "process" has been used around here 
quite frequently. The period of review is what concerns this com- 
mittee. But you do say you feel confident that you are close to 
completing that current issue? 

Mr. Langenkamp. Yes. 

Mr. FoRSYTHE. And due diligence, will be complete within the 
fiscal year? 

Mr. Langenkamp. Yes. 

Mr. FoRSYTHE. Which is not too far down the road. 

Mr. Chairman. I think I will pass. 

Mr. Hughes. Thank you, Mr. Forsythe. 

First of all, Mr. Langenkamp, maybe you can interpret table 3 
for me. I must confess counsel and I are having some difficulty 
trying to understand your table particularly as it applies to the 
annual sale frequencies. 



" 99 

Mr. Langenkamp. I will attempt to answer any question you 
have but perhaps Bob Kalter can back me up if I cannot handle 
the question. 

Do you want me to just generally explain this or do you have a 
specific question? 

Mr. Hughes. Maybe you could tell us — you indicate annual sale 
frequencies and you have a column 7 and you have it broken down 
by regions. You have 12, for instance, for the Gulf of Mexico. 
Maybe you can tell me just what that 12 means. 

Mr. Langenkamp. That means three sales a year for 4 years. 
This is a 4-year span. 

Mr. Hughes. So the Atlantic would be one sale per year for 4 
years and the same thing with the Pacific and in Alaska would be 
two sales per year for 4 years? 

Mr. Langenkamp. Yes. 

Mr. Hughes. Is that what that means? 

Mr. Langenkamp. Not necessarily distributed in that order 
except maybe for the Gulf of Mexico. Bob Kalter wanted to make a 
comment on that point. 

Mr. Kalter. The table on the far left, which is listed as seven 
sales per year, covers the 1982 to 1985 timetable. We are assuming 
that the Interior Department August 1977 schedule stays in effect 
through the end of 1981 and that a new schedule is promulgated 
through 1981 to 1985. So we are talking here three sales per year 
for 4 years in the Gulf of Mexico and a total of four sales per year 
in the Atlantic and Pacific and eight in Alaska. 

Now, those are not necessarily distributed one per year. 

Mr. Hughes. Eight sales a year? 

Mr. Kalter. No, negative. 

Mr. Hughes. Eight sales for 4 years? 

Mr. Kalter. Over a 4-year period but not necessarily one each 
year in the 4-year period. What we essentially have done here is 
run a series of computer models which take account of the USGS 
resource estimates, the costs of production in each of the regions, 
assumed resource prices and the constraints; constraints on the 
leasing process, both as concerns the industry, as you mentioned 
before, and as far as the Government is involved in carry out the 
lease sales and from those, from that analysis, comes a series of 
potential lease sales in various areas and we have essentially mod- 
eled the expected production from oil and gas from going ahead 
with those sales. 

Now, what the rest of the table does is compare the recommenda- 
tion for seven sales a year with recommendations for six, five and 
four sales a year to see what the quantitative difference might be if 
you drop down to five or six or four. 

Mr. Hughes. Perhaps you can supply to this committee all the 
variables that went into your computation. 

Mr. Langenkamp. Congressman, we will be glad to submit a 
copy of the goals. 

Mr. Hughes. Without objection that will be received for the 
record. 

[The following was received for the record:] 



100 

OCS Oil and Gas Production Goals for 1985, 1990, and 1995 Assuming 
Mean Resource and Yield Levels for the Medium Low and Medium High 

Price Levels 



1 2 

Medium Low Price Medium High Price 





Estimated 














Source of Production 


1978 


1985 


1990 


1995 


1985 


1990 


1995 


Oil Production^ 
















Existing leases^ 


292 


257 


198 


97 


257 


198 


97 


DOI 1979-81^ 





27 


310 


201 


26 


319 


210 


Optimized 1982-85* 








73 


234 





80 


274 


Total 


292 


284 


581 


532 


283 


597 


581 


Gas Production^ 
















Existing leases 


4385 


3543 


2364 


1186 


3543 


2364 


1186 


DOI 1979-81 





207 


544 


259 


214 


556 


267 


Optimized 1982-85 








401 


511 





408 


536 


Total 


4385 


3750 


3309 


1956 


3757 


3328 


1989 


^S18.50/bbl and $3. 


50/mcf. 














2$23.85/bbl and $4. 


50/mcf. 















Annual production in millions of barrels. 

^USGS "most likely" estimate. 

^The proposed schedule provides for 6 sales in 1979, 4 in 1980, 
and 5 in 1981. 

Assuming 7 sales per year from 1982 to 1984 and two sales in 
1985. 

Annual production in millions of mcf. 

Mr. Langenkamp. We might mention that this key sequence of 
sales set forth is not necessarily the 6 level or the 5 level or the 4 
level. It is not necessarily the sequence that the Department of the 
Interior will select. The six-sale column and the five-sale and four- 
sale were optimum sale patterns at that level. 

Mr. Hughes. Obviously that does not take into account a lot of 
other variables that you have no control over, such as litigation 
which would really throw your computations off significantly. 

Mr. Langenkamp. That is right. 

Mr. Hughes. Also, I understand it is based upon USGS estimates 
of hydrocarbons in an area based upon seismic and geophysical and 
other testing? 

Mr. Langenkamp. That is correct. 

Mr. Hughes. They have been known to reduce that significantly 
in a very short period of time as we began to sink test wells into 
structures so that there is a great deal of speculation involved even 
within the components that go into the model. 

Mr. Langenkamp. I think that is generally correct. Dr. Kalter 
wanted to make a comment on that. 

Mr. Kalter. Congressman Hughes, we recognize the sensitivity 
of all numbers of variables, prices, production costs, et cetera, in 
the document that we have submitted for the record; and, by the 
way. Counsel O'Brien has been sent a copy in the last several days 



101 

and I think the minority counsel. We have attempted to run sensi- 
tivity analyses in all these assumptions. 

We have run it with high, low and medium resource ranges to 
see whether it would make any difference in the lease schedules 
that we are talking about and to see whether it would make any 
difference in the total levels of production. Obviously, it makes 
differences in the total levels of production. 

We are finding, somewhat hopefully, that it does not make a lot 
of difference in terms of the lease schedules themselves. When you 
go from a medium to a low or a medium to a high, the schedules 
tend to stay about the same, but the production drops when you go 
from medium down to low. 

Mr. Hughes. Did you factor in OMB's need for additional money 
in time to help balance the budget? 

Mr. Kalter. Negative. 

The entire process was run on the basis of maximizing social 
welfare in terms of economic value. We also ran it to maximize 
production and found that the difference between maximizing 
social value, in terms of economic value and maximizing value was 
less than 4 percent. 

Mr. Hughes. Let me ask a general question. 

I think that you indicated at the very outset of your testimony, 
Mr. Langenkamp, that the administration was very supportive of 
the chairman's initial opening statement that, with the world situ- 
ation being what it is, that it is even more important that we move 
along and inventory as best we can resources domestically. 

I wonder if you could tell me what your projections are for the 
next — well, until 1985 for OCS contributions to this kind of energy 
need? 

Mr. Langenkamp. Well, I think we have those figures here. I am 
told to refer to table 2. 

If you take a look at the projections based on the existing leasing 
schedule, this is on page 13. 

Mr. Hughes. I have it. 

Mr. Langenkamp. It sets forth the total annual production fig- 
ures for the year 1985, 1990, 1995, based on the existing leases. 

The 1979 through 1981 projected leases — and that sets forth our 
projections — and you can see what the contribution is. 

It is not as great as we would like, but you will also see that we 
have based it on two different price scenarios, a medium /low price 
and a medium/high price. 

Mr. Hughes. What do you refer to; what is your definition of 
"medium price"? 

Mr. Kalter. We ran four price schedules through the medium/ 
low price and the medium /high price scenarios being used for the 
national energy plan, the exercise that the department is going 
through right now. They are $18.50 a barrel for the medium/low 
price, and $23.85 for the medium/high price in constant dollars. 

Now, the production from the existing leases, which is Row 1 in 
the table, does not vary by price, because those numbers were 
furnished to us by the USGS as extrapolations in the current 
decline curves on existing leases. Everj^hing from that point on; 
that is, the scheduled sales for 1979 through 1981, and the opti- 
mized sales for 1981 through 1985, are based on different price 



102 

scenarios; because we anticipate different size reservoirs coming 
into production, depending on the world price. 

Mr. Hughes. I am curious. What is your scenario for medium/ 
low-priced, for the year 1980? 

Mr. Kalter. We are running constant prices here and the 
medium/low price is $18.50 a barrel. 

Mr. Hughes. It remains the same? 

Mr. Kalter. It remains the same. 

Mr. Hughes. You are an optimist. 

Mr. Kalter. Probably. 

Mr. Hughes. What is the medium/high price? 

Mr. Kalter. The medium/price 

Mr. Hughes. For 1990. 

Mr. Kalter. A barrel at $23.85 and we assume that to be con- 
stant. We have run a scenario and I believe it is $31 a barrel. All 
the assumptions are listed on table 1, the previous two pages. 

Mr. Hughes. Did you get that information from OPEC or the oil 
companies? 

Mr. Kalter. For planning purposes we had to make some as- 
sumption and we chose four different price levels starting with the 
current world price and moving up. 

Mr. Hughes. I am interested more specifically in the Baltimore 
Canyon area, which is part of your analysis. Have you made any 
adjustments as a result of the limited amount of exploration that 
has taken place in the Baltimore Canyon? 

Mr. Kalter. When we look at the USGS resource estimates, we 
raise the same question that you are raising with them and they 
went back and reviewed the data and came back to us with new 
resource estimates for Baltimore Canyon which we have used in 
this exercise. Generally, those estimates, as opposed to the early 
1974 estimates, give more prominence to gas than to oil and sub- 
stantially reduce the expected oil production from Baltimore 
Canyon. 

Mr. Hughes. How much of a role do you play; how do you 
interface with Interior in determining a leasing schedule? 

Mr. Langenkamp. Well, pursuant to the memorandum of under- 
standing that was reached, entered into in September of last year, 
we prepare and submit, as the drafts were completed, informally, 
each chapter of the production goals to the Department of the 
Interior and then when the production goals were completed they 
were submitted formally. The formal submission has taken place. 
Informally, it has gone on over a number of months, and included 
in that informal interaction were a number of briefings by Bob 
Kalter and Bob Lawton on the DOE staff with the Interior and 
they have been aware for some time on what our position is and as 
Heather Ross indicated, they appear to be giving it due considera- 
tion. 

Mr. Hughes. So that actually what you do is recommend and 
then Interior considers? 

Mr. Langenkamp. That is correct. We make a recommendation 
and we give our analysis and frankly our analysis has the force of 
its inherent logic and nothing more and we found that the Interior 
has been — we will not say that we agree with them in all aspects 



103 

regarding these matters of pace and speed and so forth. We found 
them very receptive to the ideas and the data that we submitted. 

Mr. Hughes. Did you have any recommendations to submit to 
the Department of the Interior with respect to lease sale 49? 

Mr. Langenkamp. No, we made no recommendations. The recom- 
mendations that I was discussing this morning are the new lease 
schedule rather than the old lease schedule. 

Mr. Hughes. Are there some differences— the differences that 
you referred to with the Department of the Interior, could you be 
more specific as with regard to their lease policies? 

Mr. Langenkamp. You heard this morning that the options that 
were presented to the Secretary, Department of the Interior, 
ranged from six lease sales down and our production goals indicate 
seven sales are an optimum so that would indicate some slight 
difference in approach. . , ■. 

Of course, we have to make certain allowance for the tact that it 
is the Department of the Interior that has to handle this problem 
from an administrative standpoint and try as we may to determine 
what the administrative burdens are and what the hassle is of 
trying to complete in good order six sales versus seven or more, 
that their judgment on that point is certainly something we cannot 
override. We still feel that the seven-sale scenario is possible and 
would be preferable and I think in a nutshell that would— that sets 
forth the difference in perspective. 

Mr. Hughes. It is not a major difference? 

Mr. Langenkamp. I do not think it would be considered major. 
We have not seen the recommendation, we have not seen the 
position that the Secretary of the Interior has taken. I am taking 
the high range of his options, the difference between the high 
range of his options and what we feel to be the optimum number of 
sales is not an o'er.vhelming difference. 

Now, it may be that they pick a different range. 

Mr. Hughes. What do you think the experience from lease sale 

49 shows? 
Mr. Langenkamp. Well, it is disappointing. I think what I would 

prefer to do is 

Mr. Hughes. That is probably the understatement of the year; 

$41 million is traveling money. 

Mr. Langenkamp. Well, I think that it is true. Also, I do not 
view these lease sales necessarily as a budget balancing operation. 
I am far more disappointed by the lack of interest in the fact that 
major companies and independents and so forth involved in this 
process did not have very much confidence in hydrocarbons. The 
number of dollars is important to us but I think the disappointing 
fact is it indicates that there is not much there in the way of 
hydrocarbons. t j 

Mr. Hughes. Do you think that that is what it indicates or do 
you think it might indicate that the industry did not have enough 
time to analyze the results from the first sale? 

Mr. Langenkamp. Let me refer to Bob Lawton who is an older 
hand in the leasing business and let him give us his opinion on it. I 
do not know really whether or not I would have an opinion off the 
top of my head. 



104 

Mr. Lawton. Mr. Congressman, I think you have to look at the 
work that was done out there, reaUzing that most of it is propri- 
etary information. Geological Survey does get all results from work 
done, the drilling, the testing, everything. They have that informa- 
tion. Significant tests such as the ones run by Texaco in their 
potential gas discovery, Geological Survey actually has members on 
site when those tests are run. So they know what comes out of this. 
But the companies themselves do not release this information, the 
detailed information, to other companies. For the nine dry holes 
that were drilled, I think there is pretty good assurance that they 
were actually dry. I do not think it is an act that somebody is 
misleading somebody else. Geological Survey does know the results. 
We do not. But we take their word that they were dry. 

This is not favorable to the area, especially the large stone dome, 
the one that Mobil drilled, it was supposedly on the highest portion 
of that structure. 

Indications are that they absolutely found nothing. So it is not 
the fact that they did not have time to evaluate. It appears now 
that in at least nine of the wells drilled there was basically nothing 
to evaluate. 

Mr. Hughes. Would you not say it would be remarkable indeed if 
each of the companies that have sunk wells on structure had found 
oil the first time; that would be remarkable would it not? 

Mr. Lawton. Yes. 

Mr. Hughes. I believe there are a couple of rigs right now in the 
Middle Atlantic, and we have completed nine wells, have we not? 

Mr. Lawton. Well, there have been nine dry and abandoned. 
There are two being tested by Texaco and six more— no, excuse me, 
the apparent discovery by Texaco is being tested by an offset and 
then six more drilling. 

Mr. Hughes. Then you had to add to that the COST well off 
structure that showed a significant find of hydrocarbon. So roughly 
out of a total of 10 that have been completed, you had 2 finds. That 
is 2 out of 10. That is still pretty good odds, is it not? Isn't the 
usual rule of thumb that you will have about 12 dry holes before a 
significant find is made. Is not that the usual assumption? 

Mr. Lawton. The general rule of thumb historically has been 

1 out of 10. 

Mr. Hughes. One out of ten? 

Mr. Lawton. So that is a good average. 

Mr. Hughes. That is still remarkable, 2 out of 10, one off struc- 
ture. When you consider that Prudhoe Bay, there were what, 
dozens of wells sunk before there was a find and it was on the last 
one that there was a significant find; and in the North Sea the 
number of dry holes was even greater. There were a number of 
wells that were sunk before there was any significant hydrocarbon 

finds. 

Mr. Lawton. Well, actually the potential discovery you have now 
and the COST well, but again we do not have that information. We 
understand that those were classified as significant gas shows with 
potential proof 

Mr. Hughes. That is, the significant gas show is a pretty good 

sign? 



105 

Mr. Lawton. There is no indication until you go in and actually 
set the pipe and do your testing. I do not know to what extent they 
did test the wells, whether it was by drill stem testing, just core 
samples, or what. 

Mr. Hughes. They could not have found much more because 
under the existing regulations of the Department of the Interior 
they had to cap it and move the rig off. 

Mr. Lawton. For the COST well yes, sir. 

Mr. Hughes. So there was no effort to try to find out any more 
about it. It seems to me to be ridiculous. 

Mr. Lawton. As to the Texaco discovery they did release infor- 
mation on their first well and it indicates they have considerable 
gas potential. Whether it is commercial at that distance offshore, 
at that depth, no one knows at this time. We do not know anything 
on the confirmation well which is located a mile and a half away. 
So we do not know to what extent that reservoir extends, if it does. 
This will have to be determined. 

Mr. Hughes. Did you participate at all in the decision that was 
made by Interior to insist upon present regulations that indicate 
that when there is a find in a COST well, that automatically 

Mr. Lawton. No, we have nothing in that. 

Mr. Hughes. Does that disturb you at all? Here we are, a coun- 
try trying to inventory as best we can oil and gas resources and 
lo and behold we make a find; we do not know very much about 
it. There was something like $6 or $7 million that was put in 
the ground by those — that consortium of companies and yet our 
regulations indicate that they have to at that point stop, move the 
rig off, and not try to determine a little more about the structure 
than they did. The company conceded that they could have found 
more, that is the operating company, information about that par- 
ticular structure if they had continued their operation. 

Does that make sense to you? 

Mr. Kalter. Now, Congressman Hughes, you are referring to the 
proposed regulations for onstructure drilling? 

Mr. Hughes. No, I am talking about the regulations that are 
presently in place which require the operator of that particular 
lease to cap the well and move the rig off. Here is a rig in place. 
Apparently they had gone down just short of the target point and 
presumably if the company felt that it would have been prudent to 
even go beyond that, since they had the rig in place, they could 
have requested permission. But the regulations made it advisable 
to cap the well. 

Mr. Kalter. Congressman Hughes, we had a COST well in Cali- 
fornia that struck hydrocarbon at a shallow depth. It is my under- 
standing that the regulations permitted that well to continue 
beyond the horizons where they found the oil in the shallow zones 
and drill on down. I am not sure exactly of the regulations that 
you are talking about that force men to pull off before doing full 
testing. 

Mr. Hughes. I believe it was a practical matter as much as 
anything because I think existing regulations require that the con- 
sortium make that information available to the public; so obviously 
they are not going to continue to discover additional information if 
they have to share it with the world. 



106 

Mr. Kalter. The Interior Department has to make a press re- 
lease of a significant finding of oil and gas and the actual core hole 
information is not released for 5 years or 60 days after a sale 
within 50 miles, whichever is sooner. So assuming that there was 
no sale within 50 miles of that site, within 5 years they would have 
to release it. 

I think the point that you are making to the Interior Depart- 
ment in the prior testimony was that perhaps that 5-year period 
was not even sufficient if you want to do on-structure drilling given 
the length of the leasing schedule. That is a factor that has con- 
cerned the Department of Energy. I have verbally discussed with 
the Department officials and suggested that we give careful consid- 
eration to changing that particular timing when the new regula- 
tions for on-structure drilling come out. 

They have come out proposed at this point with essentially rep- 
etition of the old rig but that does not mean that it cannot be 
changed. 

Mr. Hughes. That is progress. Thank you. 

Let me ask you the state of the art right now in trying to 
determine industry's ability to assimilate new leases, capital re- 
straints and equipment restraints which I touched upon with the 
Department of the Interior. 

How are we coming along in trying to develop an independent 
data base so that we can make some proper judgment values in 5 
years? 

Mr. Langenkamp. Let me state generally to that. I do not think 
we should underestimate the impact that the Government has on 
the ability of the private companies to respond in terms of financ- 
ing drilling rigs. We have statistics on the number of rigs under 
construction now. We have 52 rigs, including 42 jack-ups, from the 
section of the country that I come from, Oklahoma. I know that 
these rigs are built with borrowed money, regardless of the size of 
the company. They are built on the expectation of the company, 
the expectation of their board and the expectation of the bankers 
that are involved, and what we do here with regard to scheduling 
these lease schedules has a tremendous effect on it. Beyond that, 
the production goal document, which we submitted for the record 
today, goes into these questions of the capability of industry to 
respond. A number of rigs in the last 5 years has doubled. 

I think that we are starting at the wrong end of the problem to 
anticipate problems of manpower and material. I think we should 
be looking at how the Government can make it possible to respond 
and have some confidence in the industry to meet the need with 
regard to these things. 

Mr. Hughes. Let me interrupt you. I do not know that we are 
starting at the wrong end of the spectrum. The problem has been 
that that end of the spectrum has been ignored. 

Nobody is suggesting that we ought to start with what the man- 
power or availability is. I think we have thrown a lot of acreage at 
oil companies in the past and never looked at the other side of the 
balance sheet. 

Mr. Langenkamp. You cannot ignore the question of the capabil- 
ity of industry to respond. The production goal document that I 
referred to spent over 100 pages going over this problem. The 



107 

National Petroleum Council is doing a study on manpower and 
material availability of the industry, including onshore and off- 
shore and so forth. So we are not underestimating the problem, but 
one of the aspects that we are really not concerned with here, 
economics, and economics is more than just availability of the 
leases, needless to say. If you went to the industry and you said, 
well, now, we make this many leases available, can you respond? 
The question is a qualified yes, assuming that the economics are 
there. 

Mr. Hughes. How much of a role do you expect to play in trying 
to prioritize leasing? Obviously, if we acknowledge that we have 
certain limitations in trying to bring on a number of different 
frontier areas and still try to do a good job in exploring structures 
in the Gulf of Mexico and other areas where we know we have 
high probability of finding additional hydrocarbons, how much of a 
role are you going to play in trying to prioritize leasing schedules 
so that we get over the business of what is in frontier areas but, at 
the same time, not make ourselves so thin in areas that we have 
high probability of hydrocarbons. We may see the net result being 
less oil and gas for this country? 

Mr. Langenkamp. Well, the problem of prioritizing, as you are 
aware, is extremely complex. You have to analyze the Department 
vis-a-vis the available rigs. You have to analyze the price. Our 
scenario showed, if you used the $23 price, that lease sales in 
Alaska are more attractive because of the increased cost in drilling 
in Alaska as opposed to the Gulf of Mexico. All I can say is that 
the Department of Energy has spent a lot of time going into these 
variables and constraints, and our production goal set forth a sce- 
nario which we think will work given these various pricing as- 
sumptions in these various areas. 

Taking into consideration all these constraints, we are hoping 
that this study that we have done will be carefully reviewed and 
will continue to try to give support to the Department of Interior 
on the scenario and the sequence of these leases and the very 
difficult tradeoffs that they have to make. 

Mr. Hughes. Finally, do you support the present proposal that 
the Department of the Interior make permits available to industry 
to adopt onstructure stratographic testing? 

Mr. Langenkamp. Yes, we support it. 

Mr. Hughes. Thank you. I have never had such candor. 

Mr. Walsh, I do not mean to neglect you or Mr. Whiting. Mr. 
Studds said he was extremely disappointed about a few things. I 
want to tell you that I am less than enthusiastic about what has 
happened to the State grants 

I remember, and I am sure Mr. Belsky can remember, too, dis- 
cussions in the last Congress about the funding level and, the 
authorization for CEIP and the Office of Management and Budget 
made a big thing about trying to keep it at $100 million. Well, on 
reflection, it looks like if we could have gotten a commitment from 
0MB that they would have provided half of that, we would have 
been well off. 

We authorized $130 million, and I understand 0MB recommends 
no funding whatsoever for the State grants. Is that correct? 

Mr. Walsh. Just the administrative grants? 



U9-118 0-79 



108 

Mr. Hughes. I am talking about all the coastal energy impact 
programs. 

Mr. Walsh. The formula grants — we are recommending funds 
for that, Mr. Hughes. 

Mr. Hughes. What is the funding level? 

Mr. Walsh. $27 million. We have a carryover which brings us to 
about $41 million total. 

Mr. Hughes. I would like to now refer to the State participation 
grant. 

Mr. Walsh. That is a different section, and that section relates 
to planning activities and participation by the States, in all ele- 
ments of the leasing decision, that is the decision with regard to 
tract selection and exploration, and finally exploitation. The ad- 
ministration has not requested the funds for that. 

As you know, there are $5 million authorized for that purpose, 
but we have not requested funds for that. 

Mr. Hughes. I see. So that my information was not correct? The 
administration is recommending $27 million for the energy impact 
program, while the State participation grant program is not being 
funded at all? 

Mr. Walsh. There are two parts to the coastal impact. First is 
the formula grants which are available to States that are directly 
affected by actual leasing and landing. 

Mr. Hughes. What is that funding level? 

Mr. Walsh. The funding level there is a total of $41 million at 
the present time. The second part is the loan account, and we have 
at the present time $157 million available in that account. 

Mr. Hughes. What is the recommendation of OMB for the coast- 
al zone management program? 

Mr. Walsh. The program itself? 

Mr. Hughes. Yes. 

Mr. Walsh. Total funds for the coastal zone management, I 
believe it is around $40 million. Let me supply that for the record. 
My recollection of the basic program, that is the 306 program, that 
is for each of the States, is around $40 million. Let me supply that 
for the record. My memory is probably not very good on it. 

Mr. Hughes. What is it that you requested from the administra- 
tion. What was the recommendation of the Department of Com- 
merce for the coastal energy impact fund? 

Mr. Walsh. What was our recommendation? 

Mr. Hughes. Yes, to the OMB. 

Mr. Walsh. If I could, I would like to supply that for the record. 
We do have set forth exactly what we have requested for each of 
these programs to the Department of Commerce, and then what 
the Department of Commerce requested from OMB, and then the 
President's budget level. Let me supply that for the record again. I 
cannot recollect it now. 

[The following was received for the record:] 



109 



-a 






(D 






+-> 






d 






•H 






^ 






rH ft 


(N 


O 


oJ O 


iH 


in 


3 ^^ 


(N 


i> 


+j a 


• 


• 


o a 


t> 


o 


< <c 


(M 


CQ 



H 


















Z 


















» 


















S 


















pq 




+^ 














o 




CQ 




<M 


O 


o 






<; 




Q) 




iH 


ID 


o 






z 




3 




(N 


t> 


lO 






< 


CQ 


cr 




• 


• 


• 






s 


o 






t> 




CO 






H 


















K 


















O 


















tsi 


















nq 


















<: 


















H 


















oa 


















< 


















o 




+j 














o 




w 




(N 


O 


o 


o 











1 J 


rH 


00 


o 


o 




1 




13 


o 


(N 


CO 


in 


in 




w 


o 


C 


o 


• 


• 


• 


• 




iz; 


o 


cu 


o 


C^ 


CO 


CO 


T-( 




O 


Q 


« 


</> 


csj 


"^ 








M 


















E-t 


















<J 




































^ 


















H 




































g 


















O 


















O 


















H 




+J 














Oh 




(0 




N 


o 


o 


O 


O 











iH 


00 


o 


o 


O 


Eh 


< 


d 




O 


CO 


in 


in 


I> 


« 


<: 


cr 




• 


• 


• 


• 


• 


C 


o 







(N 


CO 


CO 


iH 


CO 


Q 


s « 




■"^ 


"^ 






in 


p 
















tH 


PQ 


















O 


















00 


















a> 


















iH 


















>H 


















Ph 

























CO 








^-N 


oi 


+-> 








a 


iH 


G 


rH 






o 


3 


a 


ri 






•H 


E 


u 


+-> 






E -P 


u 


bD 


C 






Ki Cj 


o 


^-v 


/-s (1) 


r-\ 




f^ U 


«H 


iH bC 


'^ s 


rH 




t>C4J 


>^^ 


N-' C 


w G --N 


v_^ 


CO 


O CO 


^N 


•H 


CO 


/^N 


c 


fn -H 


/^ CO 


^ a 


^^ ;^ 4-> 


/-N CO 


o 


ft C 


£1 +^ 


O fl 


Xi -H c 


TJ C 


•H 


^x-H 


w C 


^-^ ri 


w > nS 


w ci 


+-> 


E 


rt 


i-H 


c u 


O 


o 


CO TJ 


00 ^ 


00 ft 


00 bD 


00 rH 





O uj 


O bJD 


O w 


O w 


O w 


CO 


CO 


CO 


CO 


CO 


CO 




o 





O 
CJ 

o 

+J 
c 


E 

ft 

Q 



G 
O 

•H 

+-> 

U 
■P 
CQ 



E 

< 

O 
•H 
^ 


J3 
ft 
CQ 
O 

E 

4-> 

< 

T3 
c<i 

O 

•H 

a 


o 
o 



c 
o 

•H 

+-> 
>. 





ft 
ft 

+-> 

P 
* 



no 

Mr. Hughes. Thank you. 

Finally, Mr. Whiting, I want to thank you for your testimony 
and it is encouraging to see that you are moving along, too, rapidly 
with regulations. 

Mr. Forsythe? 

Mr. Forsythe. Thank you, Mr. Chairman. 

The chairman referred to lease sale No. 49, the gulf, and the 
disappointing results of the lease sale bids. 

Do you have any concern over this situation, which may have 
been caused by administrative delays in the implementation of the 
new act. 

Mr. Langenkamp. I do not believe that reflects any suspicion 
that we have. 

Mr. Forsythe. That seems to me unreal. It seems to me that 
there has to be a concern on this part of industry since they do not 
know what the regs are going to be. You cannot give them encour- 
agement toward putting up a lot of money in a sale at this particu- 
lar time. But thank you for that answer. 

Back to the 5-year lease schedule, and again the chairman has 
discussed this with you in terms of meeting the goal of accelerated 
production schedule. 

Does this not more and more confirm, if we are not only going to 
meet the goal of high production, but also a spread of exploration 
over the new frontier, that any diminution is going to seriously 
affect the ability to do those things simultaneously? 

Mr. Langenkamp. We think the — as set forth on table 3 that a 
reduction from seven, six, five, four sales a year, regardless of what 
you do with the Gulf of Mexico, within that group of sales will 
have a substantial impact on either gas production or oil produc- 
tion or both. 

Mr. Forsythe. If you are going to keep up the broad scale explo- 
ration in the gulf, you cannot do it with sales. You are going to 
reduce your potential from the already known areas in the gulf. 

Mr. Langenkamp. That is correct, and I think one thing that 
ought to be taken into account, we have been forced to utilize the — 
such data as is known regarding these areas, but these are frontier 
areas, and I think this is the — this is the explanation for at least 
the most recent lease sale No. 49. Once you have a number of wells 
drilled and the quantity of information available to those who are 
knowledgeable is increased by a quantum leap and we are talking 
here in the frontier areas about relatively sketchy information, and 
we should never forget that it is sketchy until the first number 
of — first series of wells are drilled and, therefore, we think it is 
very important that you get some of those wells drilled and you 
maximize the number of sales to do that. 

Mr. Forsythe. It seems to me if it were possible, even more 
might be in the optimum. 

Mr. Langenkamp. I would agree. 

Mr. Forsythe. I am trying to reaffirm what you have recom- 
mended in terms of your studies and then, hopefully, the Depart- 
ment of the Interior will give added consideration to your recom- 
mendations as a result of these hearings. Because as we do fall 



Ill 

back at all, we are going to rue the day, it may be 10 years down 
the road before any of this comes on. 

Mr. Langenkamp. Let me dramatize that. Congressman. 

If you look at the seventh sale versus the sixth sale scenario and 
assurning that you go to the Gulf of Mexico six times in those sales, 
the difference is 400 million barrels based on this calculation. Four 
hundred million barrels, you know, based on that one change alone 
is about one-half of the reserves in the Elk Hills Naval Petroleum 
Reserve. These are substantial quantities. 

Mr. FoRSYTHE. And at the same time there is a dramatic falling 
off of existing leases in the gulf just because of the age and the 
depletion of the total resource in the existing leases? 

Mr. Langenkamp. That is correct. 

Mr. FoRSYTHE. So you have a downturn that we are fighting if 
we are going to gain in overall production. These are the kinds of 
things that have to be given high priority in the Nation as we look 
at them. 

Mr. Langenkamp. We find that when industry representatives 
come in and talk to us, and we say what are we doing wrong, and 
they give us a long list of items, many of which we discount, one, of 
course, is the pricing issue, but one of the persuasive arguments, 
and we hear it over and over the little guy as well as the majors, 
and that is the lack of available lands and they give us these 
charts showing that in 1930 you did not have to fool with the 
Government because of the access of lands, but you are required to 
go to these frontier areas, offshore lands, and so forth, and we hear 
this at a significant number of intervals. 

I believe that it does constitute a constraint, and if the country is 
to resolve the supply problem, we have to be aggressive with 
regard to onshore and offshore Federal leasing. 

Mr. FoRSYTHE. Thank you. 

Mr. Hughes. Thank you, Mr. Forsythe. 

On the lighthearted side, I asked you if you had factored into 
that computer model OMB's need to reduce the budget deficit in 
the years ahead, and I am curious, and cannot resist my urge to 
ask you what changes were made by 0MB that required a redoing 
of the entire statement that you gave here today? 

Mr. Langenkamp. I think it is always fun to blame others and 
particularly fun to blame 0MB for things, but I think probably we 
are here in the Department of Energy to take the rap for the 
delivery date on this. Congressman, because this statement was not 
controversial and it was not substantially rewritten. 

Mr. Hughes. We are not going to be critical of that. 

But my question is specifically what changes did 0MB recom- 
mend? 

Mr. Kalter. Since I was the person on the end of the telephone 
last night, just extremely minor additions pointing out that some of 
the factors involved in the production goals were due to assump- 
tions and this type of thing, very trivial additions and changes. I do 
not know, I am not sure where you get the word that OMB rewrote 
the statement, but that is incorrect. Probably the reason for the 
statement being so late is we were notified on Monday that the 
hearings were going to be on Thursday. 

Mr. Hughes. Were any changes made in the tables? 



112 

Mr. Kalter. No. 

Mr. Hughes. There were not? OK. 

Mr. Kitsos. 

Mr. Kitsos. I want to make certain that we have the State 
participation grant situation clear. 

NOAA recommended some funding but the Department of Com- 
merce did not forward it. Now, the Secretary of Commerce will 
respond in a letter to Chairman Murphy that some effort will be 
made to restore that funding. Is that correct? 

Mr. Walsh. That is correct. 

Mr. Kitsos. Now, if it is not possible to obtain the funds from the 
President's budget, it is possible, as indicated in the statement I 
read from the Commerce Department, to perhaps reprogram 
money. Reprograming would require, as your statement points out, 
authorizations or approval from the House and Senate Appropri- 
ations Committees and 0MB. That money would come from the 
loan fund. Is that right? 

Mr. Walsh. Well, it would probably come from there — it is prob- 
ably the only place that we can get that amount of money and 
move it out without real substantial interference. But the loan 
account is where we are looking at. There is a serious policy issue 
as to the conversion of funds in the loan account and into a grant 
account, and that issue has not been fully resolved. 

But that is the place where we are looking to possibly find a 
source of funds for this provision. 

Mr. Kitsos. Do you know how much money is in the loan ac- 
count now that has not been expended? 

Mr. Walsh. Well, I mentioned that we have about $174 million 
in 1979. We have applications being processed for the use of ap- 
proximately $67 million, and therefore during 1979, this fiscal year, 
available for reprograming we have $110 million. 

Mr. Kitsos. I see. OK. 

Thank you, Mr. Chairman. 

Mr. Hughes. OK. Thank you. 

I want to thank the witnesses, Mr. Walsh, Mr. Whiting, and Mr. 
Langenkamp, for their testimony today. 

This hearing will now recess to reconvene on March 14 at 1:30 
p.m. I might request Mr. Whiting, prior to that time, prior to 
March 14, if you can submit to this committee some summary of 
your findings with respect to the fire that has taken place in the 
gulf. That is one of the things that will be taken up at our next 
hearing. 

At the next hearing we will hear from industry officials as well 
as the Coast Guard, and at this time the hearing will be recessed. 

[Whereupon, at 1:21 p.m., the committee recessed, to reconvene 
at 1:30 p.m., Wednesday, March 14, 1979.] 

[The following material was supplied for inclusion in the printed 
record:] 



113 



FLORIDA INSTITUTE FOR OCEANOGRAPHY 

830 First Street. South. St. Petersburg. Florida S3 701 

Phone (813) 893-9100 



March 5, 1979 



Honorable John M. Murphy, Chairman 

Ad Hoc Select Committee on the Outer Continental Shelf 

Room 3383, House Annex No. 2 

3rd and D Streets, S.W. 

Washington, D.C. 20515 

Dear Mr. Chairman: 

The State of Florida appreciates the opportunity to comment on the 
OCS Administrative Grants under Public Law 95-372. We are presently 
allotting State resources for two and a half man years to participate 
with and supply information to the Department of the Interior (DOI) 
for OCS activities. To date the State has not received any money from 
OCS operations, nor does it appear it will for several years. 

Under Public Law 95-372 the State of Florida will be participating in 
two OCS regions - the South Atlantic and the Gulf of Mexico. Florida 
has one of the largest coastlines associated with OCS activities. 
These factors will create a work load, which is two or more times 
greater than that experienced by other coastal states. Further, its 
OCS operations are in frontier areas. Its citizens have concerns on 
the effect of these OCS operations on the State's tourist economy, 
which is dependent upon its environment. Therefore, the State feels 
It must participate to the maximum in OCS matters. 

The State of Florida has carefully analyzed the contents of Public 
Law 95-372 and its requirements for state participation with the 
Federal Government. This participation will require the resources of 
additional State agencies and cooperation and coordination with county 
and local governments. The State, therefore, has a real need for funds 
to support its OCS activities. It has repeatedly stressed the need for 
Federal money to support these operations until OCS revenues are availa- 
ble to the State. We strongly support the funding requested under 
Public Law 95-372 under CEIP to support state OCS Administrative Grants. 



AN AFFIRMATIVE ACTION EQUAL OPPORTUNITY rMPLOYER 

""""g^^LT'^ n<,n^5«ret/„,v.rmv FlcruU, A. i M. Univer^.y Uni.er^n of Scum FlorUa Flor^ A,i.„„c Unner.,. 

C..«„.ar Tamhn^e TalMasse, Tampo Boca Ra,o„ 

Vniy^yof We« Fhrida FhrUa Technolopccl £/n.ve™,v Um.ermy of Nonh Florid Florida ln,ema,^onal U„,,ers,n- 

'^"i"" Orlando JackionvMe Miam, 



114 



Honroable John M. Murphy 
March 5, 1979 
Page 2 

We presently have a grant under CEIP 308(c) funds to support the State 
of Florida OCS representative. However, this is deleting available 
money that should be used for shore based OCS planning purposes. We 
solicit the Ad Hoc Select Comnittee support in generating Federal funds 



for OCS operations. 
Respectfully submitted, 

Murice 0. Rinkel 

State of Florida OCS Representative 



MOR/rvf 



Mr. W. Kolb 
Mr. K. Woodburn 



115 



/' 




®fftcE of tt|e (So&ernor 

Atlanta, (georgia 3033-1 

Storge JBiiBbfe -iiformon 33n6trlDoo!> 

oovERNo« November 22. 1978 executive secretary 



Honorable John M. Murphy 

Chairman 

Ad Hoc Select Committee on the 

Outer Continental Shelf 
U.S. House of Representatives 
Washington, D.C. 20515 

Dear Congressman Murphy: 

Thank you for the invitation to appear before your committee 
during your oversight hearings on the implementation of the Outer 
Continental Shelf Lands Act Amendments of 1978. Regrettably, my 
schedule will not allow me to take advantage of this invitation. I 
would like, however, to make a few comments which I hope will be of 
some use to your committee. 

First, let me commend you and your fellow committee members for 
your work in achieving passage of the 1978 Amendments. I think the 
attitudes and interests expressed by the Congress in the early drafting 
of those Amendments were largely responsible for the successful sale of 
leases in the South Atlantic last March. As you know, that was the 
first OCS lease sale in the Atlantic frontier area to be held without a 
legal challenge. I felt that our major concerns would be adequately 
addressed in the forthcoming legislation and it is gratifying to see 
that my confidence was well placed. 

Although there have been very few regulations promulgated to dace 
to implement the Amendments, I would like to comment on some of the 
recent activities which have taken place. Probably the most disturbing 
event was the temporary suspension of certain provisions of 30 CFR 
250.34 by the U.S. Geological Survey (USGS) on November 1, 1978. 
This suspension essentially eliminated the provision guaranteeing my 
right to review and comment on Exploration Plans and their accompanying 
Environmental Reports filed by South Atlantic operators. As you know, 
coastal communities in frontier areas have no experience whatsoever 
with the offshore oil industry. 



116 



Honorable John M. Murphy 
November 22, 1978 
Page Two 



The location of onshore support bases for exploration will have 
not only an immediate impact on coastal communities but also a direct 
bearing on the eventual location of permanent bases during development 
and production. I therefore feel very strongly that the state and 
local governments should have an opportunity to comment on proposed 
Exploration Plans. I think it is a serious oversight that the 1978 
Amendments do not specifically provide for Governors to comment on 
exploration plans. 

Section 26 of the Amendments provides for an OCS Oil and Gas 
Information Program. This would provide the states with vitally needed 
planning information on an ongoing basis and lend consistency and 
coherence in the flow of information which the individual exploration 
and development/production plans cannot provide. In anticipation of 
this mandated program, USGS issued a final rule on January 27, 1978, 
(30 CFR 252) establishing an information program. 

Almost a year later there has been no implementation of even a 
basic program and my understanding is that we are still several months 
away from one. The USGS is conducting a series of workshops directed 
at compiling the onshore and nearshore information needs of the coastal 
states. The Bureau of Land Management and the Office of Coastal Zone 
Management conducted a similar assessment of needs during 1976 which 
involved considerable time and effort on the part of the states. I 
would think that the results of that study would be more than 
sufficient to at least initiate some form of Information Program. 

Another aspect of the Amendments which I would like to discuss 
concerns the environmental studies required by Section 20. You may be 
aware of a letter 1 wrote to Mr. Frank Gregg, Director, Bureau of Land 
Management, last March regarding a proposed lease sale (No. 54) on the 
Blake Plateau. In that letter I requested a suspension of the planning 
process for the sale pending further environmental analyses. At that 
point, there was a severe paucity of scientific data pertaining to the 
Plateau. 

Section 20 of the Amendments requires environmental studies to 
commence at least six months prior to the holding of a lease sale. I 
sincerely doubt that the environment of such an ecologically complex 
system as the Blake Plateau can be adequately studied in so few months. 
Data should be collected over several seasonal cycles to ensure 
validity and provide ample time for assessment before any irreversible 
decisions are made. 



117 



Honorable John M. Murphy 
November 22, 1978 
Page Three 



I note that in response to the Amendments' requirement for a Five 
Year Leasing Program, the Department is soliciting comments again on 
the Blake Plateau. Since I am unaware of any new studies on the 
Plateau since my letter last March, I will be essentially repeating my 
comments. I would hope that eventually procedures are adopted, 
particularly in frontier areas, whereby adequate environmental studies 
are commenced and complete d well in advance of key decisions and that 
the results of the studies are used to provide a prudent basis for 
proceeding with the schedule. I am not confident that Section 20 as 
now written will foster this type of approach. 

The final comment I would like to make concerns Section 503 of the 
Amendments, Outer Continental Shelf Grants. The states have many 
responsibilities if they are to seriously participate in developing the 
oil and gas resources of the CCS. It is gratifying to see that 
Congress appreciates the financial burden this places on state and 
local governments. It is somewhat perplexing, however, to find that 
the states' eligibility for these grants is contingent upon their 
satisfactory participation in the Coastal Zone Management program, a 
program under the administration of the Department of Commerce, not the 
Department of the Interior. 

If oil and gas development were allowed only off the coasts of 
states with approved or pending Coastal Zone Management Plans, then the 
grant restrictions might be so warranted. But in reality, every state 
potentially affected by offshore development must have some form of an 
ongoing OCS coordination program to keep up to date on the environ- 
mental studies program, proposed lease sales, etc., regardless of its 
CZM program effort. The states also perform a valuable public 
information service for the Department of the Interior and the oil and 
gas industry in keeping their citizens and local governments apprised 
of the program. I think it is an injustice to penalize states who for 
one reason or another choose not to participate in the CZM program. 
Such a penalty certainly places them at an unfair disadvantage in 
trying to protect the interests of their citizens. 

In summary, let me again thank you for the opportunity to comment 
on the new Amendments. Everyone who has worked so hard for their 
passage can take great pride in the final achievement. I hope my 
comments will be useful for your purposes. 

With kind regards, 

Ulncct oly , 



GB:jbr 

cc: Honorable Bo Cinn 

Honorable Cecil Andrus 




118 




Department of Energy 
Washington, D.C. 20461 



APR 1 2 1979 



Honorable John M. Murphy 
House of Representatives 
Washington, D.C. 20510 

Dear Mr .w.t^L^rphy ; 

This ie^er j^esponds to a question posed by Mr. Belsky of 
the comrtiittee staff during the hearings held on December 7, 1978 
by the Ad Hoc Select Committee on the Outer Continental Shelf. 
The question appears on page 2 90 of the hearing transcript and 
pertains to the fee of up to three cents per barrel on crude 
oil obtained from the Outer Continental Shelf. Pursuant to 
the Outer Continental Shelf Lands Act Amendments of 197 8 
(Section 302(d)), the fee would be levied by the Secretary 
of Transportation ana collected by the Secretary of the 
Treasury for deposit in the Offshore Oil Pollution Compensa- 
tion Fund. On December 4, 1973, the Coast Guard issued 
proposed regulations (F.R., Vol. 43, No. 233) that would 
implement its authority to levy the fee. Specifically, 
Mr. Belsky asked whether producers of crude oil from the 
Outer Continental Shelf could add the amount of the fee to 
the lower or upper tier ceiling prices for any first sales 
of domestic crude oil that are subject to ceiling prices. 

Under the Mandatory Petroleum Price Regulations set forth in 
10 CFR Part 212, producers of crude oil can not recover any 
fees collected on domestic crude oil for deposit in the 
Offshore Oil Pollution Compensation Fund by charging prices 
which exceed the lower or upper tier ceiling prices for any 
first sales of domestic crude oil established according to 
the provisions of 10 CFR 212.73 and 212.74. The Department 
of Energy Regulations do not permit the addition of any costs 
to the lower or upper tier ceiling prices applicable to 
first sales of domestic crude oil. 

I have enclosed two documents ("Evaluation of Profit Share 
Leasing Systems" and "Evaluation of Royalty Provisions for 
OCS Leasing") which were requested by the committee. As 



119 



indicated at the hearings, we have delayed this response 
until all of the information was available and complete. 

I hope that this information is helpful to you. If you or 
your staff have any questions regarding this matter, please 
contact Robert Kalter at 633-9421. 

Sincerely, 



S. Mclsaac 
ant Secreta 
Resource Applications 




'Gec/rge S. Mclsaac 
Assistant Secretary 



Enclosure 



120 

EVALUATION OF ROYALTY PROVISIONS FOR OCS LEASING 

by 
Wallace E. Tyner 

Introduce Ion 
Collection of royalty on resource extraction has been practiced for 
centuries. Ttie term royalty originally signified the crown's share in the 
output of mines. In the context of this paper, royalty is defined as the 
share of oil and gas which is paid to the government as part of the terms 
and conditions for a lease on the Outer Continental Shelf (OCS). Historically, 
a number of different royalty provisions have been used for OCS leasing: 

(1) A fixed royalty rate of 16.67 percent with cash bonus bidding 

(2) A higher fixed royalty rate ranging from 33.33 to 40.00 percent 
with cash bonus bidding 

(3) Royalty bidding with a nominal bonus 

(A) Royalty bidding with a higher fixed bonus 

(5) Cash bonus bidding with a sliding scale royalty -in which the 
royalty rate in each period is a linear function of the value 
of production 

Other possible royalty systems include sliding scale royalty with a non- 
linear relationship between the value of production and the royalty rate 
and combination royalty and cash bonus bid systems in which the royalty 
rate is the bid variable up to a fixed level after which cash bonus becomes 
the bid variable. 



McDonald, Stephen L. T^e Leasing of Federal Lands for Mineral Fuels 
Production (unpublished draft), written under a grant from Resources 
for the Future, January 1978. 



121 



Purpose 

The purposes of this paper are to compare alternative royalty systems, 
to describe the differential effects of each system and to formulate policy 
recommendations for royalty provisions In future lease sales. 'Hiere is 
nowhere in the leasing literature a comprehensive evaluation of alternative 
royalty systems. Furthermore, most of the theoretical work which has been 
done on royalty systems has assumed fixed production capacity. Yet 
changes in capacity induced by alternative royalty provisions may be as 

great a source of inefficiency as non-development or early abandonment im- 

2 

pacts discussed widely in the literature. Hence, this paper will examine 

alternative royalty systems in a capacity optimization framework. The 
GEN2 leasing simulation model developed by Kalter and Tyner will be used 
for all policy simulations. 
Scope of the study 

It is important at the outset to define the scope of this paper. The 
paper will provide both a theoretical and empirical comparison of the royalty 
systems mentioned above. The analysis will be conducted . over a wide range 
of reserve sizes, but initially price and cose variables will be held 
constant. In designing the study, it was postulated that changes In price 



2 

For example, early abandonment due to royalty is discussed in Leland, Hayne E. , 

Norgaard, Richard B. , and Pearson, Scott R. , "An Economic Analysis of Alterna- 
tive Outer Gsntinental Shelf Petroleum Leasing Policies," prepared for the 
Office of Energy R.iD, Policy, National Science Foundation, September 197i. 

Non'development and production prolongation are discussed in Kalter, Robert J., 
Stevens, Thomas H. , and Bloom, Oren A., "The Economics of Outer Continental 
Shelf Leasing," American Journal of Agricultural Economics 57, No. 2 (Mav 1975, 
pp. 251-258. 

Tyner, Wallace E. and ICalter, Robert J., "A Simulation Model for Resource 
Policy Evaluation," (revised version), Cornell Agricultural Economics 
Staff Paper No. 77-28, September 1977. 



122 



or cose assumptions would affect the values of parameters and minimum and 
maximum royalty values used for the systems but would not alter the general 
direction of the conclusions of the analysis. This hypothesis was tested 
by expanding the analysis to include alternative price and cost assumptions, 
and the results generally verified the initial hypothesis. Detailed results 
of the price and cost sensitivity analysis are included in the Appendix. 

This study also Ignores the bid formation process. We assume thac the 
bonus bid is equal to a fixed fraction of after tax net presenc value (ATNPV), 
Organization 

TTiis paper is organized into four parts and an Appendix. Following this 
introduction, a theoretical analysis of alternative royalty systems is 
developed. This section includes a general theoretical background plus a 
discussion of the theoretical implications of fixed royalty, sliding scale 
royalty and royalty bid systems. The third section provides the results of 
leasing simulations on each royalty system, and the fourth section presents 
conclusions and policy recommendations. Detailed results of sensitivity 
tests are provided In the Appendix. 

Theory of Royalty Provisions in Leasing 

The major effect of royalty which has been discussed in leasing and 
general resources literature Is the early termination problem. According 
to the theory, production may be terminated earlier than with no royalty 
because the rising marginal cost (MC) curve intersects the marginal revenue 
(MR) curve sooner. Sliding scale or diminishing royalty has been suggested 
aa a means of alleviating the early termination problem. Other than these 
two points, the leasing literature is largely silent on the Impacts of 



123 



4 

alternative royalty systems. In this section we explore some of the 

theoretical background for the empirical analysis which follows. 
Problems with the current leasing system 

Before launching into the theoretical discussion it will be useful to 
provide some general background information. The major reason for the 
recent interest in alternative leasing systems is the widespread belief 
that the cash bonus leasing system does not result in the government's 
capturing fair market value for its resources. Receipt of fair market 
value is one of the three major objectives of government leasing policy. 

The current cash bonus system Is believed to be defective for two 
major reasons. First, because of the high degree of uncertainty in oil and 
gas prospects and because of the large amounts of money involved in cash 
bonus bidding, it is believed that companies discount bids to account for 
the high risk. To the extent that the winning cash bonus bid is less than 
the expected value of a lease, a higher value could be obtained by the 
government if a leasing system were used which better shared the risk. 
Theoretically, systems which place greater weight on contingency payments 



4 

The paucity of research on alternative systems is partially due to the 

fact that concern with alternative leasing systems is relatively recent. 

In fact, some of the alternative royalty schemes discussed in thk paper 

do not appear anywhere in the leasing literature. 

As a manifestation of this belief, a group called Energy Action Education 
Foundation is contesting the legality o-f OCS Sale No. 45 on the basis that 
the public did not receive fair market value ( Oil and Gas Journal , May 1, 
1978. p. 30). 

The other two objectives are (1) orderly and timely development of the 
resource, and (2) protection of the environment. (Kaltcr, Robert J. and 
Tyner, Wallace E. , "Disposal Policy for Energy Resources in the Public 
Domain," contained in Energy Supply and Government Policy edited by Robert 
J. Kalter and Villlaa A. Vogely. 

- Hence, companies arc believed to b« risk averse in bidding for OCS oil 
and gas, at least at some bid level. 



1+9-118 0- 79 



124 



(royalty or profit share payments) share risk better because government 
collects revenue only If oil or gas Is found and then only In proportion 
to the size of the discovery. Hence, government takes more of the risk 
and private companies bear less risk. With contingency payments a larger 
portion of total government revenue, it is argued that less risk discounting 
will be necessary by private companies.® Hence, government revenue will 
more nearly approximate expected value of the lease, which for our purposes 
is defined as fair market value. 

Second, the current cash bonus system may fail to capture fair market 
value because competition may be limited by using the system. Because much 
of the government revenue from its resources comes in the fonn of cash 
bonus payments, the values of bonus bids may be very high--in the hundreds 
of millions of dollars. Such high "entry prices" may prevent a number of 
small companies from participating in OCS lease sales. Hence, competition 
may be reduced, and with inadequate competition, fair market value is 
unlikely to be achieved. It is argued that if the cash values required to 
win leases were lower, more companies would participate in lease sales 
thereby Increasing competition. With more competition, receipt of fair 
market value would be more likely, ceteris paribus . Also, participation 
of more small companies in lease sales could result in more small companies 
winning leases which would mean a more diverse ownership pattern for OCS 



8 

Also, with contingency payments representing a larger fraction of total 
government revenue, the government is less vulnerable to government 
revenue reductions due to Inadequate competition. 

9 

Government captures the economic rent which 1, the return to the resource 
I^^ /!!"" °^ * "°""^ profit. Hence, fair market value Is the surplus 
•fter deduction of all legitimate costs and a normal profit 



125 



oil and gas resource*. 
Fixed royalty ays teas 

As aentloned above, the main problem with fixed royalty aystesis 
which has been discussed In the literature Is the early termination prob- 
lem which Is Illustrated In Figure 1. P represents market price, > the 
royalty rate, and MC. the marginal cost associated with the Installed capa- 
city. Vlth no royalty, production ceases at t*, the point In time when 



?rlce and 
cost $ 



(l-X)P 





/ 


/s 


/"S 




1 


/ 






/ 






t' 


t* 




Time 



Figure 1. Production Termination V'lth and Without Royalty. 



MC ■ MR ■ P. Hcwever, with a fixed royalty In place, production tentinates 
at t' where MC ■ MR ■ (l-X)P. t' Ic less than t* — hence the early tennlna- 
tlon conclusion of aost early work on royalty. However, this conclusion 
is dependent on the (implicit) assumption that installed capacity is fixed. 
Tb the extent that installed capacity is variable, there exists a different 
MC curve for each possible capacity. A different size capacity may be 
chosen with a royalty In place than would be selected in the absence of 
, a royalty. 



126 



To understand this, we c«n review the capacity selection process. 
For any given capacity the condition for maxlmtilng profit is to equate 
the present value of net revenue atreans in all periods as shown In 



aquation (1): 

As capacity Increases, MC generally decreases (assunlng economies of scale) 
and production Is shifted towards the present. Analogoasly. with a royalcv. 
MR decreases and production may be shifted towards the future. Consider 
first selection of optimal capacity with no royalty. Starting with very low 
capacities, ATNPV rises at first as capacity increases because it pays to 
get the returns earlier (a larger investment produces the resource sooner). 
At some point, however, ATNPV reaches a maximum and begins to decline because 
no further investment Is Justified by the prospective returns. Curve V^ in 
Figure 2 Illustrates the process. Note that with no royalty. ATNPV equals 
the total government revenue from the resource exclusive of taxes (assuming 
ATNPV equals the bonus bid). With a royalty, equation (1) is modified as 
ahown In equation (2): 



R,(l-1)-C, R,(l-X)-C, R (l-X)-C 
(2) (1-X) R^-C^ - -2 ^ - ^ 



3 n n 



(1+r)' (1+r)^ (1+r)" 



Because of the royalty deduction from net revenue, the annual net value 
•treams are lower and ATNPV Is reduced. The value and capacity curve V 
la draw for the situation with royalty. Because the annual net value 



.^° HcDonald, p. 83. 



127 



FV $ 



nax ATNPV 



_\ ATNPV nax with royalty 




Q' Q* Capacity 

Figure 2. After Tax Value and Capacity Relationships. 



Btream Is reduced, a lower capacity (Q') may be Installed than with no 
royalty. Lower production capacity, of course, means a longer production 
tine horizon (assuming the economic cut-off point is not reached). 

Now we can relate this conclusion back to Figure 1 and the "conven- 
tional wisdom" on royalty impacts. To the extent that capacity is vari- 
able, imposition of a royalty (especially a high fixed royalty or a royalty 
bid) will likely result in reducing installed capacity and lengthening the 
production time horizon. This conclusion is the exact opposite of the 
"early termination" conclusion of conventional analysis. Hence, theoreti- 
cally, we would predict that imposition of a royalty would result in lower 
capacity and longer production profiles. In the empirical analysis section, 
we will test this hypothesis within the real world with taxes and non- 
linear cost relationahlps. 

A aecond effect of fixed royalty is the reduction in development of 
aarginal fidda. Ficlda that are Just profitable with no royalty could not 
be developed after imposition of a royalty. (All potential investments 



128 



cost nore than Che present value of the net revenue stream.) Therefore, 
the size of the snallesc field which can be produced Increases. For higher 
fixed royalties, this effect can be substantial--resultlng In non-develo'pment 
of large numbers of fields. 

In sunsnary, the two major effects of a fixed royalty which we can pre- 
dict theoretically are: 

(1) Reduction in installed capacity and lengthening of the 
production time horizon. 

(2) Increase in the size of the smallest field which can be 
developed profitably resulting in non-developmenc of 
numbers of small fields. 

These effects would be accentuated with higher fixed royalty rates. 

Royalty bidding 

We will divide the discussion of royalty bidding into two parts. 
The first part concerns the efficiency impacts of a royalty bidding systen 
once the bid is decided and exploration and development proceed. The 
second part concerns the bidding process and problems associated with 
speculative bidding when royalty bidding is used. 

Once the royalty bid is decided, the royalty rate is fixed and the 
effects of the system are essentially the same as described above for a 
fixed royalty system. We need not repeat that discussion, but we can add 
that the effects would be magnified because the fixed winning royalty bid 
generally would be relatively high, and the degree of both types of fixed 
royalty impacts is a function of the level of the fixed royalty. 

The second effect of royalty bidding has received the nost attention 
In the literature. Because only a nominal cash payment Is Involved In 
royalty bidding, flras wilh little cash available can place bids, and firms 
may tend to "speculate" in bidding. In an analysis of OCS Sale No. 36 



129 

10 

which Included royalty and cash bonus tracts, Townsend and Casklns concluded 
that royalty bid tracts did receive significantly more bidders and that 
royalty bidding did attract new bidders. Speculation in the royalty * 
bidding context means that a firm bids from its optimistic tet of expecta- 
tions regarding resources and value rather than bidding based on average 
(or mean and variance) expectations. For any prospect, a firm holds a range 
of beliefs about the quantity of reserves which may be found. Each bonus 
bid is presumed to be based on the average (or the entire distribution) of 
these beliefs because of the large amounts of capital which are risked in 
the bonus bid. However, in royalty bidding, little is risked, so firms may 
tend to base bids on the optimistic side of their beliefs. If a high 
royalty bid is placed, it is more likely to win (especially with the 
increased competition In royalty bidding). If less than the optimistic 
expectation on reserves Is found, and It Is not profitable to produce the 
field, the firm can simply give up the lease. The company loses only its 
exploration costs (and these are tax deductible). However, society loses 
the value of all the oil and gas which Is not produced (or Is delayed uncil 
It can be re-leased). Townsend and Gasklns conclude as follows: 

Competitive foyalty] bidding drives royalty rates to levels 
that seriously erode the potential coranierclal value of a tract. 
With the Introduction of royalty bidding, there appears to be: 

■a marked Increase In the probability that tracts will 

not yield coocierclal finds; 
•an expected decrease in the ultimate recovery from any 

given connerclal find 



11 



Tbwncend, Ralph and Gasklns, Darius, of the Office of OCS Program 
Coordination, Department of the Interior. "An Analysla of the 
Royalty Bidding Experiment In OCS Sale No. 36". 



130 



11 

On balance, royalty bidding could Introduce broader Industry 
participation on the OCS, perhaps even on a wider range of 
tracts. However, the risks Involved are substantial In terms 

■of the potential loss, or at least delay, of ultimate recovery 

. from the OCS. 

In suoDary, royalty bidding promotes competition but also ipecula- 
tlon. Once leased, royalty bid tracts are developed the same as if they 
had been leased with a high fixed royalty. This means that large amounts 
of production can be lost or delayed. 
Variable rovaltv 

Variable or sliding scale royalty systems are those in which the 
royalty rate in each period is a function of the quantity or value of 

production In the period. The first empirical evaluation of variable 

12 
royalty systems was undertaken by Kalter, Tyner, and Hughes in 1975. 

Their study examined variable royalty systems in which the royalty rate 

in each period was a linear function of the quantity or value of production 

in that period. However, other functional forms may be used. Semi- log 

and reciprocal functions are evaluated in this study as well as a sliding 

royalty schedule which may approximate any desired functional form. 

Detailed specifications for all these functions are provided in the 

analysis section t^hich follows. 

Theoretically, variable royalty systems offer both advantages and 

disadvantages over fixed royalty systems. The major source of uncertainty 

for private firms In oil and gas leasing is the amount of reserves which 



12 

Kalter, Robert J., Tyner, Wallace E. , and Hughes, Daniel U. Alternative 

Energy Leasing Strategies and Schedules for the Outer Continental Shelf . 

A. E. Reacarch 75-33, Department of Agricultural Economics, Cornell 

University. Ichaca, New York. 



131 

12 

• 

can be produced. Producible reserves on lease tracts range from zero to 
millions of barrels of oil or the gas equivalent. Price and cost uncer- 
tainty are also Important, but not so much as reserve uncertainty. As . 
discussed above, one important reason for royalty (or profit share) systems 
Is to transfer uncertainty from the private to the public sector. While 
royalty with fixed rates does result in risk transference, much greater risk 
transference would take place with variable royalty rates. This is true 
because of the huge economies of scale inherent in oil and gas production. 
The larger the discovery, the lower the cost per unit to produce the 
resource, ceteris paribus . Hence, the economic rent to the resource rises 
more than proportionately as field size increases, at least over a very 
large range. 

By making the royalty rate a function of the quantity or value of 
annual production, the burden of the royalty payment essentially becomes 
a function of the profitability of the discovery. Lou profit fields pay 
a low royalty and high profit fields pay a larger royalty. Therefore, 
the variability in potential profitability is reduced significantly. Also, 
a larger portion of total government revenue is collected in the form of 
royalty and less by the cash bonus. This feature means that entry would 
be facilitated for smaller firms. 

Another desirable feature of variable royalty is that the royalty 
rate diminishes as production declines through time. Hence, the earlv 
termination of production problem with higher fixed royalty is reduced 
considerably. 



Higher fixed royalty also reduces cash bonus payments and could also 
promote entry. 



132 



13 

As was mentioned above, Che royalty rate can be made to vary with 
quantity or value of production. An important distinction between the 
two is that the quantity determined rate captures uncertainty only in 
reserves discovered while the value determined rate captures both quantity 
and price uncertainty. Because of this advantage, only value based systems 
will be used in this analysis. 

One potentially important disadvantage of variable royalty Is that 
It provides an incentive for producers to stretch out production in 
order to achieve a lower effective royalty rate. Because the royalty 
rate In each period Is a function of the value of production In that 
period, producers can achieve a lover overall royalty rate by Install- 
ing less capacity and stretching out the production time horlion. This 
effect could be much more pronounced with variable royalty than with a 
fixed royalty. To understand this, we refer again to equation (2) rewrit- 
ten In time Indexed form as equation (3): 

(1-X,)R,-C, (1-X )P -C, (l-X )R -C 

(3) (1-X,)R,-C, ?-4-^ 5_^ .... n_EL_n 

^ ^ ^ (1+r)^ (l*r)3 (1+r)" 

The subscripted X values refer to the calculated royalty rate In each 
period. A different time atream represented by equation (3) holds for 
each possible installed capacity . Beginning with low potential installed 
capacities, as we increase capacity, the a values for any given period 
increase. As capacity increases, gross revenue (net of royalty) and net 
revenue are lower in nost periods than they would be with no royalty or a 
low fixed royalty. This means that the optimal installed capacity will 



14 

Tl>ic statement aisumes that the variable royalty slope begins at the 

tame point at the low fixed royalty and that for at least tome pro> 
duction years, the calculated variable royalty it greater than the 
minimum royalty. 



133 



lA 



be lower with variable royalty (because expected net revenue Is lower 
In each period) than for Che low fixed royalty case. Figure 3 illustrates 
this difference. ATNPV max is lower for variable royalty (V") than for ' 
low fixed royalty (V ) because more of the government revenue (or economic 
rent) is being collected through royalties than through the cash bonus. 
Note also that the variability in ATNPV is less with variable royalty 
because much of the variation (risk) in revenue is absorbed through 
changes in royalty payments. 




^ ATNPV max with fixed royalty 

ATNPV max with variable royalty 



Installed capacity bbls./year 



Figure 3. Installed Capacity with Fixed and Variable Royalty. 



The major problem, then, with variable royalty is that it provides 
an incentive for producers to Install less capacity and elongate the 
production period of the lease. Elongation of production results in a 
reduction In present value of the resource. 

One major uncertainty exists regarding analysis of Chit problem: 
we don't know che extent Co which producers can and will actually vary 
Installed capacity In response to the incentives provided by variable 
royalty. The nodcl Co be used for Chis analysis (CtN2) assumes that 
capacity can be and is varied In response to changing economic conditions. 



134 



15 

Furchennore, the nodel assumes that development cost per unit of Installed 
capacity Is a function of reserve size (and climatic region) only and not 
of the amount of Installed capacity. Hence, capacity can be reduced at 
oo cost (in terms of cost per unit). In actual operations, geologic, 
engineering, or management constraints may limit the flexibility in 
installed capacity size. In addition, it Is likely that cost per unit 
of installed capacity goes up as the amount of capacity Installed (on a 
given reservoir) goes down. To the extent that these conditions reflect 
production reality, the GEN2 nodel results would overstate the diminution 
of installed capacity and extension of production time that would actually 
occur with variable royalty. 

In sunmary, variable royalty offers the advantages of greater risk 
sharing and bonus reduction plus alleviating the early termination of 
production problem. A potential disadvantage is the incentive provided 
by the variable structure to obtain lower royalty rates by producing less 
in each period and producing over a longer period of time. 

Simulation Results 

Before proceeding with the results of simulations on each royalty 
•ystem, we will review the starting point for this analysis and the data 
and assumptions used for the simulations. Ue will then review results 
for the current cash bonus, higher fixed royalties, linear variable 
royalty, aemi-log variable royalty, and a variable royalty using a seep 
function schedule. Each of these systems will be defined in the respec- 
tive sections. 



Once capacity Is installed, these same types of constraints may limit 
flexibility in varying the production profile. Further research needs 
to be done on this point. 



135 

16 

Initial approach 

To begin this analysis, we wanted to obtain some Idea of how expected 
governnent revenue (bonus and royalty revenue) varied with reserve size-. 
From another viewpoint, we wanted to learn how the price required to bring 
forth production (with no royalty or bonus) varied with reserve size. By 
calculating the price-to-produce at each reserve size in the data set and 
subtracting that value from $1A (the market price assumed in this analysis), 
we could get some idea of what fraction of oil revenue might be obtained 
from bonus and royalty payments at each reserve size. The results of this 
analysis are shown In Table 1 and Figure A. Table 1 shows the reserve sizes, 
minimum price required to produce the reserves, $K minus that price (li-P) 
and the fraction of the $14 price represented by (lA-P). Figure 1 contains 
a plot of price-to-produce (P) and (i^-P) against reserve size. 

Price-to-produce ranges from $36.56 per barrel for an expected reserve 
size of 10 million barrels to $2.23 for an expected reserve size of 1 
billion barrels. "Hie smallest reserve size having a price- to- produce of 
less than $14 is 40 million barrels. Residual value (14-P) ranges from 
$.67 per barrel for an expected 40 million barrel reserve to $11.77 
per barrel for an expected reserve of 1 billion barrels. The fraction 
of residual value ranges from 5 percent to 84 percent. 

The main point revealed by the price-to-produce analysis was the 
confirmation Chat the relationship between residual value fraction 
[(14-P)/P J and reserve size is non-linear. In an attempt to better 
understand the nature of Che relationship, we regressed reserve size 
against residual value fraction using linear, power curve, and seml-Iog 

forms. The linear form has Che lowest r of .47 and Che semi-log had the 

2 2 

hlghes_t r of .87. The power curve r was .67. These results Indicate that 



136 



17 



Table 1 
Prlce-to-Produce for a Range of Reserve Sizes 



Expected 
Reserve 
Size 


Prlce-to- 
Produce 


Sli-P 


Fraction of $16 
Required to 
Produce* 




R 

(Bll.bbl.) 


P 

(S) 


($) 


S6-P/16 




10 


$36.56 


-S22.56 






20 


21.80 


-7.80 






30 


16.19 


-2.19 






40 


13.33 


.67 


05 




60 


10.13 


3.87 


28 




80 


e.u 


5.56 


40 




.100 


7.33 


6.67 


48 




120 . 


6.56 


l.U 


53 




UO 


5.98 


8.02 


57 




160 


5.47 


8.53 


61 




180 


5.13 


8.87 


63 




200 


6.85 


9.15 


65 




250 


«.27 


9.73 


70 




300 


3.89 


10.11 


72 




500 


3.02 


10.98 


78 




1000 


2.23 


11.77 


84 





•Royalty bid runs were done on alternate reserve sizes as a check on 
these values. The correlation between the two was very- high as we 
would expect. 



137 



18 



Reserve 
(■11. bbl.) 

300 




18 20 22 $ 

Price-to-produce 



Figure 1 
Prlce-to-Produce for a Range of Reserve Sizes 



138 



19 

Che residual value fraction Is a function of the natural logarithm of 
reserves as shown in equation (A*): 

(A) F - a + b-ln R 
It was this result which led us to Include the semi-log function as one 
of the variable royalty systems. 
Assumptions and data 

Ihree important assumptions pertinent to this analysis should be 
stated at this point. First, the variable capacity version of the CEN2 
iBodel was used for all simulations. Second, all simulations beyond the 
price-to-produce tests were run for the complete set of expected reserve 
sizes from 30 million to 1 billion barrels. Reserve standard deviations 
were set equal to one half of the mean. Third, costs for a moderately 
expensive region (Mid-Atlantic) in 1978 dollars were used for all runs. 
The power curve cost functions contained in GEN2 were used throughout. 
The results described below should hold (with appropriate modifications) 
for other cost regions and reserve ranges. The cost sensitivity analyses 
using Gulf of Mexico and North Atlantic costs are reported in the Appendix. 

The basic data used for the analysis common to all simulations is 
listed In Table 2. System parameters particular to each system are speci- 
fied in the appropriate section. 



The CEN2 nodel may be used either with fixed Installed capacity or 
with Installed capacity optlnized within the model. The optimizing 
version was used for simulations in this study. 

For detailed information on the power curve cost functions, see 
Chapter V of Kalter, Tyner, and Hughes. 



139 



Table 2 
Cocnon Input Values for System Simulations 



20 



Geologic 

Production decline rate, 
Reserve distributions 
Dry hole risk, aean 
Dry hole risk, std. dev. 

Price related 



.12 

lognonaal 
.700 
.103 



Initial oil price, Pq 
Initial gas price, GPq 
. Kean of oil price change distribution, RPIMK 

Std. dev. of oil price change distribution, RPISTD 

Mean of gas price change distribution, CPIMK 

Std. dev. of gas price change distribution, CPISTD 

Tax related 



S16.00 
2.00 
0.00 
0.04 
0.00 
0.04 



Depreciation method. NDEPR 
Depreciation lifetime, N 
Percent Investment salvageable, a 
Investment tax credit rate, n 
Federal corporate tax rate, t 

Tine related 



Sum of years digits 

prod, lifetire 
.10 
.10 
.46 



Minimum production time, TMTK 

Maximum production time, TMAX 

Length of flat production plus production build-up, FLAT? 

Development and exploration period, LAG 

Exploration period, LEXL^R 

Production build-up period, IBP 

Production build-up factors, BPP 

year 1 

year 2 



9 


years 


40 


years 


4 


years 


5 


vears 


2 


years 


2 


years 




.5 




.8 



Cost related 

Working capital factor 

Triangular Investment and operating cost contingency 

dlatrlbutlona* ' 

oris, KMIK 

CMJDE, KM^DE 

CMAX, KMAX 
**te of change In unit operating cost, THETA 



Rent per acre. 
No. of 



Rfarr 

acres per tract. 



ACRES 



.10 



.25 

.30 

.40 

0.00 

$3.00 

5760, 



49-118 0-79 



10 



140 



, Table 2. Continued 



Investment cost allocation during development, FD 




year 1 


0.00 


■ year 2 


0.10 


year 3 


0.30 


year 4 


0.40 


year 5 


0.20 


Percent Investment each year that is tangible, TD 




year 1 


0.00 


year 2 


0.70 


year 3 


0.70 


year U 


0.80 


year 5 


0.80 


Exploration cost allocation during exploration, FX 




year 1 


O.iO 


year 2 


0.6C 


Percent exploration cost each year that is tangible, 


TX 


year 1 


0.50 


year 2 


O.80 


Investment cost control (cllaatlc region), LCLM 


2 




Kld-Atlantlc 


Initial operating cost/barrel 


0.52 


Cost per exploratorj- well (million S) 


S5.68 


Acquisition cost 


$100,000.00 



Other factors 

Discount rate .10 

No. of exploratory wells per 1000 acres, WELLS .50 

Bonus factor, BFAC .75 

No. of M.C. iterations, NCMP 100 

*Thftse values reflect a 30? adjustment to the cost curves' in the model which 
are in 1975 dollars. Costs are assumed to have increased 30 percent between 
1975 and 1978. By subtracting .30 from these factors, one can obtain the 
actual contingency distributions in 1978 dollars. Hence CHIK and KXIN are 
-.05, CH0DE and KH0DE are 0.00, and CH0DE and CKA.X are 0.10. 



System simulations 

Having reviewed the general approach to this analysis and provided 
the comDon input data and assumptions, we are now prepared to present 
Che results of Individual system tiraulations. The base case, which will 
be presented first, is the current cash bonus system. Then cash bor.us 
with a higher fixed royalty and royalty bid systems are reviewed. The 
last group of tysteas are variable royalty systems which include linear, 
.reciprocal, semi- log, and fixed schedule aysteos. 



141 



22 

Results of each system are presented in this section, and the overall 
comparison and policy recommendations are provided in the concluding sections. 
For each system, results are tabulated for fourteen expected reserve siees 
ranging from 30 million barrels to 1 billion barrels. The output provided 
includes after tax net present value (ATNPV), present value of taxes and 
royalty payments, expected revenues, present value of gross revenue, expected 
production, installed capacity and production plus development time horizon 
(given development), percentage of reserve selections developed given that 
oil is found, peak annual revenue for the mean values case, the smallest 
developed reservoir, present value of government revenue assuming bonus is 
equal ATNPV, and present value government revenue assuming bonus is equal 
,75 times ATNPV. Both mean and standard deviation are provided for each 
expected reserve size. 
Current cash bonus system 

The leasing system which is most frequently used is the cash bonus 
system with a .1667 royalty. Simulation results for this system are 
presented in Table 3. The smallest reserve size which is developed is 
iO million barrels, and ATNPV is just barely positive for this reserve 
size. ATNPV ranges from $.04 to $831.17 million. Royalty ranges from 
$8.02 to $311.81 million, and gross value ranges from $i8.12 to $1870. i9 
million. Production and development time horizon ranges from 15 years 
to 14 years decreasing as reserve size increases. Percentage develop- 
Bent ranges from 22 to 100 percent. The smallest developed reservoir 
ranges from 37 to 43 million barrels. Government revenue with bonus 
equal to ATNPV ranges from $15 million to $1625 million. The government 
revenue range with bonus - .75 * ATNPV is $15 to $1417 million. All 



142 



21 



e <^ 

I 

: E 

5"i 



«b • > 9 

» • c 

S'i 



-15 

• a o 



^ 9 C 

- e • 

- * k • 
•■ » r u 

4- 



> « 



I- e * 

— ^ 



e • 






• 9 

O — » 

k • • 

u > •> 



T : 

r t 



jr. 

a*; 



^ o •-> 



O -« ♦ ^ ^ ^ a 

^ ^ ^ « ^ « c 



igggiigg 



• eccceececcc 
:*cceccccccc 



.»^ — -#*i^*»-»l 



4C<«C'«C'«C<#C.«C 



' t^ C r» f^ « • 



■ rq V .« « « o 



. . •>. ^ •«- C — 
. « <N. ^ ^ f> 9 

• *" ^ •■ ^ « e 






■ * ^ ^ .r^ c < 



• « e « ■• • 









143 



economic results are present values. Refer to Table 3 for iK>re detailed 
results. 

The cash bonus case will be used as a reference case, so no evaluation 
of this system will be undertaken. However, readers are reminded of the 
limitations of the cash bonus system which were discussed In the theoretical 
background section. 
Higher fixed royalty 

This system is similar to the current cash bonus system except that 

the royalty rate is higher. For this analysis, the royalty rate was set 

18 
at 40 percent. Results of the analysis are displayed in Table 4. The 

first noticable change is Chat the smallest expected reserve size which 

has a positive value is 80 million barrels, as compared with 40 million 

for the current cash bonus case. The first field size with all Iterations 

developed is 200 million barrels. Percentage development is considerably 

lower than for the cash bonus system for all field sizes up to 200 million 

barrels. Production and development time for developed cases ranges fror. 

15 to 14 years as with cash bonus. 

This result deviates from the theoretically based 'prediction that 

higher royalty rates would reduce installed capacity and lengthen production 

time horizon. Fortunately, there are two good reasons for this departure. 

First, the model was constrained to a mimimum production time horizon of 

19 
nine years. From previous analysis, we know that the unconstrained 



18 

At this level, officials in the Office of Policy Analysis, Department 

of the Interior, have concluded tentatively that social losses from the 

higher royalty are acceptable given other tradeoffs which must be made. 

19 

Nine years of production plus five years of development yields the 

fourteen year field life minimum which Is coonon for the cash bonus 

case. 



144 



e ^ 

t ;' 
» E J : 

^ • > 9 
* * E 

e « 5 



• k. ft • 

k •* » 3 

> V C 

5"£ 



■ & O 

• ° E 






t: 
t: 



■ > 



- 1 

3 W b 



'•'as 



i t s t z 



c c — — 



8«« « » — « ^ 

M »i. ^ c « ^ 

M « -■ 1^ » ^ « 

« •- < o ^ •■ ^ 



i i i g I 



C — VC^t'^-AV «< 



■ »«.e«'s»^c — ' 



C Z T Z 



■c — '-•■•^<«»». — < 






• « ^ ^ c e* < 






■« e ■« • « « 






■ c 

3 • 



• c 



^ 3 

• ^ 

w > 



.• i 



: t 



145 



26 

model would produce fields In as little as four to seven years. However, 
geologic and engineering constraints prevent this from happening In actual 
production practice, so the minlmutn time constraint was imposed. Since. 
the economics of the model drive the solution towards producing as soon 
as possible (in the cash bonus case), a fourteen year production and 
development time is comnon. 

Because the cash bonus case production time is higher with the constraint 
than pure economics would dictate, It is moved closer to the solution time 
with a higher royalty. Suppose the pure economic production time for a 
cash bonus case is five years. Further suppose that the pure economic 
production time for the higher royalty case is eight years. Both will 
solve in the constrained model at nine years and the prolongation effect 
of higher royalty will not be evidenced. What this says is that the 
geologic and engineering production constraints almost entirely nute the 
effect of production time elongation induced by a higher royalty. In the 
real world then, higher royalty would not be expected to significantly 
extend production times. 

A second reason the theoretically predicted extension does not 
occur Is because of the bonus and exploration cost tax write-off impact 
on development decisions. The prolongation impact would be expected 
to be strongest on marginal fields. However, with the tax write-off 
from bonus and exploration costs, many marginal fields are not developed 
because the tax write-off has greater present value than developing the 



reservoir. Hence, the production time extension that would have occurred 

20 ^ 
had these fields been developed does not enter Into the averages. For 

these two reasons, production time horizon does not get extended in practice 



20 



Ihe installed capacity and time horiron figures are "given development." 



146 

27 

with a higher royalty as predicted by the pure economic theory. 
Royalty bid system 

.Under this system, the royalty rate is the bid variable. For 
Dodeling purposes. It was assumed that the royalty bid rate Is that 
royalty which drives ATNPV to zero. In other words, it is the rate which 
converts all of the expected residual value (except taxes) into royalty 
payments. Mechanically, the GEN2 model uses a search technique to find 
that royalty rate which makes ATNPV fall between zero and an input zero 
calllbratlon factor. The factor used for this analysis was $.5 million. 

The royalty bid system was run for seven alternative reserve sizes from 

21 
40 to 1000 million. 

Results of the simulations are displayed In Table 5. Royalty bid 

rates ranged from 17 to 86 percent. It is important to note that the 

bid formation process used here assumes no speculat ion--f inns bid that 

royalty rate which corresponds to their expected reserve distribution . 

Production and development time ranged from 15.3 to 14.7 years. Notice 

that some production delay did occur with these higher royalty rates. 

Percentage development ranged from 51 percent for a 40 million barrel 

field CO 29 percent for a 1 billion barrel field. The smallest developed 

reservoir Increased dramatically with increasing expected reserve size. 

Generally the smallest developed reserve tended to be roughly equal to 

the Input reserve size. For example, if 200 million barrels were the 

expected reserve size, the minimum discovered field size Chat would be 



21 

fru*T runs vere done because the royalcy bid system Is quite expensive 
to sljDulate. 



147 



28 

22 
developed Is 207 million barrels under this system. All fields smaller 

than 207 million barrels would not be developed. This result means chat 

significant amounts of oil are not developed. For example, expected pro- 

ductlon on the 300 million barrel field with royalty bidding is 44 million 

barrels as compared with 89 million barrels for the current cash bonus 

23 
system. We would expect to loose half the oil with the royalty bid 

system as compared to the cash bonus system. Furthermore, oil value and 

government revenue fall drastically in the royalty bid system. For the 

300 million barrel expected reserve size, government revenue is S231 

million for royalty bid and $440 million for the current cash bonus case, 

24 
a 48 percent reduction. 

Clearly, use of the royalty bidding system results in major social 
losses. Moreover, if speculative bidding occurs, these losses would be 
even higher. It is very doubtful that increases in competition or other 
advantages could offset the major social losses caused by the royalty 
bidding system. 
Variable royalty systems 

Variable royalty systems are those in which the royalty rate in 
each period is determined by the value or quantity of production in that 
period. Only systems using value as the determining factor will be 



The smallest developed field is slightly larger than the mean of the 
expected reserves distribution because the lognormal distribution is 
used. A few large highly profitable fields in the right tail of the 
distribution drive the royalty bid rate up to the point that the mean 
field size is just fub-economlc. 

^^ The chance of no resource being found is .7, which accounts for the 
difference between 300 and 88* 90. 

^ Thlt calculation assumes government revenue is calculated with bonus ■ 
ATNPV. If bonus - .75 ♦ ATNPV, government revenue falls from $387 to 
^ $231 million. • 40 percent reduction. 



148 



3* 





hi 


« 




O 




i 




^ 




J^^ 


« 


» 


P- 
*■ 


9. 


i 


C 


e 




> 


*^ 


.. 


r. 


C 


» 


« 






►^ 




















^ K 


ss 


•• mm 






f» C 


« ^ 
« •^ 






■* 


#H •> 


ir> M 


^ 


^ 


M "" 


« 




c? 


gC 


«x B 


<« o 


2S 


C K 


S;: 


e »^ 






»». r« 


* ^ 


fa 


C 9 


^_ 


«i 


iZ 


• 


o 










— * 


< *- 

3J" 


c S 


V. 


•i 

3 

• 
> 




» — 




C — 


*• c 

£5 




2 3 


m 

s 


• 


















t 




■* *r 


«^ c 


^. "^ 




« 5 


< c' 




« 














r* — 




*• 


« c 


■* C 


r'. 


^ c 


^ — 


c ^ 

£3 


H 




• 


<C f^ 




c •■ 




£; 


*• * 
*. •■ 


o « 
• — 






^ 


" 


" 


** 


?* 


— •*• 


•" *" 




• — 

r 




• 


s 


s 


o 


•^ 
i^ 


« 




n 


s 


S 


s 


s 


1 


1 


i 



149 



30 

evaluated in this study. Four different types of variable royalty systems 

will be examined: (1) linear, (2) reciprocal, (3) semi-log, and (^ ) fixed 

(step function) schedule. Ihe calculation formulae , rate of change in the 

royalty rate with respect to a change in value, and rate of change in royalty 

payments with respect to • change in value are given in Table 6. 

The linear system makes the royalty rate in any period (R ) a function 

of the minimum royalty rate (R ), value of production in that period (V ), 

the value of production up to which the minimum royalty applies (V ), and 

o 

the slope of the linear equation (b). The rate of change of the royalty race 

with respect to a change in production value is b, the slope of the linear 

equation. This slope is constant regardless of the level of production 

value. The rate of change in royalty payments with respect to a change in 

value is R + 2bV - V . For the reciprocal function, the rovaltv rate 
o t o "^ ' - 

varies between the minimum and maximum rates with the reciprocal of produc- 
tion value as shown in Table 6. The derivat i ve of the reciprocal function 
is a more complex function and makes the rate of change in royalty rate 
vith respect to a change in production value an inverse function of the 
square of production value. In other words, the rate of change of the 
royalty rate decreases as the square of production value increases. The 
rate of change of royalty payments for the reciprocal function is simply 
Ry. The derivative of the semi-log function is b/v. This rate of change 
In the royalty rate is also an inverse function of the value of production -- 
as value Increases, the rate of change In the royalty rate decreases in 
Inverse proportion. The rate of change In royalty payments for the 
seai-log Is a function of b and the natural log of the scaled adjusted 
production value. The fixed variable royalty schedule Is a step function 



150 



31 



•*»Ssj 



•'**;« 



tt 

X 

u 

Vi 

K 
Ii. 


e 
o 

. u 
u 

c 

3 
Q. 



oe > 

1 1 

mm mm 

ec > 

1 

> 

o 

oe 

o 


< 

> BC 

K > 

< 




s 

1 

E 
c 


, oe ec 

•^ ee EC 

c • • 

— . •• K O 

OK K 

A V 
X • 4J J^ 

— , EC OC 
I X 

u 3 IM te> 

K tr ^ .^ 


> 

■X 

1 

4J 

> 

"O 

oe 

■c 


• 
> w 

no c 
oe _ 

■D X 


— 
a 
u 


u 

a 
u 

b 


1 

a 
e 


ce 

*e 

> 

X 

e . u 

—1 > 

X 

4^ ? **- 

c m — 



d: 

1 

K 
K 

o 

> 

c 


> 

> 
□ 

C 



ec 
n 

> 
«^ 

4J 
> 
4J 

ec 


b 

a 
*> 
c 


■ 

4rf OK 

> ec tc 
^ II 

ee oe 

+ o >* J*' 

O V A 

^ > oc 
1 X 

ec B ^ «« 


1 

> 

oe 

T5 


1 >* 

> 

^ X 


u 

•) 

b 
H 

u 

• 

• 


« 


m 
9 

E 
£ 

« 


«M 

o 
•1 

• 


^ c 

■ u « 

>> — « oc 

•( o > u c 

•C b bat/ 
c •> ax 3 

B X « » '■ 
U M b b • > 


M ee 

« w 

iDm- m 

•I C « 4J 

w a >. c 
« X o tl 
£ U b I 

• 


U tl 

b ec 
a. c 
m m *i 

f X 9 
b U — 

■ 
X • > 

4J 

— o c 



01 
X 



u 

3 

o 



> 

c 






c 



u 
c 





0. 










X 






<e 
















Arf 










b- 








ii 
















L. 










c 






3 










D. 






4-1 










a 






u 


























V. 






C 
















4-> 










t 






K 










^« 






b 










N-- 






4rf 
















a 










K 






b 










E 
b 






0. 










o 
















b. 






X 
















« 










St. 
















c 






b -O 
















<8 b 










1 






> W 
















3 










E 






«/ 










c. 






X •! 










c 






*m ■■* 


*j 








^ 






X «< 










e 






O 4J 


b 








« 






■_ a 


« 














X b 


a> 






• 


b 






9 


>s 






A. 


K 






>< 










i. 






4.1 4.1 


c 






•v 


C 






a — 


•M 


■ 


• 





•- 






a 




ii 


0. 


"■ 


^- 






c >. 


c 


*mt 


*j 


b 








o o 


o 


9 


a 


c. 


C/ 






«• b 




b 


b 


o. 


X 






4rf 


41^ 








4.1 






u E 


u 


>^ 


V 


c 








3 3 


3 


4.1 


4.1 


^ 


tM 






"85 


O 


■ 


« 


•> 





b 




b C 


b 


K 


>^ 


^ 


^ 







a — 


a 





o 


■ 


c 


4J 




E 




b 


b 


b 


tl 


u 




•b 


<w 








*• 


■ 




e •> 


e 


1 


E 


> 


bl 


«M 




X 

• 4^ 


« 


i 


*m 


b. 


CI 


• • 


3 


9 






C 


IM 


^ 


■ 






C 


K 


> 


0. 


« 


c 


■ e 


• 




I 


O 





u 


o 


> > 


> 


K 


b 


u 


B 


















^ 


1 


1 


1 


■ 


c 


1 


1 


c 


o 


b 


e 


X 


b* 






> 


> 


ee 


ee 


ee 


X 


M 


<M 

































151 



32 



with the royalty rate Increasing In discrete steps as value of production 
Increases. For example, the royalty rate might be 12.5 percent for annual 
production values up to $50 million and Increase to 15 percent at that. 
point. The rate could remain at 15 percent for annual production values 
up to $90 million and Increase to 20 percent at that point. The schedule 
would continue to rise In like manner up to the maximum royalty rate. The 
schedule used for this analysis has a maximum of 13 steps, but 11 additional steps 
could be easily added as mid-points of the existing steps. Any number of 
Steps could be used If the step schedule is designed to approximate some 
functional form such as semi- log. 

The fixed step functions schedule has two major advantages. First, it 
Is the most flexible of the systems. It can be designed to approximate a 
linear, reciprocal, or semi- log schedule or any other type of schedule. 
In fact. It can combine advantages of several functional schedules. 
Another advantage of the system is its simplicity. To determine the 
royalty rate In any period, one simply scans the table to determine the 
applicable rate. No calculation Is required. One potential disadvantage 
is that companies may try to reduce production at year end if they could 
reduce the rate by such a reduction. However, with a large number of 
Steps and quarterly royalty calculation this potential problem is not 
likely to be serious. 

To get an Idea how the systems compare. Table 7 contains the royalty 
rate which would be Imposed for a sample schedule of each of the four 
■ystcffls evaluated. Revenue values were obtained from the peak revenue 
values of the current cash bonus case (Table 3). The linear schedule is 
the one which was used In OCS sales 43 and 45. The minimum and Baximum 



152 

33 

• 

royalty rates are 16.67 and 50 percent. The minimurn rate applies for 
production value up to $6 million, and the slope Is .0025 per Billion 
dollars. The reciprocal schedule ranges from 12.5 to 50 percent and 
begins at a value of $60 million. The semi-log schedule ranges from 12.5 
to 70 percent with a b value of .09. The fixed step function schedule 
ranges from 12.5 to 70 percent and is designed to approximate the semi-log 
schedule. Details of the parameters for all the systems are provided in 
Table 7. 

The linear achedule accelerates (in terms of royalty rate) faster 
than any of the other systems. In fact, the maximum rate is reached at a 
reserve size of 100 million barrels. This occurs largely because this set 
of system parameters is "tuned" to the much lower reserve expectations for 
sales 43 and 45. One of the characteristics of the linear system is that 
it must be "tuned" to the range of reserve expectations for each sale or 
group of tracts. 

The reciprocal schedule accelerates fairly rapidly at first and much 
slower as reserve size continues to increase. The semi-log schedule 
accelerates more slowly at first and then at a faster rate than the 
reciprocal. The fixed step function schedule behaves much as the semi- log 
schedule because it was designed to approximate the semi- log. Neither 
the semi-log nor the fixed schedule reach their maximum rate of 70 percent 
vithin this range of reserve sizes. 

Ve have now described the four systems which are being used in this 
analysis. Detailed results of model simulations are provided below. 

Linear variable royalty . Results of the linear variable system are 
presented in Table 8. Linear variable royalty system results are similar 



153 

34 



Tible 7 
Comparison of Variable Royalty Schedules 



Expected 


Peak 








Fixed 


Reserve 
Size 


Revenue 
Mean Case 


Linear^ 


Reciprocal 


Seal-Log 


Step ^ 
Funttion 


(Million bbl.) 


(Million S) 


(7.) 


(7.) 


(7.) 


(7.) 


30 


57.5 


29.5 


12.5 


15.7 


15.0 


40 


81.3 


35.5 


22.3 


18.9 


15.0 


60 


130.9 


47.9 


32.8 


23.1 


20.0 


80 


162.6 


50.0 


36.2 


25.1 


25.0 


100 


218.1 


50.0 


40.0 


27.7 


25.0 


120 


261,8 


50.0 


41.4 


29.4 


25.0 


140 


305.4 


50.0 


42.6 


30.8 


30.0 


160 


349.0 


50.0 


43.6 


32.0 


30.0 


180 


392.6 


50.0 


44.3 


33.0 


30.0 


200 


436.3 


50.0 


44.8 


34.0 


30.0 


250 


545.3 


50.0 


45.9 


36.0 


35.0 


300 


654.4 


50.0 


46.6 


37.6 


35.0 


500 ■ 


1090.6 


50.0 


47.9 


42.2 


40.0 


1000 


2181.3 


50.0 


49.0 


48.5 


45.0 



V - S6 million, R - .1667, R - .50, b • .0025 per million dollars. 

o o max 

2 V - $60 million, R - .125, R - .50. 

o o max 

^ V - 0.0, b - .09, S - $10 million, R « .70. 

o max 

It 

R ■ .125, R " .70, the remainder of the schedule is as follows: 
o max 

Royalty Rate Value 

.15 50 

.20 90 

.25 160 

.30 280 

,35 490 

.40 850 

.45 1480 

.50 2 590 

.55 4500 

.60 7860 

.65 13700 

.70 23800 



154 



IS". 

: E £ : 

. » > 9 

> • e 

3*5 



£ «& 

• ■ 9 < 

> C C • 

b * ■ 

«> » 9 

» » e 

e K o 



• ft o 



■ c • 

iti, 






t ^ 



• 9 

£ • 

u > ^ 



*^ « c 



3 ; 



•» * iT « 



— • « ^ C * *^ •'^ « * 






- « — .r H- < I 



It 



. •« « r» V C • 



» — <^ C < »* 1 






:sj 



• » ^ V* » . 



*-<«»-- ^c — 



: s s s £ s :; s X ? s ; ? : s 



) — ^»»*»^C»'*"'« < 



■ « « c * — •", 

I K C «' 'C </ 9 

I « ^ « « e ^ 






> «■ ^ C •^ — • 






"S "5 



c • 

f i 






« e c 



f2S8SSSS|S|sf 



155 



36 

to the AO percent fixed royalty in some respects. The mlnliauni expected 
reserve which has positive value is 80 million barrels. All discovered 
reserves are not developed until the expected reserve size of 180 million 
barrels. Ihe major difference between this system and ones discussed 

earlier is the greater production time horizon. For developed cases, 

25 
production and development time horizon ranges from 22 to lA years. 

Production time horizon is lengthened considerably for the lower reserve 

sizes and very little for large expected reserves. When production is 

spread out, the present value of economic variables is reduced. Hence, 

gross value and government revenue will be lower than the cash bonus case 

for lower expected sizes. 

Reciprocal system . Results of the reciprocal system are presented 
in Table 9. For smaller reserve sizes, the reciprocal system yields 
prolongation of production time similar to the linear system. As field 
size increases, it also tends to behave like the linear variable royalty 
and higher fixed systems with little time extension and significant ATNPV 
reduction. 

Semi-log systems . Results of two semi-log systems are presented in 
Tables 10 and 11. Table 10 uses a semi-log function which is "tuned" to 
the price-to-produce curve shown in Figure 3. V was set at S32 million 
and b at .15. The smallest positive value expected reserve size was 60 



25 

Greater prolongation of production tine is evidenced here than was 

expected for this same system when used in sales 43 and 45. The reason 

prolongation was lower for the data used in the analysis of sales 43 

and 45 is Chat both costs and expected reserve sizes were lower. If 

we attempted to fine tune the linear system parameters to data used in 

this analysis, less prolongation could be achieved. 



49-118 0-79-11 



156 



> 




^ 




u <l 








• i;-: 


•* 


»: e S I 














5-^ 




> 




S.I 




>gl' 






a 


k • > a 










o • 






'^ 










Z^ £ 










« > ■ 

a « « 


VI o cc 




•■ ^ 


^ 




v> 


« c • a 




• • » « 


i 




a-- 










• > 












M ^ 




• *-• 


• 


u > 


w 


»- c « 


3 






>* 




^ 


18 .. 


^ 


















c • 


^ 


** *J 






^^ 


:» . 


J 


w ^ 


Ul 


w o 


^ 


• w 




(kO. 


a 




« 










• 3 • 












U > •• 


^ 




'- 


• M 


^ 


3£ 


A 




• • 




& ■ 


1 


















t*. 


a 


a- 


_j 


9* 


w» 








3 


^ 

^ 


J 


< 


n 


1 





c^ M e <« 
o* ^ * «^ 
r^ <A <« r> 



s s 



i s 



o « r- 
« tf^ « 

■» « f-1 



s s s 



M r> « 



•« «*t <« ^ 



gss§ss§s 



v4 -4 M r4M<^v«csiM«nrM4^<e'^<*^'A 



) (M rfl » n w^ « • 
> 9- « ^ (M ■« » r 



• » «^ r» •« ■« k 



C fo* ■> W -4 «' IB O *■ 






« «>a 1*^ «^ # 



* «D ^ « iO • 



1 rt p«*«f^(Mt>«r««r<«»<A 









■ « r^ C ^ <^ 



■ O O « O •• «B ■• 
I « V r^ r-^ O O I 



KO-«S<'^<M»«e«3«<><i<A^i^ 






' c « » o ■ 



SSSS8SSSSSS(S8| 



£ *• 



4 

a 



157 






- i 

t s 

*. E E •. 

k ■> > 9 
» fr C 

a* " 



i 9 < 

> C C I 

■ w V ■ 
». « > 3 

Si 



^2 t 



ft. » Z (-> 

a- 



i* 



• 3 • 
u > *• 



i: 



rs. o o « 

4 ^ •■ r* «r 



<s. 9 < 



C * »- 



3 g i ? S 



111111111 
: ; : :: s = s S i £ J E 1 f s 2 ;: 2 -. 3 i 



: > .r c ^ (^ *>- f^ '^- C — C e C « ff 2 r »- --^^ -ff '; - * 'ff 



O B- ^ I 
» v- — « 

C • •«* • 



■ V f » c <c c < 



tt 






VOC'^^->'C*^<C *-• 



f *s, * — •■ C — 






:j*r-'o»^<^»-'*«^c — j^^'j^^cj;^^^*; 



<^«"»-< 



>«*«•)«•« 









; e V < ^ ^ »^ "■* » -j o J ; 



^ ^ V c ^ ' 



r 2 S S 8 I I 



« • 

■ £ 



I ^ 



J : 



158 



I ; 

' ti'. 

■b * > a 

» * c 

o s o 

u m 



m 9 < 
> e c ■ 



-1 

• » 



is:: 



X „ 



c « 



^: 

r t 
i: 



5* 



« *«■ C 



S« « • ^ ^ r. ^ 
e ^ vh « *^ ■« « 

« M o o « 



c — c 



r« .r ^ C C 



•^ ♦ < C 

* << •■* ^ 



t z 



t: t 



*^ ^ •* < 

< ^ « e 

^ « *» • 



i i £ § £ 



« rf — ^ — 1^ — ^_. 






■ C C -» C 



>«-«■«•• 



■ — ■ c r c 



c c ^ < 
c c * < 



■C — '-•^■^'-C»'--#i 



. ^ a < — « >^ w- < 



* 1 

m c 
3 « 



« C 



w > 

— c 



.*»^^*^«»>.< — ^Ci 



><C^C^^V<C«r'i 









• — »«««' 






'< • » o <« ^ •■ • 



e c p 



: •■ » <c e I 



s s s s § s 



c ■ 



« X 

s % 



b. I- 

« « 



159 



40 



million barrels. However, the 40 million reserve »iie was only slightly 

negative. Production plus development time horizons ranged from 20 to 25 

years with times increasing with larger expected reserve sizes. TTiis 

system provides a rather large Incentive to postpone production which 

increases with reserve size. Notice, however, the very large reductions 

in ATNPV (and consequently bonus) achieved by this system as coapared with 

the current cash bonus system. 

The second semi-log system is the one described in Table 7. It has 

V of 0.0 and a b value of .09. Production and development time for this 
o 

system range from 16.7 to lA.O years for developed cases. The minimum expected 
reserve size with a positive value is 60 million barrels, but the AG million 
expected reserve has a very small negative value. The semi-log system with 
these parameter values caused very little production time extension yet did 
achieve significant reductions in ATKPV. For the 300 million barrel expected 
reserve, an ATOPV reduction of 3i percent was achieved with an average time 

extension of .3 years. The largest production time extension was 2.3 years 

26 
which is a 26 percent extension. Yet even for this case a greater per- 
centage of the reserve discoveries were developed (80 versus 77 for current 
cash bonus) and government revenue was virtually the same as the current 
cash bonus case. For the expected 300 million barrel reserve, government 
revenue with unadjusted bonus is about the same as current cash bonus, but 
government revenue with bonus adjusted for risk is 4 percent higher using 
the semi-log variable royalty system. 



26 

If there are costs associated with production prolongation, the actual 

prolongation could be considerably less. TTie Appendix contains a set 

of simulation results with installed capacity and production time horizon 

held constant. With these results we will have presented two extreme 

cases: (1) The assumption used in the main text which allows any degree 

of production prolongation at no cost (per unit of installed capacity); 

and (2) The Appendix case in which no production prolongation is permitted 

at any cost. The real world likely lies in between these extremes. 



160 



41 



Fixed step function schedule . IXrfo schedules are presented for the 
fixed schedule variable royalty In Tables 12 and 13. The first schedule 
in Table 12 was scaled to the price to produce results as was done for the 
first semi-log function. Production and development time horizons ranged 
from 26 to 17 years for positive value cases. Basically, the results of 
this test are similar to the first semi-log case: significant reductions 
In ATNPV were achieved, but significant production time extension also 
occurred. 

The second fixed schedule results are displayed in Table 13. This 
schedule Is the same as the one defined in Table 7. Production and develop- 
ment time horizon ranged from 16 to 15 years and significant A'DsPV reduction 
occurred. The smallest positive value expected reserve size was 40 million 
barrels, the same as for the current cash bonus case. Percentage development 
was higher for the fixed schedule system than for the current cash bonus 
in all cases with less than 100 percent developed. 

Summary and Conclusions 

In reviewing the analysis and tables of output, three very important 
conclusions emerge: 

1. The installed capacity optimization algorithm and assumptions used in 
this analysis are critical to the results. If installed capacity optimiza- 
tion is constrained by geology, engineering, or management considerations, 
or if capacity reductions cannot be done at zero cost, the answers could 
be very different. In particular, the semi-log and fixed schedule variable 
royalty systems with steep slopes would look ouch better than indicated 
here. The Appendix provides one set of results in which production time 
Is fixed for all systems. These results verify the Importance of under- 
standing constraints on Installed capacity optimization. 



161 



c «^ 

* E E i 

•. *• > 9 

» « C 

5'£ 



S.^ 



k » > 9 
> •> C 

5"i 



-"Si 

• fc e 

•p O > 

a> • 



1 K 



1 ; 



3 • «i 



^ •■ ^ »■ V •" *' •' *' 



O ^ r^ K ' •^ 

O « tr V' ^ V 



^ •- • c c 



' — ^.r^^v ^e. 



■^^Vr^^C — '-c«'^ei 



: C < — c <« « • 



■ * •■ -^ -^ C — » 



»C C<^'^-*<Ci^«' 






o«**'^*» — •■<o^ «i 



o o o e o 

<« 4. w F '• 












r o o c c 

V r. s ? ? 



162 



* s 



•if 

> •> 

St * , 

'JiJ 

II 

t ls:l 



■ > X u 



tt 



m V 

It 



J . 



il. 



43 



It 
Si 



l^ 



I 



X « 



s • af s * '^ •** •^' * • 



; ; s 



X S 5 £ ; 

V «' « c »' 



■ « « 

* * *. 

^ •« 0> 

rf» .i^ 6 



3 S ? S S 



5. S = 

•• C - 

C • K. 

« C — 



SS^5?iSSi§SS 



« ~ < — « -^ 1^ «-*««-*«-' «J ir «.* ^ 



*^ ^ m^ <^ _' .r .* 1^' .' •'' — •■" . 



> c -■ * c - 



■ '^'M'S'ic — »e— e-i 



r •■ ^ * »^ I 



<s. «• f» « irv ^ c _ .<* ^' 4 « 1-^ C «c e ^ » c*—' ^' <" ^' <-'«'■.' ».t" 



■ <«' »».' c ^ •^ •■' * i^* e . 



■ K « e < ' 



X S ? s s S £ : ^ £ ^ » s E s s :( £ r s 3 f ; s : :; $ ; 

r« « ^ e ^ «»« e «>«««' c* '^* •^' •- *k* «* •^ •- «^ c* * •"' *^ i^' ■^' 



1 •■■•Mr«*«^f^«^«^»h4a«#.7r»<«-<«M<c— c* 



X^S8SS5|2^S|^^ 



> • 



• c 

9 » 



* C 









i i 

Z t 

i : 

: i 



.! t 



163 



2. Because very little Is known about reserve possibilities before a sale, 
any set of royalty provisions should produce acceptable results over a wide 
range of reserve possibilities . The systems tested produce marked differences 
in their ability to handle wide ranges of reserve possibilities. ITie royalty 
bid system yielded disasterous results. Very large social losses would 
likely result from use of this system. The higher fixed royalty and linear 
variable royalty caused losses for smaller expected reserve sizes but yielded 
significant ATNPV reductions for larger reserve sizes without any losses. 

The only systems which worked equally well on all expected reserve sizes 
were the semi-log and corresponding fixed schedule systems . For these 
systems, virtually nothing need be known about expected reserve sizes to 
formulate appropriate schedules. The reciprocal variable royalty systen 
performed in between these extremes. 

3. Decent cost information is vital to formulating acceptable royalty 

provisions. Cost uncertainty is not captured by any type of royalty 

27 
system, so cost information is essential. With decent cost information 

regarding conditions in a future sale area, variable royalty systems can 

be designed chat are insensitive to reserve discoveries over a very wide 

28 
range. 



27 

This is not strictly true because cost per unit is a function of reserve 

size. Because royalty provisions can shift reserve uncertainty from the 

private Co Che public sector, tome of the cost uncertainty Is also 

shifted. 

28 

This study used relatively large expected reserve sizes and relatively 

high costs. However, the same principles hold over ocher reservoir and 

cost ranges as shown in Che Appendix. 



164 



A5 



The major policy recomnendat Ion which emerges froa this study is that 

the government use semi-log or fixed schedule variable royalty systems in 

29 
lieu of all other experimental royalty systems . A parallel recommendation 

1> Chat policy evaluation models such as GEN2 which was used in this study 

be modified so that more accurate and more robust cost subroutines may be 

used for future policy analysis. 



29 

The fixed step function system may be preferred because of its simplicity, 



165 



46 



APPENDIX 

This appendix provides additional oodel simulations to provide sen- 
sitivity analysis and expand on some of the points raised In the text. 
The appendix Is divided Into three sections. The first section provides 
simulations with production time horizon fixed to determine how the 
results of the main text would change if production time horizon In 
reality Is not flexible. The second section provides simulations for 
lower and higher cost regions than the Mld-Atlantlc region used for the 
main study. The results of this section confirm that the conclusions are 
readily applicable to other cost regions. The last section provides a 
comparison of the cash bonus and fixed schedule (approximating a semi- 
log) systems under the assumption of expected rising prices for oil and 
gas. 

Fixed production time horizon / 

As was discussed in the main text, the extent to which production 
time horizon can be varied is unknown. The assumption In the main text 
was that production capacity (and time horizon) could be varied and at no 
cost per unit of Installed capacity. This extreme is not likely in 
reality. In this section, we present results of the other extreme — 
production capacity and tine horizon are fixed (for a given reserve 
size) and cannot be varied at any cost. 

Table A-1 presents the results of the cash bonus system with fixed 

production time horizon. By comparing Table A-1 with Table 3 on page 

• 23, one can readily see that the results are almost identical. The AO 
1 

Billion barrel field did not develop with fixed production time horizon. 



166 



- • • ■ 



• i o < 
> c « I 

• c > •> 

~. « to 3 



3 :: 

y» e> m 



jt c a • 



4 

e 

ft. 



I- > 
C 



■s . 



.3 






« > 

a*- 



I I 






^ tN «n 



i ^ «n 
«n VI « 



5 S 8 

«^ « O 



? 8 



o o o o 



^ococoooooooooooeooooccoooSo 






>. r>. ^ C » m •« < 



^ •<« • 9- •<> 



) « O C ■« » s * 









> O C r^ •« « 



* <C »'*'■« I 



■ « d < 






I ^ v4 M ^ o> f 



.,.iS SS«|S5SS|8§|| 



e • 



■ c 

•I o 

S U 






« • 

I s 

o • 

s c 

s s 

s 3 

« 

I i 

to — 

f I 



167 



48 



but It was just positive for the original case. 

Table A-2 presents the results of the semi-log system (slope - .09) 
with fixed production time horizon. The corresponding table In the main _ 
text Is Table 11 on page 39. Here again the results are very similar. 
This similarity occurs because of the low variance In possible optimal 
production time (and capacity) values for the semi-log system. The dif- 
ference between the optimal time and a time different by one or two years 
Is very small (see Figure 3, page lA) , so the difference between the 
optimized time and fixed time Is correspondingly small. 

This result Is important because It tends to support the view that 
production time horizon would not be shifted significantly with an appro- 
priate semi-log function. The payoff from optimization Is simply too 
small relative to the probable costs. 

Cost sensitivity analysis 

The simulations reported In this section test the sensitivity of the 
results of the main text to lower and higher costs than those of the Mld- 
Atlantlc region. Tables A-3 and A-4 display results for the cash bonus 
system and the «eml-log variable royalty system using costs for the Gulf 
of Mexico. The coefficient of the semi-log function is 0.11 (0.09 was 
used for the Mld-Atlantlc simulations—Table 11, page 39). Reviewing these 
tables and comparing them with Tables 3 and 11 of the main text will 
reveal that the aeml-log variable royalty system works as well or better 
with Gulf of Mexico costs as Mld-Atlantlc costs. 

Tables A-5 and A-6 present the same two systems with Gulf of Alaska 
costa. The coefficient of the aeml-log variable royalty in Table A-6 
Is 0.07. The main difference revealed by these tables Is the increase in 



168 







_ 


«0•««>•>^m••^^or^ «*■ 


49 




*^ 


•^^^■*w^»*n«f*»».» 






r-^>7- 


^ 








> tr wi 




•^-^M-«Mr«f^«^-ir% 






& I 




■* 






a 










** £ 




1 






6 Sf 


"^ 








. ■ c5 


"^ 






> C « I 


-« 


1 lr^O«-iic«oe««^r<^«K-«V 










<««B»4«r>.*««t^^i-t*^^ 






> K C 










<S 2 










•a b 


-^ 








M « *< 










• & o 


















• > a 


^ 




• 




■ « « 


■ 








M O OC 










, 


^ 










w 








• £ s : 


^ 






• > • • 










ft* W X U 


■ 






K »— ' 












.-1 fs. 






>t 






: 




i? * 




rv.r>-«ClO>«OCOOOOCOC 


o 




c 






•> 






'4^rrtr4..«vH*4vHr4 


** 


■ 


»# •* 






• 












1- 




^^ 




> 


c 
o 


^ '^ 


■ 


g g g g i g g g g g g g i g g g g g g g § § 8 g g g g g 


'O 


w 


f. £ i 


: 


^ O « C 4 O* V C V O •» C W C •« C •«' O -• C V C V C •« C V C 




V 


«■ -o 


►s 






^ 








b c 


o 








o « 


k> 










ft. 


•o 


'^ 




1 • 


2 1 


• > 






*i a 




^ 




•o — 


< K 




£ 




« k. 






'C-■^<^l^<^^^■•*^n^c^*^« (M^tTtO^^r^^ ■^-«•:»'Cc^c 


: { 


^ 


• a 




vd »4 ^4 V4 ra r«>«r>4v4«nM■«lB■«»-^^« 


s ^ 


X> f 


c « 


a 




• ** 


•i* CJ 






•0 


1- — 








■ c 


> 








s s 


t 








^ •> 


^ 






« B 




« • 






> 


• 


M ^ 


^ 


?^s?::;;::3£ = sss5rss::5j:;s3?£sss::P 


b 


►* 


u o 


4 


« £ 




C U 






i I 




& a. 

K 


B 




2 


^ fs.- 


m c 


*• 








« 


1 


■ • 


J^ 




"S i 


V. 


s = ^* 






w « 




o ^ > 


^ 


Ct^P^O-f-0'(Si<C^»-^C--r,»>^***«»^<s. — r^»-.-- C — 


« 




U > Cm 


B 


r***•^»r>•^•'«-^dfn iCt*- 9'r^^9'^r4iCr^«r4<^-«r>. » 


— c 








M — «r<-«*«*^f>*^»^-*«-<«>.^r«»-.»-i»«*^itCi 


« • 

• S 






^ 








*{; 


^ 




^ :: 






^ 


: I 












M 




£k 


■ 


v4 r* >« 


• r 




K 


•* 


g r: s s s 2 c s 5 :: 3 ^ s c ; t r g ? s s : s 2 3 s s s 


41 « 

« X 




^ . 


J, 


« w 




« > 










« «_' 






w • 




a*- 




M ^ ^ — *N — #-^r-<«>-^ 










5sss2SRgR2ss:;s5ssr:;;s=s2Ks;:s£ 


• 




a=: 


^ 


• t 




— 


'■'"^SSSSSSSSSSSSSSSSSSSSCK^;:? 


« « 




*- ft> 


■ 


»• ■ 






^ 


^ «-« r< r« 


« • 






^ 




V X 




1 


^ 




s i 










• 




< 


■ 


1 1 ^«r..^^«N,^ts,«^r^«f-%r^«««iH«r.<.^<«f->^M^o- 


: s 


















X >. 














y 






la — 




M L 


i; 


$t3SS8SSSS8gg§g 


f 1 



169 



*— K 



^ s 



c <« 

• C 3 "^ 

. C « *• 

*. « > 3 

» « c 
o « o 


> 

• s si 

> C C I 

• u • n 
ft. « > 9 


■ o. o 

i.2 £ 

•-> • « 

a > M 

m V V 

4A O K 


J< 3 C W 

a c 4 • 
« • « ■ 


> * 


H C V 
*4 ^ 




• • 

u 

V u 

.3 


O > *■ 


-s: 

• • 
& • 

H ■ 

m « 


a- 


5": 


5 

< 


> 



? S 3 St S S 7 



r* » ^ «^ o 



I ^• 



E = t S 



0> o » ir> 



»^ t^ -« O 



« m fp ^ rt « » 

4 M S *ft v' r^ ^ 



« c 



2 E S 2 g § 8 S S g g § S 8 8 § g S 8 § § § g ? g ? 8 ? £ I 



'^♦^-^•'^^■■"C" 



t iTi ir^ r* ^ ■^ V 

. 9. «. 9> ««• C •« 

- M C 0< C O' C 






«4 ^MMMf<tM^r<-«f>««f-<irt«-i«^«nro««'>-««»'« 



-M^7»«0»«rk^^0«^-« c •Art 



*^ » •« O ■* ' 



9 ■« ^ « 
• 4 o < 






£ *• 



sssssgsssss^iii 



170 



ft. • > 3 

i I- c 

OHO 



' S ^ SS T 7i S ^ t 



• ^ f-. * 



^ » o 

" « »» 

" ~ ~ 






• > « 

■ » » 



j( 3 e « 

~ c • - 

*■ » X (J 



•• « * -^ 



•n ^t ^ 



|SSS£Sgggig§ 



• <« c c ~ * 



"8 •; 

fi. r 

o • 



• « 
o « > 



* * 

m m 

■ • 
M m 



■ > 



- V m r^ 9- •» C ' 



'C««»r«p^4«v. 



:«^,-»^r.*e^<-'»-^ir'C — ^»^i 



: K C 1* — *- 
: c « ^ ^* » 



= KgS2;5 = SE5s2sjs:s5PEs::25;g:r:? 
x: £ £ s r 5 £ J 5 • £ § :: £ =■ ~ -■ -■ s J ~ « 5 r ?■ :: £ • « = 



» » B 1^ rk ^ « 

^ • O • »^ r* - 









• c 

9 ft 



• c 
m « 

«. 
^ 3 

• ^ 

— c 



: I 



I s 

c • 



C««*S«a-»SM«f-<MM<c«rNKc^rKKr«r>e«Z^^^v- 



C « «• a 

e « »^ • v^ 



g 5 S g f 



I £ I E S § I 



171 



".if. 

S i 






• » 



■ » 9 

' « e 



-1 

B » ■ 
> * * 

M e ac 



3 --^ - 

j( e e -^ 

■ ft ■ 

* » » ^ 



«r•ar^^ts.v».^r«e^ 

— ■o«■^« ** a m m ^ 



I I w 






At V 



■ 3 

e -^ 

hi « 

c > fc 






• » — 



e •r^ O « c 






^ c •* c 



■C>»«s>-«*r<.«0'CO-C 



'^■icce^Ko-^ 



b c 
c ■ 



2 - 



i£ ^ .^1^ il 





i c 


«^^ — «IPS?*S*r?2S5^ee?.«So2 — ^ 


** • 

: i 

• E 
l = 




<**!-'*-. — »^eiC*'^«i^'^*^^r^^»-«-«~*?»-e5 


£ t 




c « 
• 

t t 




r : 




•m X 


1 !*■ M#«*««->«^^«ifr^»#%r.«^«*i.O'-'*«« 


• 

1 i 


« 8 « 1 s s 2 1 1 E S 5 1 


f 1 



1+9-118 0-79-12 



172 



t = a 



' t i : 



X2 i 

« > «> 
• » f 



c c «• 

» « • 

> «. a 

fc z u 



I «• J 






I I « 



•rt vs X 
^ • 5 



s :: s 



o m 



*■ r^ O »> 



*■ #^ « 



E::$ssgggg 



• a. 
c ■ 



• > 



— '^-- — "■ — ^ — ^#S1< 



^ •« * c 



'<'«^ff'«*-»'*«^ 



■ C C O V (^ ^ « 



. 9 p.. e. *. « . 






«C'-««C*— ^ 



I 1^ M >^ 9 I 
r ^r^ « C C 1 

- ^ * •■ w^ . 
• *> ^ .« tn . 

. «C C *o »^ « 

■ M (S< i« <C < 

^ O «n M » ( 



'< c c <-< c ' 



t «e o tr- <« ^ •> • 



'*^«««r*«* 0*«^ 



C C -■ « C 



53 



^ ^ ^ w% O < 



' *0 C « r^ •> « I 



■I-. I 



SS£8S£SSgSSf| 



ft B 
ft > 



B C 

ft c 

9 U 



ft X 

t *- 

ft % 

K C 



■C 3 
ft — 

d » 



ft k 
•I ft 



: t 

m ft 



J I 



: I 



173 



3H 



slnlmulB field size developed. The smallest expected reserve having a 
■positive ATNPV la 80 allllon barrels for both systems. With the 0.07 
■lope, the semi-log variable royalty does exhibit some production pro- 
longation, but not to a major extent. To eliminate all prolongation, a 
lover coefficient could be used. Other than these effects, the Gulf of 
Alaska costs yield the same results as were experienced for other regions. 

The basic conclusion of the cost sensitivity analysis is that the 
semi-log variable royalty system can vork equally veil in cost regions 
other than the Mid-Atlantic. With adequate cost Information, the semi- 
log function (or a fixed schedule designed after the senl-log) can 
yield satisfactory results under a wide range of reserve and cost situ- 
ations. 

Ixpectation of rising oil and 
gas prices 

The results in this section answer the question, "How would the 
systems differ under the expectation of rising (rather than constant) 
prices?" For the simulations, both oil and gas prices were expected to 
rise at a 3 percent annual rate. (The mean price change was 3 percent 
»nd the standard deviation was 4 percent.) Table A-7 displays the 
xesultB of the cash bonus system and Table A-8 displays the rising price 
■results of a fixed schedule system patterned after the semi-log function. 
The corresponding text tables are Table 3, page 23 and Table 13, page 
43. Both the cash bonus and fixed schedule system exhibited some pro- 
longation of production time horizon relative to the constant price 
cases. This Is to be expected because higher future price* reduce the 
Incentive to produce qulcVly — the resource is »ore valuable later. 



174 



2 I 



t IJ! 

=:£}-. 

» « 94 

5 i 

> 
c ft E 

• fc. > • 

ft. ft ft 9 

» «[ C 

•C to 
B b O 

ii t 

— ft. ft 

: : : 

tn a m 

«> 

.K £ e ft 

« ft s • 

ft > •. « 

■- * 5 ^ 

C > 
1- C ft 

ft fti 

II 

t £ 

b. b. 

m 
ft- 

« ft 
B 9 • 

O -- > 
to « 

u > ». 

■s: 

11 

• > 
ft- - 
o ^ 

c 

^ r 
t " ft- ft. 


a 

vt 

> 

J 

c 

E 
"■ 

■ 
fl 
■ 


« 
r- • iC « •«• 

•^ «* 4C »■ 

C K K 41^ -^ r-' *« C r^ •-' ^ •/*>-* ■- 


35 


S£Sggggggggggg 


i 

c 


45 *.47 14,77 
41 1.71 1.14 
41 5.74 15.45 
05 2.14 1.42 

40 4.11 14.12 
44 1.71 1.15 

41 10.14 14.44 
11 4.17 .45 
47 11.44 14.22 
94 4.17 .40 
14 14.71 14.10 
17 7.21 .14 

44 11.54 14.0! 
71 4.41 .72 
11 72.17 14.01 

10 9.41 .10 

11 75.14 It. 01 
tl 10.10 .10 
21 27.17 14.00 
47 12.10 0.00 
04 14.94 14.00 
14 15.12 0.00 

45 41.11 It. 00 
41 14.11 . OO 
09 49.92 ' It. 00 
41 1n.7t 0.00 
17 119.44 It. 00 
17 40.49 O.OO 


> 
ft 
■X 

i 1 

t- i 

ft s 

> 

ft B 

\ I 

» , 

: I 

— ft 

B B 
> 

ft 


ss?5ssg5 = ss;:;ESsr = s:jsg?:£:ss 


i - 

ft ^ 

K C 
ft B 

ft 

1 i 

M B 


n 4.51 t.44 t.44 52 
45 15.45 1.11 5.04 55 
11 14.74 14.11 11.45 41 
14 11.74 11.14 4.77 44 
14 21.45 71.72 17.77 142 
14 14.71 14.94 10.14 41 
47 41.01 11.47 J1.41 114 
It 14.11 11.11 11.55 114 
77 55.44 40.70 74.42 144 
47 44.71 11.45 14.14 141 
17 44.42 44.41 15.54 111 
57 51.14 14.14 70.11 171 
57 41.14 57.04 41.44 142 
It 41.44 11.14 71,71 200 

10 14.14 45.71 47.11 HI 
74 40.44 14.10 77.10 114 

41 107.11 71.40 51.11 440 
14 11.10 41.44 10.41 757 

42 170.10 41.14 51.21 449 

14 101.77 47.41 51.47 145 
It 111.71 101.95 74.04 411 
27 174.51 59.51 41.14 157 
54 145.44 117.14 44.45 711 
tl 155.11 71. It 50.41 424 

15 117.11 701.11 144.01 nil 

11 141.40 111.05 44.41 714 
.15 441.71 407.42 114.17 7t'.4 
.70 515.10 114.09 141.17 1474 


ft 

•- c 

ft s 

I I 

• — • 

« I 

ft to 
M 

• • 
to 

t *- 

! ^' 

^ ft 

1 i 

e • 
•> 

♦ E 

k s 

B ft 

it 

i i 

to » 

: 1 


f;sstsEsss|sg|| 



175 



- r 



*« p « « 

** A r^ ^ 



■ • c < ■ 

■ e * I I— 

■k « » 9 ■ 

» « C '«' 



ceo 



C ^ •£ C 



7 S Hz 

ri 

^ e c t. ■ 

■ » « •>— 

L » ft «'— 

* z u ■ 



: *r <£ V r« » 



o c c 



: — tfMtfMte'~«*>«k»a 



« « 



» »^ — 



:««C«^C«e«r*« 



« e »<- ^ c ^ ^ o- <c >r- c — ^ f-.' •^* ^ e e •" V '^ «' c « — ' tf" r 



V k ^ 



■ C — « — I 



• r* •- « c r • 



•«.«£« C — — 

r rf »w < P, e- — I 
. ^ * ^ '-' c • 



•- 1^ «« K »» *■ t 
C ^ »■ •■ «C -• • 






« ic tf e ^ *« r I 

« *• ■• r^ *<• c x^ < 
— « ^ c — <^ « 1 






■ O « «* i^ • • 

% e •- «r fi* O i 

^ I* « ^k C ' « 

r »». « — 5 •- • 



^•fjj:^SS|ES88fX|| 



176 



57 



However, the ■prolongation vas not -major for either system anountlng to 
cne year or less In laost cases. "The only other major Impact of Tlslng 
•prices Is the obvious one — the -values are higher. These reeulti Indicate 
that t>ie seni-log or fixed schedule variable royalty system can also 
•perform veil under the Assumption of rising oil and gas prices. 

S"^TTT-ary 

"The general conclusion of this appendljc Is that the analyses support 
the conclusions of the main text. "Three major points -emerge: 

(1) Because the fixed time horizon and optimized time horizon results 
ve re -very similar, it is likely that little production postponement vlll 
occur so long as the semi-log coefficient Is selected vith appropriate 
cost data. 

(2) The results of the main text hold in other cost regions vith 
lower and higher costs than the Hld-Atlar.tic. 

(3) The seni-log and fixed schedule systems also perform veil imder 
the assumption of rising (rather than constant) -prices. 

The conclusions of the analyses for oil vould also hold for gas 
fields. In the CZK2 model (and In other models), oil and gas recovery are 
modeled In the same manner, so oil and gas behave the same vay In leasing 
•policy simulations. 



177 



EVALUATION OF PROFIT SHARE LEASING SYSTEMS 
S. W. EDWARDS 



March 1979 
Leasing Policy Development Office 



178 

Introduction 

The Outer Continental Shelf Lands Act Anendments of 1978 
(the "Amendments"), P.L. 95-372, 92 Stat. 629, were signed 
into law on September 18, 1978, "... to establish a policy 
for the management of oil and natural gas on the Outer 
Continental Shelf; to protect the marine and coastal 
environment;" and for other related purposes.-^ The 
Anendments constitute a sweeping revision of the Outer 
Continental Shelf Lands Act of 1953, Pub. L. 212, 67 Stat. 
462, 43 U.S.C. 1331 et seq .^ Sections of the 1953 Act 
that specified policies and procedures for leasing Federal 
lands on the Outer Continental Shelf ("OCS") were one of many 
areas that underwent substantial modification. In 
particular, the Amendments now specifically authorize the use 
of several new leasing systems and, in fact, require the use 
of bidding systems other than the cash bonus-fixed royalty 



^U.S., Congress, House, Committee of Conference for 
S . 9 , O uter Continental Shelf Lands Act Amendments of 1978, 
Conference Report to accompany S.9, Report No. 95-1474, 95th 
Cong., 2nd sess., August 10, 1978, p. 1, 75. Referred to 
hereafter as the " Conference Report ." 

^The Outer Continental Shelf Lands Act, as amended, 43 
U.S.C. 1331 et sea., is referred to hereafter as 
"OCSLA." 



179 



system for at least 20 percent of tracts offered over the 
next five years. 

The Congress, throughout its discussion of the 
Anendnents, indicated a special interest in using one new 
leasing system — the profit share system.'* However, 
profit share leasing can take many forms. This study 
examines several types of profit share systems that fall into 
the (new) leasing system category defined by OCSLA section 
8(a)(1)(D): "cash bonus bid with a fixed share of the net 
profits of no less than 30 per centum to be derived from the 
production of oil and gas from the lease area." The object 
is to determine the profit share system, belonging to this 
category, most appropriate for the first implementation of 
profit share leasing. 



"Bidding systems other than bonus bidding, including 
royalty, net profit, wor>: commitment and nonenumerated 
systems, are to be utilized in at least 20 percent and not 
more than 60 percent of the tracts offered for leasing in all 
OCS areas during each of the next 5 years." Conference 
Report , p. 92. This requirement is contained in OCSLA, 
§8(a)(5)(B). 

^"The comnittee believes that net profit share and 
other arrangements can be effective in shifting Government 
revenue away from initial bonuses and into deferred payments 
made out of leaseholder's profits based on actual production 
of oil and gas." U.S., Congress, Senate, Committee on Energy 
and Natural Resources, Outer Continental Shelf Lands Act 
Amendments of 1977 , S. Rept. 95-284 to accompany S.9, 95th 
Cong., 1st sess., 1977, p. 73. Referred to hereafter as the 
"Senate Report." 



180 



The analysis proceeds as follows. First, a background 
section briefly traces legislative debate on the Amendments, 
particularly alte.rnative leasing systems, to determine 
characteristics of leasing systems that Congress recognizes 
as important for achieving objectives of the OCSLA. These 
criteria guide the selection of a profit share system. 
Congress's overall policy objectives for management of the 
OCS are also analyzed and redefined in economic terms that 
allow discrimination among leasing systems, and selection of 
a profit share system, best suited to meet these objectives. 

Next, previous research on profit share systems is 
briefly reviewed. This research identifies three profit 
share systems as (a) having properties consistent with 
Congress's objectives, and (b) reasonably easy to implement 
and administer. These systems are the fixed capital recovery 
system, the investment account system, and the annuity 
capital recovery system. 

These three systems are then analyzed in detail. The 
behavior of each system is simulated with a computer model 
over a wide range of leasing parameters (e.g., profit share 
rates, interest rates, capital recovery factors, etc.), 
reserve sizes, and geological (cost) regions. Simulation 
results are analyzed to determine which system best 
accommodates the design criteria and policy objectives. 

Finally, the profit share system selected as "best" is 
compared with other alternative leasing systems to 



181 



illustrate the benefits attributed to profit share leasing. 

Background 

The first legislation dealing with policies and 
procedures for leasing Federal lands on the Outer Continental 
Shelf (OCS) was the OCS Lands Act of 1953. Following passage 
of this statute there developed an ongoing discussion, 
primarily in academic literature, of advantages and 
disadvantages attributed to bidding systems authorized in the 
original (1953) legislation (cash bonus and royalty bidding 
systems) and other "alternative" leasing systems. 
Conflicting priorities brought this debate to national 
attention in the early 1970 's. The potential for 
environmental damage from OCS development was already a 
divisive issue, at least in affected coastal regions, when 
the Arab oil embargo of 1973 accentuated the need for rapid 
energy resource development. VJith this came increased 
pressure for accelerated development of Federal OCS 
resources. These issues collided in the period following the 
OPEC oil embargo, as the Federal government made its first 
attempts to craft an energy policy consistent with the 
environmental concerns of parties affected by OCS 
development. 



182 



The OCS Lands Act Amendments of 1978 embody the 
resulting legislative compromise. The amended OCSLA is a 
major revision and extension of the original 1953 
legislation. Congress believes these changes will "expedite 
the systematic development of the OCS, while protecting our 
marine and coastal environment." A basic objective of 
the Amendments is to promote a "swift, orderly and efficient 
exploitation of our almost untapped domestic oil and gas 
resources on the OCS."^ 

Explicit in the Amendments is Congress's conclusion that 
terms and conditions under which leases are awarded, i.e., 
the bidding and leasing process, have an important effect on 
orderly and efficient resource development. In particular, 
"with the present shortage of investment capital that will 
prevail for many years, increasing risk of uncertainty, and 
the increasing integration and concentration of energy 



^U.S., Congress, House, Ad Hoc Select Committee on the 
Outer Continental Shelf, Outer Continental Shelf Lands Act 
Amendments of 1977 , Report No. 95-590 to accompany H.R.1614, 
95th Cong. 1st sess., 1977, p. 53. This document is referred 
to hereafter as the " House Report ." 

^ House Report , p. 53. Also, a stated purpose of the 
OCSLA is to "establish policies and procedures... intended to 
result in expedited exploration and development of the Outer 
Continental Shelf ..." OCSLA, § 102(1). 



183 

6 ' 

industries, there is some doubt whether cash bonus bidding 
remains the best system for the future." 

Thus, Congress directed through the Amendments that new 

bidding arrangements be developed and used on an experi- 

p 
mental basis, so as to "...strike a proper balance between 

securing a fair market return to the Federal Government for 
the lease of its lands, increasing competition in exploi- 
tation of resources, and providing the incentive of a fair 
profit to the oil companies, which must risk their 
investment capital."^ Congress specifically authorized 
the use of new systems by (1) enumerating the additional 
bidding systems that are now available for use, and (2) 
including an option for developing new systems not 
specifically identified in the legislation. Congress left 
unchanged the requirement that leases be awarded by 
competitive bidding to the highest qualified bidder under 
regulations promulgated in advance. ^^ 

Congress's general objectives for administering the OCS 
leasing program are detailed in the conference report for 



^ House Report , p . 54. 
^See footnote 3. 

House Report , p. 54. 
^°OCSLA, S8(a) (1) . 



184 



the Amendments. All are integral to the development 
of a comprehensive OCS leasing policy. However, these 
objectives are not all equally affected by the selection of a 
particular leasing system. The following guidelines restate 
objectives that are directly influenced by the design and 
selection of leasing systems, and thus allow discrimination 
between particular systems: 

(1) providing a fair return to the Federal Government; 

(2) increasing competition; 

(3) avoiding undue speculation; 

(4) timely and efficient exploration, development, and 
production of OCS oil and gas resources; 

(5) limiting administrative burdens of government and 
industry. 



■^•^Although previous versions of the Amendments 
included sections that detailed reasons for using the new 
leasing systems, the conferees agreed that an expression of 
purposes and policies was more properly included in the final 
conference report. This statement is as follows: 

The conferees intend that in utilizing the new bidding 
alternatives, a wide variety of considerations should be 
taken into account, including, but not limited to: (i) 
providing a fair return to the Federal Government; (ii) 
increasing competition; (iii) assuring competent and 
safe operations; (iv) avoiding undue speculation; (v) 
avoiding unnecessary delays in exploration, development, 
and production; (vi) discovering and recovering oil and 
gas; (vii) developing new oil and gas resources in an 
efficient and timely manner; and (viii) limiting 
administrative burdens on government and industry. 
Conference Report , p. 92. 



185 



The first four criteria have generally guided the development 
of royalty based leasing systems. The fourth objective is 
particularly important when viewed from the perspective of 
the National Energy Act, a basic goal of which is to 
stimulate domestic energy production. The fifth guideline is 
focused primarily on profit share leasing systems, because 
such systems require, for practical implementation, a set of 
accounting regulations and procedures to define and calculate 
"profits." Administrative burdens associated with industry 
compliance and government monitoring of a profit share system 
could offset its benefits, and thus are important design 
considerations . 

To summarize, a review of the OCSLA's legislative 
history shows clearly that (a) while the Amendments authorize 
the use of many alternative bidding systems. Congress is 
especially interested in developing and using profit share 
leasing systems, but (b) the design and selection of 
individual profit share systems must be consistent with 
Congress's stated policy considerations. Those consider- 
ations most directly influenced by the use of particular 
leasing systems are restated, above, as guidelines for the 
design of a profit share system. They will be interpreted, 
in later sections, and translated into economic criteria that 
allow one to measure and compare the relative merits of 
different leasing systems. 



186 



The next section presents a brief discussion of economic 
concepts and terms required to discuss leasing systems. This 
is followed by a general review of previous" research on 
leasing systems ,- which identifies the basic profit share 
systems that warrant detailed examination according to the 
economic design criteria just identified. 

Leasing Economics (In Brief) 

Federal OCS leases transfer to private parties a right 
to exploit oil and gas resources. These rights have a value. 
In economic terms, the value of a lease -- the economic rent 
— is the difference between the value of production from a 
lease and the associated resource extraction costs. 

Assuming competitive market conditions, the equating of 
price and long-run marginal costs determines the total volume 
of production available from an expected resource deposit. 
Infra-marginal units of production produce the economic rent, 
i.e., they produce a positive difference between price and 
cost until the marginal unit is produced at exactly zero 
economic rent. Discounting the sum of economic rents earned 
in each time period, which is to say the net present value, 
determines ex ante total economic rent attributable to a 

-i 

lease, and represents lease value. 



187 

At bid evaluation tine, since everything is prospective, 
the potential bidder must consider all future costs associ- 
ated with resource exploitation as being marginal costs. 
These long-run marginal costs include both operating costs 
plus all costs of lease exploration and development. Also, 
the long-run marginal costs include required opportunity 
costs of capital and any risk premiums required to engage in 
OCS activity. These are all real resource costs in the sense 
that they compensate for goods and services consumed in the 
lease exploitation process, and for the use of capital. 

Thus, economic rent is net of all long-run costs, which 
by definition include (adequate) provisions for return on 
capital investment that is consistent with risks of offshore 
activity vis-a-vis alternative investment opportunities. 
Economic rent represents the amount that government should 
capture as the social value of the resource. 

Two concepts should be emphasized at this point. Eco- 
nomic rents are not actually earned until there is production 
from a lease. Consequently, at the time of a lease sale, any 
value attributed to a lease is the discounted sum of these 
expected future economic rents. 

This suggests there are two basic opportunities for the 
government to capture the economic rent. The first is at 
lease sale^ time. Transfer, at this time, would be in the 



1+9-118 0-79-13 



188 



form of cash bonuses paid for lease acquisition, and by the 
reasoning just presented, the amount of the cash bonus is 
closely related to the total expected economic rent. The 
second opportunity is for the government to receive a portion 
of the economic rent as it is earned in each production 
period. This is accomplished through the mechanism of roy- 
alty or profit share type payments. Recognize that these 
later transfers are contingent on the lease becoming produc- 
tive. Hence, they are referred to as contingency payments. 

When the mechanism of contingency payments is employed 
to transfer economic rent to the government, these transfer 
payments appear to the potential bidder as an additional cost 
that reduces the economic rent he can retain in each produc- 
tion period. The remaining value of the lease at bid eval- 
uation time becomes the former total expected economic rent 
less the discounted sum of these transfer payments. Conse- 
quently, the higher the contingency payments (i.e., higher 
royalty or profit share rates and payments) , the lower the 
net present value at bid evaluation time, and the lower the 
cash bonus that a potential bidder is willing to offer to 
acquire the lease. 

For completeness, we must mention two other forms of 
transfer payments to the government. The first, a very 
important element of any ex ante lease analysis, is Federal 
and state taxes: income taxes, severence taxes, property 



189 

taxes, etc. These are not directly affected by the leasing 
process although, as will be discussed subsequently, they . 
have dranatic effects on producer behavior. The second 
transfer payment irs an annual fixed rental fee paid each year 
the lease is active. However, rental fees are nominal in 
comparison with other transfer payments. 

All these transfer payments -- cash bonuses, contingency 
payments, rental fees, and taxes -- operate to divert eco- 
nomic rent from the lessee/producer to the government. 
Assuming competitive market conditions, a potential bidder 
should be willing to increase his cash bonus bid to an amount 
where the sum of all transfer payment exhausts, ex ante , the 
economic rents associated with lease development rights. To 
go beyond this limit means bidding away normal profits and 
returns on capital. 

Recognize, however, that given the true state of nature, 
i.e., the presence or absence of oil or gas deposits, all ex 
ante bids are either too high or too low. All initial cash 
bonus payments are made at the risk of complete loss, a 
result of no resource being present. Putting most of the 
emphasis on cash bonus payments places most of the resource 
risk on the lessee. But, the resulting low contingency 
payment provisions prevent the governmnent from participating 
in "larger than expected" economic rents coming from large 



190 

deposits. These are typical of the problems identified with 
the traditional cash bonus bid, low fixed royal ty leasing 
systens . 

Previous Research 

Profit share leasing has been examined by many 
researchers as an alternative to the traditional cash bonus 
bid-fixed royalty leasing system. ^ One motive is to 
improve the level of competition for OCS leases. Generally, 
when one accepts the premise that private sector bidders are 
risk averse, ■'■■^ reducing the magnitude of cash bonuses 
initially paid for leases is considered a necessary condition 
for increasing the number of competitors in the bidding 



12 ■ 

This section is not an exhaustive survey of 

research on profit share leasing. Rather it highlights 
important developments and conclusions of previous 
research . 

Leland summarizes the type behavior one expects 
from risk averse firms: (a) they tend to explore less, (b) 
they tend to extract discovered resources too rapidly (due to 
price uncertainty), and (c) they tend to bid less for leases. 
Hayne E. Leland, "Cash Bonus Bidding for Mineral Resources: 
Comment," in Michael Crommeling and Andrew R. Thompson, eds.. 
Mineral Leasing as an Instrument of Public Policy , 
(Vancouver: University of British Columbia Press, 1977), p. 
57-8. 



191 

1 4 
process. Arguments supporting this compare (a) the 

magnitude of cash bonuses required to acquire attractive 

leases with (b) the financial size of bidding firms, and 

conclude that "smaller" firms, vis-a-vis "larger firms," have 

comparatively less ability to financially absorb a complete 

loss of the cash bonus. "Smaller" firms are inherently 

placed at a disadvantage in the bidding process. Such firm.s 

either do not enter bids or must restrict their bidding 

participation. 

With more firms able to compete effectively in the 

bidding process, one can expect a greater diversification of 

OCS reserve ownership. Further, more bidding competitors 

provides greater assurance that the lease auction process 

will produce a winning bid that represents "fair market 

value," resulting in the Government obtaining a fair price 

for this public property. This reasoning is accepted by the 

Congress, as evidenced by the following excerpt from the 

Senate Report on the Amendments: 



■••This point is stressed in research developed for 
Congressional debate on the use of alternative bidding 
systems: "The purpose of reducing the cash bonus is to 
encourage smaller producers to participate in OCS develop- 
ment." Library of Congress, Congressional Research Service, 
"Effects of Offshore Oil and Natural Gas Development on the 
Coastal Zone," study prepared for the Ad Hoc Select Committee 
on Outer Continental Shelf, U.S. House Representatives, 94th 
Cong., 2nd^sess., (Washington, DC: Government Printing 
Office, 1976), p. 101. 



192 



The basic thrust of all these new [leasing] options is 
to reduce the reliance on large front-end cash bonuses 
as the means of obtaining a fair price for the public's 
property. Th'e comnittee wants to authorize lease 
allocation systems that would encourage the widest 
possible participation in competitive lease sales 
consistent with receipt by the public of fair market 
value for its resources. The committee believes that 
net profits share and other arrangements can be 
effective in shifting Government revenue away from 
initial bonuses and into deferred payments made out of 
a leaseholder's profits based on actual production of 
oil and gas. 

Using contingency payments as the primary mechanism for 
transfering economic rents to the government is an important 
method of sharing with industry the risks of OCS exploration 
and development. Cash bonuses are reduced by increasing the 
size of contingency payments. Since this reduces the amounts 
at risk from the outset, there results a higher degree of 
risk sharing with industry. This is a particularly 



^Senate Report, p. 73. 



193 

attractive feature of profit share leasing. •'■^ 

Deemphasizing initial cash bonus payments contributes in 
another important way to ensuring that the Government 
receives fair value for public resources. Comparisons of 
actual bids made for leases with expected values of those 
leases often indicate that actual bids represent a fraction 
of the lease's risked, discounted net present economic value. 
In very simplistic terms, this implies that potential bidders 
incorporate into their bid evaluation analysis all the 
uncertainty factors they feel are associated with geological 
characteristics of the lease; the costs of exploration 
development, and production; and the general economic 
environment. Then bidders may discount the resulting 
residual economic value a second time to arrive at the bid 
entered at the lease sale. This "second discounting" 
reflects the risk averse nature of bidders, i.e., their 



■'■""One proposal does stand out, however, as having 
extremely desirable features. This is the profit sharing 
contract. Profit sharing does transfer risk from a firm to 
the government, and furthermore, if the profit base is 
properly defined, it will not destroy exploration, 
development, or production decisions." Leland, "Comments," 
p. 59. Also, "For a given level of expected bonus bids, a 
profit sharing plan will share risk more effectively than any 
other scheme. This has the? desirable effect of lowering 
front-end costs, increasing competition, and increasing 
expected government revenues. Note that profit sharing not 
only shared discovery risks but also market price risks and 
production cost uncertainties." Hayne E. Leland, Richard B. 
Norgaard, ^cott R. Pearson, "An Economic Analysis of 
Alternative Outer Continental Shelf Petroleum Leasing 
Policies," prepared for the Office of Energy R&D Policy, 
National Science Foundation (mimeo, Washington, DC: 1974), 
p. 28 . 



194 



inherent unwillingness to accept risk beyond certain levels 
and their general uncertainty with the evaluation process 
itself. It can result in reduced bid levels and a propor- 
tionate loss of Government revenue from cash bonuses. 

Thus, reducing cash bonuses and emphasizing royalty and 
profit share payments is an efficient way to ensure the 
Government realizes fair return for the resource. Bidders 
still stand to loose their cash bonus bids and they will 
continue to discount bids. But the discounted portion 
becomes smaller as the bonus bids become smaller, resulting 
in less absolute economic loss to the Government. However, 
the Government receives higher contingency payments through- 
out the life of the lease, provided the lease is productive. 
These contingency payments are not subject to discounting 
because there is no uncertainty once a lease becomes produc- 
tive. Further, the Government has greater opportunity to 
share in the benefits of resource discoveries larger than 
originally anticipated. 

Since contingency payments take the form of either 
royalty or profit share payments, increasing the amount of 
either results in a reduction of residual economic value to 
the lessee, and hence a reduction of cash bonuses bid at the 
lease sale. We have mentioned that contingency payments are 
increased by increasing either the royalty or profit share 



195 

rate stipulated in the lease. However, increases in royalty 
rates result in several well known perverse effects on the 
pattern of lease development and production. First, with 
higher royalty rate leases, resource discoveries must be 
larger to support -commercial development and production. 
Royalty contributions to the Government represent an 
additional cost to the producer. Larger "pool" sizes must be 
found in order for cost economies of scale to provide returns 
to the developer/producer. This is to say that higher 
royalty rates tend to cause the smaller resource discoveries 
-- the "marginal" fields -- to go undeveloped. Consequently, 
while cash bonuses are reduced by adopting a higher royalty 
rate leasing system, the equally important objective of 
promoting efficient resource recovery is not furthered. 

The second undersirable result of increasing royalty 
rates occurs when design decisions on how to develop a lease 
are made. Economists previously believed that higher royalty 
rates caused early or "premature" termination of production. 
However, this conclusion results from a static analysis of 
lease production. It ignored the dynamic relationship 
between the initial sizing of production capacity and the 
time period during which a lease is produced. A developer 
can decide to install a smaller production facility and 
operate for a longer time, or he can install a larger 



196 



production facility and operate for a shorter tine. The best 
decision, from the developer's point of view, is that which 
naxinizes the present value of after-tax net profits. 
Tyner has analyzed many different forms of royalty 
leasing systems, using the dynamic framework just discussed, 
and makes the important contribution that higher royalty 
rates do not necessarily force an early termination of 
production. Rather, they prolong the production life of a 
lease, a result of "optimal" producer decisions to install 
smaller initial production capacities and operate for addi- 
tional production periods. The same amount of resource will 
be produced but over a longer time frame. However, this 
constitutes less than efficient development of the resource 
when compared to development decisions and production produc- 
tion profiles expected under the traditional cash bonus 
bid-1/6 royalty leasing system. 

The "prolongation of production" effect caused by higher 
fixed-rate royalty leasing systems (i.e., adopting fixed 
royalty rate of 40 percent) can be mitigated to a certain 
extent by the use of variable-rate royalty systems. The 
semi-log variable royalty system is one of the more 



Wallace E. Tyner, "Evaluation of Royalty 
Provisions for OCS Leasing," prepared for the Leasing Policy 
Develooment Office, U.S. Department of Energy (Washington, 
DC: 1978). 



197 

efficient variable-royalty systems and versions of it were 
used in several OCS sales held in 1978. The semi-log 
variable royalty system reduces cash bonuses without causing 
severe production prolongation problems, although production 
continues for several addition years. Tyner discusses the 
seni-log variable royalty system in detail and compares it 
with many other variations of royalty leasing. In a later 
section of this paper, the characteristics of semi-log 
variable royalty systems are discussed and compared with 
profit share systems. 

The use of profit share systems constitutes the second 
basic alternative for reducing the magnitude of cash bonuses 
(the first alternative being the use of higher or variable 
royalty provisions). Although not yet tried by the Federal 
government, profit share leasing has been used for many years 
by Great Britain and Norway in their development of the North 
Sea. In the U.S., several state and local governments have 
used forms of profit share systems to lease development 
rights for oil and gas (e.g.. City of Long Beach, California 
in early 1960's) and geothermal resources (e.g.. State of 
California in early 1970's). While actual experience with 
profit share leasing in this country is limited, theoretical 
aspects of profit share leasing have been examined exten- 
sively and some have already been mentioned. 



198 

One of the more comprehensive examinations of alterna- 
tive leasing systems was conducted by the Federal Trade 
Commission in 1975. Researchers involved with the FTC 
work concluded that: 

1. Profit share systems permit a more equitable sharing 

19 
of risk than is available under other systems. 

2. Shifting more of the risk to the government reduces 
the undesirable effects of risk aversion (i.e., avoids 
"double discounting" of cash bonus bids, expands the oppor- 
tunities for firms to bid, and thus improves the competitive 
atmosphere for OCS resources).^" 

3. When properly administered, profit share leasing 
comes closest to capturing the fair market value of 
leases. 21 



^^Federal Trade Commission, Bureau of Competition, 
Bureau of Economics, "Report to the Federal Trade Commission 
on Federal Energy Land Policy: Efficiency, Revenue, and 
Competition," (Washington, DC: October, 1975). 

^^"Risks are shared to a greater extent under a 
profit system than under any other lease allocation system.., 
Such a system shares not only discovery and market price 
risks, but also cost risks." Ibid., p. 283-4. 

20lbid. , p. 284. 

21lbid. , p. 295. 



199 

This FTC report concluded that profit share leasing systens 
could be "fnore conducive to the attainment of energy self 

sufficiency than any other seriously considered lease allo- 

2 2 
cation system. -Counter balancing this optinisn, how- 
ever, is the FTC's concern that, in practical terms, it will 

2 "^ 
be difficult to define and measure profits. 

The FTC study concentrated primarily on comparing, in 
theoretical terms, leasing systems on the basis of a static, 
one-period economic approach. Kalter, et al., independently 
extended this research into a dynam.ic, multi-period analysis 
by developing a computer simulation model of firm behavior 
under various leasing policies. An expanded descrip- 
tion of the Kalter model is presented later in this paper. 
However, it is important to realize that through the use of 
Monte Carlo simulation techniques, the discounted cash flow 
procedures in the Kalter model allow the policy analyst to 



^^Ibid. , p. 295. 

2 T 

"...one disadvantage of the profit-sharing system 

derives from the difficulty of measuring profits. The 

allocation of overhead and common costs is often arbitrary. 

The lessee's accountant would have an incentive to shift 

expense items from other areas to lease operations." Ibid., 

p. 287. 

^^Robert J. Kalter, Wallace E. Tyner, and Daniel W. 
Hughes, Alternative Energy Leasing Strategies and Schedules 
for the OuJ:er Continental Shelf , A. R. Res. 75-33 (Ithaca, 
NY: Cornell University, Dept. of Agricultural Economics, 
1975) . 



200 

consider all uncertainties inherent in exploring, developing, 
and producing fron the OCH. In particular, the nodel allows 
one to understand the effect that leasing policy alternatives 
will have on a firm's prospective fornulation of cash bonus 
bids. 

The Kalter study was also one of the first to 
distinguish between different types of profit share leasing 
systens. Using the model discussed above, the Kalter study 
concluded that four profit share systens (annuity and fixed 
capital recovery systems with either fixed or variable profit 
share rates) and the variable rate royalty system based on 
value are all significantly better than the current cash 
bonus system. ^^ The variable rate royalty system 
has already been mentioned; it will be compared with these 
profit share systems in a later section of this analysis. 

Rose has suggested a third type of profit share leasing 
system — the investment account system — that is similar in 
many respects to the fixed capital recovery and the annuity 
capital recovery systems. The investment account 



25ibid. , p. 111. 

^^Marshall Rose, "The Leasing of OCS Tracts Using a 
Profit-Sharing System," Department of the Interior Memorandum 
(mimeo; Washington, DC: 1977). 



201 

system does not differentiate betwen exploration/development 
(pre-production) expenses and production expenses. This 
feature adds an element of administrative simplicity that is 
desirable if it does not cause anomalous producer behavior. 
The investment account system will be analyzed and compared 
with the profit share systems already discussed. 

This discussion has concentrated exclusively on cash 
bonus bid forms of profit sharing. The alternative, 
establishing a nominal cash bonus and awarding leases to the 
highest profit share rate bidder, is also a possibility. 
However, it is believed that profit share rate bidding 
versions of profit share leasing will exihibit the same 
problems experienced with royalty bidding, namely: 

o A strong temptation to over bid the profit share 

rate . Because the low cash bonus reduces the risk of 
a complete loss, and there is no penalty per se for 
over bidding the profit share rate, bidders are 
tempted to bid excessively high rates to acquire a 
lease, 
o Speculative bidding . Since there is little cash 

bonus required to acquire a lease, bidders enter the 
competition hoping to acquire and then resell later. 
The risk of not reselling is no greater than the risk 
of<not finding resource deposits. 



202 

o Inefficient resource developinent ♦ Simulation 
analyses show that royalty rate bidding systems 
result in (a) dramatically reduced levels of resource 
development for all expected reserve sizes, (b) the 
minimum size field discovery required to support 
commercial production is larger, and (c) production 
profiles are longer, indicating lower initial 
installed capacity. ' Similar production 
inefficiencies are expected to result from profit 
share bidding. 
Faced with these potentially adverse effects of a profit 
share rate bidding sale, initial experimentation with bonus 
bid profit sharing seems prudent, at least until the more 
mechanical problems of profit share accounting, auditing, and 
general administration have been resolved. 

To summarize this section, previous research has identi- 
fied the benefits that can result from the adoption of profit 
share leasing systems. Recent studies have looked at differ- 
ent types of profit share leasing systems and identified 
three — the fixed capital recovery system, the investment 
account system, and the annuity capital recovery system — 



27 
'See, for example, S. W. Edwards and A. A. Prato, 

■Regulatory Analysis: Outer Continental Shelf Bidding Sys- 
tems Regulations," Department of Energy (mimeo; Washington, 
D.C.: Leasing Policy Development Office, 1978) 



203 

that, generically, achieve these benefits to a higher dearee 
than other profit share system variations. The next section 
develops the structure of profit share accounting needed to 
define and calculable actual profit share payments. Then, 
using this structure, the three systems are analyzed in de- 
tail and evaluated according to the economic criteria pre- 
viously discussed. 

Analysis of Profit Share Systems 

The material presented to this point is largely a syn- 
thesis of research and general discussions on profit share 
leasing. It provides the necesary foundation for the anal- 
ysis that follows. The remainder of this study describes an 
economic analysis designed (1) to provide a basis for selec- 
ting, for the first implementation of profit share leasing, 
one of the three cash bonus bid, fixed rate profit share 
systems identified previously, and (2) for comparing, in a 
cost benefit sense, the advantages of using the selected 
profit share system with other alternative leasing systems. 

Because profit share systems incorporate a definition of 
cost as well as revenue into the structure of the leasing 
system, they differ from all systems previously used for 
leasing Felleral lands in the United States. Royalty systems 
need only be concerned with the gross value of production 



49-118 0-79-14 



204 

attributable to a lease, whereas profit share systens are 
based on some measure of profit -- revenue less cost — 
attributable to production from a lease. Hence, an analysis 
of individual profi-t share systems is relevant only after the 
structure of cost and revenue accounts is established. 

The Exploration/Developnent/Product ion Cycle 



The system of accounts needed to implement the profit 
share leasing systems examined in this analysis is closely 
related to the exploratory/developraent/product ion cycle for 
offshore leases. A brief description of this cycle at this 
point will make the discussion of individual profit share 
accounts that follows more meaningful. 

Prior to each lease sale, potential bidders evaluate in- 
dividual tracts to appraise their resource potential and 
value. Bids for individual tracts are determined and a cor- 
porate bidding strategy developed. 

The lease sale itself, i.e., the administrative process 
of receiving, opening, and announcing bids, is conducted by 
the Bureau of Land Management (BLM) district office responsi- 
ble for the area of the sale. All bids are delivered to the 
BLM office on the morning of the sale. After cataloging, 
bids are opened and publicly announced. A firm submitting 
the highest bid is, in most cases, awarded the lease within 



205 



thirty to sixty days of the sale, providing the 
bidder is qualified."^- 

Following issuance of a lease, the lessee begins a pro- 
gran of exploratio-n activities that generally include detail- 
ed geophysical surveys and the drilling of exploratory wells. 
A lease is valid for a period of five years during which time 
the lessee must establish that commercially producible quan- 
tities of hydrocarbons (oil and gas) exist on the lease, or, 
that because of extenuating circumstances (severe climatic 
conditions, unusually deep water, etc.), the lease should be 



"^^Prior to 1978, BLM regulations required that leases 
be awarded (or rejected) within 30 days of the lease sale. 
These regulations were changed to allow 60 days between the 
sale and the last day for accepting a lease, primarily to 
provide time for conducting and evaluating a post-sale compe- 
titive review (see footnote 24). 

''^There are several administrative requirements that 
must be satisfied before a bidder is considered "qualified." 
For example, the bidder must establish a performance bond in 
accordance with BLM regulations. Also, if the bid is 
submitted by a joint venture, the venture must certify that 
no two members individually control production in excess of 
1.6 million barrels per day. See §105(c). Energy Policy and 
Conservation Act, 42 U.S.C. 6201 et. seq. Recent amendments 
to the OCSLA have added another procedural test — the 
post-sale competitive review — that could result in a high 
(and otherwise "qualified") bidder being denied a lease. 
This post-sale analysis of competition may be conducted by 
the Attorney General, in consultation with the Federal Trade 
Commission, and is designed to determine whether the issuance 
of leases will maintain or create situations inconsistent 
with the antitrust laws. See §8(c), OCSLA. 



206 

extended. In the absence of such circumstances, a lease ex- 
pires after five years. 

If a comnercially producible hydrocarbon deposit is dis- 
covered, the lessee begins a sequence of development activi- 
ties that generally include (1) drilling additional explora- 
tory wells to delineate the extent of a reservoir, (2) 
designing platforms and production equipment, (3) fabricating 
and installing platforms and production equipment, (4) dril- 
ling development (production) wells from the platforms, and 
(5) testing production facilities prior to establishing de- 
sign volumes of production. The combined exploration and 
development period is referred to as the "pre-production" 
period, which ends on the first day that commercial quanti- 
ties of production are established from the lease. The "pro- 
duction" period begins on the day of first oroduction ani 
ends on the last day of productioa 

Profit Share System of Accounts 

Profit share leasing is, by definition, based on some 
measure of profits. Generally speaking, profits are the dif- 
ference between revenues and costs. But which revenues, 
which costs? It is reasonably easy to develop procedures 
that determine the volume and hence the value of production 
(revenues) attributable to lease operations. It is consider- 



207 



ably nore difficult to develop procedures that unambiguously 
determine the magnitude of expenses (costs) incurred because 
of lease operations. Also, "profit" is inherently a time 
dependent concept; implementation of a profit sharing system 
requires one to specify time periods for measuring revenues 
and costs, and calculating profits. The alternative -- wait- 
ing until all production ceases before tallying revenues and 
costs, and calculating final profits — is unacceptable. 

Thus, profit share leasing requires a set of procedures 
— an accounting system — to deal with these problems in 
practical terms. The accounting procedures focus primarily 
on definitions of the costs allowable as offsets to lease 
revenue. These definitions contain attribution rules that 
determine whether a cost was incurred as a result of develop- 
ing or operating a profit share lease (and should thus offset 
some amount of revenue from the lease) . Once a cost item has 
been attrributed to profit share operations, there may be 
difficulty determining the amount of the cost that is allow- 
able, particularly if it was incurred jointly with costs for 
other non-allowable activities. Thus, in addition to cost 
definitions and attribution rules, accounting procedures must 
include allocation rules that break joint costs into the 
allowable profit share component and the disallowed non- 
profit shire component. 

Previous studies provide little guidance on the sensi- 
tivity of profit share systems to different types of cost. 



208 

In fact, previous studies have not dealt with problems and 
burdens of inplementation other than to suggest that the 
administration of profit share leasing could be difficult. 
They have tacitly-'assuned that all costs incurred in the 
course of exploring, developing, producing, etc. a profit 
share lease (from direct tract expenses to the most indirect 
elements of corporate overhead) are included within the 
framework of the profit share system. 

However, certain costs are more difficult to define and 
measure than others. For example, direct purchases of equip- 
ment and direct labor on production platforms are costs that 
can be easily measured and attributed to profit share opera- 
tions, where as elements of corporate overhead are very dif- 
ficult to attribute to particular profit share leases, much 
less measure. Moreover, as will be shown in several 
instances throughout this study, certain costs are more 
instrumental than others in influencing firms to behave in 
the manner that promotes policy objectives. Depending on how 
critical a cost element is in influencing desired producer 
behavior, -^^ it may or may not be necessary from an 



^'^The terminology "desired producer behavior" and 
"desired pattern of behavior" is used frequently to denote 
firm decisions that affect (a) whether or not to develop a 
marginal discovery, (b) the initial installed capacity of 
production facilities, (c) production rates, and (d) termina- 
tion of production. What is "desired" is that firms (a) 
develop marginal field discoveries, (b) install larger pro- 
duction facilities, (c) have higher production rates over 
shorter periods of time (short of production rates so high 
that resource conservation becomes a problem), and (d) do not 
terminate production until the maximum amount of resource is 
recovered. 



209 



econonic standpoint, to include the cost iten in actual 
profit share calculations. Generally speaking, the size of 
the production facility initially installed (initial 
installed capacity) is largely deternined by the cost of 
lease development and the speed at which this cost can be 
recovered. Variable operating costs will determine the 
actual production rate, as well as decisions to terminate 
production once facilities are in place. Therefore, 
providing adequate recognition of development expenses, an 
adequate mechanism for the return of capital, and accurate 
measurement and recognition of variable operating costs are 
the most critical features of a profit share accounting 
system. 



•^^These are primarily economic criteria that deter- 
mine whether there will be timely and efficient exploitation 
of resources discovered. Emphasizing these cost elements in 
deference to other elements of cost will have "little impact 
on the Government's ability to capture fair market values 
providing the following conditions hold: 

(1) There is a strict formula for computing net prof- 
its. The formula need not be correct, but must be 
consistent; 

(2) No firm has a significant advantage in being able 
to shift book profits between profit-sharing and 
other operations; and {3)There is effective compe- 
tition for leases. 

... As long as the factors which overstate or understate net 
profits are generally known, firms will adjust their bids 
accordingly. Competitive bids are not based on accounting 
profits, but on firm's real profit expectations." Federal 
Trade Commission, "Federal Energy Land Policy...", 
p. 288. 



210 

Unfortunately, as accounting systems become nore 
sophisticated in their ability to recognize and classify 
costs, the procedures and regulations that comprise the 
system become correspondingly detailed. Increased complexity 
adds opportunities for disagreement as to the interpretation 
^of regulations, allocation of joint costs, etc. Designers of 
\the accounting system must weigh these tradeoffs -- added 
complexity to increase accuracy and scope of cost definition 
and allocation, versus administrative simplicity. The 
accounting system, when implemented, must allow enough of the 
true economic costs of conducting offshore operations v;hile 
not becoming overly dependent on government auditing and 
supervision to ensure compliance, misinterpretations, 
nisallocation of cost items, etc., ... even to prevent 
unjustified shifting of expenses to profit share accounts 
from other nonprofit share activities. 

Thus, the guidelines for developing the accounting sys- 
tem appear to be: emphasize elements of cost that influence, 
in the manner previously discussed, optimum firm behavior, 
but be very conscious of whether the inclusion of additional 
cost items will require excessive regulatory definition, 
which would lead to compliance and auditing difficulties. Of 
course, these guidelines pertain more to the development of 



211 



the accounting system itself, not to the economic 
analysis of individual profit sharing systems. To clarify, 
the accounting system specifies which cost elements are 
allowable and how- they are to be combined to form aggregate 
cost balances. The same is true for production revenues and 
other credits. The profit share systems differ in the way 



these aggregate balances are maniuplrated t o determ ine 

"profits". However, the economic analysis of each system 
assumes the accounting system is operating "perfectly," i.e., 
is properly identifying, measuring, and aggregating costs. 
The analysis works with aggregate costs (which will differ in 
magnitude according to water depths, reserve sizes, OCS 
region, etc.) to determine how the calculation that 
characterizes each profit share system influences producer 
behavior. 



One could (reasonably) suggest that, because there 
has developed over the years several sophisticated accounting 
systems for determining and reporting "profits", the Federal 
Government might adopt an existing accounting system instead 
of designing another. For example, the Internal Revenue 
Service's definition of taxable income could be adopted, or 
perhaps net profits as determined by standard financial 
accounting procedures. However, reliance on an "outside" 
accounting system ("outside" in the sense that changes to the 
system would be made by parties unaware of, or unconcerned 
with the impact such changes could have on the Federal leas- 
ing program) carries the risk that rules or interpretations 
could change and thus radically alter the behavior of les- 
see's dependent on those definitions. 



212 

with this background, we can proceed to define the basic 
profit share accounts needed to implement (and analyze) the 
three profit share systems of interest. Actually, we need 
only two accounts.- The first account -- the pre-production 
period account -- accumulates all expenses incurred during 
the pre-production period. Every allowable expense, regard- 
less of its nature, (i.e., current operating expense, intan- 
gible drilling expenses, equipment purchases, etc.), incurred 
during the exploration and development period is debited to 
the pre-production account. These will include: all explo- 
ration cost (surveys, drilling, etc.) incurred after issuance 
of a lease, all development costs (design work, fabrication, 
installation of platforms and facilities, etc.), and lease 
rental fees. Only costs directly related to lease operations 
are allowed. The original cash bonus paid for a lease is 
specifically not allowed. ^-^ The pre-production period 



^^Excluding as an allowable expense the cash bonus 
paid for lease acquisition lowers the net present value of 
the lease, hence lowers the cash bonus bid. This is a basic 
objective motivating the switch to profit share leasing. 
Further, with a lower cash bonus, there is less incentive for 
firms to abandon marginal resource discoveries. This incen- 
tive exists because Federal tax laws allow unexpensed lease 
acquisition and exploration costs to be "written off" when a 
lease is relinquished, thus providing a partial recovery of 
these otherwise "sunk" costs. When the amount recoverable 
through the tax write-off process exceeds the expected pres- 
ent value available from lease development, the lessee will 
generally opt to abandon the lease. 



213 

ends when conmerical production begins - the "day of first 
production . -^ 

Simarily, all expenses incurred during the production 
period are accumuTated in the "production" account. Again, 
there is no discrimination according to the nature of the 
expense, i.e., whether it is a current operating expense or a 
capital expense. No debit is nade to the production 
account for depreciation, amortization, etc., of capital in- 
vestments made during the pre-production period. Provisions 
for capital recovery are specifically provided through the 
capital recovery mechanism of each leasing system, to be dis- 
cussed next. 

Allowance for Capital Recovery 
As has been noted, previous economic analyses of profit 



^ The importance of establishing the day of first 
production cannot be skipped over lightly. What qualifies as 
the day of first production will be a matter of definition in 
the accounting regulations. However, the analysis of each 
system presented later in this study will consider the sensi- 
tivity of each system to adjustments in the "day of first 
production." This will indicate whether particular profit 
share systems provide economic incentives to artificially 
manipulate this date, i.e., "play games" with ths date to 
include more (or less) expense in the pre-production 
account. 

^ InH.erest to finance capital purchases is not an 
allowable expense for either the development or the produc- 
tion accounts. 



214 

share leasing were (basically) oblivious to practical 
consideration of cost measurement. These studies started 
with the premise that "development" costs can be identified 
and distinguished^-f rom "production" costs. This segregation 
is important because aggregate "development" costs form the 
basis for the capital recovery mechanism that each system 
uses to (a) provide a return of lease development costs, and 
(b) compensate for the use of capital invested in lease 
development. These mechanisms are completely different from 
the depreciation or amortization procedures used for 
financial or tax accounting, although, in theoretical terms, 
the purpose each serves is the same — each provides a 
mechanism for capital recovery. 

Moreover, economic studies of profit share leasing gen- 
erally assume that all lease development costs have been in- 
curred by the time that commercial quantities of production 
are established. Hence, the distinction between the pre- 
production and the production expense account. The defini- 
tion and use of these accounts in the manner described emu- 
lates the assumptions used in economic analyses of profit 

sharing. 

The three profit share systems that will be examined use 
the balance in the pre-production account (i.e., accumulated 
allowable' exploration and development costs) as the proxy for 



215 

total lease capital investnent. The mechanisn for returning 
this investment to the lessee is described below for each 
system: 

Fixed Capital Recovery System ; Expenses are debited to 
the pre-production account as they are incurred during the 
pre-production period. When the pre-production periods ends, 
the balance in this account is multiplied by a capital re- 
covery factor. The product of this calculation is the total 
allowance for capital recovery (TACR) . The capital recovery 
factor is typically a number between 1.0 and 2.0, although it 
can be any number. As will be brought out in later discus- 
sion, the capital recovery factor actually selected for a 
particular lease sale is that needed to provide returns to a 
lessee commensurate with the risks of OCS activity, given (1) 
anticipated exploration and development costs, and (2) time 
delays from the date of lease acquisition to production. 
Procedures for selecting this factor are demonstrated in the 
economic analysis of this system, which is presented later. 
An allowance for capital recovery can be taken in any report- 
ing period (procedures for using ACR and calculating net pro- 
fits are discussed in the next section) until the sum of 
ACR's used in successive reporting periods equals the total 
ACR available (TACR). 



216 



Annuity Capital Recovery System Expenses are debited 
to the pre-production account as they are incurred during the 
pre-production period. When the pre-production period ends, 
the balance in this account is annuitized to deternine the 
ACR available to the lessee each reportina period. Paran- 
eters needed to calculate the annuity -- interest 
rate per reporting period and the number of reporting periods 
-- are terms stipulated in the lease (and would be known 
prior to a lease sale). For example, if the lease stipulates 
that the pre-production account balance will be annuitized 
over "n" reporting periods, the annuity formula determines 
the equal amounts that can be used as ACR for the "n" succes- 
sive reporting periods. The maximum ACR that can be used in 
any one reporting period is the sum of (a) the ACR available 



■^"The annuity formula used for this system is the 
same used to calculate equal payments for amortizing home 
mortgages. The formula calculates the amount due (or avail- 
able) each reporting period so that the resulting stream of 
payments provides an internal rate of return equal to the 
interest rate per period, and the final payment completely 
amortizes the oriqinal balance in the account. If the lease 
stipulates that the interest rate is "i" per reporting period 
for "n" periods, then: 

ACR = P/ l-d+iT" 



where P is the original balance in the pre-production period 
account. ^ 



217 

for the period itself, and (b) any unused ACP. fror' previous 
periods. Note that this systen differs from the fixed capi- 
tal recovery systen in that the annuity syster. limits ACP. 
available in any period to the amount calculated by the annui- 
ty formula (plus previously unused ACR) , while the fixed 
system permits up to the full TACR to be used in any one 
period . 

Investment Account System : The investment account 
system establishes accounting periods during the pre- 
production period (as well as reporting periods during the 
production period). Expenses are debited to the pre- 
production account when incurred. However, the pre-produc- 
tion account is totaled at the end of each accounting period 
and the balance plus an interest charge (debit) become the 
opening balance for the next accounting period. The interest 
charge is the pre-production account balance multiplied by an 
interest rate that is stipulated in the lease. At the end of 
the pre-production period, the sum of all expenses and 
interest charges becomes the TACR. This is available as an 
ACR in any period, as with the fixed capital recovery system. 
However, unlike the fixed system, any unused TACR is for- 
warded to the next period with an additional interest charge 
(increasing the TACR available), which is calculated by 
multiplying the unused TACR by the interest rate. 



218 

Basic Profit Share Calculations 

The profit share systens exanined in this paper use a 
connon series of calculations to determine net lease profits 
-- the "profit share base" -- and, consequently, the profit 
share payment owed to the government. The systems differ 
primarily in the manner that an allowance for capital re- 
covery is calculated. This section describes the basic 
series of calculations; the procedures for determining the 
allowance for capital recovery are explained in the sections 
describing each profit share system, which follow. 

Net profits ascribed to a lease are determined for each 
calendar month (the "reporting period"-^ ) of the pro- 
duction period, according to the following procedures: 

1. Gross lease revenue . This is the value of all production 
realized from a lease during the reporting period. Pricing 
rules incorporated in the profit share accounting regulations 



■37 , . 

The selection of an accounting period is a compro- 
mise between administrative burden and government's desire 
for quick receipt of profit share payments. Companies are 
accustomed to a monthly acounting cycle for many activities. 
Moreover, monthly reporting is the current practice under 
royalty leasing. A monthly reporting requirement seems reas- 
onable for profit share leasing, although the economic bene- 
fits of profit share leasing are unaltered by the selection 
of any period. 



219 

42 



will guide the valuation of production. Gross lease revenue- 
is the sane figure (calculated on a monthly basis) on which 
royalty payments for royalty leasing systems would be based. 
For accounting purposes, gross lease revenue is a credit to 
the production account. 

2. Net lease revenue . Expenses incurred during the produc- 
tion period are debited to the production account. At the end 
of each reporting period, the balance in the production 
account represents net lease revenue, i.e., the difference 
between gross lease revenue and expenses. A negative balance 
is carried forward to the next reporting period. 

3. Profit Share Base . The profit share base is determined 
by subtracting any allowance for capital recovery (ACR) 
available during the current reporting period from net lease 
revenue. Any "unused" ACR is carried forward to the next 
reporting period. A carry forward would occur if either (1) 
there were already negative net lease revenues, in which case 
the entire ACR for the period is carried over, or (2) if net 
lease revenue was less than ACR. 

4. Profit Share Payment . The profit share payment is the 
amount owned to the government for the current reporting 



1+9-118 0-79-15 



220 

43 



period. This is determined by multiplying the profit share 
rate by the profit share base. The profit share rate is 
stipulated in a profit share lease as a lease tern and condi- 
tion, and is fixed - for the duration of a lease. 

Carry forwards of unused production expenses or ACR is 
specifically provided by these profit share systems. The in- 
vestment account system forwards unused production expenses 
and TACR with an additional interest charge. The other two 
systems only carry forward the unused balances. 

Note, however, there is no provision for applying expen- 
ses incurred on one profit share lease against revenue gener- 
ated from another source (other lease operations, other cor- 
porate activities, etc.). Several mechanisms for 
sharing losses have been proposed. However, even the most 
simple loss sharing mechanism — allowing the losses from one 
profit share lease to offset revenues from another profit 
share lease held by the same lessee — raises problems that 
severely complicate administration of the overall profit 
sharing system. While not ruled out, extensions such as 



^"However, the use of a profit share leasing system 
in no way alters standard tax accounting procedures. Thus, 
to the extent allowed by Federal tax laws, intangible drill- 
ing costs and other currently deductible expenses can reduce 
taxable income from other sources. This is another form of 
capital recovery which makes a profit share lease more at- 
tractive than is evident from an analysis of cash flows gen- 
erated strictly by the lease itself. All simulations of 
leasing systems in this study assume that sufficient revenue 
from other sources is available to utilize this tax 
advantage . 



221 

44 



"loss offsetting" should be examined after the a basic systen 
can be evaluated. 

Sinulajtion Analysis of Leasing Systens 

The three profit share leasing systens were analyzed by sinu- 
lating their perfornance with the GEN2 resource policy 
evaluation nodel. Simulation is an analysis technique 
that permits, in this case, the bidding systens to be analyz- 
ed under a connon set of conditions and assumptions. Hence, 
meaningful comparisons between systems are possible. The 
GEN2 model evaluates the economics of each leasing situation 
with a standard discounted cash flow procedure, and uses 
Monte Carlo simulation techniques to represent the uncertain- 
ty associated with variables (e.g., resource size, price. 



•'^For simplicity, this section refers only to "three 
profit share leasing systems;" namely, the fixed capital re- 
covery system, the investment account system and the annuity 
capital recovery system (ACR). There are, however, many 
variations of each system. One variation of the FCR system 
is obtained by specifying a profit share rate (PSR) of 50 
percent and a capital recovery factor (CRF) of 1.5. Changing 
the PSR to 60 percent, with the CRF at 1.5, denotes another 
FRC system variation. Many variations of each system have 
been simulated; the results are discussed in following 
sections . 



222 

45 



40 
etc.) most critical to the valuation process. 

Table 1 presents the assunptions used for the sinulation 
analysis of each systen. To facilitate comparison between 
the results obtained for this profit share leasing analysis 
and previous analyses of royalty systems, the assump- 
tions shown in Table 1 are the same used in that previous 
work. The primarily purpose of the analysis is to determine 
relative performance characteristics of each system. Thus, 
while some may question the current accuracy of a particular 
assumption, e.g., $14.00 per barrel oil instead of a higher 
price, the assumptions are being applied consistently to eacli 
system. The sensitivity of the results to several key input 
assumptions are tested as part of the analysis. 

Several important features of the GEtl2 model should be 
emphasized. First, given a set of values for the economic 
and geological variables in the model (i.e., one iteration). 



'*°For a complete description of GEN2 see Kalter, et 
al. Alternative Energy Leasing Strategies , and Robert J. 
Kalter and Wallace E. Tyner, A Simulation Model for Resource 
Policy Evaluation , revised version. No. 77-78 (Ithaca, NY: 
Cornell University, Department of Agriculture Economics, 
1977) . 

^■^Tyner, "Evaluation of Royalty Provisions...". 



223 



46 

Table 1 
General Assunptions for Profit Share Leasinc Systens Sinulations 



Geologic 

Production decline rate, a 

Reserve distribution 

Dry hole risk, r>ean 

Dry hole risk, std. dev. 

Price relate; 

Initial oil price, P ^ 

Initial gas price, GP q 

Mean of oil price change d l str ibut : ^n , RPIKN 

Std. dev. o^ oil price change dis t r i out ion , RPISTD 

Mean of gas price change distribution, GPIMN 

Std. dev. of gas price change distribution, GPISTD 



• IJ 

lognorral 
.TOO 
.103 



S14.00 
2.00 
O.OC 
0.0< 
O.OC 
0.04 



Sur of years digits 

prod, lifetire 

.10 
.10 
.46 



.10 



Tax related 

Depreciation nethod, NDEPR 
Depreciation lifttir>e, N 
Percent investnent salvageable, a 
Investnent tax credit rate. 
Federal corporate tax rate, 

TiiT<e relate d 

Mininur production tine, TMIN 9 years 

Mininur production tine, TMAX 40 years 
Length of flat production plus production 

build-up, FLATP 4 years 

Developnent and exploration period, LAG 5 years 

Exploration period, LEXLOR 2 years 

Production build-up period, IBP 2 years 
Production build-up factors, BPP 

year 1 .5 

year 2 .8 

Cost related 

Working capital factor 

Triangular investnent and operating cost 

contingency distributions* 

CKIN, KMIN 

CMODE, KMODE 

CMAX, UMAX 
Rate of change in unit operating cost, THETA 
Rent per acre, RENT 
No. of acres per tract, ACRES 

Investment cost allocation during development, FD 

year 1 

year 2 

year 3 

year 4 

year 5 
Percent investment each year that is tangible, TD 

year 1 

year 2 

year 3 

year 4 

year 5 
Exploration cost allocation during exploration, FX 

year 1 

year 2 
Percent exploration cost each year that is tangible, TX 

year 1 

year 2 
Investnent cost control (climatic region), LCLM 

Initial operating cost/barrel 

Cost per exploratory veil (million S) 

Acquisition cost 





.25 




,30 




.40 


0. 


.00 


S3. 


,00 


5760. 




0. 


.00 


0. 


.10 


0. 


.30 


0. 


.40 


0, 


.20 





.00 


0, 


.70 





.70 


0. 


.80 





.BO 





.40 





.60 


TX 







.50 





.80 




2 


Mid-Atlantic 





.52 


SS 


.68 


$100,000 


.00 



Other factors 

< ^ — .^ 

Discount rate 

No. of exploratory wells per 1000 acres. WELLS 

Bonus factor. BFAC 

No. of Monte Carlo Iterations, NCOOP 



.10 
.50 

.75 



100 



•These values reflect a 301 adjustment to the costs in the model, which 
are In 1975 dollars. Coats are assumed to have increased 30 percent 
between 1975 and 1978. By subtracting .30 from these factors, one can 
obtain the actual contingency distributions in 1978 dollars. Hence 
CMIS and KMIN are -.50, CMODE and KMODE are 0.00, and CMODE and CMAX 
arc 0.10. 



224 

47 



the nodel solves for the value of initial installed capacity 
that naxinizes the present value of production, qiven the 
existence of resources. The associated cost per unit of in- 
stalled capacity l"s a non-linear function of expected 
reserve size. However, having established the cost 
per unit of installed capacity at the specific reserve size 
assumed for the iteration, the model assumes that the total 
cost of actual installed capacity is a linear relationship, 
i.e., no loss of efficiency for selecting a smaller versus a 
larger initial installed capacity. 

Second, the model recognizes the time lags and engineer- 
ing constraints that determine typical production profiles 
for each OCS region. These simulations assume that a minimum 
of five year (from lease acquisition) are required to estab- 
lish production, and that the minimum production period is 
nine years. The model can select longer production periods, 
but minimum lease life for these simulations is fourteen 
years. 



A O 

The model determines a per unit cost of installed 
capacity, C, with the relationship: 

C = aR*' 

where R is the expected reserve size, and a and b parameters 
unique to each cost region. 



225 

48 

The cash bonus, 1/6 royalty systen (CP-1/6) is used as a 
standard of comparison for all systems. Simulation results 
of the CB-1/6 system for various cost regions are shown in 
Appendix A. 

Actual comparison among systems are made on the basis of 
four statistics. The first is the percentage of bonus 
reduction (PBR). This is the expected reduction in cash 
bonus when compared with the bonus expected under similar 
conditions for the CP-1/6 system: 



Percent Bonus Reduction = 100 1- ^^^^^ ^ 

CB(CB-l/6) 



where "CP(PS)" is the cash bonus of the particular profit 
share system and "CB(CB-l/6)" is the cash bonus under the 
cash bonus, 1/6 royalty system. 

The second basis for comparing these systems is the 
percent of fields developed. The GEN2 model explicitly 
represents the development decision that must be made 
following the discovery of hydrocarbons on a lease. VJhen a 
discovery is made, a lessee must decide whether there is 
greater value in (1) abandoning a lease to recover unexpected 
lease bonus and exploration costs (recovering them through 
the Federal income tax provisions that allow deductions 



226 

49 



against other incoFie) or (2) developing and producing a 
lease. This is a critical decision, particularly at lower 
reserve sizes. The percent fields developed shows the nunber 
of discoveries expected to be connercially producible for 
each original expectation of reserve size. A higher per- 
centage of discoveries produced implies the systen promotes 
comnerical development of the smaller field discoveries. 
When compared to the CB-1/6 system, an increase in the per- 
cent fields discovered in each reserve category represents an 
improvement in economic incentives to develop marginal field 
discoveries -- one of Congress's original objectives for the 
use of alternative systems. 

The third basis for comparing these leasing systems is 
the production life of the lease. Engineering constraints 
imposed on the model do not permit a lease production life of 
less than fourteen years — five years for exploration and 
development, nine years for production. However, depending 
on economic incentives provided by each system, a production 
life of greater than fourteen years is possible at the sacri- 
fice of reduced annual production. Ceterus paribus , a short- 
er rather than longer production life is desirable. 

Note that the second and third measures of leasing sys- 
tem performance -- percent of fields developed and production 
life — are directly related to the Congressional objective 
of promoting timely and efficient resource recovery. How- 



227 

50 



ever, as will be shown in the analysis of each systen, the 
objective of promoting efficient resource recovery is some- 
what antithetic to the objective of reducing cash bonuses. 
The following assumption is made regarding the relative 
importance of these objectives. Since the United States is 
in the midst of an energy crisis, a crisis which is charac- 
terized primarily by a shortage of oil and natural gas pro- 
duction, it is assumed that the objective of reducing cash 
bonuses should not be promoted at the expense of sacrificing 
resource recovery. This translates into the following 
criteria. Only systems that achieve an expected level of 
resource recovery at least as good as the current CB-1/16 
system should be considered candidates for implementation. 
Among the systems satisfying this criteria, the system that 
is most effective in reducing cash bonuses and improving 
expected government revenues (the comparison characteristic 
discussed next) will be considered "best". 

The final basis of comparison is the present value of 
expected government revenue generated by each system. 
Government receipts for a lease consist of initial cash 
bonuses, taxes, and royalty or profit share payments received 
during the life of the lease. An increase in expected 
government receipts reflects an increase in the probability 
that fair'market value will be realized for public resources. 
Again, this is one of Congress's primary objectives. 



228 

51 



Fixed Capital Recovery (FCR) Systems : 

Twelve different variations of the fixed capital recov- 
ery systen (the "fixed") systen were simulated for each of 15 
different reserve sizes fron 30 to 1000 million barrels. The 
costs used for these simulations are representative of costs 
experienced on middle-Atlantic OC? leases, which is charac- 
terized as a medium cost area. The results are shown in 
Appendix Tables B-1 through B-12. These can be compared with 
simulation results (shown in Appendix Table A-1 ) of the tra- 
ditional CB-1/6 royalty system for the same range of reserve 
sizes and costs. Apendix B also contains tables showing sim- 
ulations of the fixed system using Gulf of Mexico costs 
(which are generally lower than middle-Atlantic costs) , and 
different assumptions regarding production profiles, timing 
of development costs, and production delays. 

These simulations indicate the following characteristics 
of the fixed system. VJhen the capital recovery factor is 
held constant, an increase in the profit share rate causes a 
decrease in ATNPV, resulting in an increase in the percentage 
bonus reduction. This is anticipated since holding the capi- 
tal recovery factor constant allows no additional capital 
recovery (sheltering of net revenues), while increasing the 
profit share rate diverts greater proportions of net revenue 



229 

52 

to the government. Consequently, the value of the lease 
decreases. This is shown in Figure 1 . -^ 

However, as the profit share rate increases, the percent 
of field discoveries actually developed decreases . Again, 
this is expected because the increased PSR makes development 
of a given size discovery less attractive vis-a-vis develop- 
nent of the same discovery at a lower PSR. Although explora- 
tion costs remain the same, the reduced present value of 
producing under a higher PSR more than offsets the reduced 
cash bonus reduction. Hence, at the higher PSR, a greater 
proportion of discoveries tend to be abandoned. This is 
shown in Figure 2. Note that the fixed system with capital 
recovery factor 1.5 and PSR at 50 and 60 percent generate the 
highest percent bonus reduction (on Figure 1) but cause fewer 
fields to be developed (Figure 2). Also, of the four fixed 
system variations shown in Figure 2, only the 30 percent PSR 
variation produces more field discoveries than the tradition- 
al CB-1/6 royalty system, although the 40 percent PSR varia- 
tion produces results roughly comparable to the cash bonus 
system. 



^The legend for Figures 1 through 6 should be 
interpreted as follows: 'FIXED' means the fixed capital 
recovery system; '1.5' in the second position means a capital 
recovery factor of 1.5; '40' in the third position means a 
PSR of 40 percent. Also, the plots for each system variation 
start at the lowest expected reserve size that is economic, 
i.e., lowest reserve size with a positive ATNPV. 



230 



53 



co^ II 



S 



T 



9 

/ 



1 




i; 



8 S B 

luoojsd NOiLDnaaH snNoa 




231 



54 



9 

3 •- 



1 1 


J 




ill 


Si 

Si 




S 8 S S 

G3dOT3Aaa SCnSLd INSOaSd 



232 

55 



Figure 3 denionstrates how total governnent revenue is 
affected by the changes in PSR (holding the capital recovery 
factor constant). This figure, and all like it that follow, 
conpare the totals-expected government revenue strean for a 
particular leasing system variation to total governnent reve- 
nue expected under the CB-1/6 royalty system. Total expected 
government revenue is the present value of all transfer pay- 
ments to the government: cash bonus, taxes, rents, royalties, 
profit share payments, etc. Only leasing system variations 
that produce more field discoveries (than the cash bonus sys- 
tem) at each expected reserve size generate an increase in 
total government revenue. This phenomenon is true for all 
profit share systems discussed in this paper (and, is gener- 
ally true for all leasing systems) . Note also that when 100 
percent of all field discoveries are developed, the leasing 
system has no impact on total expected government revenue, 
because this simulation procedure does not represent the ex- 
traction of a risk premium from ATNPV at bid evaluation time 
(i.e., the "double-discounting" phenomenon discussed previ- 
ously). There is little empirical evidence to support the 
selection of a value for this phenomenon. Arbitrary selec- 
tion of a value for the risk premium would artificially bias 
the results, making profit share systems appear significantly 
more attractive than the CB-1/6 system when compared on the 
basis of percent cash bonus reduction and expected government 



233 



56 



9 


1 1 1 

R 8; R 


Q in 
2 - 


in in in 


^1 


FIXOD 
FIXED 
FIXED 



4X0 







§ 8 8 



^ 



B • 
o ^ 
u 

^ t„ 
o 

<D 

03 O 

o 



o 



0) n! 
c o 

f-1 C 

> +^ 

CO 

c 
o 
o 



o 



03 



o 

CD 
Cm -P 

tr-l CO 

0) 

m o 

o 

£ o 



234 

57 



receipts (e.g.. Figures 1 and 3). However, this phenonenon 
operates the sane on all profit share systens, thus it is not 
necessary to explicitly represent it when the prinary motive 
is to select frorr anong the profit share systens. 

Figures 4 through 6 show how the fixed system reacts 
when the PSR is held constant (at 50 percent) and the capital 
recovery factor is increased. Lower capital recovery factors 
result in less total allowance for capital recovery, which 
shelters less lease revenue. This lowers ATNPV, causing 
large reductions in initial cash bonuses. But, lower capital 
recovery factors result in fewer field discoveries being 
developed, hence less total governnent revenue. Of the fixed 
system variations shown in Figures 4 through 6, the fixed 
system with PSP at 50 percent and a 2.0 capital recovery fac- 
tor performs better than the CB-1/6 system in terns of devel- 
oping field discoveries and generating government revenue, 
and it reduces cash bonuses approximately 30 percent. 
Although not shown here, the fixed system with PSR at 60 per- 
cent and capital recovery factor at 2.0 similarly outperforms 
the cash bonus system and reduces cash bonuses 40 to 45 per- 
cent (see Figures 9 through 12 and Appendix Table B-12). 

Average production periods for these profit share sys- 
tems have not been plotted but can be seen in the appendix 
tables. Except for slight variations at low reserve sizes, 
all fixed system variations display no tendency to prolong 



235 

58 




H9-118 0-79 



15 



236 



59 



i i 


1 


^\^ 


t 


to o 

• • 


d 


gig 




::li: 


8 






4 X ■ 



\n 




s 



8-8 9 



E 
o 
u 
til 

u 

o • 
o o 

>> o 



-p 



O t>-i 

o 

0) (-1 

-p 
M C 
C 03 
•H +J 
>j CD 
U C 
03 O 
> O 



o 

-p 
o 

0) 

t« 

Cm 

u> 
S 
o 



03 






o 



r 



237 

61 



the production period. Fourteen years — 5 years for explor- 
ation and development, and 9 years ninimuD production life ~ 
is the mininum production period allowed in these simultions. 
Therefore, simulaUons resulting in production periods of 
14.0 generally indicate that a "pure" economic optimum, one 
independent of practical engineering constraints, would occu 
at production periods less than 14.0 years. When compared 
with production periods for the traditional CB-1/6 royalty 
system, these fixed systems (and, generally, all profit share 
systems examined in this analysis) provide no great improve- 
ment. However, when compared with production profiles for 
other alternative leasing systems that have been used to 
reduce cash bonuses (e.g., the semi-log sliding scale royalty 
system), these profit share systems provide a significant 
improvement by reducing the tendency to prolong production 
time periods. Simulations of fixed system variations discus- 
sed to this point have assumed costs typical of those exper- 
ienced on middle-Atlantic OCS leases. However, the structure 
of costs, i.e., exploration costs, development costs, and 
production costs, can all change (a) in absolute magnitude 
and (b) relative to each other depending on a particular OCS 
region. Thus, it is important to understand the sensitivity 
of a leasing system to changes in this structure of costs. 

Sevei^l simulations using costs typical of the Gulf of 
Mexico were made on the fixed system variations that perform- 



238 

62 

ed well in simulations with niddle-Atlantic OCS costs. The 
results are shown in Table 2. One obvious difference is that 
the snaller reserve sizes are far more economic to produce in 
the Gulf than in ihe middle-Atlantic. More importantly, the 
fixed system variation that produced "best" results for 
middle-Atlantic costs, 2.0 capital recovery factor and 60 
percent PSR, is still very effective in reducing cash bonus- 
es, particularly for the lower reserve sizes. However, this 
variation causes a slight decrease in the percent of field 
discoveries developed when compared with the CB-1/6 fixed 
royalty system simulated for Gulf costs (Appendix Table A-2). 
As Table 2 shows, reducing the PSR to 50 percent causes cash 
bonuses to increase somewhat, but also brings the percent 
fields developed figure back into line (i.e., improves it 
with respect to the CB-1/6 royalty system). 

It is difficult to distill from the results of these 
costs runs a general rule that allows one to prejudge which 
fixed system variation is best suited to a particular OCS 
cost region. Ceterus paribus , system performance depends on 
the relative magnitude of exploration costs versus develop- 
ment and production costs. Comparing the Gulf of Mexico to 
the middle-Atlantic region, development costs drop roughly 46 
percent while operating costs drop 23 percent. Thus, a capi- 
tal recovery factor of 2.0 allows sufficiently fast recovery 
of exploration and development costs, but the PSR must be 



239 



63 



Table 2 

Sensitivity of Fixed Capital Recovery Systers 

to Changes in Cost 



Percent Bonus Reductions 



Gulf_ of Mexico Costs Hiddle-Atlant ic Costs^ 

Expected Fixed Fixed Fixed Fixed Fixed Fi)^d 

Reserves 1.5 - 50% 2.0 - 50% 2.0 - 60% 2.5 - 60% 1.5 - 50% 2.0 -"60% 



30 64% 36% 62% 32% -/- -^ -/- 

*f^ 49 33 50 " 34 +/- * +/- 

ff 42 33 47 38 53a 42i 

80 40 34 47 40 43 41 ' 

ion 40 34 47 41 40 41 

200 40 36 47 44 40 41 

B. Percent Field Discoveries Developed ^ 

3C -10% 1% -5% +4% - 6% 1% 

40 - 7 -2 +3 -14 1 

60 -1 0-5 1 

80 C -50 

100 - 2 2 

:or 



1. 



'These simulations use tlje sane assunptions shown in Table 1, except for 
cost assunptions as follows: 

Exploration costs - cost per exploratory well: S4.06 nillion 
Operating costs, initial - cost per barrel: .40 

Developnent costs: C = aR 

where: C = cost per unit of installed capacity 
a = 296,472 
R = expected reserve size 

b « .57839 

■'Uses variable values shown in Table 1. Coefficient "a" in development 
cost function is 549,473. 

-/- indicates that ATKPV at this reserve size was negative for cash bonus- 
1/6 royalty system, and slightly negative under this system. 

-/- indicates that ATNPV at this reserve size was slightly positive for 
cash bonus - 1/6 royalty system, and slightly negative under this systen. 

^The entries in this table differ from values plotted in Figures 2 and 5. 
Numbers shown here are the difference between percent fields developed under the 
fixed systems and the cash bonus - 1/6 royalty system. A negative entry indicates 
that fewer fields were developed under the fixed system. 



240 

64 

dropped (to 50 percent) to make production from smaller 
reserve sizes attractive. Experimentation with costs repre- 
sentative of a particular sale region will always be neces- 
sary to "fine tune"^' a system and determine the parameters 
that generate the "optimal" lease development and production 
behavior. 

A final comment regarding the timing of expenses. For 
expenses incurred during the pre-production period or during 
the production period, the fixed system provides no incen- 
tives that would change the normal timing of expenses within 
the period. That is, under the fixed system there is no 
reason to unincurr and book an expense, for profit share 
accounting purposes, early in the period rather than late. 
Standard "cost of capital" reasoning leads one to expect that 
developers will delay payment of costs until the last pos- 
sible moment, which is true for the fixed system as well as 
the royalty systems. 

A related problem, however, is whether there are econom- 
ic incentives built into the fixed system that encourage 
developers to actually delay production, so that (a) the pre- 
production period is extended, (b) more expenses will be 
eligible for the pre-production account, and (c) there is a 
proportionate increase in total allowance for capital recov- 
ery (the "proportionate increase" results from the applica- 
tion of the capital recovery factor to the pre-production 



241 



65 



account, provided it is greater than 1.0). The existence of 
and severity of this problem will be exanined in a later sec- 
tion which compares the various profit share systems. 
Suffice to say he^re , there are no actual economic incentives 
that encourage this behavior. 

From a public policy standpoint, the pre-production per- 
iod should end when the lease is ready to commence commerical 
production, assuming diligent exploration and development 
activity. AS a practical matter, lessees are required to 
submit for USGS Supervisor approval detailed plans that 
describe all exploration, development and production activi- 
ty. These are required by the OCSLA 25(c)(5) for reasons 
completely unrelated to profit share leasing. The require- 
nent is that these plans must indicate the "expected rate of 
development and production and a time schedule for perform- 
ance" (underscoring added). Thus, the USGS Supervisor, who 
nust ascertain the reasonableness of these plans and must 
similarly approve any modifications of the plans, will be 
aware of circumstances that delay production and warrant an 
extension of the pre-production period. Also, the Supervisor 
has readily available the means to determine when production 
is being delayed unnecessarily, possibly to extend the pre- 
production period, and he can act to administratively termi- 
nate the pre-production period. m fact, this "leverage" may 
operate to ensure timely development and production. 



242 

66 

Investnent Account System 

Several variations of the investnent account syster" were 
sinulated using middle-Atlantic OCS costs. The results, 
which show the effect of increasing the PSR fron 30 to 60 
percent and the interest rate from .08 to .14 percent, are 
presented in Appendix Tables C- 1 through C-15. 

Figure 7 and 8 show how changes in the interest rate and 
the PSR affect performance of the investment account system. 
Holding the PSR constant at 50 percent, a change in the in- 
terest rate from .08 to .10 causes ATNPV to increase (because 
more lease revenue can be sheltered) and the percent bonus 
reduction to decrease. Holding the interest rate constant, 
an increase in the PSR fron 50 percent to 60 percent reduces 
lease ATNPV and increases the percent bonus reduction. How- 
ever, of the four investment account variations shown here, 
none result in as many field discoveries being produced as 
the traditional cash bonus-1/6 fixed royalty system. Under 
the middle-Atlantic structure of costs, an interest rate of 
approximately 14 percent and a PSR of 50 percent are required 
before the percent of fields discovered exceeds that for the 
CB-1/6 fixed royalty system, and the percent bonus reduction 
approaches that obtained by the fixed 2.0-60 percent system. 
No investment account system variation was found that devel- 
oped more^fields than the CB-1/6 system and reduced cash 
bonuses more than the fixed system. 



243 



67 



9 






1 


1 


1 


^ 


8 


s 


• 


8 
•• 


o 


> 




•- 



D ■ 



f^B 



c^ 



:5 

Cos 

< 9 

Pen 

Cog 



o 



E 
w 

CO 



I 

w 
:3 
c 
o 

x: 

o 



§ 




C 



o 

•D 

C 

rc 

■^ 
o 

c« 
O 

cn 

O) 

+J 
ca 
u 

K) -o 

c 

-^ rt 

o 00 
u 

o 

o w 

0) 

■p +^ 

O Ct! 

O) W 
0) 

? QJ 

O +J 

x: c 

♦ 



8 5 IS S 8 

lUMjad N0Ii0nG3H SOHCS CiaJL33dX3 



244 

68 



q8 

4 



1 


1 1 

• 1 


R 


S S 


o 


8 2 
•; • 


ll 


IV5T 
IVST 



X o ■ 



si 

Si 

■ 



OD 




^uoojad Noijonaay sanos crajoadxa 



245 

69 



A scan of the appendix tables for the investnent account 
systen shows that average production tine periods are essen- 
tially the same as for the fixed systen. This is true for 
all investnent account systen variations exanined. 

Sinulations of the investnent account systen were also 
nade using Gulf of Mexico costs. Table 3 conpares investnent 
account variations simulated for these two cost regions. 
Given that the tining of exploration and developnent costs is 
unchanged (as are the tining of production expenses and reve- 
nues), the investment account systen shows less sensitivity 
to changes in cost structure than does the fixed systen. 
That is, for the particular set of paraneters defining an 
investnent systen, a change in cost does not appear to change 
the resulting percentage cash bonus reduction as much as 
would result under the fixed systen. 

The previous section discussed the degree to which the 
fixed systen is sensitive to the timing of expenses (or reve- 
nues) within the pre-production or the production periods. 
The fixed system is insensitive to this aspect of tining. 
However, while the investment account systen does not adnin- 
istratively divide the lease cycle into two tine periods 
(pre-production versus production), the investment system is 
very sensitive to the problem of timing. To get results com- 
parable to the fixed system, the simulation analysis indi- 
cates that practical implementation of the investnent system 



246 



70 






V. 

C 
(V 

j-i 

10 

>1 

tr. 

jj 

c 

o 
u 
u 
< 



c 
o 

E 

> 

c 



O 

C 



1—1 

m 

>, 
o 
u 



rsi 

in 
O 

u 





t>^ 


DP ,. 


1 


1 CO r^ r- CO 


«3- (N ro O (M 


1 


\ ro po rn m 

+ 


+ + + + 



OP 
I CT. ^ O OS 

\ "s- ■^ TT n 

+ 



I I 



rsi 
I 



(0 
> 

u 

0) 

to 

<u - 
(X i 

•D : 

0) ■ 

■u 

o 

a> 

a 

»« 

u 





dfi 


* 


1 


1 r^ in rs c 


vo «r in in CM c 


\ 


\ in ■^ "a- 'a- 

+ 


.-H 
1 1 1 1 1 



I in 



o in .-( 
in Tj- ^ 



1 








3 




OP 




C 




c 




o 




in 




XI 




1 




x: 




i-H 




V) 




• 




ro 


>— 1 






U 


to 






*— ' 


XJ 


c*P 






to 


O 


Of 


c 


o 


in 


1— f 


O 


u 


1 


VD 


•r-l 




CM 




JJ 


o 


•-( 




U 


u 


• 




3 


• *-t 






T! 


X 






0) 


(U 


c»f 




K 


2 


O 


dP 






in 


cc 


to 


<4-l 


1 


\o 


3 


o 


o 




C 




.-) 




O 


U-l 


• 




m 


■— t 

3 






JJ 


c 


OP 




c 




o 


OP 


0) 




in 


m 


u 




1 


r-- 


u 




CD 




Q) 




O 




a, 




• 





in 

t: 

(D 

a 
O 
i-i 
a; 

> 

c 
to 

u 

> 

o 
u 
to 



CO (N I— I C C 

^r «a- T Tf "* 



.-( rl- fsl nH C 

in «3" rr TT ^ 



T VD m rj c 
in TT T "tr «T 



o 



o o c o o 
^r vD CO o o 



4J 

c 
u 

0) 



m 



Of 

O" r- o r^ 'T o 

I— I —I 
I I I I I 



t~- in o o o o 
I I 



Of 

o r- i-H o c o 
r I I 



OP 

CN CTs rr o o o 

•—I 

I I I 



o o o o c o 

fl TT VO 00 O O 



(N 


<N 


(N 


<N 


CM 


0) 


<1) 


0) 


0) 


0) 


.-( 


1— 1 


i-i 


1—1 


.— 1 


XI 


X3 


J3 


Xi 


XI 


fO 


m 


TO 


(U 


fO 


E- 


E- 


E-^ 


E-i 


Eh 


>— 1 




n 


^ 


in 


01 


01 


0) 


0) 


0) 


4J 


OJ 


4J 


JJ 


JJ 


O 


O 





o 


O 


c 


c 


c 


c 


c 


4J 


4-1 


4J 


JJ 


JJ 


o 








o 


o 





o 





o 


o 


D- 


Cu 


Ci. 


IJU 


Ci. 


0) 


a> 


0) 


a; 


0) 


<D 


0) 


0) 


01 


0> 


c/: 


en 


w 


w 


w 


-H 


(N 


n 


rr 


in 



247 



''t^^r: 



would require using interest rates substantially higher than 
the generally assumed discount rate. But, when the allowed 
interest rate on the investment account is greater than the 
assumed discount rate, a developer is automatically provided 
a "return" that increases as a function of time , i.e., from 
the day the expense is booked in the investment account to 
the day the expense (and accumulated interest) is matched 
with production revenues. Assuming continuous compounding, 
the lessee "earns" at the rate: 



^ii-r)t 



where "i" is the allowed interest rate on the investment 
account "r" is the assumed discount rate, and "t" is the 
elapsed time between "booking" the expense and matching it 
against revenue. 

Opportunities to benefit from this timing anomaly come 
from two sources. First, a developer can actually pay devel- 
opment expenses sooner than would be expected under compar- 
able development schedules for other systems. To the extent 
this accelerates development and production, it is not neces- 
sarily a bad feature. However, to the extent actual produc- 
tion is not accelerated, this aspect of the investment 
account sS'stem presents a significant administrative problem. 



248 

72 



Regulations will have to define what constitutes a "nornal" 
pattern of exploration, developnent , and production expense 
so that attempts to artifically accelerate the tiding of ex- 
penses can be detected. Second, a developer can appear to 
pay expenses sooner than actually occurred. This is pcfrticu- 
larly disturbing because, rather than eliminating an element 
of controversy from the use of profit share systems, i.e., 
disputes over what constitutes the first day of production, 
the investment account system builds into the system many 
additional opportunities to question ex'pense timing. Thus 
administrative problems are compounded, not alleviated. 

Auditors will need to examine the timing and booking of 
expenses in each accounting period , because accelerating (on 
the books) the debiting of an expense item for just one time 
period provides automatically a return of sufficient 
magnitude to justify a lessee's effort to substantiate his 
case, if questioned. In any event, the timing problem, is one 
that will require greater attention and specificity in the 
writing of regulations, and more auditing to control. The 
practical significance of this problem is, again, highlighted 
by the fact all simulations indicate interest rates well 
above assumed discount rate are needed to make investment 
account systems perform adequately under the structure of 
costs and timing of development expected in OCS regions. 



249 



73 



Annuity Capital Recovery Syste n 

Many variations of the annuity capital recovery systen 
were simulated usi"ng profit share rates fron 30 to 60 per- 
cent, annuity time periods of three to seven years, and annu- 
ity interest rates from .08 to .14. These results are shown 
in Apendix Tables D-1 through D-8. The best exanple of the 
annuity system is plotted on Figures 9 through 12 (discussed 
in a later section). In general, short (approximately three 
year) annuity time periods at discount rates equal to or 
higher than the assumed discount rate were required to gener- 
ate results comparable to the fixed capital recovery systen. 
A detailed discussion of the annuity systen will not be 
presented, although the appendix tables provide all informa- 
tion needed to make this analysis, because the results of any 
annuity capital recovery system can be reproduced with a fix- 
ed capital recovery system. The effect of any combination of 
annuity factors (time period and interest rate) can be basic- 
ally duplicated with the selection of an appropriate captial 
recovery factor. Also, using the fixed capital recovery sys- 
tem has several advantages over the annuity system. First, 
the annuity system creates an upper bound on the amount of 
allowance for capital recovery available in any production 
reporting^period, which the fixed capital system does not. 
Thus, the practical effect of an annuity system is to prolong 



\ 



250 

74 



the recovery of invested capital. For any set of parameters 
for the annuity systen, a fixed system variation can be found 
which produces sliqhtly better results, if for no other 
reason than capital recovery is accelerated. Second, the 
fixed systen requires setting only two parameters -- the 
profit share rate and the capital recovery factor — while 
the investment account systen requires three -- profit share 
rate, annuity time period, and annuity interest rate. 

Comparison of Leasing Systems 

This final section (1) continues the discussion of prof- 
it share systems by directly comparing certain features of 
the fixed and the investment systems and (2) concludes the 
study by comparing the best example of each profit share sys- 
tem examined in this study to other alternative leasing 
systems. ^ 

Regarding the problem of development expense timing 
within the pre-productin period, the relative sensitivity of 
each system to this problem can be illustrated with the simu- 
lation results presented in Table 4. This table shows the 
effect of least ATNPV when the timing of development expenses 
is altered. The "normal" pattern is that described in Table 
1. The accelerated pattern represents development expenses 



251 



75 



Table 4 



Effect on ATNPV of Changing the Timing of Developnent Expense; 
(100 r.illion barrel reserve size, mid-Atlantic costs, 
production begins in vear six) 



Developnent Expense 
Timing 



Lease ATNPV (millions) 



Investment System, 
.14 - 50%-^ 



Fixed System. 
2 



2.0 



60%' 



5 year - Normal 

5 year - Accelerated 
(5: 0-5-5) 



$28.34 
$29.25 



$26.22 
S23.94 



Interest rate at 14 percent; profit share rate at 50 percent. 

2 

Capital recovery factor at 2.0; profit share rate at 60 per- 
cent . 

^The "normal" pattern is described in Table 1. 

This accelerated schedule is: no development expense year 1, 
50 percent of total lease development expense in years 2 
and 3 . 



U9-118 



79 - 17 



252 



76 



incurred equally in years two and three. In all cases, pro- 
duction does not begin until year six. The length of the 
developnent (pre-production) period is unchanged, as is the 
tining of production revenues and expenses. The systen vari- 
ations shown in Table 4 represents the "best" variation of 
each system for the mid-Atlantic cost region. 

Table 4 shows that for the investment account system 
there is an increase in ATNPV which results purely from the 
acceleration of development expenses. Conversely, the fixed 
systen suffers a decrease in lease value. The inference 
drawn from these results is that an "artificial" manipulation 
of the timing of development expenses (or, in general, the 
timing of any expense) can result in an increase in lease 
value for the investment system. Note further that Table 4 
shows an acceleration of actual expenses; if an expense can 
be entered in the profit share accounts sooner than it is 
actually paid, an additional increase in lease ATNPV will 
result. This underscores the critical role that expense tim- 
ing plays in lease economics for the investment account sys- 
tem, and the added reliance on compliance auditing that will 
be required if the investment account system is implemented. 
The problem of altering expense timing within the pre- 
production period has been discussed, but there is a related 
problem that centers on shifts in the "date of first produc- 



253 



77 



tion," which has not yet been examined. Adninistratively , 
the investment account system does not define the "date of 
first production" because costs are not differentiated on 
this basis. However, both systems are sensitive to shifts in 
the date that commercial quantities of production are estab- 
lished, as shown in Table 5. 

The top of Table 5 (part A) shows the effect on the 
investment account system of adding an additional year to the 
pre-production period, and adding an additional year plus 20 
percent more cost to the pre-production period. The bottom 
of Table 5 shows the efect of these changes on the fixed sys- 
tem. These simulations are for a 100 million barrel reserve 
in the mid-Atlantic cost region. They are compared with 
results under the normal five year development pattern. 

Under the investment account system, at an interest rate 
of 14 percent (which is needed to get reasonable system per- 
formance) , the effect of delaying production one year at no 
additional development cost is a drop in ATNPV of 24 percent. 
This compares with a drop in ATNPV for the fixed system of 36 
percent. Thus, the fixed system provides far less incentive 
to prolong the development period than the investment account 
system, even though the fixed system's capital recovery mech- 
anism depends on the event "day of first production." What 
happens if the development period is extended to include more 
costs in the fixed system's more favorable pre-production 



254 



78 



4J 




U 




o 




u 




4-> 


w 


c 


u 


<u 


IT3 


E 


—i 


Cl,i— 1 








.H -D 


O 




> 


l4-i 


01 





Q 






w 


D^ C 


C 





•H 


•rt 


■D 


-H 


t; -h 


< 


•i-i 




E 


■c 




c 


^ 


<D 


w 




4-1 


Tl 


U) 








-.H 


u 


U 




0) 


u 


a 


•^ 


in 


AJ 


■u 


c 


o c 


(D 


.— 1 0; 


^ 


X! E 


4-1 


<D a< 


^ 


1 


i-H 


o 


dJ 


,— < 


> 


'D 


Q) 


713 


D 


•w 








«^ 


Di 




C 


•». 


•w 


<D 


IT 


N 


C 


•H 


(0 


w 


x: 




u 


4) 




> 


U-l 


^ 





<D 




W 


> 


O 


04 


IX 


z 




Eh 


c 


< 


E 




Z 


C 







o 




o 


JJ 


•—{ 


u 


■— 


0) 





u 



w 

D, 

C 

in 



E 

4J 



c 

D 

o 
o 
u 

< 



c 
<I> 

E 

4J 
W 

> 

c 



cc 
o 



o 

•iH 

a. 

c 
o 

-H 
4J 
O 

3 
■D 
O 

u 
a. 



m 


u? 


m 


• 


• 


• 


oc 


•— 1 


o> 


rj 


(N 


i-H 


v> 










00 

0-. 



c 



in 
rsi 



in 



■«r 


VC 


• 


« 


(N 


VO 


rs 


^ 


v> 







4J 


w 




W 


o 




o 


u 




o 


i-H 




.-H 


(D 




IB 


c 




C 







o 


• p^ 




•rH 


4J 




4-) 


• «H 




•H 


t; 




■c 


t; 




-c 


10 




UJ 


OP 




o 


O '^ 




c 


(N IC 




^^ 


U 


;j 


u 


14 ra 


(D 


ro 


(D 0) 


<U 


0) 


(D >, 


>, 


>1 


>, 



v£) 



VO 



a, 

Of 

c 






E 
d) 

4J 
W 

>i 

> 

o 
o 

cc 



a 
u 

o; 



m 






OC 





4J 






W 






o 






u 


_ 




■-H 


4-1 




(0 


M 




c 


O 







O 




-M 






4J 


dJ 




•rt 


U 




-D 


o 




■D 


E 




(D 


OP 







o 




c 


<N 




*— 


^^ 


Li 


u 


u 


«J 


nj 


(D 


(U 


<u 


ID 


>i 


>i 


>i 



VO 



VO 



255 



79 



period? Under the fixed system, delaying production 1 year 
to include 20 percent more development costs causes a 
reduction in total lease ATNPV of 58 percent. Under the 
investment account system the reduction is only 32 percent. 
Thus, while both systems show that prolonging the development 
period is not economically expected behavior, the fixed 
system provides almost twice the incentive to expeditiously 
develop a lease and commence production. 

There have been concerns that (for the fixed system) a 
capital recovery factor of 2.0 implies a lessee "automatic- 
ally" earns a 100 percent return on each dollar invested (or, 
similarly, he earns 15 percent when the capital recovery fac- 
tor is 1.75). Further, if true, this implies that "gold- 
plating", i.e., over-investing, would be rewarded under the 
fixed system. However, the results of Table 5 show this is 
not the case. For the fixed system example, increasing the 
development costs 20 percent in the sixth year result in a 34 
percent reduction in total lease value. This is certainly no 
incentive to add additional development costs, for, to be 
economic, one must see at least a proportionate increase in 
lease value as development costs increase. 

To recapitulate, the simulation analyses presented in 
this study shows that the fixed capital recovery system 
(using a 2.0 capital recovery factor and a 60 percent profit 
share rate) : 



256 



80 



improves, with respect to the CB-1/6 royalty systen, 
the percent of fields expected to be developed, and 
thus enhances efficient resource recovery ; 

reduces expected cash bonuses approximately 40 per- 
cent, with respect to the CB-1/6 royalty system, and 
thus promotes the competition improvements ) desired by 
the Congress ; 

increases slightly the amount of expected government 
revenues , a stated objective of Congress; 

- and does not result in any prolongation of produc- 
tion , another indicator of efficient resource re- 
covery. 

Further, comparing the investment account system with 
the fixed capital recovery system: 

- no investment account system variation was found that 
(a) resulted in a greater percentage of cash bonus 
reduction while (b) maintaining as high a percentage 
of fields developed as is available under the fixed 
capital recovery system; 



257 



81 



- the investment account systen provides less incentive 
for expeditious lease development; 

the investment account system is extremely vulnerable 
to the artificial acceleration, for accounting pur- 
poses, of the timing of all expenses. 

This later defect cancels any administrative simplicity 
presumed to result from not defining a "date of first produc- 
tion." It puts extreme pressure on the accuracy of regula- 
tions that must be available to define the "normal" pattern 
of lease development (and payment of costs), and it increases 
the reliance on government auditing efforts to monitor cor,- 
pliance during each accounting period. Moreover, a regula- 
tory definition of the "date of first production" that is 
coupled with (required) lease development plans could be a 
major incentive for diligent lease development when used with 
the fixed capital recovery profit share system. 

Figures 9 through 16 serve to relate the advantages 
expected of profit share leasing to those of other alterna- 
tive bidding systems. The simulation results on which these 
figures are based assume mid-Atlantic OCS costs. 



258 



82 



Figures 9 through 12 conpare several "better" variations 
of profit share systens with a currently popular alternative 
systen -- the seni-log sliding scale royalty system (with .09 
coefficient). _ Figure 9 shows that the annuity 
capital recovery system v;ith an annuity period of three years 
at 3 percent interest and a 50 percent profit share rate 
achieves significant cash bonus reductions. However, Figure 
10 shows that the fewest field discoveries are developd under 
this annuity system. The results for other profit systems 
are consistent with this behavior, i.e., generally, a higher 
percentage cash bonus reduction results in a lower percentage 
of field discoveries produced. Note that the fixed systen 
with 2.0 capital recovery factor and a 60 percent profit 
share rate shows a fairly uniform reduction of cash bonuses 
of 40 to 45 percent. This is almost twice the bonus 
reduction of the semi-log sliding scale royalty system. The 



'''*The legend for Figures 9 through 12 is read as 
follows: "ANTY 3 .08 50" means annuity capital recovery 
system, three year annuity period at eight percent, 50 
percent profit share rate; " IVST RI = .08 50" means 
investment account system with eight percent interest rate, 
50 percent profit share rate; "SMLG RLTY .09" means semi-log 
sliding scale royalty system, .09 coefficient; "FIXD 2.0 60" 
means fixed capital recovery system, 2.0 capital recovery 
factor, 60 percent profit share rate; "FIXD 1.5 50" means 
fixed system, 1.5 capital recovery factor, 50 percent profit 
share rate; "CB 1/6 RLTY" means traditional cash bonus 
system, .167 royalty rate. 



259 



83 



a s 



s 


s! 




! 

■ 


s 


• I 


S 


S 


1 

i 


t 


o 


in 


•c 


^ 


rs 








e 


e 


» 


s 


k 


lIi 



o 




^nsojsd KOIiDnaTd SANC3 aai33dX3 



»-l I UD3 8MM3 



260 



84 



invGstnent account system achieves a higher percentage bonus 
reduction than the fixed system at the lower reserve sizes. 
However, these two systems "cross" at approximately the 130 
million barrel re'serve size; from that point the fixed system 
achieves greater cash bonus reductions. Moreover, the 
investment account system is significantly lower than the 
fixed system on the basis of percent field discoveries 
developed, shown on Figure 10. In fact, only the fixed 
system with 2.0 capital recovery factor and 60 percent profit 
share rate, and the semi-log sliding scale royalty system 
result in more field discoveries being developed than the 
traditional cash bonus-1/6 royalty system. 

Figure 11 shows the expected total government revenue 
that is generated by each system. Only the fixed system 
(2.0; 60 percent) consistently generates a level of govern- 
ment revenue that equals the cash bonus-1/6 royalty system. 
Further, Table 12 shows the advantage of using profit share 
systems instead of the alternative semi-log sliding scale 
royalty system: the later system tends to prolong the pro- 
duction life of a lease while profit share systems do not 
exhibit this tendency. 

Figures 13 through 16 illustrate, using the economic 
criteria developed for examining the profit share systems, 
the characteristics of other alternative leasing 



261 



85 



a 8 

2 • 

ii 

< 



8 ' S 
- S ° 

ae C ; rg 


1.5 50 

'6 RLTY 


s? 3 e 
i fi ;: 


s - 



Q ■ 




dSdOTLAaa stnmd jjao^sd 



262 



86 



a 

Q 3 

z • 



^i 



s 



8i 



2 5i 



S 



2:1 si z 



Si 

inj 

9; 



< X a ■ 



Co -N 

CoCq 
CrjCjq 

<&-. CO 

:?^ 




S 9 S 



t-* * icgg 



263 



87 



00 



Co o 

Co 






Co 



a 

Q s 


o . S 

- i °- 


1 

1 
1 

aj 


^i 


t^ 3 9 

2 s j: 





4 X Q ■ ■ 



r 



r 



71 






/ 



/i 



•••r 



/ 



i/. 



y 



b S 9 S E 

"»^ aoia3d NOiionaoud soraa^ 



8 



1-6 
E 

C3 
O 

<73 

U 

-Set: 
es 



-P 



.e 



a 



•-1 • 109 



264 



88 



systems.''^ The semi-log sliding scale system (with 
coefficient of .09) is also shown on these figures to serve 
as a reference, and to show why this system was choosen over 
the others for use as an alternative leasing system. 

Figure 13 shows that the linear sliding scale royalty 
system and the cash bonus system with a royalty rate of 40 
percent both produce significant cash bonus reductions. How- 
ever, Figure 14 shows that neither system results in a per- 
centage of field discoveries developed as high as the cash 
bonus-1/6 royalty system. Also, expected government revenues 
for all alternative systems shown on Figure 15 are lower than 
the cash bonus-1/6 royalty system. More importantly. Figure 
16 shows that the system producing the highest cash bonus 
reduction also significantly prolonges the production life of 
the lease. Note on Figures 14 and 15 that the royalty bid- 
ding'system results in the least percentage of field dis- 
coveries being developed and the lowest expected total 
government revenue. In general, the semi-log sliding scale 



''^The legend for Figures 13 through 16 is read as 
follows: "Cb'^40 RLTY" means traditional cash bonus royalty 
system with .40 royalty rate; "LIN SLI SCL" means linear 
sliding scale royalty system; "RCP SLI SCL" means reciprocal 
sliding scale royalty system; "SCLG SCL HI" means semi-log 
sliding scale royalty system, .11 coefficient; "SLG SCL .09" 
means semi-log sliding scale royalty system, .09 coefficient; 
"CB 1/6 RLTY" means traditional cash bonus system with .167 
royalty rate; "RLTY BID" means royalty bid system. 



265 



89 




266 



90 



S 

4 



I I I 







aadcnaA3a scnau iKaoaM 



!-• « isa 



267 



91 



Q C 

I' 

4 



8 



SCL 


1 

r S 




-1 -1 


5i Si 




X 1. 


3 1 


c 

a^ 



X a 



J « 



U-N 




lUKuad 3nN3A3H lNaWNH3A00 TVlOl 



49-118 0-79 



18 



268 



92 




"wx aoiHSd NOiiDnaoHd sovna^ 



»-■ < tK3 



269 



93 



royalty systen is the best compromise among the systems shown 
in Figures 13-16. 

Conclusions 

To conclude, the analysis presented in this study indi- 
cates that the fixed capital recovery system is the best 
candidate for initial implementation of profit share leasing. 
The fixed system variation selected for each lease sale will 
depend on anticipated costs of exploration, development and 
production. However, it is expected that use of the fixed 
capital recovery profit share system will allow cash bonuses 
to drop approximately 40 percent from levels expected under 
the traditional cash bonus bid-1/6 fixed royalty system. 
This represents a significant improvement over the perform- 
ance of alternative leasing systems currently available. 



OCS OVERSIGHT OF 1978 AMENDMENTS 



WEDNESDAY, MARCH 14, 1979 

House of Representatives, 
Select Committee on the Outer Continental Shelf, 

Washington, D.C. 

The committee met, pursuant to notice, at 1:40 p.m., in room 
2218, Rayburn House Office Building, Hon. John M. Murphy, chair- 
man of the committee, presiding. 

Present: Representatives Murphy, Hughes, Breaux, and For- 
sj^he. 

Staff Present: Carl Perian, staff director; Lawrence J. O'Brien, 
chief counsel; Thomas R. Kitsos, majority counsel; C. Grady Drago, 
minority counsel. 

The Chairman. The committee will come to order. Today, we 
resume proceedings which we commenced last week, overseeing the 
implementation of the 1978 Outer Continental Shelf Lands Act 
Amendments. As our hearings last week vividly demonstrated, the 
enactment of the 1978 OCS legislation was but a first step in what 
appears to be a long and ponderous process of putting into place a 
new OCS regime. 

Last week's witnesses brought to the committee's attention sever- 
al instances where legislative intent has not been strictly adhered 
to. In addition, the testimony of several administration representa- 
tives suggested several areas of disagreement within the adminis- 
tration on the pace of proposed OCS development. 

Today, we will hear from industry representatives, the Coast 
Guard, and representatives of the diving community to further 
assess the progress of, and the reaction to, the landmark statute 
that was enacted last year. 

Before proceeding with our distinguished guests — we were going 
to hear from Representative David Emery, but we will hear from 
him later. We certainly appreciated his appearance before the 
Rules Committee last week in which he strongly supported the 
retention of the OCS Committee. He has proven himself a powerful 
and articulate advocate of prudent exploitation of offshore oil and 
gas. 

We will start with a panel — the panel will be comprised of 
George Lawrence, the president of the American Gas Association; 
Carl Savit, senior vice president. Western Geophysical, and he is 
representing the National Ocean Industries Association; Mr. Ken- 
neth Wallace, president of Taylor Diving & Salvage Co., and he 
will be accompanied by James Eberle and Dan Wilson. 

Gentlemen, would you please come up to the witness table. We 
have a nameplate for each of you. George, do you want to start off? 

(271) 



272 

STATEMENT OF A PANEL CONSISTING OF GEORGE H. LAW- 
RENCE, PRESIDENT, AMERICAN GAS ASSOCIATION; CARL H. 
SAVIT SENIOR VICE PRESIDENT, WESTERN GEOPHYSICAL 
CO REPRESENTING THE NATIONAL OCEAN INDUSTRIES AS- 
SOCIATION; KENNETH W. WALLACE, PRESIDENT, TAYLOR 
DIVING & SALVAGE CO., INC., REPRESENTING THE ASSOCI- 
ATION OF DIVING CONTRACTORS, ACCOMPANIED BY JAMES 
EBERLE, ASSISTANT PROJECT MANAGER, TAYLOR DIVING & 
SALVAGE CO., INC., AND DAN WILSON, CONSULTANT, TAYLOR 
DIVING & SALVAGE CO., INC. 

Mr. Lawrence. Mr. Chairman, we appreciate very much the 
opportunity to appear before your committee. As you know, the 
American Gas Association does represent the 300 natural gas dis- 
tribution and transmission companies of the Nation, and we are 
very interested in OCS development, because throughout the histo- 
ry of OCS development, particularly in the gulf, some 50 percent of 
the energy forthcoming has been gas energy, as distinct from oil. 
I would like to say, Mr. Chairman, that we worked very closely 
with this committee and other committees of the Congress while 
legislation was being considered in the 94th and 95th Congresses, 
to provide insights regarding different issues reviewed under the 
legislative process. We wish to commend this committee, in particu- 
lar for its excellent efforts during consideration of numerous 
amendments to OCS legislation in both the 94th and 95th Con- 
gresses. , , , • ^-L,- 

Incidentally, Mr. Chairman, I do plan to summarize this very 
briefly. We have a comprehensive statement that, with your per- 
mission, I would like to have included in the record. 

The Chairman. Without objection, it will be included in the 
record following your direct remarks. , • ^ u ^ u 

Mr Lawrence. I would summarize this most briefly, but empha- 
size a part that I think is most important at this time on page 2, 
Mr Chairman. We understand that efforts are underway to poten- 
tially fragment OCS oversight among 10 committees of the House, 
which we firmly believe is unwise in light of the need to ettectively 
develop our Nation's OCS energy resources. 

Effective congressional oversight necessitates a coordinated ap- 
proach Efficient OCS regulatory implementation must also proceed 
in this fashion. If oversight is fragmented among many congres- 
sional committees, the ability of the legislative branch to assess 
executive branch administration and implementation ot the UUb 

Act is severely diminished. , . , , . ^ r ^.v,^ nra 

In this regard, we strongly submit that maintenance ot the OCb 
oversight function can best be accomplished by the House through 
establishment of the House Ad Hoc Committee on the Outer Conti- 
nental Shelf as a select committee for this session of Congress. 
As this committee has specifically recognized in this recent series 
of hearings, there is a continuing need for oversight ot the nine 
Federal departments and two agencies involved in the implementa- 
tion of this complex and comprehensive piece of legislation, buch 
oversight could indeed facilitate compliance with the stated objec- 
tives of the act, while insuring compliance and cooperation among 
the Federal agencies and States that have specific roles to perform 
in OCS development. 



273 

Mr. Chairman, on page 3 we have a summary of our specific 
recommendations which we think will expedite implementation of 
the OCS Lands Act Amendments of 1978. I would focus very brief- 
ly, beginning at the bottom of page 3 and the top of page 4, on the 
split of decisionmaking between the Department of Energy and the 
Department of the Interior. 

In this regard, we think the scheduling of lease sales should 
indeed rest with the Department of Energy, and we think this, like 
the more comprehensive and less fragmented approach that we are 
recommending for Congress, would accomplish the same purpose in 
the executive branch. 

Again, Mr. Chairman, our statement contains certain specific 
recommendations that we would urge FERC and other agencies to 
proceed under your oversight in the implementation of the act, and 
I will leave those comments for the record and close on that. 
Thank you. 

The Chairman. Carl, do you want to begin? We apologize for the 
incorrect spelling of the name "Savit" in our record. 

Mr. Savit. I find, Mr. Chairman, that I am given an extra "t" 
more often than I am not, so that the activity here is certainly 
within the majority, rather than the minority, of potential spell- 
ings of my name. 

The Chairman. An extra "t" may be all right on the links, but 
we certainly admire your prompt and effective action in getting rid 
of it. 

Mr. Savit. Thank you. It is a bit difficult, after an informal start 
like that, to try to get into these formal things. I perhaps will not 
but simply mention that I am here representing the National 
Ocean Industries Association, which is an organization of nearly 
400 companies that currently are living on the Outer Continental 
Shelf in one way or another. Most of our companies have some- 
thing to do, at least, with the production of energy on the Outer 
Continental Shelf. We have quite a number of them that deal with 
fisheries, and the like, so that we have a sort of reasonable balance 
that is attempted to be achieved by the Government, I think, in 
balanced use of the oceans. Our organization represents a consider- 
able balance of use. 

If there is no objection, I will just begin reading from my state- 
ment on page 3 and the rest of the statement, if you will, can be 
put into the record. 

The Chairman. Your entire statement will be printed in the 
record. 

Mr. Savit. Thank you, sir. In enacting Public Law 95-372 last 
year, the Congress, with commendable foresight, enunciated 15 
findings, most of which are even more valid today than they were 
when written. The majority of those findings relate to the pressing 
national need to develop the energy resources of the OCS. 

Even those findings that relate to the need to minimize the 
impact of OCS energy development on the environment, on other 
resources, and on State and local governments are directed to 
expediting development by providing avenues for the resolution of 
conflicts. 

There is no room to doubt that the intent of Congress was to 
provide for the development of the energy resources of the Outer 



274 

Continental Shelf in a responsible manner. Clearly, Congress did 
not intend that this act would be used to impede or delay the 
critical process of finding new sources of energy and bringing that 
newfound energy to the shortage-plagued American public. 

Despite the clear intent of Congress, attempts are being made to 
use the act to halt or delay indefinitely much of the planned and 
projected exploration of our frontier areas. Lawsuits and adminis- 
trative objections have been repeatedly raised, almost invariably on 
procedural grounds. Rarely, if ever, has a serious substantive objec- 
tion been put forth. 

At this moment, plans exist within the administration that, if 
implemented, will increase the opportunity for delay in the OCS 
leasing program. In the administration's program to establish a 
Department of Natural Resources, it is presently planned to sepa- 
rate the existing mechanism for administering OCS exploration 
permits and the subsequent leasing programs from the mainstream 
of technical and administrative expertise that now exists. 

In the new department, these critical functions would be sub- 
merged in a bureau devoted to the management of all marine 
resources. Within such an arrangement, the interest and motiva- 
tion to develop energy resources would be subordinated to an inter- 
est in preservation of the environment. 

In view of our national energy crisis, a further tilt toward preser- 
vation and away from energy production could well prove disas- 
trous. 

At the regulatory level, the Department of the Interior has pub- 
lished proposed regulations that purportedly are intended to carry 
out the legislative mandate of the act. In one part of those pro- 
posed regulations — sections 252.6 and 252.7 — the Secretary gives 
himself the power to turn over to the States data that he has 
bought under contractual promise of confidentiality. 

He specifically exempts himself from the statutory safeguards of 
section 26 of the act with respect to data relevant to those Federal 
waters that lie within 3 miles of State waters. There are adequate 
provisions in the Act to make available all data that could possibly 
be needed by State officials to plan joint State-Federal leasing 
programs. There is no need to take the additional steps of sections 
252.6 and 252.7 that could, and probably would, be challenged in 
the courts as forbidden by the statute and which, in any event, 
would constitute an unlawful taking of private property without 
just compensation. 

It would appear that the administration is attempting, by regula- 
tion and other administrative steps, to circumvent the intent of 
Congress, not only with respect to program direction, but with 
respect to such specifics as the protection of proprietary data and 
onstructure, prelease drilling. 

There is little room to doubt that oversight by this committee 
will remain necessary to insure that the intent of Congress is 
carried out in the husbanding and development of our Nation's 
Outer Continental Shelf energy resources. 

At this point, I will stop reading the prepared statement, and I 
would like to elaborate a bit on some of these thoughts. The matter 
of the reorganization of the OCS administration that is encom- 
passed in the present view by the administration of the Depart- 



275 

merit of Natural Resources is the one that I think disturbs many of 
us very, very strongly. 

The present administration of the OCS leasing program is large- 
ly handled by the Conservation Division of the U.S. Geological 
Survey. In the plans that presently exist in the President's reorga- 
nization group, it is contemplated that the Conservation Division 
would be separated from the rest of the Geological Survey and that 
it would be broken into three parts: A part that would deal with 
the oceans; a part that would deal with the land oil and gas energy 
resources; and a part that would deal with the water resources. 

These three parts would be put, in turn, into a marine depart- 
ment, a land department, and a water resources department, which 
means that the overall blanket of technical expertise that exists in 
the Conservation Division would have to be triplicated and com- 
plete, new organizations built — separate hierarchies, each with its 
technical background and resources. 

It seems to us that to do this would disrupt the present leasing 
program rather badly, and would take at least a year or two to 
build back up to the level of expertise that presently exists. There 
would not seem to be any real need for this kind of a separation at 
the present time. 

In addition to that, the parts of the U.S. Geological Survey that 
would then be delegated to the marine resources group would have 
a lower level in the organization, and that would be the highest 
level at which there would be a drive toward development. These 
groups would be either on an equal level with or subordinated to 
other groups that would be dealing primarily with preservation 
and protection, with the general drive to slow down the program. 

So we see that if the program is carried out as it presently 
appears to be planned, it would, in general, slow the entire process. 
We also see particular difficulties with some of the attempts that 
the administration is making to circumvent the congressional 
intent on the subject of onstructure drilling, and I think some of 
these other witnesses may be intending to talk on that subject and 
if they have not covered everjrthing that is involved, I am certainly 
free to answer questions, if you have any, at the end of the panel 
group. But we have some pretty strong views on the subject of 
onstructure drilling, also. 

I think with that, I would like to finish my prepared statement 
and leave myself available for questions. 

The Chairman. Thank you, Mr. Savit; we appreciate that. 

We will hear next from Mr. Wallace. Mr. Kenneth Wallace is 
president of the undersea divers association. Mr. Wallace? 

Mr. Wallace. Just a specification. I am the president of the 
Taylor Diving & Salvage Co., and on the board of directors of the 
association. 

Unlike my two predecessors, I am going to read direct from the 
statement through its entirety. 

Mr. Chairman and members of the select committee, my name is 
Ken Wallace, and I represent the Association of Diving Contrac- 
tors. Our organization represents nearly all of the U.S. diving 
companies operating on the Outer Continental Shelf in support of 
the offshore petroleum industry's exploration and production pro- 
grams. 



276 

Our request to be heard today is a direct result of actions being 
taken in implementing 21(e) of the OCS Lands Acts amendments 
by several Federal agencies that we believe have no relationship to 
diving safety or technological advancement and will cost the Gov- 
ernment untold millions of dollars in the years to come. 

Before defining the problem areas to be addressed, I would like 
to give you an updated, unexaggerated picture of our industry and 
hopefully, explode a few myths along the way. 

First, American companies, technically and contractually, domi- 
nate the world's offshore diving business with over 125 saturation 
and bell diving systems in operation. No other country can serious- 
ly challenge America's technological superiority, and if the regula- 
tory process in the United States does not irreparably damage our 
industry, this advantage can be maintained into the foreseeable 
future. 

Second, domestic operations account for approximately one-tenth 
of our worldwide activity, employing only about 350 divers at the 
present time. The size of U.S. offshore diving has often been exag- 
gerated by Federal agencies to justify their involvement in this 
new and exploitable area. 

Third, the use of divers in the offshore petroleum industry, con- 
trary to popular belief, is a function of economics, and the diver 
can be engineered around if regulation, cost, and political climate 
creates an unacceptable burden to the user. The diver plays a very 
minor role in the overall offshore petroleum industry. 

Fourth, the diving industry is now in a substantial recession, 
with some companies reporting their projected sales for 1979 at 
one-half those of the preceding year. This situation has been caused 
mainly by operating changes in the North Sea from an explosive 
exploration and construction phase to slower maintenance and pro- 
duction operations. On the U.S. Outer Continental Shelf, there 
have been no large discoveries equal to those in the North Sea for 
which our industry has geared itself to service. 

Fifth, there is a large surplus of diving personnel in the United 
States which is mainly the result of the worldwide slowdown. Nine 
diving schools in the United States are still pouring out graduates 
in spite of the decreased activity. 

Sixth, the U.S. Navy's past efforts in diving have been the 
anchor around which our offshore commercial industry was built. 
Contrary to popular belief, the NOAA multimillion-dollar pro- 
grams have not resulted in any meaningful technological improve- 
ment in commercial operations that we know of. 

Seventh, there have been 10 fatalities in the past 9 years of 
domestic operations. When considering the thousands of hours of 
exposure, one has to conclude we have a relatively safe business. In 
the past, the fatality rate was exaggerated by a factor of 10 to 
justify a regulatory thrust into our industry. NOAA, in contrast 
has had two fatalities in the recent past, and if the seven addition- 
al fatalities in scientific diving, to which they have direct safety 
input through their MUST program, are included, you can begin to 
see our concern in having this agency tasked with the responsibili- 
ty of doing studies that would evolve into additional regulations. I 
would like to point out enclosure 1. 



277 

Eighth, publicity released by some Federal agencies would have 
you believe that without expending vast sums to increase water 
depth capabilities, we will not be able to properly exploit our 
Continental Shelf. Most of the larger diving companies already 
have capabilities in excess of 1,000 feet. The U.S. Navy, NIH, and 
the diving industry have already done vastly more physiological 
research in diving than was done for the Apollo program to place 
man on the Moon. Did you know that there are more people doing 
research in diving than there are divers now working in U.S. 
offshore waters? 

Ninth, existing regulations developed by the Coast Guard and 
OSHA — two separate regulations— have placed U.S. commercial 
diving in a position of being one of the most controlled industries 
in the United States, with a prognosis of dramatically increased 
regulations being promulgated in the near future. And I also like 
to point out enclosure 2 on Marshall's letter. 

In concluding the identification section of our presentation, we 
must ask ourselves, why all this federal importance placed on 
diving. I will try to answer the question like this: There is a 
charisma about diving that lends itself to bureaucratic exploitation. 
By exaggerating the size, importance, and safety problems of our 
industry, certain agencies see for themselves a secure future in 
advancing a wet NASA concept. They know there is a built-in 
interest factor about diving that has popular appeal, thus making 
it much simpler to obtain support for projects in this area rather 
than the typical agency proposal that does not have a strong public 
interest. The present banner being waved is the critical role of the 
diver in the procurement of petroleum on our Continental Shelf. In 
reading some of the output from these agencies, one would con- 
clude that the diver is singlehandedly responsible for oil and gas 
production offshore. 

The offshore diving industry is highly concerned that NOAA, the 
lead agency for diving under 21(e) of the OCS Lands Act amend- 
ments, has held a series of meetings — six of them — in Washington 
and has unilaterally developed a study plan for diving without any 
industry participation and without even requesting from the indus- 
try as to what problems, if any, should be addressed. See enclosure 
3. 

NOAA has also chosen to ignore the monumental amount of 
diving research that has already been completed and has not taken 
into consideration the results of their own accident statistical 
study. It is obvious that if the full expertise of the offshore diving 
industry were brought to bear and the past research and statistical 
information were properly taken into consideration, NOAA might 
have to substantially reduce their efforts, thus delegating them- 
selves to a minor role in undersea activities and virtually eliminat- 
ing the future glory of a U.S. wet NASA. There is a real question 
within the offshore diving community as to NOAA's capability to 
direct diving studies under 21(e), as has been illustrated by their 
own inability to conduct simple shallow water diving operations as 
demonstrated by the Helgaland and the more recent New York 
Bight debacles that ended in two fatalities and one near miss. If 
the accounts we read of these accidents are true, and they hap- 



278 

pened to a commercial company, there would be many changes 
made, probably beginning right at the top. 

OSHA, also aware of the charisma of diving and seeing a way to 
enlarge its areas of responsibilities, has been actively pursuing the 
expansion of its regulations without contacting the industry, study- 
ing the real causes of what few accidents there are, and continuing 
the threat of harassment at a time when a large segment of our 
industry is in a severe recession. 

NIOSH, another Federal agency who participates on the NOAA 
study committee, is unilaterally committing funds for diving re- 
search without waiting for the NOAA plan to even be presented for 
public comment. To compound this indiscretion, they are in the 
process of letting two contracts on subjects that have already been 
adequately studied. The funding of these studies may be coming 
from the Department of Energy. 

Now, our recommendations are as follows: Alternative 1: Direct 
the U.S. Coast Guard to take over the chairmanship of the 21(e) 
NOAA committee and instruct them to form a representative com- 
mittee with industry playing a major role, with a strong assist 
from the U.S. Navy's various development and research groups 
that would insure that the objectives of safer operation and the 
technical advancement of the art and science of diving are ad- 
dressed. 

If the Coast Guard is unacceptable to the committee, the ADC 
would be happy to take over these responsibilities at no cost to the 
Government. 

Alternative 2: Direct NOAA to restructure their committee and 
make it more representative — see enclosure 4 for the present com- 
mittee makeup — by giving the various specialized diving groups — 
exploration, construction, pipeline, maintenance and inspection, 
equipment, physiological, and human factors research — and, most 
important, the users of services, a strong voice as to what pro- 
grams, if any, should be initiated. 

Our association will be happy to work with NOAA in the restruc- 
turing of their committee by submitting the names of knowledge- 
able and experienced people from all appropriate segments of the 
industry. We also request that you advise NOAA not to dilute 
industry's input by including other groups that have little or no 
activities on the OCS. There is also a question as to whether OSHA 
should sit on the committee, as they are strictly a regulatory 
agency with little knowledge of diving. 

Direct OSHA to work with the offshore diving industry and see 
what regulations can be deleted in order to simplify our operations. 
This would, of course, be coordinated with the Coast Guard, as 
their regulations are very similar. OSHA must be reminded that 
its objective is not to promulgate regulations, but to create a safer 
environment in the workplace. 

Direct NIOSH to cease the expenditure of public funds on diving 
until such time as the objectives of 21(e) of the OCS bill have been 
identified and a balanced approach to solve critical problems, if 
any, that justify government studies in the field of diving have 
been developed. 

In closing, Mr. Chairman, the U.S. offshore diving industry is 
unique in that nearly all of its executive leadership spent many 



279 

years as active divers during a period of dramatic change as the 
petroleum industry was moving offshore. It is shameful that this 
array of talent that put America in first place underwater is being 
totally ignored by an inexperienced group of bureaucrats that are 
claiming the right of control over our industry. It is our desire to 
see 21(e) implemented in a meaningful way and not be used as a 
tool of bureaucratic opportunism that results in a mockery being 
made of what was intended to help our industry. 

Thank you, Mr. Chairman. 

[The following was supplied for the record:] 

(From Ocean Science News, Vol. 21, No. 5, Jan. 29, 1979] 

A NOAA diver's death may lead to a long overdue revamping of the diving 
organization of the Natl. Oceanic & Atmospheric Administration, insiders tell OSN. 
The administration of the training and medical programs, and the relationship of 
diving operations throughout NOAA to the Manned Undersea Science & Technology 
Office, are at stake. Critics inside the agency are speaking out now because they 
fear a series of recommendations made by a special Board of Inquiry may be 
gathering dust on the desk of Associate Administrator George Benton. On the other 
hand, Benton is under pressure from some of those most closed connected with the 
status quo to do nothing, other than to make a few cosmetic changes in NOAA 
diving procedures. 

The first and only NOAA diving fatality occurred Mar. 29, 1978. Douglas Fewer, 
an oiler and diver from the NOAA ship George B. Kelez, was picking up an 
instrumentation cage from the New York Bight area in 47 ft. of water when he 
disappeared, according to the NOAA accident report. Visibility was 3-4 ft. He was 
accompanied by Richard Rutkowski of the Atlantic Oceanographic & Meteorological 
Laboratory in Miami, by reputation one of NOAA's best divers. Fewer surfaced, 
with his weight belt missing, and "in some difficulty," according to the report. 
"Foam ♦ * * (was) issuing from his mouth and nose.' Picked up by a U.S. Coast 
Guard cutter and flown by Air Force helicopter to New London CT (where a 
recompression chamber is located). Fewer was pronounced dead on arrival. 

The Board of Inquiry was not ordered until May 30. Headed by Capt. (NOAA 
Corps) Roger Lanier, special assistant to Rear Admiral (Corps) Allen Powell, the 
head of NOAA's Natl. Ocean Survey, the board forwarded its report to Benton Aug. 
18, 1978. It has never been made public. The members of the board included: John 
Callahan, a NOAA Corps officer attached to the NOAA general counsel's office; 
Paul Selfon, M.D., the medical director for the Dept. of Commerce, and the chari- 
man of the NOAA Diving Medical Review Board; William Nicholson, associate 
director for marine technology at NOAA; and Richard Cooper, diving officer of the 
Natl. Marine Fisheries Service, stationed at Woods Hole MA. 

When OSN inquired about the board's report a second time, it was made available 
by Benton, It was only then that OSN learned officially that the board's work was 
in two parts. OSN was given only the first portion which covers the accident itself, 
and which makes a couple of very specific recommendations about NOAA diving 
practices. The second portion of the report, Benton told an OSN reporter, was still 
'an internal document," because it made recommendations about NOAA's diving 
"for the longer term." That portion of the report (which makes recommendations 
about NOAA's organization, training, operations, medical procedures, and diving 
practices), Benton said, was still "under review" within NOAA. He said that he had 
only received it a "couple of weeks ago," and that he wanted "our own people to see 
it." He meant, he said, that the recommendations had come "from one side of the 
organization" of NOAA and that he wanted it seen "by all concerned." Benton 
requested this second portion of the report from the special board on May 30. 

Other NOAA sources indicate that the second part of the report left Powell's shop 
no later than October. It apparently traveled a circuitous route through the agency 
before it landed on Benton's desk. OSN has been unable to determine exactly how 
many hands it passed through, but there is a suspicion on the part of some of OSN's 
sources that there was an attempt to bury it before it reached Benton. Others say 
everyone recognized that the report would surface inevitably but that some people 
were able to gain more time within which they could work to blunt its impact. That 
Benton publicly says it still needs more reviewing inside NOAA concerns these 
people very much. 

Those who oppose any drastic changes in NOAA diving argue that to pull the 
existing organization apart and attach it, for example, to Benton's own office, isn't 
necessary despite the fact that NOAA diving operations are carried on throughout 



280 

the agency, particularly by the Natl. Marine Fisheries Service, the Environmental 
Research Laboratories, and the Natl. Ocean Survey. They believe that the MUST 
office (which is part of the Office of Ocean Engineering but pretty much has a free 
hand) can be responsible for diver training and safety despite its other missions, 
including the follow-on to the old Oceanlab project, Hydrolab (the habitat in the 
Virgin Islands enjoyed by a few research scientists and a congressman on occasion), 
and its coordination work with Navy diving research. They argue too that the 
NOAA diving coordinator is not under any particular financial restraint, even 
though he is part of MUST. (Indirectly, Diving Coordinator J. Morgan Wells is 
responsible for over 400 NOAA divers, although MUST has no diving programs of 
its own.) These people also see no problems with the present organizational setup 
which finds Wells and other diving operations people reporting to MUST chief 
Donald Beaumariage, who reports to Steven Anastasion, head of the Office of Ocean 
Engineering. That office in turn reports to NOAA Asst. Administrator for Research 
& Development Ferris Webster. 

Another point is made by the defenders of the status quo: Because this is "the 
first time ever" NOAA diving has been thoroughly reviewed, the old hands should 
have their chance to straighten things out for themselves, if there really are 
problems. Some of the recommendations for change, they argue, are just a matter of 
getting more dollars and personnel into NOAA diving, particularly MUST, and 
those decisions are made at the top, and are not really the province of a board 
originally constituted to investigate the death of a diver. 

The accident investigation report provided by Benton to OSN concluded that 
Fewer "suffered an apparent air embolism and died." Fewer was certified as "a 
limited NOAA diver after completing a two- week training course" three months 
earlier. The board rated him 'relatively inexperienced," having made only one 
logged dive since his training course. He had one hour's experience in a swimming 
pool with the variable volume dry suit he was wearing. In an earlier dive on the day 
of his death. Fewer was criticized by his partner, Rutkowski, for failing to follow the 
dive plan. The board concluded that Fewer came to the surface too rapidly, failing 
"to sufficiently vent the air in his lungs * * *." The rapid ascent was caused by the 
loss of the weight belt, and "diver error." 

But, the board added, "* * * in two areas, judgment was exercised by personnel 
other than the diver, which points out the need for regulations which would help to 
prevent a repetition of circumstances which could lead to similar incidents." The 
board faults the decision to allow the inexperienced diver to use a variable volume 
suit, as well as the failure "to provide for constant contact by physical or visual 
means during a working dive with an inexperienced diver under conditions of 
reduced visibility." 

The board reported that the type of error made by Fewer is not restricted to 
inexperienced divers. Similar incidents have occurred "with the most experienced 
divers," it contended. The board added that "present NOAA regulations * * * 
insure that personnel qualified * * * know proper procedures" but that NOAA can't 
"insure that individuals will carry these out in new, unusual, or difficult situa- 
tions." The board did not explain how the Fewer situation was "new, unusual, or 
difficult." 

The board did agree, however, that "variable volume suits should not be used by 
inexperienced divers * * *" and noted that NOAA's regulations "do not cover the 
use of variable volume suits with respect to minimum qualifications, checkouts, 
etc." The board reported that Rutkowski (a NOAA diving instructor) accepted 
Fewer's word that he was able to use the suit. Crux: "In view of this fatality and 
subsequent inquiry, the board feels * * * the level of protection against self-inflict- 
ed error * * * must be raised." 

While the board determined on the basis of conversations with Fewer's diving 
instructors that he had completed the 15 open water dives which are required to 
qualify as a "limited diver" at NOAA, Fewer's diving log did not show the 15. The 
board suggested that "it is not uncommon during training, when the trainees are 
kept very busy and logging each individual dive is difficult, for several dives to be 
logged as a single dive * * * Interviews with NOAA divers with varying levels of 
experience revealed that many of them do not log every dive." This first portion of 
the board's report recommended that NOAA's diving regulations be amended to 
prohibit "the use of variable volume suits except where the diver has ahd a mini- 
mum of three hours training in the use of the particular variable volume suit, two 
hours of which must be in open water." The diver must also be a "NOAA unlimited 
diver" or have had a personal checkout by a "NOAA unit diving officer." The board 
also recommended that consideration be given to requiring the use of buddy lines 
between divers when visibility is less than four ft. and one of the divers is a trainee. 
It also suggested that diving logs should be kept. 



281 

OSN has also obtained (through unofficial channels) a copy of the second portion 
of the board's report — the long-term recommendations, at least some of which are 
being heartily resisted by the NOAA personnel most directly involved. This portion 
of the report is based on three months of meetings and interviews with divers and 
non-divers from Alaska to Miami to Woods Hole. The review, incidentally, does not 
take up saturation or mixed gas diving, but deals with scuba diving with compressed 
air only. 

The board found "certain standards, policies and practices that should be revised 
to reduce the risk of future accidents." The recommendations are specifically: 

"The NOAA diving coordinator functions of training and safety should be trans- 
ferred out of the MUST office." 

"The training and safety functions of the NOAA diving coordinator should be 
under the control of a NOAA official having cognizance over major program ele- 
ments in which divers work." The board recommended that the proper level for this 
sort of control would be the level of the NOAA associate administrator— i.e., 
Benton. 

"A unit responsible for diving safety and training should be composed of (a) a 
person responsible for the training and safety functions formerly held by the NOAA 
diving coordinator, reporting directly to the associate administrator;" and (b) should 
have one assistant for both the east and west coasts plus secretarial help. The head 
of the unit would be formally designated the "NOAA Diving Program Coordinator," 
and would be located in Washington DC, as would his east coast assistant. The west 
coast assistant would be located in either Alaska or Seattle. 

Diving unit officers would report to their east or west coast representatives 
"concerning matters of training and safety." Major program element officers 
(NMFS, for example) would report, "and consult with, the NOAA Diving Program 
Coordinator concerning policy and operational considerations peculiar to the major 
program element." 

Separate funding should be sought for NOAA's training and safety functions, 
including on site inspection. These funds would be "earmarked" for these purposes 
in the diving program coordinator's office. (This is one of the crucial points in the 
board's recommendations. OSN is told that within the MUST office diving often 
loses out to more politically favored activities.) 

The program coordinator would publish "relevant educational and safety-related 
material" on a timely basis. 

Screening procedures should be established for the selection of candidates for the 
NOAA diver training program. Some of NOAA's divers receive only "rudimentary" 
screening, according to the report. Some candidates for training have not even 
possessed the ability to swim "or were otherwise poorly qualified * * *" says the 
report, although recently "better initial screening has eliminated the obviously 
unqualified." The board also pointed out that "while the two-week course meets the 
need for training of divers for the NOAA fleet," the course is not adequate "for 
many of the working diver units." It did not, however, recommend any changes in 
the course. 

Specific training in cold water and/or low visibility should be required. 

Refresher courses and specialized training in new equipment and techniques 
should be provided for NOAA divers. 

NOAA field administrators should be encouraged by NOAA headquarters to allow 
"sufficient time and money * * *" for divers to meet proficiency requirements and 
take specialized training or refresher courses. 

Field diving supervisors should be given special training in diving supervision. 

Each NOAA vessel whose cruise plan calls for diving should have a properly 
trained diving officer aboard. Shore-based diving activities should have a diving 
officer present where three or more divers are involved. NOAA vessels with "a 
programmed need" for diving should have at least four divers on board. NOAA 
vessel diving requirements should be reviewed. 

A "diver pool" should be formed of highly experienced and specialized personnel. 
("Lack of experience, insufficent training, and insufficient numbers of divers were 
the three most commonly heard complaints" when the board visited NOAA installa- 
tions. There was "general unawareness on the part of the laboratory directors and 
vessel captains of the minimal requirements for conducting diving operations from 
an ocean-going vessel," added the board. The diver pool would probably take some 
time to build up, it suggested, because of the lack of competent divers in NOAA, or 
for fear of stripping some organizations of their best divers. Apparently, the pool 
would be secondary to any individual organization's needs.) 

Divers with limited capabilities should be placed in two categories, the lower of 
which would preclude working dives unless the diver was supervised on a one-to-one 



282 

basis. The board also suggested that the maximum period of activity now permitted 
before certifications lapse should be reviewed. 

A minimum of two meetings a year should be held of the NOAA Diving Medical 
Review Board. The first should be at a diving training site and the second should be 
in conjunction with the annual meeting of the NOAA Diving Safety Board. The 
medical board was established in 1974, notes the report, but it has never met — 
carrying on its activities by telephone nd the mail. "Effective interaction among the 
physicians of the Medical Review Board and the resolution of complex medical 
problems cannot be satisfactorily accomplished by telephone calls and mail corre- 
spondence," comments the report. 

Initial cardiopulmonary resuscitation training and first-aid training should be 
mandatory for diving certification. The Board of Inquiry's report states flatly that 
"at each diving site visited . . . there was serious concern expressed by some NOAA 
diving personnel concerning the adequacy of diver-oriented first aid training and 
CPR training." The report also recommends diver physical conditioning programs. 

The presence of adequately trained medical personnel for recompression cham- 
bers should be required. The report says that "some" NOAA chambers are not in a 
state of readiness. 

The NOAA Diving Safety Board should "examine and establish a NOAA policy 
concerning the use of buoyancy compensator vests with variable volume suits and 
the type of weight belt to be used with such suits. 

The board's report makes it very clear that "due to the many responsibilities of 
the MUST office and personnel limitations, the NOAA diving coordinator (Wells) 
cannot devote sufficient time to training and safety. A good deal of his time is spent 
traveling and working on various MUST programs. This results in a backlog of 
training and safety paperwork which cannot be accomplished . . . Problem areas 
include processing of diving physicals, documentation of diver qualifications and 
experience, and dissemination of diving information on training and safety. Addi- 
tionally, little time is spent checking diving units for compliance with diving regula- 
tions." The report concludes that "as long as the diving coordinator is tasked with 
MUST projects, the priority of these projects will continue to detract from the time 
necessary to run an effective training and safety program for divers ..." Nowhere 
does the report indicate Wells is in any way at fault. Rather it implies that Wells' 
superiors need to be reminded that he has a responsibility for the lives of NOAA's 
divers he is not being allowed to meet. 

Statistics on nonprofessional diving deaths in the U.S. show a rise in fatal acci- 
dents from 131 in 1975 to 147 in 1976. The previous high was 144 in 1974. The 
report, "U.S. Underwater Diving Fatality Statistics, 1976," was done for the Natl. 
Oceanic & Atmospheric Administration and the U.S. Coast Guard by the Univ. of 
Rhode Island's John J. Schenck Jr. and John J. McAniff It is an annual report, and 
generally regarded as the best survey available, although it may not be complete. 
The latest report followed a major revision in its counting system, the authors 
reported. A "more rigorous definition" is provided than was used before. Covering 
the period 1970-76, the previously-used classification of semi-professional scuba 
diver has been eliminated, "because it is almost impossible to define accurately." 
While the report focuses on sport and recreational diving fatalities, a section on 
professional, occupational and commercial fatalities also is included. All underwater 
fatalities for 1976 totaled 175, compared with 161 in 1975. The high was 187 in 1974. 

Among states, Florida recorded the highest nonprofessional death toll at 40, equal 
to the previous year's, but lower than the high in 1974 of 42. California followed 
with 23, up from 17 in 1975 but down from the 36 and 32 set in 1974 and 1973 
respectively. Deaths in Hawaii increased to 11 from six in 1975. Of the 1976 total, 
137 were men and 10 were women. Most of the deaths occurred as a result of 
following improper procedures, according to the URI study, or from taking unneces- 
sary risks. A lack of training was not singled out as a cause of accidents, nor was 
the failure of equipment — although at least one manufacturer recently recalled 
some of his equipment so the possibility for such failures among nonprofessional 
divers must exist. The report is available from NOAA's Manned Undersea Science 
& Technology Office, or the USCG's Office of Merchant Marine Safety. 



[From Ocean Science News, Vol. 17, No. 39, Sept 26, 1975] 

Tragedy has visited NOAA's saturation diving fisheries study in the German 
habitat Helgoland, moored 100 ft. down on the bottom of the Gulf of Maine 8.5 miles 
off Rockport MA. Veteran German diver Joachim Wendler, 36, was pronounced 
dead yesterday (25 Sep.) after emergency treatment in a portable recompression 
chamber at dive headquarters in the Ralph Waldo Emerson Inn in Rockport. 
Wendler and two other employees of the German firm GKSS, which operates the 



283 

large and advanced habitat, had entered Helgoland on 19 Sep. On 22 Sep. they were 
joined by Lt. Cdr. Laurence Bussey, USN, head of the Natl. Oceanic & Atmos. 
Admin, project and Roger Clifford, a fisheries scientist from NOAA's Woods Hole 
lab. Their breathing gas was a "normoxic" mixture of oxygen and nitrogen, a 
development also used by NOAA in its recent project SCORE dive in the Bahamas 
(OSN 16 May). Wendler, Bussey, and another German, Joachim Rediske, shortly 
began decompression in the habitat. They reached one atmosphere at 6:30 p.m. 
Wednesday (24 Sep.), but waited for daylight before swimming to the surface at 
11:30 a.m. Thursday. On reaching the surface, Wendler clung to a buoy, waving for 
help. He was rushed to the chamber at Rockport and recompressed to 165 ft. After 
two hours in the chamber, attended by Anthony Low (M.D.), the GKSS medical 
supervisor, he was pronounced dead. NOAA has convened board of inquiry, headed 
by J. Morgan Wells of the Manned Undersea Science & Technology office (MUST) to 
determine what went wrong and decide on the study's future course, which was to 
include a bounce dive to the habitat by two members of Congress (OSN, 19 Sep.). 
Two divers remain in Helgoland, Clifford and GKSS chief diver Hans Belau. 



[From Ocean Science News, Vol. 17, No. 40, Oct. 3, 1975] 

German diver Joachim Wendler died of an air embolism, apparently incurred as 
he ascended the 104 ft. from the Helgoland habitat to the surface Sept. 25, according 
to the preliminary autopsy report. Wendler was pulled from the water at about 
11:30 a.m. and given oxygen, mouth-to-mouth resuscitation, and external heart 
massage aboard the 50-ft. diving tender boat on the way to the wharf at Rockport 
MA (OSN, Sept. 26). The trip to the recompression chamber at Rockport took about 
IVa hours, the Natl. Oceanic $ Atmospheric Administration Diving Manual notes 
that immediate recompression to 165 ft. is the only treatment for air embolism. 

Accordingly, among the new rules for continuation of the saturation diving fish- 
ery study, number one is: "a recompression chamber must be available at the diving 
site (i.e., on the boat at the surface) during all diving operations." The five rules 
were ordered by NOAA Associate Administrator David Wallace after receiving the 
oral report of the board of investigation. The board, headed by J. Morgan Wells of 
NOAA^ Manned Undersea Science & Technology (MUST) office, told Wallace that 
Wendler's death "was in no way connected with the systems in the habitat or the 
decompression procedures use. Wallace's other directives provide that a small 
recovery boat be available at the site at all times and an on-site operational safety 
officer be designated. 



U.S. Department of Labor, 

Office of the Secretary, 

Washington, D.C. 

Hon. Brock Adams, 

Secretary, Department of Transportation, 

Washington, D.C. 

Dear Brock: The Occupational Safety and Health Administration (OSHA) wel- 
comes the opportunity to aid in the implementation of the Outer Continental Shelf 
(OCS) Lands Act Amendments of 1978. Two paragraphs of the amendments mandate 
studies related to employee safety and health. Section 21(a) of that Act calls for the 
Secretary of Interior and the Secretary of the Department in which the Coast Guard 
is operating to initiate a cooperative study in consultation with the heads of other 
concerned Federal agencies on the adquacy of existing safety and health regulations 
on the OCS; section 21(e) explicitly directs the Secretary of Commerce, in coopera- 
tion with the Secretary of Transportation and the Director of the National Institute 
for Occupational Safety and Health (NIOSH), to conduct studies of underwater 
diving techniques and equipment. As one of the concerned agencies, OSHA has 
views which it would like to share concerning these studies. 

Since August 1975, when the AFL-CIO presented a petition to OSHA claiming a 
situation of grave danger existed within the diving industry, the agency has been 
deeply involved in studying and regulating diving hazards. On June 15, 1976, OSHA 
issued an Emergency Temporary Standard for Commercial Diving Operations (41 
FR 24272); on November 5, 1976, a Notice of Proposed Rulemaking (41 FR 48950); 
and on July 22, 1977, a final diving standard (42 FR 37650). An examination of the 
available literature and the information collected in hearings held prior to promul- 
gation of the final standard has enabled us to isolate several issues where further 
study would likely lead either to the promulgation of additional provisions for 
currently unregulated diving hazards or to the updating of the current standard to 



H9-118 0-79-19 



284 

reflect new knowledge and practices. We present these issues as problem areas 
which the studies mandated in sections 21(a) and (e) could address, but particularly 
that of section 21(e). 

Our suggestions are aimed at achieving four goals: alleviating the dangers associ- 
ated with decompressing divers, improving diving equipment, improving the breath- 
ing gas mixtures currently in use, and developing better emergency procedures. The 
basic information needed for achieving these goals will come from a proposed 
epidemiological study which would provide comprehensive data on all hazards 
which divers face. We are discussing with NIOSH the prospects of doing such a 
study. 

DANGERS ASSOCIATED WITH DECOMPRESSING DIVERS 

Decompression sickness is the most common hazard associated with decompress- 
ing divers. The best means for protecting divers from this hazard is to make sure 
that the decompression tables in use provide acceptable levels of safety for the 
environment of the dive. Our efforts towards developing a method of reviewing 
these tables were hindered by trade secret problems. We highly recommend that 
you study the possibility of developing criteria for judging the appropriateness of 
the decompression tables in use. 

A necessary complement to the development of review criteria for decompression 
tables will be a study to determine criteria for modifying the tables for cases where 
decompression sickness occurs. The proper completion of these two studies could 
lead to requirements mandating the steady improvement of decompression tables. 

Research into the exact causes of decompression sickness and emboli would also 
be helpful in combatting these hazards. If the controversy surrounding the causes of 
these two conditions could be resolved, it might be possible to take better remedial 
and preventive measures. 

The most serious chronic ailment associated with decompression is dysbaric os- 
teonecrosis. We were uable in our standard to prescribe either preventive or remedi- 
al measures, for we found in the hearing record no consensus among the experts on 
the proper steps to be taken. We, therefore, recommend a long-term study of the 
causes and possible treatments of dysbaric osteonecrosis, and the development of 
criteria to determine whether afflicted divers should be allowed to dive, or if 
allowed, what special precautions must be taken. 

Currently, Scuba diving below 130 feet of sea water (fsw) is forbidden, and there is 
controversy over whether decompression Scuba diving should be allowed. Recent 
tests of the National Oceanographic and Atmospheric Administration (NOAA) sug- 
gest that decompression-Scuba diving at depths significantly greater than 130 fsw 
might be done safely. This study should be pursued further with particular atten- 
tion given to the effects of environmental and task-level factors on the abilities of 
divers to withstand higher pressures. 

EQUIPMENT IMPROVEMENT 

The requirements on the equipment used in dives is stringent in both the OSHA 
and the CG standards, but we perceive two areas needing improvement in the 
present standards and one practice, the so-called "Hookah" diving, which has gone 
unregulated. "Hookah" diving has resulted in several fatalities off the northwest 
coast of the U.S. The various techniques employed in these operations need to be 
surveyed, and regulations which insure acceptably safe conditions for all divers need 
to be promulgated. 

The two areas needing improvement involve the standards for reserve gas sup- 
plies for Scuba divers and helmets for surface-supplied divers. In both cases, the 
standards are quite general and need to be more specific. Research could lead to 
better correlation between the design of these pieces of equipment, the various 
environments they are used in, and the various tasks their users do. 

BREATHING MIXTURE IMPROVEMENT 

Two recent series of experiments with breathing mixtures have produced results 
which raise the possibility of diving deeper with adequate safety. NOAA's experi- 
ments on nitrgoen/ oxygen breathing mixtures show that certain mixtures might be 
used at deeper depths for longer times without increasing the level of nitrogen 
narcosis. The ability to use nitrogen at lower depths would allow divers to circum- 
vent the problems inherent in helium such as increased susceptibility to hypother- 
mia and changes in voice timbre. 

The U.S. Navy and Duke University have studied using higher partial pressures 
of oxygen in breathing mixtures. If the oxygen pressure could be increased without 
increasing the danger of oxygen poisoning, divers might be less susceptible to 



285 

decompression sickness, less susceptible to disorientation, and quicker in their reac- 
tions to brain impulses. Both lines of investigation merit further study, for their 
successful conclusion could grant the diving industry greater latitude in selecting 
diving methods without compromising worker safety. 

EMERGENCY PROCEDURES DEVELOPMENT 

Emergency procedures need to be tightened in both the OSHA and CG standards. 
The standards require that a physician experienced in hyperbaric medicine be on 
call during dives, but there is no institutionally-established medical subspecialty of 
hyperbaric medicine. Methods for qualifying physicians for examining and treating 
divers need to be developed. The standards require that a bag-type manual resusci- 
tator be available at diving sites, but more research is needed to determine whether 
this is the definitive means of artifical respiration. The standards require a first aid 
kit "appropriate for the dive" to be at the diving site, but no specifications are given 
as to what is appropriate even for hyperbaric conditions. We feel that research is 
needed into developing criteria for qualifying physicians for treating divers, into 
determining the best means of artificial respiration for divers, and into the specific 
requirements for a first aid kit that would be effective under hyperbaric conditions. 

We hope you find the above points useful in conducting the diving study which 
section 21(e) mandates. We will be glad to answer any questions you may have on 
these issues. The U.S. Air Force School of Aerospace Medicine also has expertise in 
some of these areas and we suggest you consider them as another concerned Federal 
agency for assistance in the study. 

At a later date, we will supply information which we feel should be included in 
the study of other existing regulations called for in section 21(a). We look forward to 
working closely with you as both of these studies progress. 
Sincerely, 

Ray F. Marshall, Secretary. 



286 



PROGRAM DEVELOPMENT PLAN 

for 

Studies of Underwater Diving Techniques and Equipment 

Suitable for Protection of Human Safety and 

Improvement of Diver Performance 

Outer Continental Shelf Lands Act Amendments of 1978 
Section 21(e) of Section 208 of Title II 
Public Law 95-372 
September 18, 1978 

I. Purpose 

The Outer Continental Shelf Lands Act Amendments of 1978 was signed into 
law "to establish a policy for the management of oil and natural gas in the 
Outer Continental Shelf; to protect the marine and coastal environment; to 
amend the Outer Continental Shelf Lands Act; and for other purposes." 

The "Outer Continental Shelf" as used in this Act means that portion of the 
continental margin lying beyond state boundaries within U.S. federal jurisdiction. 
The continental margin consists of the continental shelf, the continental slope, 
and the continental rise. Bounding the continental margin is the land (continent) 
on one side, and the deep seabed on the other (See Figure below). A more specific 
definition of the Outer Continental Shelf (OCS) is difficult because the legal 
meaning of the tenn continental shelf is inconsistent with the general scientific 
meaning, i.e.. variations in the state jurisdiction (some states have 3 mile 
limits while others have 3 marine league limits), depth of water, and location 
and classification of shelf resources. 











1 


Cam 
LANO 




\ TaniUHUl I 


OCIAN 




~"\ 






CaMa<««» 


k. 








CanlMMal 

Da* 


0«p 
baud 


\ 








The purposes of the Act are to: 

(1) establish policies and procedures for managing the oil 
and natural gas resources of the Outer Continental Shelf which are 
intended to result in expedited exploration and development of 
the Outer Continental Shelf in order to achieve national economic 
and energy policy goals, assure national security, reduce depen- 
dence on foreign sources, and maintain a favorable balance of pay- 
ments in world trade; 



287 



(2) preserve, protect, and develop oil and natural gas 
resources in the Outer Continental Shelf In a manner which is 
consistent with the need (A) to make such resources available to 
meet the Nation's energy needs as rapidly as possible, (B) to 
balance orderly energy resource development v/ith protection of the 
human, marine, and coastal environments, (C) to insure the public 
a fair and equitable return on the resources of the Outer Conti- 
nental shelf; and (D) to preserve and maintain free enterprise 
competition; 

(3) encourage development of new and improved technology for 
energy resource production which will eliminate or minimize risk 
of damage to the human, marine, and coastal environment ; 

(4) provide States, and through States, local governments, 
which are impacted by Outer Continental Shelf oil and gas explo- 
ration, development, and production with comprehensive assistance 
in order to anticipate and plan for such impact, and thereby to 
assure adequate protection of the human environment; 

(5) assure that States, and through States, local governments, 
have timely access to information regarding activities on the 
Outer Continental Shelf, and opportunity to review and coiment on 
decisions relating to such activities, in order to anticipate, 
ameliorate, and plan for the impacts of such activities; 

(6) assure that States, and through States, local governments, 
which are directly affected by exploration, development, and pro- 
duction of oil and natural gas are provided an opportunity to parti- 
cipate in policy and planning decisions relating to management of 
the resources of the Outer Continental Shelf; 

(7) minimize or eliminate conflicts between the exploration, 
development, and production of oil and natural gas, and the recovery 
of other resources such as fish and shellfish; 

(8) establish an oil spill liability fund to pay for the prompt 
removal of any oil spilled or discharged as a result of activities 

on the Outer Continental Shelf and for any damages to public or private 
interests caused by such spills or discharges; 



288 



(9) Insure that the extent of oil and natural gas resources of the 
Outer Continental Shelf Is assessed at the earliest practicable time; 
and 

(10) establish a fishermen's contingency fund to pay for damages 
to commercial fishing vessels and gear due to Outer Continental Shelf 
activities. 

Section 21 of the Act establishes procedures for study, review, coordination, 
and if necessary, revision of safety regulations to promote safety and health in 
the exploration, development, and production of the minerals of the Outer 
Continental Shelf. Section 21(e) states— 

The Secretary of Commerce, in cooperation with the Secretary 
of the Department in which the Coast Guard is operating, and the 
Director of the National Institute for Occupational Safety and 
Health, shall conduct studies of underv/ater diving techniques and 
equipment suitable for protection of human safety and improvement 
of diver performance. Such studies shall include, but not be 
limited to,~decompression and excursion table development and 
improvement and all aspects of diver physiological restraints and 
protective gear for exposure to hostile environments. 

This Program Development Plan (POP) is being developed specifically in res- 
ponse to this section of the Act. With the assistance of other designated 
agencies, the Department of Commerce (NOAA) is developing this study program 
designed to increase diver effectiveness, improve operational safety, and reduce 
those safety and health hazards associated with diving operations on the Outer 
Continental Shelf. 

II. Background 

The vast majority of all U.S. commercial diving activities prior to 1960 
were conducted in shallow waters (i.e., the inland waters, harbors, and 
sheltered coastal waters) for construction, repair, and salvage work. Inland 
and harbor diving is limited in depth by geography as well as by the work to be 
performed. The majority of inland and harbor diving occurs at depths less than 
100 feet of seawater (fsw). 



289 



Tha-.-,Vic t/rruiiure tinlling platform was In the Ellwood Field, off 
Santa Barbara, California, in 1924. The next offshore development occurred 
in 1947 when a 1,200 ton structure was erected in 20 feet of water in the 
Gulf of Mexico. 

By 1970 energy requirements and developing technology resulted in the 
installation of a 7,000 ton platform in 373 feet of water in the Gulf of 
Mexico. In January 1978 there were 364 manned platforms, 2168 fixed structures 
of all types, 1200 supply and support vessels, 105 mobile drilling units, 175 
separate diving operations, 46 construction and pipe-lay barges and over 27,000 
individuals working on the Outer Continental Shelf of the United States. Today, 
approximately 2,300 fixed structures and 150 mobile offshore drilling units 
exist in the Gulf of Mexico under the jurisdiction of the U.S. Coast Guard and 
the Department of Interior. 

Since 1960, commercial diving activities have utilized several breathing 
mixtures, in addition to air to permit work at greater depths. The offshore 
diver does not have, because of geography, as severe a depth limitation as does 
the inland and harbor diver and may work at depths in excess of 1,000 fsw, with 
the majority of.- the diving activity occuring between the surface and a depth of 
500 fsw. Technology has advanced sufficiently to enable working dives at depths 
in excess of 1,000 fsw. Divers are utilized extensively in most phases of the 
offshore energy industry — exploration, construction, production, pipeline 
transportation, and maintenance. Based on national energy needs and the current 
trand in offshore oil exploration, deeper and longer working dives can be 
anticipated. 

At present there is a wide diversity in the quality, quantity, and direction 
of research being applied to the needs of the divers working on the Outer Con- 
tinental Shelf. Although the U.S. Navy has had and continues to have an important 
role in the development of equipment and procedures designed to support manned 
underv/ater activities, the U.S. Navy activities are limited to Navy military 
missions and therefore Navy research efforts must remain germane to their opera- 
tional requirements. 

In response to the new statutory requirement for federally directed and 
supported research and development for equipment and procedures that support 
diving operations on the Outer Continental Shelf, the Department of Conmerce is 
developing this program. The Program Development Plan (POP) is being designed 



290 



to increase diver if/e.?. ... .is, improve operational safety, and reduce 
hazardous working conditions associated with diving operations on the Outer 
continental Shelf, 

Surface supplied (umbilical) diving is more cotimon than .scuba (self-contained) 
diving for Outer Continental Shelf commercial operations. This method involves 
supplying the diver with a breathing medium, either air or mixed-gas, through a 
hose and other necessary life support measures, as necessary, from a remote 
source located at the surface. Surface supplied diving allows monitoring of 
the working diver, who is tethered by and in communication with the surface 
control . 

When a dive is lengthy or particularly deep, the use of a diving bell may 
be appropriate. A diving bell is a device which allows the diver to be trans- 
ported to and from the underwater worksite. 

Mixed-gas diving is carried out with a breathing medium consisting of oxygen 
and an inert gas or gases such as helium or nitrogen. In Outel- Continental Shelf 
and offshore mixed-gas diving, a helium and oxygen mixture is most commonly used. 
Cormercial mixed-gas operations usually involve surface supplied diving and may 
utilize a closed bell and saturation diving techniques. 

Saturation diving is when the body tissues become saturated with the inert 
gas or gases in the breathing medium. Saturation diving is used in situations 
where the diver will be exposed for long periods of time to elevated (high 
ambient) pressure conditions. The advantage of saturation diving is that once 
the body tissues become saturated with the inert gas or gases at any given depth, 
no additional decompression is needed regardless of the length of time of the 
diver's exposure to the elevated pressure. 

III. Organization and Participants 

In accordance with Section 21 of Section 208, of Title II, paragraph (e) 
of the Act, this program has been developed by representatives of the 
three lead agencies. National Oceanic and Atmospheric Administration (NOAA), 
Coast Guard, and the National Institute for Occupational Safety and Health (NIOSH), 
with the assistance of the Navy, the Occupational Safety and Health Administration 
(OSHA), National Heart, Lung and Blood Institute, Department of Interior, and 
the Department of Energy. 



291 



In addition to federal agency representation, the Industrial and 
scientific communities have contributed to the development of the plan to 
ensure that the needs of the working diver are met. The process by which the 
above was achieved was to hold a series of planning meetings involving the 
lead agencies, which were expanded early to Include the other appropriate 
federal agencies, as cited above . 

This plan could not be developed properly without the cooperation of and 
contribution from the c_ommercia1 diving and academic comnunities. Their repre- 
sentatives were given an opportunity to review the preliminary draft and were 
invited to participate in a public forum sponsored by NOAA. the Coast Guard, 
and the NIOSH. with the assistance of the Undersea Medical Society and the Marine 
Technology Society. This forum afforded them an opportunity to discuss and 
modify the program so that it could be optimally responsive to the intent of the 
Act. 

IV. Approach 

The overall goal of this program is to "conduct studies of underwater diving 
techniques and equipment suitable for protection of human safety and improvement 
of diver performance." This goal can be achieved only with the cooperation and 
support of the appropriate federal agencies, and those organizations and persons 
Involved in the diving industry. 

In proceeding with the program development, basic premises which were 
agreed upon are: 

- Every effort will be made to utilize information from both national and 
international sources in the planning and implementation of this program. 

- The program will be responsive to the needs of the working and scientific 
diver on the PCS 

- The program will be national in scope 

- Where research facilities are required existing facilities will be 
utilized 

- Federal and non-federal facilities will be used as appropriate 

- Funds will not be sought for the purpose of constructing new hyperbaric 
facilities 

- Funds will be made available to federal and non-federal organizations to 
aid in solving selected immediate and long range needs. 



292 



- Proprietary Information, so Identified, win be safeguarded 

V. General Objectives 

The following four objectives are really categories Into which the proposed 
programs have been placed. Elements of each category are needed In order to have 
an adequate total program. Research and development efforts will be coordinated 
closely among those organizations already engaged in supporting these areas, such 
as NOAA, the Navy, the National Institute of Health (NIH), private foundations, 
and Industrial organizations. The order In which the objectives are presented 
is not Intended to imply a priority and should not be construed as such. 

A. Procedures 

Emphasis will be on the responsiveness of routine procedures in the 
event of an emergency or life-threatening situation. The type of equipment ' 
• used will have an Important relationship to the procedures Involved. Pro- 
cedural research addressed will relate primarily to those factors concerned 
with the safety and health of divers. 

- Example areas of concern are: communications, diving bell recompres- 
sion chamber mating, evacuation of offshore platforms, medical 
procedures, and assignment of responsibilities during emergencies. 

B. Equipment 

Within the present context, equipment is defined as that which is supportive 
of diving operations from a medical and operational safety standpoint. The 
diving Industry has made great strides in developing personal support equip- 
ment such as diving helmets, regulators and umbilical hoses, and is con- 
tinuing such efforts as required by real world diving operations. It is 
more difficult, however, for industry to support the development of basic 
technology and standardization leading to long range improvement in equip- 
ment systems. Studies are needed, therefore, to obtain further information 
and for recormiending minimum requirements for the safe operation (including 
failure and backup) of all equipment supporting divers. 

C. Training 

The procedures for selecting and training divers and support personnel 
should be designed not only to provide qualified individuals but also to 
anticipate future skill requirements. Considering the rapid technological 
advances being made in the field of diving, it. is essential that training 
and retraining programs be developed that respond rapidly to such advances 



293 



with respect to both equipment and procsdures. 

Areas In which training is required include divers, tenders, specialist 
support personnel, hyperbaric physicians, emergency medical technician/ 
divers, and supervisors. 

Funding will be provided for research directed towards developing 
curricula for the purpose of initiating the most effective training pro- 
cedures to produce efficient and productive divers and support personnel 
and to minimize risk with respect to safety and health. 

D. Biomedical and Diver Performance 

The biomedical program will address problems of both an Immediate and • 
long range nature. Examples of specific research areas are those involving 
basic mechanisms such as the underlying causes of decompression sickness, 
bubble formation in living tissue and oxygen toxicity. Long range health 
problems and treatment procedures need to be identified. Studies of more 
limedlate problems will result In Increased understanding of human physio- 
logy. Improved hyperbaric medical procedures, saturation diving procedures, 
data management, and the development of specific decompression schedules. 
Human engineering studies are needed to Improve performance by refining 
the design of equipment to better match the physiological and psychomotor 
skills of the diver. Handbooks reflecting the results of such efforts will 
be compiled and published. 

In 1974, NIOSH formed a Federal Diving Task Force in an effort to 
coordinate the national diving community and to prioritize its principal 
needs with respect to occupational safety and health. The final report 
(National Plan for the Safety and Health of Divers in their Quest for Subsea 
Energy,") was published by the Undersea Medical Society in January 1976. 
Since that time Federal diving regulations have been promulgated by OSHA 
In July 1977, and the Coast Guard in November 1978. The "National Plan" 
primarily addressed biomedical considerations and will be used as a reference 
document during the development of the current POP. 

IV. Research and Development Programs 

The research and development programs which are described do not in any way 
reflect an exhaustive list. They are based on recommendations by numerous 
individuals and on previous documents and articles. The programs are not 
listed in order of priority. Priorities will be established following considera- 



294 



tion of comments and reviews by both federal and non-federal ji ga.r. . '=o. -;. 

A. Procedures Program 

Experience 1n the North Sea has shown the desirability to have a capa- 
bility to evacuate diving and non-diving personnel from offshore platforms 
In the event of emergencies. If a diver Is under pressure during an 
emergency requiring evacuation, the situation 1s further complicated. It 
may be necessary to provide a system capable of keeping a diver under 
pressure continuously during transit from an offshore location to a 
treatment center. Such a system requires standard mating flanges, and 
procedures and a closely coordinated comnunication and transportation 
system. A study 1s needed to identify the necessary elements In this 
system. 

B. Equipment Program 

As stated in Section V-B, the emphasis here will be on the safety and 
. operational aspects of equipment support systems rather than on the develop- 
ment or refinement of personal equipment items. Examples of such studies 

are: 

Environmental Effects 

- The long range effects of adverse elements of the marine environ- 
ment such as salt water, pollutants, wave action, and oil on life 
support systems components. 

Performance Standards 

- A review of equipment performance standards. 

Equipment Interface 

- The requirements for interfacing equipment components such as 
diving bells, recompression chambers, and their relation to 
emergency evacuation procedures. 

Handling Gear 

- This program will involve the review of basic criteria and 
the recommendations for safe load requirements for primary and 
backup handling systems. The capabilities of retrieval systems 
will be evaluated including electro-hydraulic, air, mechanical 
and other systems with respect to extreme heat and cold, 
viscosity of fluids and oils in extreme temperatures, and the 
effects of external pressure on system components. 



295 



Breathing Gas Systems 

- Review existing standards and reconninended minimum safe require- 
ments for design, cleaning. Inspection, gas filtration, mani- 
folding, and filling of breathing gas containers. The wide 
differences which now exist create difficulty in achieving uniform 
safety practices. 

C. Training Program 
Curricula 

- Specialist Training : The complexity of technology in the field 
of diving is Increasing continually. On the assumption that this 
trend will continue there will be a need for a variety of specialized 
training for divers and diver support personnel. The selection of 
subjects for training will be made in cooperation with the diving 
industry and organized labor. The role of the federal government 
will be to assist in the development of the curricula and the esta- 
blishment of the training programs but actual training will be 
carried out by non-federal organizations. 

- A study comparing training techniques, curricula, length of course, 
■ training facilities and relative costs. This study also would 

include the determination of the needs for refresher training in 
many areas, an important element in a field as dynamic and changeable 

as diving. 

. Emergency MpHiral Torhniciar. (Diving) EMTd : As in other areas, 
the demand for emergency medical training is increasing in the field 
of diving. Because of the impractical ity of providing physicians 
on offshore facilities, there is a need to train selected diving 
personnel in the emergency medical care of diving casualties. While 
one 0^ two organizations do offer such training, there is a need 
to develop criteria for establishing curricula resulting in a 
certifiable course that is recognized by the Department of Trans- 
portation on the same basis as other specialized courses in emergency 
medical care. In addition to providing basic training, it is 
Important to establish a procedure to allow for retraining (re- 
fresher courses) in order to ensure the utilization of the most 
current techniques of emergency medical care and the maintenance 
of skills. 



296 



- Diving Physicians: An expansion of the current NOAA/Navy/ 
Undersea Medical Society program for training physicians in 
diving medicine. The current program can handle only about 20 
percent of the physicians who apply for such training. It is 
felt that federal support should continue for about 4-5 years, 

at which time the responsibility for such training can be assumed 
by non-federal organizations 

- Training of Research Personnel : Development of a program to 
train scientists and engineers in the techniques of deep water 
diving and the use of the equipment involved. Such a program 
would be carried out with the cooperation of conmercial diving 
training organizations. The investigations mandated under Section 
20 of this Act requires that there exist a cadre of scientists and 
engineers capable of conducting research programs on the OCS. 

D. Biomedical Program 

This program has both basic and applied elements. The dual goals of 
providing answers to immediate problems plus the study of basic medical 
issues should assure the systematic improvement of diver effectiveness and 
at the same time minimize health hazards. It is recognized that the role of 
the diver is shifting as technology advances, and that in some instances there 
will continue to be engineering solutions to what historically have been 
biomedical problems, e.g., the one atmosphere diving system and/or remotely 
controlled manipulators. Examples of reconmended biomedical programs are: 
. Diving Accident Management: NCAA, in cooperation with the Undersea 
Medical Society, is in the process of establishing a national diving 
accident network. This network should permit the expeditious handling 
of diving accident victims using existing transportation systems and 
treatment centers. It also will facilitate the acquisition and 
dissemination of accident related information. A problem needing 
specific attention in this regard involves the proper examination of 
diving accident victims. The true cause of death in a pressure- 
related accident may inadvertently be obscured by a medical examiner 
who is not familiar with hyperbaric physiology. For this reason, 
the broad dissemination of information relating to the proper autopsy 
procedures in such cases is important. It is proposed therefore to 
develop a reconmended system for medical examiners which coordinates 



297 



the requisite medical expertise on che handling of diving 
casualties. 

Medical Criteria Standards: The growth of national diving 
activities has been accompanied by an increase in diving related 
medical problems. Medical aspects of diving is a subject area 
which is not covered well in most medical school instruction since 
these problems are not seen much, if at all, in the general 
practice of medicine. Interested physicians can easily acquire 
the knowledge of the general aspects of diving medicine sufficient 
to treat common diving complaints or to recognize th^ need for 
consultation with an expert specializing in complex diving medical 
problems. It would be useful to patients and medical practitioners 
alike if the incidence of more coitmon medical problems of diving 
were identified and standard guidelines were established for the 
'provision of medical care to divers and for the conduct of 
medical and paramedical instruction in general diving medicine. 
The results of this study will be fed into existing physician 
and Emergency Medical Technician Diving (EMTd) training programs. 
An additional area needing investigation involves identifying 
Individual differences with respect to tolerance to increased 
atmospheric pressures and the effects of such increases on 
performance and the subsequent refinement of medical examinations. 
Epidemiological Study : This would be a broad study to determine 
long range health problems associated with diving, factors 
associated with pressure-related accidents, effectiveness of 
different decompression sickness treatment regimes, and causes 
of fatal diving accidents. Such a study not only would aid in 
improving diver safety and health, but would aid in the acquisi- 
tion of actuarial data and provide information to assist in the 
selection of future research areas. 

National Diving Data Center : Establishment and maintenance of 
National Diving Data Center to collect, analyze, and disseminate 
data related to decompression, treatment of diving casualties, 
and diving accidents. This center would include the National 
Diving Accident Network referred to earlier, now being established 
by NOAA and the Undersea Medical Society. The Center would fully 



298 



utilize existing data and rv.Hor£iii|, . -<i:..,. s. 
Air/Nitroqen-Oxyqen Saturation Diving: Recent investigations 
have shown that it is possible to use air and nitrogen-oxygen 
breathing mixtures in situations which heretofore were thought 
to require more exotic and expensive breathing gases. Extended 
bottori times can be obtained at depths up to 250 fsw when divers sat- 
urate on air or nitrogen-oxygen mixtures at depths from 50-100 fsw. 
Additional research is needed, hov/ever, to develop repetitive dive 
schedules, decompression procedures, and the procedures for using 
helium-oxygen as a breathing gas when making excursion dives from 
a saturation breathing mixture of air or nitrogen-oxygen. 
Helium-Oxygen Diving: Although helium-oxygen breathing mixtures 
have been in use for many years, the significant increase in diving 
depths is continuing to require new research. For example, studies 
are needed to further refine and improve tlje safety and efficiency 
of excursion diving from saturation on helium-oxygen breathing 
mixtures. Specifically information is needed on optimizing com- 
pression rates and decompression profiles. In addition, there 
is a need for improvement of helium-oxygen diving procedures for 
diving to depths of 150-600 fsw for bottom times of 30-60 minutes. 
Thermal Problems in Diving: Diving in winter, northern latitudes, 
in deep water, or when using helium, can produce severe thermal 
problems when the diver is not protected adequately. Chilling, 
even if not severe enough to threaten life, will produce loss 
of dexterity and sense of touch in the hands, making it difficult 
for a diver to do useful work or in some instances to control 
diving equipment. Shivering causes a lack of coordination and may 
make it difficult for a diver to hold even a mouthpiece in place. 
The ability to think clearly and short-term memory also may be 
affected seriously by cold. A combined approach must be pursued 
to develop protective garments which will permit divers to work 
safely and efficiently underv(ater in all depths and locations. 
A program of medical investigations and biomedical development 
in the area of thermal stresses in diving is essential. 

Areas requiring study include: establishing thermal tolerance 
levels; improving methods of monitoring the diver's thermal state; 
developing improved insulation and self-contained power sources; 



299 



developing methods of rewarming; determining tiiermodynamic and 
physical properties of diving gases; define the relation between 
body heat loss and performance; and investigate the role of 
evaporative heat transfer in hyperbaric gas environments.' 
Hicrobioloqy: Microbiological hazards with respect to diving 
fall into three general categories: the effects of increased 
atmospheric pressure on the behavior of microorganisms; the possible 
effects of increased pressure on the human inmune response; and 
infections from pathogenic organisms found in sea water. Research 
Is urgently needed to define the consequences of these variables 
for diving. Specific areas in which research is needed include: 
the effects of hyperbaric conditions on the permeability of 
chemicals in microbial processes, microbial metabolism of organic 
and inorganic compounds, enzyme activity, and protein synthesis. 

Research is also needed related to infectious and immuno- 
logical procedures in connection with problems stemming from living 
in close confinement such as in pressure chambers or undersea 
habitats. 

With respect to the third category, there has been recognition 
of increasing health risks to divers operating in polluted waters. 
In order to assess the risks involved, as well as the efficacy 
of decontamination procedures currently employed aboard vessels 
and offshore platforms, it is necessary to carry out microbiolo- 
gical studies that include both microbial ecology and medical 
microbiology, so that the incidence, seasonal and spatial dis- 
tribution, persistence, and pathogenicity of the microorganisms 
found in polluted estuarine and marine water and sediment can 
be determined. 

Mechanism of Oxygen Toxicity and its Prevention: Oxygen is an 
essential element in any breathing mixture used in diving and 
its exact proportion must be controlled carefully within a 
relatively narrow range in order to protect the diver against the 
hazards of either too little or too much oxygen. Since the 
partial pressure of oxygen is a function of both proportion and 
absolute pressure (depth), protection against the variations 



1+9-118 0-79-20 



300 



■jf oxygen pressure becomes an Increasing problem with 
deeper diving as the percentage of oxygen In the breathing 
mixture must become smaller and smaller. On the other hand 
if protection against oxygen toxicity could be developed there are 
a number of applications for reducing decompression time or for 
Improving the effectiveness of recompression therapy In which the 
utilization of high pressures of oxygen would have definite 
advantages. There Is a great need, therefore, to conduct Investi- 
gations into the effects of oxygen under pressure, both in the 
basic research areas of the biochemical mechanisms of oxygen 
toxicity and its prevention and In the more applied/developments 
of testing compounds or diving procedures which enhance diving 
capabilities while avoiding oxygen toxicity. 

Sudden Loss of Consciousness of Divers: There have been a number 
of unexplained cases of loss of consciousness of divers during 
operational diving, some of which have resulted in death. The 
underlying mechanisms may involve physiological responses to 
hyperbaric conditions or variables associated with the partial 
pressures of the gases being breathed. If such deaths are to 
be prevented in the future, a better understanding of the 
physiological mechanisms is needed, especially with respect to 
cerebral function. 

Cardio-Respiratory Effects of Hyperbaric Exposures: The need 
to breathe compressed gases in diving to compensate for Increased 
hydraulic pressure is the source of problems of decompression 
sickness and of the requirement for decompression schedules. 

The difficulty in ventilating with dense gases and of expanding 
the lungs against water pressure affects CO2 removal from the 
body and through that the body's acid-base balance. All blood 
circulates through the lungs. Hydraulic pressures in diving force 
body fluids into the lung cavity where they affect both venti- 
lation and circulation. A knowledge of the dynamic effects and 
and interactions of these cardio-respiratory responses is 
probably basic to a comolete understanding of almost every bio- 
medical change in diving. Every advance in diving technology, 
development of new diving gas mixtures, new underwater breathing 



301 



.^pc. ".L-QT, exLension of depth capabilities or prolongation 
of time at present diving depths will require a re-evaluation 
of how such changes in the conditions or environment of diving 
will impact on the diver's safety and health. An understanding 
of these processes might point the way to safe engineering or 
operational exploitation of new possibilities in diving. An 
integrated program of investigation into the responses of the 
cardio-respiratory system to diving conditions is essential to 
the success of any biomedical research program in diving. 
Formation of Bubbles: Studies are needed of the exact mechanism 
for formation of bubbles in the divers body and the relationship 
between general bubble formation and the specific initiation 
of decompression sickness. The formulation of decompression 
schedules to avoid decompression sickness is a pragmatic and 
Inexact process just as is the formulation of recompression 
therapies to best treat the diver injured by decompression sick- 
ness or air embolism. Being inexact the procedures are often 
.inefficient or ineffective and fail to protect the healtti and 
safety of the divers concerned. 

New technologies in bioengineering and computer sciences have 
provided a beginning insight into the dynamic processes involved 
in Inert gas functions within the body and in the formation and 
resolution of bubbles in living tissue. Investigations are needed 
into such factors as the difference between various inert gases, 
or combinations of them, which might be used in diving breathing 
mixtures. 

Further progress in these investigations is fundamental 
to our understanding of the scientific basis for human diving. 
The information generated can be bioengineering data for accurate 
and efficient computer modeling of decompression procedures and 
can also lead to improved recompression therapies based upon a fuUei 
understanding of the generation of decompression injury and of 
the best means to restore nonnal function after such injury. 



302 



- HiC);i r\ ■■ ■«. __ __ w:.^ii va.iabrates, including 
man, are exposad t; pressures greater than 15 ATA, either irt the 
dry hyperbaric environment of a pressure chamber or by the 
hydrostatic pressure of actual submersion, signs and symptoms 
appear which include tremors of the extremities, more severe 
myoclonic jerking, fatigue, and ultimately convulsions. In 
association with these characteristics, there are changes in the 
electrical activity of the brain and, at times, nausea, dizziness, 
vertigo, and feelings of euphoria. 

In humans the above signs and symptoms comprise the High 
Pressure Nervous Syndrome (HPNS); they are affected by the rate 
of compression as well as by the hydrostatic pressure attained. 
At depths greater than 1500 fsw, even with very long compression 
times signs and symptoms of HPNS remain which may affect the 
performance, health, and safety of the deep diver. 

Once the taxonomy and signs and symptoms of HPNS have been 
identjfied, it is of importance to determine the best methods or 
profiles for compressing divers to great depths. This may involve 
testing and applying such factors as selection of personnel, 
compression profile, accommodation and adaptation, adjustment 
of temperature, and the use of nitrogen or various anesthetics to 
modify HPNS. 

- Dysbaric Osteonecrosis : Dysbaric Osteonecrosis refers to 
destructive changes in the relative density of the affected 
bone. These changes are not of infectious origin, and they have 
been noted in many conditions such as chronic alcoholism, pan- 
creatitis, sickle-cell anemia, in patients using systemic steroids, 
and in caisson workers and divers. 

Despite the steady increase in published information, impor- 
tant facts about the cause, course, and prevalence of osteonecrosis 
are still unknown. 

Differences in compression/decompression exposures, inert 
gases, types of work, and traditional practices all appear to 
influence the occurrence of this condition. 

The medico-legal aspects of this disease need to be 
established. Understanding the differences between compressed 



303 



air workers and divers, in *?rms ooth of anatomical sites and 
prevalence, may clarify the problem somewhat. 

In addition, experimental, clinical, and epidemiological 
research 1s needed to enhance our ability to treat and prevent 
this condition. 

Audio-Vestibular Injuries in Diving: Injury to the inner ear of 
the diver has serious and often permanent effect on the ability 
to hear or to maintain normal balance and equilibrium (not to 
mention the acute but extremely distressing symptoms of nausea, 
vomiting, and vertigo). These injuries are presumed to be the 
result of decompression sickness of a special type. The 
phenomenon is now recognized in association with rapid ascents 
in very deep diving. Investigations of the genesis of decom- 
pression bubbles in the anatomically protected organs of the 
inner ear, and of the mechanism of Injury in such decompression 
accidents involving the audio-vestibular system may turn out to 
be extremely fruitful for the understanding of the general 
mechanisms of inert gas transfer within the body. That under- 
standing may be necessary for the development of successful 
computer modelling of decompression schedules and of the rate 
of outgassing of the inert portion of diving breathing mixtures 
from the body of the diver. 

Medical and Surgical Treatment Under Hyperbaric Pressure : As 
more and more diving man hours are spent in saturation diving operations, 
the possibility for serious illness or injury to the diver at work 
increases. Medical or surgical treatment within the diving 
chamber under pressure may be unavoidable. Even emergency decom- 
pression for transfer to a medical center for necessary treatment 
may involve more delay than is permissible under some circumstances. 
In preparing to deal with a hyperbaric medical crisis, the doctor 
must be aware of the constraints of the chamber and of the lack 
of medical precedents and guidelines. Are the dosages of common 
pharmaceutical agents, antibiotics or anesthetics, for example 



304 



altered by high'-pressure? The reversal of anesthetic effects 
by high pressure is a well known but poorly understood phenomenon. 
Thought must be given to diagnostic tests and procedures that 
vrill work in the chamber, to the selection of anesthetic approaches 
and surgical procedures, to the requirement for communication equipment 
adequate to provide expert consultation to the medical personnel 
at pressure within the chamber, and to the conduct of nursing and 
life-supporting procedures while the patient is being decompressed 
before transfer to medical treatment centers. A compendium of such 
information and procedures would be invaluable to (1) those who 
are called upon to render emergency medical or surgical treatment 
in the chamber and (2) those who have responsibility for the 
medical care of workers in the diving industry and for the advance 
preparations necessary to make such emergency procedures successful. 
- Delayed Treatment of Decompression Sickness: In instances in which 
there is a significant delay between the onset of decompression 
sickness and recompression, standard treatment procedures may not 
be effective. Such instances can result from operating in a 
remote location, failure of a recompression chamber to function 
properly, or transportation difficulties. 

Studies are needed to determine the best pre-recompression 
treatment procedures, i.e., adjunctive drug therapy, administration 
of oxygen, intravenous fluid therapy, as well as the development 
of alternative treatment procedures when the standard procedures 
fail to alleviate symptoms of decompression sickness. 

Research is needed, therefore, to establish proper treatment 
methods (both saturation and non-saturation), the role of adjunc- 
tive drug and fluid therapy, establishment of treatment flow 
diagrams, and related emergency ca're enroute to the treatment 
facility. 

VII. Priorities 

Program priorities will be establish so as to achieve a balance between 
solutions to Immediate problems and to those of a long range nature, taking 



305 



into account both existing and anticipated government and Industry 
programs. No priorities will be established until coiiments from all 
involved government agencies and the private sector are considered. 

VIII. Program Management 

The Department of Commerce (NOAA) will serve as overall lead agency 
and will coordinate the Implementation of this program. Following the 
establishment of priorities, based on comments from Federal agencies 
and the private sector, agency initiatives will be agreed upon and 
requests for funding or redirection of existing programs will be 
implemented. Some selected programs may be carried out on a cooperative 
basis using reimbursable funds where appropriate. Attempts also will 
be made to conduct cooperative programs on a cost-sharing basis with 
industry. There will be continual interaction and re-alignment of 
priorities as needed during the development and implementation of the 
program. 



X. 



Schedule 


January 17 


January 22 


February 5-7 


February 16 


March 2 


March 9 


March 12 



May 11 

June 29 
July 31 



Completion of preliminary draft by lead agencies 
Meeting of other Federal agencies to present 
and discuss draft 

Announcement of the POP procedures and status at 
the International Diving Symposium, New Orleans 
Second interagency meeting to discuss and receive 
comments from other Federal agencies 
Completion of revised draft PDP 
Announcement of plan In the Federal Register 
Draft PDP mailed out to academic and industrial 
coiinunity and to all other Interested parties 
for comnent 

Comments received from public sector and discussed 
during an open symposia in +iashington, D.C. 
Completion of final Program Development Plan 
PDP submitted to Department of Commerce 



306 



^ J^i. 



U* 






Federal Agency Contact 
Outer Continental Shelf Diving Program 



NOAA 

Dr. James W. Miller 
NOAA - 0E3 
6010 Executive Blvd 
Rockville, MD 20852 
(301) 443-8391 

Dr. Donald C. Beaumariaqe 
NOAA - 0E3 
60T0 Executive Blvd 
Rockville, MD 20852 
(301) 443-3391 

Dr. Michael Heeb 
NOAA - SG 

6010 Executive Blvd 
Rockville, MD 20852 
(301) 443-8926 

Dr. Robert Bornmann 
NOAA - ND 

2001 Wisconsin Ave., NW 
Washington, D.C. 20235 
(202) 632-5355 



U. S. Coast Guard 

Cdr. Peter T. Muth 

U. S. Coast Guard (6-MP-3/USP/82) 

400 Seventh Street, SW 

Washington, D.C. 20590 

(202) 426-2307 

George Michel son 

U. S. Coast Guard (G-MP-3/USP/82) 

400 Seventh Street, SW 

Washington, D.C. 20590 

(202) 426-2307 



Department of Energy 

Dr. Walter Weyzen 
Division of Biomedicine 
Department of Energy 
Washington, D.C. 20545 
(202) 353-5355 



NIOSH 

Dr. Alan H. Purdy 
DHEW - NIOSH 
5600 Fishers Lane 
Rockville, MD 20857 
(301) 443-6377 

Dr. Donald W. Badger 
DHEW - NIOSH 
4676 Columbia Pkwy 
Cincinnati, Ohio 45226 
(513) 684-8286 



Dr. James Vorosmarti 
NNMC - NMRI 
"R&D Command 
Bethesda, MD 20014 
(301) 295-1473 

Dr. Suzanne Kronheim 

Office of Naval Research - Code 441 

800 North Quincy Street 

Ballustrom Centre Tower #1 

Arlington, VA 22217 

(703) 696-4053 

Cdr. F. D. Duff 

Naval Sea Systems Command 

Washington, D.C. 

(202) 697-7606 



OSHA 

Mr. Jerry Purswell 
U. S. Department of Labor, OSHA 
200 Constitution Ave., N.W. 
Washington, D.C. 20210 
(202) 523-7216 

Mr. Joseph La Rocca 
U. S. Department'Of Labor, OSHA 
200 Constitution Ave., N.W. 
Washington, D.C. 20210 
(202) 523-8038 



307 



Federal Agency Contact (cont) 



Department of Interior 



Mr. Donald Truesdell 
Bureau of Land Management 
Department of Interior 
Washington, D.C. 
(202) 343-4437 



Thomas E. Burke 
Bureau of Land Management 
Department of Interior 
Washington, D.C. 20240 
(202) 343-7744 



Richard J. Giangerelli 
U. S. Geological Survey 
National Center (m.s. 620) 
Reston, Virginia 22092 
(703) 860-6822 



NIH 



Dr. Claude L'Enfant 

National Heart and Lung Institute 

National Institutes of Health 

Bethesda, MD 20014 

(301) 496-7208 



308 

The Chairman. Thank you, Mr. Wallace. Do Mr. Eberle and Mr. 
Wilson have an5rthing to add? 

Mr. Wallace. No. 

The Chairman. Mr. Forsythe? 

Mr. Forsythe. Thank you, Mr. Chairman. 

I thank the panel of witnesses. I think you had very helpful 
testimony. Mr. Lawrence, you know that this committee last week 
revealed to the Department of the Interior a 5-year leasing sched- 
ule that had been completed and called for a maximum of five or 
six lease sales a year. And while they had denied they had complet- 
ed the schedule, they released it within 24 hours. 

The schedule contained a leasing program after 1981 that was 
substantially less than the recommended schedule by the Depart- 
ment of Energy, having four sales in 1980, five in 1981, five in 1982, 
five in 1983, and only six in 1984. We have heard from DOE that 
seven sales a year, with three in the gulf, is the optimum sched- 
uled. The difference between seven sales a year and DOI's proposal 
represents a loss of a billion barrels of oil. 

Can you comment on this situation, particularly as it relates to 
the lack of expanded exploration in our frontier areas? 

Mr. Lawrence. Yes, Congressman Fors3^he. We would be very 
much more comfortable with the Department of Energy's projec- 
tion on more extensive a basis. I think with the events of the past 
several months, with the insecurity of oil supply from the Middle 
East, our domestic energy policy literally cries out for more aggres- 
sive development. 

I think, also, as far as the gas industry in particular is con- 
cerned, the greater focus on the contribution that gas can make to 
this Nation's total energy needs that came out of the extended 
debate of the past year of the Natural Gas Policy Act made it 
increasingly clear that there is indeed a huge natural gas energy 
potential. 

We think there is a very significant potential in the frontier OCS 
areas, as well as in the remaining unleased areas of the Gulf of 
Mexico. So what you refer to lies at the very heart of our recom- 
mendation that the DOE and not the Department of the Interior 
should have the authority of prescribing leasing schedules. 

Then, in their capacity as manager of public lands, the Depart- 
ment of the Interior could certainly go forward with their imple- 
mentation procedures, pursuant to the act. But the scheduling of it 
is an energy issue, not a public lands management issue, in our 
opinion, and especially so in light of the current situation. 

Mr. Forsythe. The question as to whether the industry had the 
capability, both as to capital and as to its rigs, was a factor that 
was discussed at our hearing last week. DOE said that they had 
surveyed this and that they were confident that the seven-lease 
schedule could be met by industry in both of those areas. Would 
you agree with that assessment of DOE? 

Mr. Lawrence. I have a great deal of confidence in DOE's real- 
ism, rather than optimism, in that regard. I think, as far as capital 
is concerned, the tremendous bid amounts that have come forward 
in areas of high-search potential have demonstrated that time and 
time again. 



309 

As far as the availability of rigs is concerned, I think the drilling 
industry has demonstrated a great flexibility to provide the re- 
sources when the occasion requires it. So I would indeed agree with 
DOE's recommendation that both of those would be available. 

Mr. FoRSYTHE. It is really free enterprise at work when this is 
going on. 

Mr. Lawrence. And it works very flexibly and very effectively; it 
amazes a lot of people. 

Mr. FoRSYTHE. Thank you, Mr. Lawrence. 

Mr. Savit, on onstructure drilling — and you mentioned that if 
you had the opportunity, you would prefer for us to bring up 
questions — do you know that DOI has recently published proposed 
guidelines for onstructure drilling? It is my understanding that the 
oil geologists are opposed to this practice. Would you mind com- 
menting on the need and the advisability of prelease, onstructure 
drilling and who would be interested in such authority? 

Mr. Savit. Well, I think the question of authorizing onstructure 
drilling hinges very greatly on what one is trying to accomplish 
from a national standpoint. If the aim is to make sure that what- 
ever oil is produced is produced to generate the maximum revenue 
to the Government and to maintain the oil industry in a utility- 
type framework where a reasonable return can be gotten, on the 
average, then I think that onstructure drilling is an appropriate 
means of doing it. 

On the other hand, if the goal is to find as much oil as possible — 
find all the oil and gas that is out there, with due deference to Mr. 
Lawrence 

Mr. FoRSYTHE. It is stipulated that when we say oil, we also 
mean gas. 

Mr. Lawrence. I would rather we said it. [Laughter.] 

Mr. Savit. Actually, I think it is natural gas that we are present- 
ly looking for on the Atlantic coast, rather than oil, at the moment. 
But if the intent is to find all the oil and gas out there, what one 
needs is strikingly different ideas and brave ventures into the 
unknown. 

We have to encourage people who have new ways to interpret 
geophysical and geological data and go out and find that oil and 
gas which hitherto would not have been found, and there is a great 
deal of it. We can even refer to the very excellent paper that Dr. 
Menard wrote some years ago before he became Director of the 
USGS, in which he showed, on a statistical basis, that there must 
be a great deal of oil and g£is out in the unexplored, and even in 
the explored, parts of the United States that exists in a different 
fashion than people are normally accustomed to seeing. 

So what we have to do is to encourage people to go out and take 
the big risks, to go out and drill in places that no one else knew 
before and which most people thought were not necessarily good. 

The only way to encourage people to take these big risks is to 
have the promise of very large gain as a result of taking the big 
risk. The only reason people buy lottery tickets is that they have 
not really evaluated whether that lottery ticket really is worth 
what it costs, because it really is not worth its cost, but because the 
promise of an enormous gain is there. It is only when you promise 
an enormous gain that you get people to take unreasonable risks. 



310 

The only way, historically, that we have ever had of finding 
deposits of oil and gas in unknown, untested, and untried areas has 
been to encourage people who have imagination and courage to 
take these risks and to persist, despite the existence of many, many 
setbacks. 

I have mentioned before to this committee that in the Alberta 
Basin of Canada, 151 dry holes were drilled before the productive 
key was found — before somebody's imagination led him to take 
that 152d stupid chance that brought out the billions of barrels of 
oil that exist in the Alberta Basin. We have to encourage people on 
our OCS to take these ridiculous chances and not to play it safe, 
not to do these very well-organized things that we tend to do by 
onstructure drilling. 

Mr. FoRSYTHE. Well, again, onstructure drilling can depress the 
interest in taking that risk, because it presumably says something. 

Mr. Savit. That is exactly it; it depresses the interest. It discour- 
ages people; it encourages the Government to believe that an area 
is no longer promising and to take that area out of the lease sale 
schedule, and so on. 

Mr. FoRSYTHE. Well, that leads me right into my next question 
which concerns lease sale 49 in the Baltimore Canyon. Because of 
mud slides, 44 tracts were removed from that sale at the last 
minute. All of these tracts appeared to be in the most promising 
locations. Do you feel that this action had a deflating effect on that 
sale? 

Mr. Savit. I am absolutely sure it did, because if you look at 
some of the new technology that has been applied out there, that is 
the area, precisely where those mud slides were reported to be, 
that offers some promise of new ways of finding oil and gas out 
there. Simply withdrawing those things have discouraged the 
people from coming in and bidding on the others. 

Mr. FoRSYTHE. Do we have the technology to safely drill in that 
situation? 

Mr. Savit. I think we have the technology to do anything in the 
OCS that we want to do safely. The only problem is, how much 
does it cost? If there is a reasonable chance of finding a major 
deposit out there, we will put the necessary money in and do the 
safe things that have to be done. 

We have operated safely in all kinds of areas of the world under 
much worse conditions than that particular one, and it is simply 
an engineering problem that can be solved. 

Mr. FoRSYTHE. Therefore, you would say that you do not believe 
there was any valid reason to have removed those tracts on that 
basis? 

Mr. Savit. On that basis, I would certainly say not. 

Mr. FoRSYTHE. Well, that is what we are being told as to why 
they were removed. 

Mr. Savit. I would have to say that had I been making the 
decision, I would certainly have not withdrawn those tracts. 

Mr. FoRSYTHE. We keep seeing updates by DOI of increased 
estimates in OCS resources. Do you have any accurate idea at this 
point of the degree of hydrocarbons on the OCS? 



311 

Mr. Savit. We do not have an accurate idea. All we have are 
statistical estimates, and you can change your basis for estimates 
slightly and come out with a huge change in the final result. 

Mr. FoRSYTHE. The only way to do anything about that is to 
expand lease sales and get on with exploration. 

Mr. Savit. And let people try out their ideas. 

Mr. FoRSYTHE. Mr. Wallace, you say that this whole situation in 
terms of regulation, studies, and so forth, in the area of diving 
safety is pretty much out of hand? 

Mr. Wallace. Yes, sir. 

Mr. FoRSYTHE. I have 21(e) before me, and I agree with you; it 
provides for study only by NOAA. You allege that they are, in fact, 
preparing to go to regulation? 

Mr. Wallace. Yes, sir. There is a letter that is in the enclosures 
that would point this out. 

Mr. FoRSYTHE. Mr. Wilson? 

Mr. Wilson. They have absolutely committed that what they do, 
OSHA will pick up and put into their regulatory system. It is not a 
question of just doing a study. OSHA has already committed that 
they are going to take those studies and do more regulation on the 
diving industry, and it is in the exhibits here. 

Mr. FoRSYTHE. The authority they are going to use is the OCS 
authority? 

Mr. Wilson. I think, sir, that the long-range plan of NOAA goes 
far beyond this. I think the wet NASA bureaucratic concept here 
really shows itself, if you read between the lines. If you read this 
exhibit No. 3 here, you will see that all through here it says that 
we cannot dive unless NOAA shows us the way or approves of the 
way that we are going to carry out our operations. 

Mr. FoRSYTHE. Are you saying that they have no legislative 
authority to do that today? 

Mr. Wilson. Through OSHA, sir, yes. 

Mr. FoRSYTHE. So far as 95-372 is concerned, as I understand it, 
the Coast Guard is clearly the lead agency here. Ao far as NOAA is 
concerned, the language of the act gives them only study responsi- 
bilities. 

Mr. Wilson. Yes, sir, but they are saying in their preliminary 
proposal here 

Mr. FoRSYTHE. They are saying it, whether they have authority 
or not. 

Mr. Wilson. They are saying it here, yes, sir. 

Mr. FoRSYTHE. I have some questions here, Mr. Chairman, from 
our member, Mr. Treen, who could not be here. 

The Chairman. We will submit those questions to panel, and if 
the panel would respond in writing on the appropriate questions. 

Mr. FoRSYTHE. We will submit them to you, and if you will 
respond to these questions by Mr. Treen, all having to do with the 
diving problem and the OCS we would appreciate it. No further 
questions. 

The Chairman. Counsel? 

Mr. O'Brien. Mr. Lawrence, why do you think we had the rela- 
tively bad showing that we did in the last Baltimore Canyon lease 
sale? They only had 41 million dollars' worth of bids, compared to 
$1.1 billion on the one before that. 



312 

Mr. Lawrence. I guess the recent trend has not looked too good 
as far as the pubHc announcements are concerned. I would refer 
back, though, to Mr. Savit's point. We are not looking for that 
151st well out there yet, but we are looking for that 10th well. 

There has been a significant commercial show in 1 out of 10, 
which I think the industry has rather historically portrayed as 
about the odds in rank wildcat areas. But I suspect that Mr. 
Langston and others directly involved in exploration departments 
of the bidding companies should shed a little more light on that. 

But I would have to feel that some of the recent dry hole results 
undoubtedly had a dampening effect, plus other drilling alterna- 
tives elsewhere, hopefully in the deep areas as a result of the 
Natural Gas Policy Act, which could be a factor in a better choice 
of funds. 

Mr. O'Brien. Last week, the Deputy Assistant Secretary of the 
Interior indicated that she did not believe that the alternative 
sliding scale bidding system that was used had an effect or impact 
at all insofar as decisionmaking went. Do you have any view on 
that? Do you think that you share that view? 

Mr. Lawrence. I do not know that I could point to a specific 
impact that it might have had on that particular lease sale, Mr. 
O'Brien, but we are very strong proponents of the sliding scale bid, 
and not just on the royalty bidding concept, but in some sort of a 
flexible bidding system that would permit funds actually expended 
to go for putting the pipe and facilities in the ground, rather than 
just to replenish the treasury. 

Mr. O'Brien. Recently, the Secretary of the Interior withdrew 
one-third of the area that was scheduled for lease sale 48 for June; 
this is off the coast of southern California. This was in order to 
meet environmental concerns at the State and local levels. Do you 
have any response to that, or any particular view on that? 

Mr. Lawrence. Yes, and we have conveyed these impressions to 
officials at Interior, including the Secretary. We are disturbed by 
that, because we think there is a very significant gas potential off 
southern California. And there is no more significant contribution 
that can be made to environmental enhancement in southern Cali- 
fornia than additional natural gas supplies because of their unique 
air quality problem in the Los Angeles basin. 

So we think that is very unfortunate and should be reversed. 
There should be an all-out effort there. 

Mr. O'Brien. Today's press also carries a report with respect to 
the Sohio decision on a proposed pipeline, I believe, from the west 
coast to the east coast. How do you think that will affect the 
Northeastern United States and, in turn, how would that impact 
OCS development. 

Mr. Lawrence. I guess I have, historically at least, looked upon 
that as more of an Alaska crude oil marketing problem than a 
development problem, Mr. O'Brien. In any event, I think there are 
others here more competent to address that than I. 

I do not think it would have any significant impact on explora- 
tion in natural gas-prone areas, which we consider that to be and 
which we think should move forward. 

Mr. O'Brien. Thank you. Mr. Wallace, a couple of questions. At 
page 5 of your statement, you describe some of these NOAA meet- 



313 

ings as unilateral, and I wonder if you could provide us a little 
more by way of general background on the meetings with respect 
to who attended and whether or not they were noticed in the 
Federal Register; precisely what those six meetings were about and 
when they took place. 

Mr. Wallace. I am going to let Mr. Wilson handle it, because he 
has some papers in front of him. But these were mostly picked up 
by letters that were sent from agencies that we happened to come 
across, where we have found that the meetings have been held. 

Also, in some of these letters, they have said that there was 
industry input and we know for a fact that we have never attended 
a meeting of any type for this group. 

Mr. Wilson. May I answer that, sir? On page 6 of our exhibit No. 
3, the first two paragraphs — now, this is the NOAA proposed 
plan — right off the bat, they say: 

In addition to Federal agency representation, the industrial and scientific commu- 
nities have contributed to the development of the plan to insure that the needs of 
the working diver are met. The process by which the above was achieved was to 
hold a series of planning meetings involving the lead agency, which were extended 
early to include the appropriate Federal agencies as cited above. This plan could not 
be developed properly without the cooperation of, and contribution from, commer- 
cial diving. 

We have never been contacted, and that is why we are very 
concerned about this. Here we have an agency that is writing its 
own ticket, and I think it has to be stopped. 

Mr. Wallace. We are very concerned about it, because when 
they do say there has been industrial input, we do not know where 
it came from. Certainly, the Association of Diving Contractors, 
with the representation they have, would be a main source of 
input. 

Mr. O'Brien. Who was the author of this development plan? 

Mr. Wilson. There is an agency list, sir, in the back; I think it is 
our last exhibit. Exhibit No. 4 gives you all the names of the 
individuals from the various Federal agencies that participated in 
developing this plan. NOAA is the lead agency; they are chairing 
it. 

Please note that in this list here, there is nobody from the diving 
community. There are a bunch of doctors, regulators, et cetera; 
there is no commercial representation here at all. 

Mr. O'Brien. At page 6 when you refer to NIOSH, you indicate 
that NIOSH is unilaterally committing funds for diving research 
without waiting for the NOAA plan to be presented for public 
comment. Could you provide some specifics on that? If you do not 
have them now, could you provide them for the record? 

Mr. Wilson. There are two contracts; one is a contract to do a 
study on first aid kits for decompression chambers. Well, this has 
been done 30 or 40 years ago and has been rehashed by the U.S. 
Navy probably several dozen times. There is another study to go 
into respirators for decompression chambers. 

I personally sat on the various committees during the OSHA 
hearings on diving, and we beat this subject to death. It is all 
known knowledge. What they are doing is expending Government 
funds for work that has already been done, and it is being joked 
about right now amongst the people. 

Mr. O'Brien. How much money is involved? 



314 

Mr. Wilson. It is not too much money on these two Httle plans; I 
think it is 10,000 apiece. But the epidemiological study that is 
being done here will probably cost in the neighborhood, I would 
say, of about $500,000, and that is also ongoing. NIOSH has already 
come out and attempted to make the first contacts on this to do the 
epidemiological study and we have rejected them. 

We say, wait a minute. First, we have to show a need for an 
epidemiological study. You just do not spend money on things 
because it is fun to do, or give NIOSH something to do. 

Mr. O'Brien. Thank you. Mr. Savit, at page 5 of your statement, 
you refer to a conflict here between two of the proposed regulations 
and you say: 

The Secretary gives himself the power to turn over to the States data that he has 
bought under contractual promise of confidentiality. 

Has your organization responded to the proposed regulations? 

Mr. Savit. One of our component organizations has submitted a 
statement, pointing out these particular conflicts. I do not have any 
confidence that those statements will be heeded, since we have had 
informal conversations with the regulators and they claim that 
despite the clear intent of Congress, they read some different inter- 
pretations of the actual wording, so that they feel that they do 
have those rights. 

Mr. O'Brien. Now, you indicate that these data were acquired 
through contractual promise. 

Mr. Savit. Some of the data were, yes. 

Mr. O'Brien. Is there a right under those respective contracts to 
bring an action if one of the elements of the contract were 
breached? 

Mr. Savit. Presumably, there is such a right, and our counsel 
have generally stated that we would be empowered to bring such 
an action. However, most of those actions take many years, and 
generally if we do collect damages, it barely pays the legal fees. 

Mr. O'Brien. Could you provide those responses for the record? 

Mr. Savit. Surely. 

Mr. O'Brien. Thank you very much. Thank you, Mr. Chairman. 

The Chairman. Mr. Hughes? 

Mr. Hughes. Thank you, Mr. Chairman. Mr. Savit, on page 5 of 
your testimony, you indicate that it would appear that the adminis- 
tration is attempting, by regulation and through other administra- 
tive steps, to circumvent the intent of Congress not only with 
respect to program direction, but with respect to such specifics as 
the protection of proprietary data and onstructure, prelease drill- 
ing. 

Are you suggesting there that your concern is over the protection 
of proprietary data relative to onstructure, prelease drilling, or are 
you suggesting that there are two different areas that you are 
concerned about — protection of proprietary data and onstructure, 
prelease drilling? 

Mr. Savit. I must apologize for the confusion in the statement; 
this was rather hurriedly drafted. We are protesting two separate 
courses of action. The onstructure, prelease drilling has been han- 
dled through one set of proposed regulations. The dissemination of 



315 

proprietary data to the States has been handled through a differ- 
ent proposed regulation. 

Mr. Hughes. Are you suggesting then that by the administration 
publishing the proposed rules which would call for permits to be 
issued to the private sector for onstructure stratigraphic drilling, 
that they are violating the intent of Congress? Is that what you are 
saying? 

Mr. Savit. Yes, I think so. 

Mr. Hughes. Is that what you understand to be the intent of 
Congress? 

Mr. Savit. It is my understanding from reading the public record 
that the question of mandating onstructure drilling was debated 
rather considerably in the Congress; that the Secretary of the 
Interior himself asked for the specific authority to do onstructure 
drilling, and that by rather overwhelming votes, both Houses de- 
clined to give the Secretary that permission. 

Now the Secretary, I believe, feels that he has that right and has 
had it all along from the 1953 act. 

Mr. Hughes. If the rest of your criticisms of the Department of 
the Interior are based on the same understanding of the intent of 
Congress, then I am afraid you are erroneous in your assumptions, 
because that was not the intent of the Congress. As a matter of 
fact, the mandated onstructure drilling provisions were eliminated 
in conference, only with the understanding that Interior was going 
to go ahead anyway with the program, and it left the existing law 
as it was, which permitted onstructure stratigraphic drilling. 

There was nothing in the legislative history that indicated that 
this Congress intended to proscribe the granting of permits to the 
private sector if they wanted them for onstructure stratigraphic 
drilling. 

Mr. Savit. Also, there is an additional point of view that we 
have; namely, that the encouragement of onstructure stratigraphic 
drilling would, in fact, strongly inhibit the discovery of new types 
of oil and gas accumulations. 

Mr. Hughes. Your argument that it would inhibit is a lot differ- 
ent than what Congress concluded. What I am concerned about is 
your suggestion that Congress intended that the Secretary not have 
the authority to move ahead with permits for onstructure strati- 
graphic drilling. 

That was not the intent of the Congress; it was just the opposite 
of that. The reason that the mandate of onstructure stratigraphic 
drilling was stricken from the bill was because of representations 
to the conferees that that was not necessary; that the Secretary 
under existing law had that authority, and indeed he was going to 
go ahead and exercise that authority. 

Mr. Savit. Well, then I appear to have been misinformed. 

Mr. Hughes. Thank you, Mr. Savit. 

The Chairman. Thank you. Are there any other questions? 

Mr. Forsythe. No. 

The Chairman. Mr. Wallace, Phil Oxley, who is the chief geolo- 
gist for Tenneco, made a comment that probably the area of leas- 
ing was too shallow and that the best probability was in about 
3,000 feet of water in the Baltimore Canyon area. Does the diving 
industry have the capability of supporting drilling at 3,000 feet? 



49-118 0-79-21 



316 

Mr. Wallace. At the present time, Mr. Chairman, I would not 
say so, not 3,000. But you also have areas such as the Hondo 
platform of Exxon in California; they set a platform and drilled, I 
believe, in 850 to 900 feet of water, with no diving requirement 
other than diving 130 feet, which was all done with air. 

So I believe they could drill and produce in 3,000 feet of water 
because of the past experience. 

The Chairman. Mr. Wilson? 

Mr. Wilson. I will add to that. There has been a development in 
the armored suit. So where the diver may not be able to go, 
physiologically, because of our limitations on Earth — we may not 
be able to dive past 1,600 to 1,800 feet; it just may be too difficult. 
The submarine and articulation — these are other devices that we 
have to do work with down there. 

But I think the diver is an economic tool and he can be engi- 
neered around. We are not critical. 

The Chairman. Mr. Lawrence, I guess you can make your plane 
now. 

Thank you very much, gentlemen. 

[The following was received for the record:] 

Testimony of George H. Lawrence, President, the American Gas Association, 
ON THE Need for Oversight Regarding the Outer Continental Shelf Lands 
Act Amendments of 1978 

I am George H. Lawrence, President of the American Gas Association (A.G.A.). 
On behalf of the A.G.A. and its 300 member companies which provide natural gas 
distribution and transmission services to 160 million consumers in all 50 states, we 
submit the following statement regarding the need for continuing oversight regard- 
ing the Outer Continental Shelf Lands Act Amendments of 1978 (P.L. 95-372). 
A.G.A. member companies currently provide almost 85% of the nation's natural gas 
utility sales. 

A.G.A. expresses its appreciation to the Committee for this opportunity to review 
the ability of new OCS amendments to properly govern the exploration, develop- 
ment, and production of energy resources from the OCS. This also is an opportune 
time to examine the current status of the regulatory process to implement the OCS 
amendments, since we last testified before this Committee on December 6, 1978. 
A.G.A. worked very closely with this Committee and other Committees of the 
Congress while this legislation was being considered in both the 94th and 95th 
Congresses to provide insights regarding different issues reviewed during the legisla- 
tive process. We also wish to commend this Committee in particular for its excellent 
efforts during consideration of numerous amendments to OCS legislation in both the 
94th and 95th Congresses. 

We also understand that efforts are underway to potentially fragment OCS over- 
sight over ten Committees of the House, which we firmly believe is unwise in light 
of the need to effectively develop our nation's OCS energy resources. Effective 
Congressional oversight necessitates a coordinated approach. Efficient OCS regula- 
tory implementation must also proceed in this fashion. If oversight is fragmented 
among many Congressional Committees, the ability of the legislative branch to 
assess Executive branch administration and implementation of the OCS Act is 
severely diminished. In this regard, we strongly submit that maintenance of the 
OCS oversight function can best be accomplished by the House through establish- 
ment of the House Ad Hoc Committee on the Outer Continental Shelf as a Select 
Committee for this session of Congress. 

As this Committee has specifically recognized in this recent series of hearings, 
there is a continuing need for oversight of the nine federal department and two 
agencies involved in the implementation of this complex and comprehensive piece of 
legislation. Such oversight could facilitate compliance with the stated objectives of 
the Act while ensuring compliance and cooperation among the Federal agencies and 
States that have specific roles to perform in OCS development. 



317 

Summary of A.G.A. positions and recommendations 

A.G.A. would like to express the following particular positions and recommenda- 
tions for this Committee's consideration: 

There is still a continuing conflict between DOE and DOI regarding alternative 
bidding systems for OCS lands that has not been resolved. It is still unclear which 
Department will be handling the critical implementation phase of these bidding 
systems, since coordination of decision-making within the Executive Branch under 
Section 204 of the Act has not been yet clarified. 

Many crucial management decisions regarding OCS development cannot be made 
until the requirements and constraints of new regulations are known. Critical 
regulations for the natural gas utility industry which have not yet been released 
include: 

Regulations to implement Section 603 of the Act which encourages expanded 
oarticipation in OCS development by local natural gas distribution comapnies. 
These companies, under Section 603, will find it easier to move the OCS gas they 
helped develop to their service areas in interstate commerce. 

Regulations to implement Section 25 of the Act dealing with development and 
production plans. 

We have also recommended that the DOI leasing plan promote aggressive lease 
sales during the next five years especially in frontier areas, while encouraging and 
stimulating prelease sale geological and geophysical exploration activity (non-drill- 
ing) by choosing large numbers of tracts for inclusion in future sales. We note that 
the recently released DOI draft proposed five-year leasing plan provides for an 
average of five lease sales during the coming years, with substantial slippage in 
sales from the Georges Banks area. Further, the plan provides for contingency sales 
in the Gulf of Mexico. This approach does not conform with an optimal program 
using six sales a year, based on prior A.G.A. discussion of this issue before the 
Committee on December 6, 1978. 

The split in decisionmaking between DOE and DOI must be clarified 

A.G.A. has expressed its concern on numerous occasions before this Committee 
and the Congress regarding the fragmented decision-making on critical energy 
policy and OCS leasing issues between the Department of Energy and the Depart- 
ment of Interior. This split of authority is counter-productive to expeditious OCS 
development. A.G.A. has favored leaving jurisdiction over the mechanics of public 
land management with the Secretary of Interior. However, we have urged that the 
Secretary of Energy should be the sole decision-maker on OCS leasing schedules and 
energy policy issues. 

Thus, one authority — the Secretary of Energy — could promptly make vital OCS 
decisions without conflicting sets of responsibility with other Federal departments 
or agencies. This would also be in consonance with the stated goal of the Depart- 
ment of Energy Organization Act of 1977 to consolidate energy decision-making in 
one Executive-level department. A.G.A. urges that definitive action be taken be- 
tween both Departments as expeditiously as possible to remove this uncertainty 
regarding OCS development that has existed since the passage of the Department of 
Energy Organization Act. 

Critical regulations for the natural gas utility industry have not been issued 

The absence of regulations important for the natural gas utility industry is 
adversely impacting OCS development. Many crucial management decisions regard- 
ing OCS development and the investment of substantial capital cannot be made 
until the requirements and constraints of new regulations are know. Regulations 
implementing Sections 603 and 25 of the Act will have a substantial bearing upon 
the extent to which geis pipeline and distribution companies will participate directly 
in the acquisition and development of OCS leases. Further, delay in issuing these 
regulations impacts upon the rate at which new gas resources are developed and 
made available to consumers in these companies' service areas. 

FERC has not yet published even the first draft of its policy statement to carry 
out the purposes of Section 603 of the Act. This policy is crucial to establish the 
standards under which FERC will consider applications for and issue certificates of 
public convenience and necessity pursuant to Section 7 of the Natural Gas Act for 
interstate transportation of OCS natural gas, owned wholly or partly by a local 
distribution company, from the OCS to the distribution company's service area. 
The natural gas utility industry has supported such a "finders-keepers" provision 
for many years. Although this provision is more complex than comparable provi- 
sions in S. 9 and H.R. 1614 considered during the 95th Congress, gas distribution 
companies that wish to participate individually or as part of a joint venture in 
development and production of OCS gas must in effect await this FERC statement 
of policy. In general, state PUC's will not approve expenditures for OCS exploration. 



318 

development and production by distribution companies without adequate assurances 
that such OCS gas will be available in those distribution companies' service areas. 

Also, regulations to implement Section 25 of the Act dealing with development 
and production plans have not been released. Under this provision of the Act, at 
least once before approving a development and production plan in any OCS area or 
region, the Secretary must declare such approval to be a major federal action 
(although the Gulf of Mexico is exempted from this requirement). If the develop- 
ment and production plan contemplates the transportation of such natural gas, the 
lessee shall also transmit a copy of the plan to FERC at the same time. The 
Secretary and FERC shall then determine who shall prepare the EIS required by 
NEPA. 

The mandatory EIS required by this section of the Act fosters further delay upon 
OCS development which is already subject to numerous, unwarranted delays. The 
additional delay in releasing regulations governing this section of the Act exacer- 
bates the systemic delays fostered by the statutory requirement itself. 

The OCS lease sale program must be expedited 

A.G.A. has previously submitted that the offshore proportion of U.S. gas resources 
will increase relative to onshore resources as drilling technology permits deeper 
waters to be explored and developed. Further, almost 26 percent of our nation's 
undiscovered natural gas lies in offshore areas under 200 meters of water or less. 
Almost one-fourth of this potential gas lies off the Atlantic and Pacific coastlines. 
Thus, the volume of potentially productive deep water sediments there is far greater 
than in the Gulf of Mexico. 

In order to maximize production of offshore gas, the appropriate leasing policy to 
pursue requires development of the Atlantic and Pacific as frontier areas in propor- 
tion to their expected gas reserves, accompanied by continued active lease sales in 
the Gulf of Mexico. The immediate implementation of this type of leasing policy 
would result in 30 Tcf more of cumulative gas reserve additions by the year 2000 
than a policy that disfavored development of offshore frontiers. Cumulative produc- 
tion under this approach would be 18 Tcf greater through the year 2000 than under 
a no frontier development policy, directly preventing the need for 3.1 billion barrels 
of oil imports cumulatively by the year 2000. Thus, the benefits of diversifying U.S. 
offshore development into our frontier regions are substantial. 

Further, A.G.A. has emphasized that the maximum production level falls off as 
the number of annual sales is reduced. For instance, reduction in the number of 
lease sales from six per year to three per year would result in a loss of 18 Tcf of 
cumulative production. 

A.G.A. notes that DOI has recently released its draft proposed five year OCS 
leasing schedule for submission to the governors of affected states for review. The 
specific program under consideration provides for the offering of an average of five 
sales a year with a combination of offerings in the Gulf of Mexico and frontier 
areas. A.G.A. supports this combined approach emphasizing frontier area develop>- 
ment accompanied by continued active lease sales in the Gulf of Mexico. We do 
reiterate our belief that six sales a year would be a more optimal figure for reasons 
previously discussed, and further we note DOE has recommended that an average of 
seven lease sales per year be held. Also, we express concern regarding the additional 
delay in leasing in the Georges Banks area which has great oil and gas potential for 
the New England region, which is almost four times as dependent on foreign oil as 
is the rest of the United States. 

DOI also indicates that two contingency Gulf of Mexico sales are also included — 
one in 1981 and the other in 1983. This is a new concept in which subsequent events 
will determine whether these sales will be held as indicated, deleted, or postponed 
until a later date. 

The issue of contingency sales raises the problem of the cost to industry of 
frequently changing lease sale schedules. A consistent, long range schedule permits 
industry to program seismic reviews, drilling activity, funds for lease sales and all of 
the other long lead time activities. Changes in these long-range plans causes repro- 
gramming of resources with a resulting decreeise in the efficiency of industry 
operations. As the nation seeks to maximize the productivity of the oil and gas 
exploration and production effort, the government efforts should be directed at 
allowing the industry to operate at peak efficiency. 

On behalf of the American Gas Association and its member companies, I want to 
thank the the Committee for the opportunity to testify today. We would be pleased 
to answer any questions you may have. 



319 

Testimony of Carl H. Savit, Senior Vice President, Technology, Western Geo- 
physical Co., Houston, Tex., on Behalf of the National Ocean Industries 
Association 

Mr. Chairman, and ladies and gentlemen of the hearing panel, I am Carl H. Savit, 
of Western Geophysical Company, Houston, Texas. I appreciate the opportunity to 
comment on behalf of the National Ocean Industries Association (NOIA) on the 
continuing oversight hearings of the House Ad Hoc Committee on the Outer Conti- 
nental Shelf. This important hearing is one continuing step in America's successful 
offshore development process. It is a step I feel privileged to be taking with you. 
Privileged because I believe — as NOIA does — that inadequate and misleading infor- 
mation is one of the most insidious enemies of sound public decision-making. 

Unless the air is cleared of the myths, ignorance, or misconceptions that often 
surround offshore energy development, our nation will be severely weakened and 
NOIA believes this Committee plays an important part in this process. Although 
Western Geophysical Company is deeply concerned about America's energy future 
in the eighties and beyond, I join you today, not through my company affiliation, 
but in my capacity as a member of the Board of Directors of the National Ocean 
Industries Association. 

NOIA is the only national association representing all the various facets engaged 
in the development and use of ocean resources. NOIA's almost 400 members range 
in size from small businesses to large multi-national corporations. They are active 
in a wide variety of operations including: fishing offshore construction, salvage 
operations, air and marine transportation, oil and gas production and transmission, 
equipment supply, research, technical and consulting services, catering, deepsea 
mining, drilling and geophysical contractors, shipyards, financial services, such as 
banking and insurance companies, diving contractors, and others. 

Our association exists with the goal in mind of expanding the vital oceanic 
frontiers and utilizing this critical natural resource for the benefit of mankind. In 
the field of onshore, offshore and other marine construction, we represent world 
leadership, from design to management to construction of drilling, production and 
other marine platforms and vessels, to construction of piers, loading docks, subma- 
rine and land pipelines, and ship repair facilities. And, we are world leaders in 
diving technology. NOIA member firms are engaged in a wide variety of marine- 
related engineering and consulting services, industrial production, pollution control, 
resource recovery, design and engineering of offshore production and support struc- 
tures, ocean equipment design, and naval architecture. Some of our NOIA members 
are significantly involved in the commercial fishing industry. Geophysical contrac- 
tors, manufacturers, drilling contractors, and petroleum exploration and production 
companies, as well as research and technological development companies and serv- 
ice, support and supply companies are also NOIA members. Shipbuilders and other 
members of the transportation segment of the marine industries make up another 
percentage of the NOIA membership. Our annual budget is based on a dues struc- 
ture that allows a maximum of about IV2 percent dues contribution for any one 
company. 

In enacting Public Law 95-372 last year, the Congress with commendable fore- 
sight enunciated 15 findings, most of which are even more valid today than they 
were when written. The majority of those findings relate to the pressing national 
need to develop the energy resources of the Outer Continental Shelf. Even those 
findings that relate to the need to minimize the impact of OCS energy development 
on the environment, on other resources, and on state and local governments are 
directed to expediting development by providing avenues for the resolution of con- 
flicts. 

There is no room to doubt that the intent of Congress was to provide for the 
development of the energy resources of the Outer Continental Shelf in a responsible 
manner. Clearly, Congress did not intend that this Act would be used to impede or 
delay the critical process of finding new sources of energy and bringing that new- 
found energy to the shortage-plagued American public. 

Despite the clear intent of Congress, attempts are being made to use the Act to 
halt or to delay indefinitely much of the planned and projected exploration of our 
frontier areas, lawsuits and administrative objections have been repeatedly raised, 
almost invariably on procedural grounds. Rarely if ever has a serious substantive 
objection been put forth. 

At this moment plans exist within the Administration that, if implemented, will 
increase the opportunity for delay in the OCS leasing program. In the Administra- 
tion's program to establish a Department of Natural Resources, it is presently 
planned to separate the existing mechanism for administering OCS exploration 
permits and the subsequent leasing programs from the mainstream of technical and 
administrative expertise that now exists. In the new Department, these critical 



320 

functions would be submerged in a bureau devoted to the mangement of all marine 
resources. Within such an arrangement, the interest and motivation to develop 
energy resources would be subordinated to an interest in preservation of the envi- 
ronment. In view of our national energy crisis, a further tilt toward preservationism 
and away from energy production could well prove disasterous. 

At the regulatory level, the Department of the Interior has published proposed 
regulations that purportedly are intended to carry out the legislative mandate of 
the Act. In one part of those proposed regulations, section 252.6 and section 252.7, 
the Secretary gives himself the power to turn over to the states data that he has 
bought under contractual promise of confidentiality. He specifically exempts himself 
from the statutory safeguards of Section 26 of the Act with respect to data relevant 
to those Federal waters that lie within 3 miles of State waters. 

There are adequate provisions in the Act to make available all data that could 
possibly be needed by State officials to plan joint State-Federal leasing programs. 
There is no need to take the additional steps of sections 252.6, .7 that could, and 
probably would, be challenged in the courts as forbidden by the statute and which, 
in any event, would constitute an unlawful taking of private property without just 
compensation. 

It would appear that the Administration is attempting by regulation and other 
administrative steps to circumvent the intent of Congress not only with respect to 
program direction but with respect to such specifics as the protection of proprietary 
data and on-structure pre-lease drilling. 

There is little room to doubt that oversight by this Committee will remain 
necessary to ensure that the intent of Congress is carried out in the husbanding and 
development of our Nation's Outer Continental Shelf energy resources. 

I also want to make it abundantly clear that NOIA believes we must maintain the 
momentum of offshore development many concerned citizens have made in conjunc- 
tion with this Committee. NOIA as an organization, as a group of individual 
companies, and as many individual people such as myself have been a part of it. 
Our goal of offshore development with the highest environmental standards re- 
mains unchanged. 

However, at the same time other considerations of equal weight exist, NOIA urges 
offshore leasing decisions as well as regulatory actions be considered in the light of 
the total U.S. energy picture. 

Nothing exists in a pure form. All Americans must realize that some energy/ 
environmental tradeoffs are not only desirable, but inevitable and we believe this 
Committee will realistically face these issues. 

It is also vital that this Committee continue in the oversight of ocean develop- 
ment. Other countries are moving ahead in developing offshore oil and, I must add 
parenthetically, they are doing it with American technology and expertise. Norway 
is rapidly becoming an oil-exploiting country through the development of offshore 
oil, and Britain expects to be self-sufficient in oil in the 1980s through the develop- 
ment of North Sea Oil. 

Gentlemen, I want to again express my appreciation for this opportunity to meet 
with you today. We look forward to positive actions on these regulatory matters, 
and hope that the knowledge you have gained today will give insight to the difficul- 
ties involved in maintaining the Congressional intent of the OCS Law. 

The Chairman. Panel No. 2 is Mr. Henry A. Hill, manager of 
operations, CAGC Marine Region, North American Exploration, 
Continental Oil Co., and Mr. J. Donald Langston, vice president. 
Exploration Department, Exxon Co. 

Mr. Hill, if you will proceed. 

STATEMENT OF A PANEL CONSISTING OF HENRY A. HILL, 
MANAGER OF OPERATIONS, CAGC MARINE REGION, NORTH 
AMERICAN EXPLORATIONS, CONTINENTAL OIL CO. AND J. 
DONALD LANGSTON, VICE PRESIDENT, EXPLORATION DE- 
PARTMENT, EXXON CO., U.S.A. 

Mr. Hill. Mr. Chairman, members of the committee, I would like 
to confine my remarks to that part of the OCS that I know most 
about, and therefore, my discussion is mainly of the Gulf of Mexico. 
I would like to discuss the effect of the ever growing list of Federal 



321 

regulations on the oil and gas exploration and development activi- 
ties in the Gulf of Mexico. 

Since 1970, the cumulative action of these regulations has caused 
approximately a 1-year delay in the preparation for the sale and an 
additional 1-year delay in exploration and development activity 
following the sale. The effect of the amendments to the Outer 
Continental Shelf Lands Act will be to add additional delay to what 
is already a deteriorating situation. 

I will use the December 1970 Louisiana lease sale as a reference 
sale in this discussion. I have shown that in exhibit 1. This is 
appropriate because it occurred 1 year after the passage of the 
National Environmental Policy Act of 1969 and at a time when the 
OCS permitting and proration activities were administered with 
the assistance of the oil and gas regulatory agencies of the States 
of Louisiana and Texas. This sale also occurred just prior to the 
passage of the Coastal Zone Management Act of 1972. 

The tracts offered in the sale were nominated 13 months prior to 
the sale, and the sale was conducted on December 15, 1970. At that 
time, it was possible to drill within a month after the lease sale. 
The leases were awarded within 3 or 4 days after the sale, and 
wells were drilled immediately following the 20-day advertising 
period required for issuance of the Corps of Engineers blanket 
operations permit. Under these conditions, the industry drilled 404 
exploratory wells and 807 development wells on the 119 tracts 
leased out of the 127 offered. When we consider the mean point of 
the exploration cycle for this lease sale, the date from nomination 
to peak of exploration drilling was one of the more time-efficient — 
this was one of the more time-efficient sales conducted in the last 
10 years. Actually, that time was 31 months, from the time of 
nomination until we reached our peak of our exploratory activity 
on this lease sale. 

The time from sale date to mean point of the first 3 years of the 
exploration drilling is a measure of the efficiency of the Depart- 
ment of the Interior and the industry to find oil and gas. When the 
time of the mean point is calculated for the 1970 to 1975 sales, as I 
have done on exhibit 2, there is evidence of ever-increasing time 
losses caused chiefly by changes in the permitting procedures. In 
1971, the Supreme Court issued the first in a series of decrees 
awarding the disputed zone to the United States. At this time, the 
Federal agencies began to assume the exclusive administrative con- 
trol over the OCS regulatory procedures. Exhibit No. 2 does not 
include the regulations requiring exploration and development 
plans and state information procedures instituted in 1977 and 1978 
which have caused further deteriorations of this index of sale 
efficiency. 

I might say here that the reason we have difficulty working 
those into exhibit 2 is there is insufficient drilling to make a 
calculation of the peak of exploration activity in those 1976 
through 1978 sales. 

In exhibit No. 3, I have presented the Texas sale of June, 1973 in 
the same manner as the December 1970 sale. This is the first sale 
off Texas since the disastrous, almost nonproductive, sale of May 
1968. The mean point of exploration for this sale is 1.5 years. This 
is the last sale in which sufficient drilling data is available to 



322 

define the mean point. In addition, it was, for all practical pur- 
poses, a frontier sale for offshore Texas and could be a standard 
used to judge successful sales in other frontier areas. Nominations 
were requested 18 months prior to the sale, the leases were granted 
7 days after the sale, and 244 exploratory and 266 development 
wells were drilled. At contrast is sale 51 which we just held in 
December of last year, where it took 38 days after the sale to 
award the leases. Natural gas production began in 1978 and oil is 
being barged from scattered platforms until an oil pipeline can be 
constructed sometime in 1979. The 5-year gas and 6-year oil produc- 
tion target achieved in this sale is an ambitious standard by which 
future frontier sales should be compared. 

The efficiency achieved in the December 1970 and June 1973 
sales will be difficult, if not impossible, to achieve when the regula- 
tions required as a result of the amendments to the Outer Conti- 
nental Shelf Lands Act and the Coastal Zone Management Act 
become final. A month delay for one set of regulations, 90 days for 
another, may seem like smalltime delays, but when we multiply 
these by an average of 500 wells in a successful lease sale, it is 
obvious that the Outer Continental Shelf Lands Act amendments 
will not expedite the exploration and development of the Outer 
Continental Shelf. Sales conducted since 1975 are the first ones to 
feel the effect of the debate on the Outer Continental Shelf Lands 
Act amendments and it will take a year or more to document the 
slippage that has taken place. Of course, the standards achieved in 
the Gulf of Mexico could never have been accomplished if onstruc- 
ture drilling was required to define the resource potential before 
the lease sale. 

Now, I would like to make a few comments about further leasing 
in the Gulf of Mexico. The Gulf of Mexico is classified as an 
established area, having produced oil and gas for over 40 years. 
The oil production peaked at 391 million barrels per year in 1972, 
and the gas production has remained relatively constant at slightly 
less than 4 trillion cubic feet per year for the past few years. There 
is no doubt that the gulf will continue to be lower risk when 
compared to untested frontier areas, but is misleading to count on 
two or three productive sales per year for the next 5 to 7 years. 

We are already seeing evidence of deterioration of the quality of 
the sale offering. In 1970, almost all the tracts offered were being 
bid on the first time. In 1979, sales 58 and 58A, two proposed sales 
for 1979, will be made up of approximately 70 percent used, offered 
but unbid, rejected, or other than virgin tracts. Thus, although the 
number of sales, number of tracts, and the number of acres offered 
in the gulf may appear to remain constant over the next few years, 
the quality of the offering will most certainly decline. 

To further amplify that, in sale 47, which took place in 1977, 66 
percent of the tracts had been seen before; in sale 45, which is a 
1978 sale, 83 percent of the tracts had been seen before; in sale 51, 
a 1978 sale, 70 percent of the tracts had been seen before. 

With this in mind, it is advisable for the Secretary of the Interior 
to conduct four to six sales per year in the frontier areas. There is 
at least a 7-year wait from successful sale to production in frontier 
areas, and therefore it is important that exploration of these areas 
be moved forward as rapidly as possible. 



323 

It is my opinion that it is unreasonable to expect the amend- 
ments to the Outer Continental Shelf Lands Act to expedite the 
exploration and development of the Outer Continental Shelf. It is 
also a mistake to concentrate 30 to 50 percent of all future lease 
sales in the Gulf of Mexico. 

This concludes my written statement. I will be pleased to answer 
any questions. 

[The following information was attached to Mr. Hill's statement:] 



324 




d3iavno a3d a3-niaa sm3M dO a39wnN 



325 



M 



X 

UJ 



c 
o 

CO) ^ 

o .E o • 

;^ to -^ .E 

<»- • E 

3 • — C 

«S C O o 

c .E in *: 




o 

c 
_o 
XT 

a 

w 

o 
"a. 

M 

u 

% 

e 
e 
• 



T — I — I — I — r 



1—] — r 



m 

w 
O 
« 
>- 



-11/9 
-91 /U 
-9UZ 
-91/L 
-SZ/S 
-91 /Z 

-wyoi 
-w/s 

-W/£ 
-£//2l 
-2Z./9 

2Z/2I 
-Zl/S 



ONIlliya N0UVH01dX3 SUV3A £ ISdlJ JO 
31Va NV3IN QNV 31VS JO 31Va N33M139 3INI1 



326 



H 






" S "S 

o ^ o .~ o 



Uj 

-3 




CO 
0> 



0> 



<0 



to 






0» 



uBitivno d3d QBinma snnsM jo ussNnN 



327 

[From the Oil and Gas Journal. Mar 5, 1979) 

Why U.S. Independents Aren't Rushing Offshore 
(By Randy Sumpter, Gulf Coast News Editor) 

U.S. independents say the Government has provided more roadblocks than incen- 
tives in its efforts to involve small operators in Outer Continental Shelf exploration. 

Those hurdles range from a $35-million oil-spill-liability provision in the OCS 
Lands Act Amendments of 1978 to an aggravating Department of Interior habit of 
rejecting high bids. 

Some independents find those disincentives coupled with the traditional high 
costs of offshore operations bar them from the OCS — particularly frontier areas. 

Under the circumstances, "there just aren't any bargains left on the federal 
offshore," one independent claims. 

Instead of plunging big on OCS tracts, most independents are making prudent 
part-interest investments in federal leases in the mature Gulf of Mexico areas or 
sticking to state tracts off Texas and Louisiana. Bidding and leasing terms are more 
hospitable and the drilling environment less demanding on the state blocks, inde- 
pendents say. 

They add they're skirting high capital costs in those regions through farm-ins or 
by purchasing joint-venture interests. Few are seeking the role of operator. Most 
still are in the red or only now nearing the break-even point for their offshore 
investments. 

The independents' view 

Independents probably are responsible for about 10 percent of industry's total 
investment offshore, one operator estimates. 

Industry has paid total bonuses, royalties, and rents of $25.4 billion as of Jan. 1 
for OCS acreage alone, according to the U.S. Geological Survey. USGS says total 
value of OCS production reached $33.3 billion on the same date 

About 76 percent of the revenue went to the Government and 24 percent to the 
operators, USGS says. 

Less than 1 percent of roughly 10,000 independent operators have the economic 
resources to go offshore, estimates Lloyd Unsell, executive vice-president of the 
Independent Petroleum Association of America. 

He says IPAA isn't pushing any program with Congress to ease conditions for 
independents on the OCS. In fact, IPAA s offshore-leasing committee issued its last 
report in May 1971. 

"None of the average independents I know expects to or wants to compete out 
there (OCS)," UnselJ 3a\s. 

Government efforts 

Government has made attempts to equalize the bidding contest between inde- 
pendents and majors for OCS tracts. • 

The Department of Interior banned joint OCS bidding by major companies produc- 
ing more than 1.6 million b/d of crude, natural gas, and LP-gas on Oct. 1, 1975 
(OGJ, Oct. 6, 1975, p. 54). 

One of the OCS amendments provides an exemption to this ban. It allows joint 
bidding where high costs might prevent exploration and development. Chevron 
U.S.A. Inc. recently asked Interior for such an exemption for the joint federal-state 
sale in the Beaufort Sea in December, but the company's request was denied. 

Other efforts to attract independents offshore have included experiments with 
royalty and sliding-scale royalty bidding (OGJ, May 13, 1974, p. 32; and OGJ, Mar. 
13, 1978 p. 34). Sequential and oral-auction bidding methods, permitted under broad 
language in the OCS amendments, also are being considered to stimulate participa- 
tion by independents. 

Both methods are designed to cut the amout of money independents normally 
leave on the table during conventional (simultaneous) bonus bidding, according to 
Jeffrey Dorman, an attorney with the Justice Department's energy section. 

"There is some reason to suspect under current bidding systems that smaller 
companies face various capital constraints," Dorman says. They're having to scrape 
up large amounts of money for bidding and find much of it was for bids which didn't 
win leases. 

"I don't think there is any answer to getting the independent offshore. The only 
ones who get excited about the prospects are liberal politicians who want the 
independents to go out and compete with Exxon for elephants. 

"That's largely a pipe dream. It's like asking a hummingbird to go out in the gulf 
and scoop up a 3-lb fish just like a pelican would." 



328 

OCS hurdles 

The biggest hurdle for independents to overcome in the future? 

Unsell says it's "the $35-minion Uability for oil spills. With that kind of liability, 
insurance costs are unbelievable." 

Independents hava a long list of additional Government-related disincentives and 
other restraints to their competing on the OCS. They include: 

A need for higher and quicker returns on investment than majors. 

High front-end costs, starting with lease acquisition. 

A sporadic federal leasing achedule. 

Interior's practice of "bumping" (rejecting) many high bids. 

Additional staff requirements to meet Government regulations. 

"It has been suggested that a sequential bidding system might solve the problem. 
Under that arrangement, only a third or fourth of the bids would be opened the 
first day of a sale, allowing the companies to determine if they'd won or lost." 

The same principle would apply for an oral auction. 

"An auction system would let a company know instantaneously whether it had 
won or not," Dorman says. "But, an auction also might lower the bids on every 

tffict 

"The companies would only have an incentive to out-bid the highest bidder." 
The attorney general and Interior secretary are required by the OCS Act amend- 
ments to prepare an annual report evaluating new bidding methods, the bidding 
ban, and other measures and proposals to encourage competition. The first report is 
due Sept. 30. 

The results 

For the most part, independents active offshore say they haven't been enticed by 
the "incentives" supplied by the Government. 

And the small operator has found state tracts off Texas and Louisiana far more 
attractive than the OCS. , , . , , . 

"It's easier to work state lands because they re closer in, easier and cheaper to 
drill, and you're dealing at arm's length with people in Austin and Baton Rouge, 
IPAA's Unsell says. "The Federal Government just seems to make it more difficult 

than the states." ^ , , ^ j • 

Most to the independents which are moving into federal waters are doing so 
through farm-ins and joint-interest arrangements. Some established firms concede 
they were fortunate to have gone offshore earlier when conditions were more 
favorable and before operating costs skyrocketed. -, o t- i 

Among those are Mesa Petroleum Co., Amarillo; Louisiana Land & Exploration 
Co., New Orleans; and Forest Oil Corp., Denver. 

They credit much of their OCS success to an early start, and in some cases, to 
quick production from their first leases and to advance interest-fee payments from 
gas-transmission companies (which no longer are permitted by the Federal Energy 
Regulatory Commission). 

Mesa investments 

Mesa held a 5 percent interest each in Eugene Island Block 330 and East Ca- 
meron Block 270 when they were leased in 1970. Commercial discoveries followed 
within 4 months, and the fields were on stream 3 years later. 

"It was very important that we didn't have a long lag time for a return on our 
investment," J. K. Larsen, Mesa group vice-president, says. "Right now, if you 
bought a lease and discovered production, you'd be fortunate to get it on stream 
within 5 years. ,, 

"A more likely time frame would be 7-8 years. ,,o^o , • r *u 

Larsen blames new Bureau of Land Management and USGS regulations tor the 
longer production lead times. 

He says Mesa was able to parlay advance payments from transmission companies 
and its early successes into "a far greater investment than a company our size could 
have managed otherwise." ... i • ^Q'^n 

Larsen says Mesa has invested $254 million in lease bonuses alone since 19 /(J. 
That's bought the company an average 26 percent interest in 85 offshore tracts, all 
in the gulf and most on OCS acreage. 

Mesa holds an interest in 12 production platforms already on stream and U more 
which should be installed this year. 

The company's total U.S. offshore investment is about $555 million, Larsen esti- 
mates Mesa will realize only a $98-million gross return during 1979 on that total. 

"We've been offshore for 9 years," Larsen points out, "and our investment only 
now is starting to come back in meaningful numbers." 



329 

LL&E, Forest 

Forest has been active offshore since 1952, when it joined with several gas- 
transmission companies in its first bidding venture. 

"We got down there early with the backing of gas companies which didn't have 
the expertise," says Carl D. Hanson, Forest vice-president. 

He says the company holds a working interest or royalty override in about 
137,000 gross OCS acres. Most of the acreage is off Louisiana. Forest plans to drill 8- 
10 development wells on the tracts this year. 

It operates 26 production platforms in the gulf and plans to put two more on 
stream during 1979. Forest has a 25 percent share in about 500 MMcfd of gas 
production from the platforms. 

"We've had a couple of commercial properties in the gulf which have paid for our 
other ventures," Hanson says. "But it has paid its way, not made a lot of money. I 
can't see where the Government has helped us much." 

Among the most consistent independents bidding in OCS lease sales is LL&E. The 
company acquired its first offshore lease in 1962 and has bid in every Gulf of Mexico 
sale since. 

It holds 425,000 gross acres on the OCS, including tracts in Lower Cook Inlet and 
interests in three Baltimore Canyon blocks. 

LL&E Pres. E. L. Williamson says the company plans to spend one-third of its 
1979 exploration and production budget offshore. That could run $180-$190 million, 
depending upon how many OCS sales are held. 

'The spending will buy LL&E interests in 80 exploration and development wells — 
all but two in the gulf — and in eight production platforms scheduled for installation 
this year. 

"Government hasn't provided us with many incentives," Williamson says. "Slid- 
ing-scale royalty and joint-bidding bans have done little for LL&E." 

HO&M efforts 

Government incentives haven't had an impact on Houston Oil & Minerals Corp's 
offshore ventures, either, says Jim Floyd, general manager of the company's off- 
shore division. 

"The Government probably has provided more disincentives," Floyd says. He cites 
additional staff requirements to meet federal regulations as particularly worrisome. 

HO&M got into the offshore business during the mid-1970's and bankrolled 100 
percent of its first ventures. About one third of the company's production now 
comes from OCS and state tracts. HO&M holds a 100- percent interest in two 
production platforms and 60 percent in a third. 

It plans capital spending in excess of $50 million for gulf projects during 1979. 
That will include HO&M's interest in 15-20 wells on 160,000 undeveloped acres. The 
company also holds an interest with Phillips Petroleum Co. in four Baltimore 
Canyon tracts. 

"HO&M plans to expand its offshore activity, primarily in the gulf," Floyd says. 
"We believe we can make money out there, that's why we're willing to spend some." 

He typifies HO&M's offshore operations as "better than break even" and claims 
the company's exploration and production staff is due most of the credit. 

"The only way we can be competitive offshore with the majors is to have an 
evaluation process closer to what's in the ground," he says. "We don't cover as 
many prospects as the majors, but concentrate on only a few blocks. 

"On them, we give it our best." 

Farm-ins, state lands 

McMoRan Offshore Exploration Co. (Moxy), Metairie, La., is employing farm-ins 
to win a foothold in the gulf. 

Moxy announced a 3-year, $60-million joint venture Oct. 1, 1977 (OGJ, Nov. 21, p. 
74). It will serve as operator for three partners, pay 20 percent of drilling costs, and 
earn 30 percent interest. 

"In our opinion, this is the logical way for independents to get offshore," Andre V. 
Wogan, Moxy executive vice-president, says. "The front-end investment in bonuses 
has made it difficult for the companies involved to justify more 100 percent expendi- 
tures on farm-out tracts. 

"It takes a lot more capital to operate offshore — the traditional province of the 
majors. They've got the money, particularly when it comes to bidding in tracts at 
large sums. 

"That makes many prospects a break-even situation for independents." 

On a discounted cash-flow basis, a 12-15 percent rate of r.eturn on offshore 
investments probably would satisfy most majors, adds Dick Volk, president of 
Energy Reserves Group Inc., Wichita, Kan. 



330 

Independents need more— between 15-18 percent, depending on the type of pros- 
pect and location. ^ ^ ^ » u • 4. *. 

"I don't see any real incentives or disincentives from Government, he pomts out. 
"It's very competitive out on the OCS and it takes front-end money to stay m the 

"It hurts a small company to put up that much cash for front-end costs." 

In the past 5 years, ERG has put about $24 million of a $150 million capital 

budget into offshore operations. Volk says the results haven't been "too lucrative, 

but we're developing the acreage we hold now." 

ERG holds interests in 35,351 gross OCS acres and 21,996 gross state acres, most 

in the gulf. 

State waters 

Volk prefers operations on state acreage. , , ^ ^ 

"In state waters, we can do well," he says. "It's not as competitive, and the states 

don't give you a hassle. They don't try to second guess you and reject bids like 

Interior. , , ., . , > j u 

"If you paid the minimum, the U.S. Government doesn t think you ve paid enough 

and rejects the bid." ,,.,,, t-, o t-v i >- 

"Bid bumping" by Interior helped convince Mitchell Energy & Development 

Corp., Houston, to abandon the OCS. , ^. u a 

"This past year, we bid on an OCS tract off Texas that was both a bonus and 
escalating royalty offering," says Charlie Eldridge, Mitchell Energy s exploration 
manager. "Our bid was rejected. „ 

"We bid on the same tract once before. In both cases, we were the only bidder. 

Mitchell holds no OCS acreage now, Eldridge says, but is active in state waters, 
particularly off Texas. Sales are more frequent in Texas state waters, and there are 
fewer restrictions on drilling and qualifying for bidding, Eldridge says. 

Mitchell has an interest in 96,000 acres off Texas and in state bays and inlets^ It 
holds an average 50 percent interest in five fields in Texas waters, all of which it 
operates. Three have platforms; two are close enough to the coast to be produced 
through wellhead-to-shore pipelines. 

What's needed • . uj 

Most independents aren't certain the Government's future experiments with bid- 
ding will have any impact on them. They do have specific suggestions for improving 

competition on the OCS. , j ^ i c* ki„ tu^ 

erg's Volk says higher prices for oil and gas are needed to make protitabie the 

development of smaller reservoirs on the OCS. 

"You need prices ranging from $2.75 to $3/Mcf for new gas, he says. 

Forest Oil's Hanson agrees. . ..u -4. ^- " u^ 

"There's many things the Government could do to improve the situation, he 
says. "The biggest would be better gas prices." 

Others say more sales are needed. ,, , t "rri, 4. .1^ „„f 

"The Government needs to hold more sales," says Mesa s Larsen. That would cut 
some of the competitive bidding for tracts. There are so few plums that some 
companies get carried away on front-end bonuses for those that are ottered. 

The Chairman. Thank you, Mr. Hill. Mr. Langston? 

Mr Langston. I would like to point out to the committee that 
although we are sitting as a panel, we do represent two different 
companies and we might have different answers on the same sub- 

iect 

I am Don Langston, vice president of exploration for the Exxon 
Co USA., and we very much appreciate having the opportunity 
to present our views concerning the regulations currently being 
promulgated to implement the OCS Lands Act Amendments ot 

1978 

It is certainly in the public interest for governmental agencies to 
solicit industry's opinions and advice concerning proposed regula- 
tions on such complex issues. It is also in the national interest tor 
congressional oversight groups, such as yours, to make sure the law 
and its intent are preserved in the final enabling regulations, 
orders, and permits. 



331 

My company has been involved in offshore oil and gas operations 
for over 30 years. We have worked in every OCS area that has 
been opened up for exploration in the United States and, I might 
add, many others around the world. I hope you will keep this 
experience in mind and try to understand our concern over the 
serious problems that inappropriate regulations will cause our in- 
dustry, the Federal Government, and ultimately, the American 
public. 

We have two major concerns: The proposed regulations tend to 
defeat the primary purpose of the amendments, and the proposed 
regulations frequently go beyond the scope and intent of the law 
and, occasionally, are in direct conflict with it. 

Many of the regulations being proposed ignore a stated primary 
purpose of the amendments, which is to, "Establish policies and 
procedures * * * which are intended to result in expedited explora- 
tion and development of the Outer Continental Shelf." Some of the 
regulations we are currently reviewing establish complicated, un- 
necessarily detailed procedures for leasing, exploring, and develop- 
ing the Nation's offshore resources that can only lead to substan- 
tial delay and inefficiency. 

On March 5, 1979, Crandall Jones, who is manager of our 
Alaska /Pacific division, testified before a DOI hearing on proposed 
revisions to 30 CFR 250.34 and 252. I have attached a copy of his 
testimony to the text of my comments and request that they be 
included in the record. 

The Chairman. It will be included in the record directly after 
your testimony. 

Mr. Langston. Let me briefly summarize the points Mr. Jones 
brought out concerning these proposed regulations. 

Section 250.34, dealing with exploration plans and development 
and production plans, goes well beyond the scope and intent of the 
amendments. It contains requirements that cannot be found in the 
OCS Lands Act amendments. For instance: It imposes deadlines for 
submitting exploration plans; it requires exploration plan detail far 
beyond what is reasonable, necessary, or useful; it requires develop- 
ment and production plans in all areas of the OCS, while the 
amendments specifically exclude the Gulf of Mexico; it calls for 
environmental reports to accompany exploration or development 
and production plans, a duplication of effort coming in the wake of 
prelease and predevelopment environmental impact statements. 

The proposed revisions to section 252 of the regulations ignore 
section 26 of the amendments, which provides that confidential 
information may not be transmitted to affected States without the 
lessee's permission. Additionally, the revisions clearly conflict with 
this section of the amendments which specifically forbids sending 
confidential data to the States prior to a lease sale. 

Now, I would like to discuss the proposed revisions to 30 CFR 
Part 251 which bear on geological and geophysical exploration in 
the OCS. The change proposed for paragraph 251.3(1), which would 
permit prelease, onstructure drilling, has created the greatest po- 
tential threat we have seen so far to the amendments' original 
intent and purpose. 

You will recall that early versions of H.R. 1614 and S. 9 permit- 
ted the Secretary of Interior to authorize geological and geophysi- 



49-118 0-79-22 



332 

cal explorations, including core and test drilling. However, the 
phrase about core and test drilling was dropped from the Senate 
version by unanimous consent and from the House bill by a vote of 
328 to 77. Elsewhere in section 11(g) of H.R. 1614, the Secretary 
was specifically authorized to allow onstructure drilling; however, 
this provision was deleted from the conference report that was 
subsequently ratified by both Houses. Surely it must be apparent 
with this brief history that Congress did not intend to give the 
Secretary authority to conduct onstructure drilling. 

Prelease onstructure drilling will create a two step process. 
First, there will be a period of exploratory drilling prior to the 
lease sale, followed by another period of normal exploration and 
development. This process bears a striking resemblance to dual 
leasing a proposal that was considered and subsequently rejected 
by Congress. Furthermore, permitting oil and gas exploration drill- 
ing on Federal lands that are not under lease is tantamount to 
authorizing Federal exploration, another concept which was consid- 
ered and eliminated from the OCS Lands Act amendments 

The Department of the Interior has indicated that prelease, on- 
structure drilling will improve efforts to locate untapped petroleum 
resources improve its ability to estimate the undiscovered hydro- 
carbon potential of the OCS, and provide a basis for planning to 
meet future energy needs. Exxon does not agree with these conclu- 
sions Prelease, onstructure drilling will not greatly improve the 
DOI's ability to meet its objectives of providing timely and orderly 
resource development, protecting the environment, and receiving 
fair market value for leased resources because, one, one well 
cannot evaluate most structures and will result in inaccurate esti- 
mates of potential; drilling one structure in a basin is a partial 
evaluation and can be very misleading when applied to other struc- 
tures in the basin; a dry hole could result in delay of leasing and 
therefore exploration of an entire area; it does not take advantage 
of the varying geologic hypotheses that are developed by different 
companies and the attendant broader exploration evaluation of an 

Therefore, we strongly believe that the proposed regulations for 
part 251 should omit the language permitting the Secretary to 
authorize prelease, onstructure drilling. The legislative history of 
the amendments clearly show that onstructure drilling was not 
Congress intent. In addition, the delays caused by onstructure drill- 
ing will defeat the primary purpose of the amendments. 

Many of the proposed regulations we have reviewed thus tar 
have departed substantially from the intent and purpose of the 
amendments. Therefore, we become increasingly concerned about 
what may be in store for industry from regulations still in the 
drafting stage, especially the regulations which will administer the 
new leasing systems. Representatives from Exxon and other compa- 
nies, both large and small, have testified numerous times that the 
traditional cash bonus system will permit development of the 
greatest amount of reserves in the most rapid and efficient 
manner. We strongly urge that the alternate systenis be employed 
cautiously and at a relatively low level. A reasonable and simple 
approach must be taken toward administration of these systems; 
otherwise, resource development will suffer. 



333 

We see an increasing number of problems arising between indus- 
try and Government agencies. Securing permits becomes a more 
lengthy process, while the number of reports and the amount of 
detail required constantly increase. Industry's recommendations 
are frequently met with suspicion; we are criticized for lack of 
diligence. An adversary relationship seems to have developed be- 
tween various Government agencies and the oil industry. 

This is caused, in part, by the flood of detailed, complicated, 
time-consuming regulations, whose purpose seems more to confuse 
than regulate. We urgently need simple regulations that are under- 
standable and easy to follow and administer. The regulations 
should not be so detailed that they omit any latitude for judgment. 
An efficient exploration program must have flexibility, but the 
current trend in regulations is eliminating this flexibility. 

Some of the proposed regulations unquestionably impose major, 
new recordkeeping or reporting requirements on business and will 
have a substantial economic effect on an individual industry. 
Therefore, they satisfy two criteria for defining a significant regu- 
lation in 43 CFR part 14, authorized under Executive Order 12044. 
A regulatory analysis should be prepared for such significant regu- 
lations, as mandated in the Department of the Interior's own regu- 
lations. 

We continue to hope that ours and industry's views on OCS 
exploration will be considered. Yet, the 5-year lease sale schedule 
released last Friday appears to ignore industry input. We speak of 
our concern about delay. Yet, the new schedule delays each of the 
10 sales that were common to the previous schedule by an average 
of 6 months. Industry was asked to rank the OCS basins by poten- 
tial, presumably so that the high potential areas may be evaluated 
sooner rather than later. Judging from Exxon's basin ranking, 
from comments Bob Nanz with Shell made before this committee 
in December, and what has been published of industry's basin 
rankings in the past, this new sale schedule was formulated with 
little concern for basin potential or for industry's recommenda- 
tions. 

The U.S. oil industry has the technology and resources to explore 
the Nation's offshore areas in an environmentally sound and expe- 
ditious manner, and remains the best exploration tool the Federal 
Government has for evaluating and developing our Outer Conti- 
nental Shelf. The need was never greater, yet the efficiency of the 
industry is being seriously eroded by the emerging regulatory 
system. The spirit of cooperation between industry and Govern- 
ment must be restored. 

We thank you for this opportunity to present our company's 
views and stand ready for questions. 

[The following material was supplied for inclusion in the record:] 

Testimony by Crandall D. Jones, Manager, Alaska/Pacific Division, Exxon 

Co., U.S.A. 

testimony on proposed revision of 30 CFR PARTS 250 AND 252 

Good morning. My name is Crandall Jones. I am manager of the Alaska/Pacific 
Division of Exxon Company, U.S.A. (a division of Exxon Corp.). I appreciate this 
opportunity to discuss these proposed regulations in a public hearing such as this. 
We hope you will have hearings on future regulations such as 30 CFR 251, but also 
ask that you please provide more response time than was allowed for these present 



334 

hearings. Today I will speak to several very important points we would like to 
make. We will submit detailed comments by March 16. 

We have two great concerns about these proposed regulations. First, and foremost, 
they clearly conflict with, or go well beyond the scope and intent of the OCS Lands 
Act Amendments of 1978. Our second concern is that the proposed regulations are 
inconsistent with the primary stated purpose of the OCS Lands Act Amendments 
which is to expedite and facilitate the development of our OCS resources while at 
the same time safeguarding the environment to the maximum extent possible. We 
strongly feel that this primary purpose will not be fulfilled if these regulations are 
promulgated in their present form. There is no way that a reasonable person 
acquainted with OCS operations can conclude that expedited exploration and devel- 
opment will result from these complicated procedures. In actual fact these proposed 
regulations will impede industry activity in the OCS. During my testimony, I will 
highlight several revisions or modifications to the proposed regulations which must 

First let me say that we believe the proposed regulations are Significant Regula- 
tions under the criteria set forth under Executive Order 12044 and 43 CFR Part 14. 
One of these criteria (Part 14.3) is that a Significant Regulation "imposes major new 
record keeping or reporting requirements on businesses." A Significant Regulation 
is also one which would "have a substantial economic impact on the entire economy 
or on an individual industry." Both criteria are clearly applicable here. 

Now I would like to highlight several specific sections of the proposed regulations 
which are the primary bases for our two major concerns. , . . t. , 

Parts (i) and (ii) of Section 250.34-l(a)(4) impose deadlines for submitting Explora- 
tion Plans on both new and existing leases. These regulations would violate the 
rights granted to lessees under leases previously issued. Also imposition of such 
deadlines by regulation or lease stipulation would go beyond the terms and intent of 
the law Section 11(c) of the Act forbids a lessee from commencing exploration until 
a plan is submitted and approved; it does not say a lessee must submit a plan by a 

It is our view that the Exploration Plan called for in the Amendments should be a 
short, simple description of an operator's planned activity on a group of leases in a 
given OCS area over a given period of time. , t. , .,• r.. • i j 

Amendments to the Act specifically require that the Exploration Plan include, 
among other things, "the general location of each well" [Sec. 11(c)(3)(C)] proposed in 
the plan However the proposed regulations [250.34-l(a)(l)(iv)] call for the approxi- 
mate location * * * including surface and projected bottom hole locations of each 
directionally drilled well." This clearly goes beyond the requirements of the Amend- 
ments and beyond any reasonable requirement for an Exploration Plan. As we 
explore a prospect, information gained from each new well changes our geologic 
interpretation of the area. Locations for subsequent exploratory wells must be made 
based on a current rather than an initial interpretation. Therefore, it is essential 
that the Exploration Plan allow as much flexibility as possible in describing the 
location of exploratory wells. We also strongly urge language be added to the 
regulations providing that a plan require modification and resubmittal only when 
significant changes occur. Without proper flexibility, we envision great delays 
caused by frequent Exploration Plan modifications and ensuing repetition of the 
Federal Consistency Certification procedure. r< i *■ 

In order to be most helpful to the Coastal States and communities, an Exploration 
Plan should discuss the amount and type of equipment and manpower to be used 
and the location and nature of land support facilities. Such information as the exact 
location, total depth, and technical specifications for actually drilling the well or 
wells should not be required in the Plan but should be a part of the Permit to 
drill" application. , . 

The requirement that an Environmental Report accompany each Exploration 
Plan is not a provision of the OCS Lands Act Amendments and is beyond their 
intention This report is justified in the Supplemental Information section based on 
the premise that the Amendments require the Secretary to make decisions on the 
environmental impact of exploration. Yet the Secretary has, at this point already 
had the benefit of an exhaustive pre-sale Environmental Impact Statement tor the 
area required by the National Environmental Policy Act. To cal for additional 
detailed environmental data during the exploration phase will lead to duplication ot 

effort and wasted manpower and time. t^ , (. 

Neither do the Amendments require an Environmental Report for a Development 
and Production Plan. Nor is one necessary. The Secretary is required at least once 
in any area or region, to declare approval of a D and P Plan a major Federal action, 
which of course requires another Environmental Impact Statement. Here again, an 



335 

Environmental Report accompanying all Development and Production Plans is du- 
plicative and a waste of effort. 

Paragraphs (m) of 250.34-1 and (n) of 250.34-2 both permit the Director to "au- 
thorize and direct the lessee to conduct such geological, geophysical, or other sur- 
veys" he feels might be necessary to evaluate activities under an Exploration or a 
Development and Production Plan. These provisions should be deleted because they 
go beyond the scope and intent of the law. 

Section 250.34-2, which covers Development and Production Plans, provides at the 
outset that no development or production may be commenced on a lease "in any 
area of the OCS" until such a plan has been submitted and approved. Yet Section 25 
of the Amendments specifically excludes the Gulf of Mexico from this requirement. 
And the Conference Report, in its discussion of this requirement in Section 25, 
reiterates that it "' * * does not apply to leases, old or new, in the Gulf of Mexico." 
[page 115, Report No. 95-1091]. The wording of this regulation is clearly in conflict 
with the new statute as well as the expressed intent of Congress. 

I would like to now comment on 30 CFR 252.7 which deals with confidential data 
made available to affected States through the OCS Oil and Gas Information Pro- 
gram. This section of the proposed regulations appears to ignore Section 26(c) of the 
Amendments, which provides that any regiilations issued by the Secretary "shall 
include a provision that no such information will be transmitted to any affected 
State unless the lessee, or the permittee and all persons to whom such permittee 
has sold such information under promise of confidentiality, agree to such transmit- 
tal." Section 252.7 must be changed to include this requirement that the lessee 
agree to any confidential data transmittal to the affected States. 

Parts (i) and (ii) of paragraph (a)(1) of 252.7 further provide that the Governor 
may designate an official to receive privileged or proprietary data and information, 
after receipt of nominations for leasing areas within three miles of the seaward 
boundary of a coastal State. However, Section 26 of the Amendments specifically 
states that a Governor may designate "an appropriate State official to inspect * * * 
privileged information." And it further states "that no such inspection shall take 
place prior to the sale of a lease covering the area." These proposed regulations 
must be rewritten. The amendments obviously intended for the States to have only 
the right to inspect, not to receive privileged information. The language of the 
proposed regulations should be changed to track the law exactly so there can be no 
misunderstanding. And any such inspection by the States is specifically forbidden 
prior to a lease sale. The right to keep proprietary data confidential is paramount if 
a competitive climate is to be maintained. 

We appreciate the opportunity to offer what we feel are constructive comments 
regarding these proposed regulations. The need to maintain an open dialogue be- 
tween industry and government was never more important than it is today. 

However it should be clear that we are alarmed about the proliferation of regula- 
tions affecting our industry. The problem areas in the proposed regulations that I 
have outlined today, and which we will expand on in our written comments to be 
filed March 16, must be corrected. 

Thank you. 

The Chairman. Thank you, Mr. Langston. 

Mr. Hughes? 

Mr. Hughes. Mr. Langston, do you have a copy of section 11(g) of 
1614? 

Mr. Langston. No, I do not. 

Mr. Hughes. Are you familiar with the language of that? 

Mr. Langston. No, I am not. 

Mr. Hughes. Well, then, how can you make the statement, "Else- 
where in section 11(g) of H.R. 1614, the Secretary was specifically 
authorized to allow onstructure drilling"? 

Mr. Langston. We are saying that it was in and then was taken 
out. 

Mr. Hughes. You are saying that elsewhere in section 11(g) of 
H.R. 1614, the Secretary was specifically authorized to allow on- 
structure drilling. My question is: Have you ever seen section 11(g)? 

Mr. Langston. Yes, I have. Congressman Hughes. 

Mr. Hughes. What does it say? 

Mr. Langston. Would you please read the rest of that sentence? 



336 

Mr. Hughes. I am asking you, what does it say. If you have read 
it, what does section 11(g) of 1614 say? 

Mr. Langston. I am sorry; I cannot tell you. 

Mr. Hughes. Well, I can tell you what it says, because I was the 
author of the section. 

Mr. Langston. All right. 

Mr. Hughes. It requires the Secretary of the Interior one time to 
offer onstructure drilling permits in the private sector; it mandated 
it. You are saying it did not? 

Mr. Langston. I am saying it did not. 

Mr. Hughes. Well, I am saying you are in error. 

Mr. Langston. Well, I am not sure your section got passed by 
the Congress. 

Mr. Hughes. Well, I can tell you it did get passed by the Con- 
gress, as a matter of fact, because I argued the section on the floor 
of the House. It was in the bill when it reached the conference 
committee. Sir, you are absolutely wrong on the issue; it is as 
simple as that. 

What was eliminated from the conference report was the man- 
date that the Secretary, one time, try onstructure stratigraphic 
drilling. That was what was eliminated, and it was eliminated on 
the condition that we go back to the existing statutory language 
which, it was felt, gave the Secretary the authority to offer on- 
structure drilling. That was deemed to be sufficient, and that was 
the compromise that was struck in conference. 

Mr. Langston. You will have to agree then, sir, that any basis 
for his offering onstructure drilling in the private sector must be 
embodied in the OCS Lands Act of 1953, but not in this bill. 

Mr. Hughes. Well, it was the understanding at that point that 
we would go back to the existing language. I am telling you what 
the legislative intent was. You are talking to members here who 
were part of that conference committee and participated in the 
debate that took place in the conference. I do not know whether 
you were present at the conference committee or not. Were you? 

Mr. Langston. No, I was not. 

Mr. Hughes. I was, and I participated in that debate. One of the 
representations that was made by the Secretary at that time as we 
debated that subject, and it was one of the thorniest problems that 
we dealt with, was that the Secretary had such authority. Under 
the circumstances, it was felt that there was no need to continue 
debate on that issue. 

Mr. Langston. You would agree, though, that just because the 
Secretary thought he had the authority does not make him have 
the authority. That is a matter for the courts to decide, I suppose. 

Mr. Hughes. That is a long way from what you said earlier. You 
indicated that this committee intended that the Secretary not have 
the authority, and that is not accurate. 

Mr. Langston. I did not say "this committee"; I said the Con- 
gress. 

Mr. Hughes. Well, this committee is the committee that wrote 
the legislation. We went to Congress with it and worked out the 
differences between the House and Senate versions, and I would 
say that that is a pretty good indication of what our intent was — 
what I just described to you. 



337 

Mr. Langston. I will not deny what your intent was. 

Mr. Hughes. No, no; what the intent of the committee was. 

Mr. Langston. Or even the majority of this committee; but it 
was not in the vote of the House. 

Mr. Hughes. Aside from that issue, the industry does not have to 
accept the permit. Nobody is going to force a permit upon Exxon or 
any other company that is not interested in prelease exploration on 
the Outer Continental Shelf. The only thing the Secretary is going 
to do is offer the permit; if you do not want it, you do not have to 
take it. 

What is Exxon and some of the other companies afraid of that 
they are going to be offered something? 

Mr. Langston. You know. Congressman Hughes, as well as you 
are sitting there, that if one of these is drilled by anybody — and I 
do not have control over everybody — we cannot afford, if we are 
going to be competitive, not to be in it. That is my fear; somebody 
will accept it. 

Mr. Hughes. I believe that, too. I believe that there are a lot of 
companies out there that are interested in securing permits for 
onstructure drilling. 

Mr. Langston. That is my fear. 

Mr. Hughes. I know that that is your fear, and it is also your 
fear, I suspect, that some of these smaller companies are going to 
be able to participate a little more if onstructure stratigraphic 
drilling is offered, and that is one of the reasons why, first of all, 
this section was made available and that is why it is so important 
for the Secretary to move ahead with published regulations. 

Mr. Langston. There may be people who will do it. I would say 
that the vast majority of the oil industry and the people I have 
talked to are very concerned with this step. It only takes one. 

Mr. Hughes. I understand that. You know, it has only been the 
major oil companies that have expressed their distress over this 
permit. As you know, we presently sink cost wells offstructure, and 
I am satisfied that not only will the independents participate in 
this process, but Exxon will participate in the process; they will 
have to, because I believe that Exxon would not want any indepen- 
dents to get any information that they could not secure for them- 
selves. 

Mr. Langston. You are absolutely right. 

Mr. Hughes. I believe that, too. Thank you, Mr. Chairman. 

The Chairman. Mr. Forsythe? 

Mr. Forsythe. Thank you, Mr. Chairman. I thank the panel. I 
am going to roam around here, I suspect, a little bit. 

One of the issues that was discussed last week in the hearing was 
this question of due diligence. As I understand it, I think it is clear 
that the responsibility for regulation in this area rests with the 
Department of Energy. However, the Department of the Interior 
has stated that they were putting terms in leases at this time 
having to do with due diligence. 

I would appreciate it if each of you would comment on the status 
of this situation. Do you believe that it is proper that due diligence 
be handled in leases without regulations having been promulgated 
and that a lease which demands that drilling will proceed within 2 



338 

years of the sale, when you have got a 5-year lease, is within your 
understanding of the way it should work? 

Who wants to start? Mr. Hill? 

Mr. Hill. Mr. Forsythe, I understand that they are considering a 
system which would require us to file an exploration plan in 2 
years, which they would have the opportunity to approve. It sug- 
gests that if we do not commit to drilling a well in 2 years, then 
they would not approve a plan. 

I believe we have a 5-year lease; we have 5 years to do what we 
need to do on that lease. If you look at exhibit No. 1 where I 
showed the 1970 lease sale, you can see that it is almost 2 years 
before we have peaked on the exploratory cycle. So at that point in 
time, I think the industry has been diligent, and then it takes a 
long time to analyze, to absorb, to rehash, and to reconstitute your 
ideas to see what you plan to do next. 

That is why there is a trickling of exploratory wells spread out 
over the remaining 3 years of that project. To be specific and to 
commit myself to drill a well in 2 years, I believe I have got a 2- 
year lease then, not a 5-year lease. I would like the opportunity to 
use the full term of the 5-year lease to analyze all the opportunities 
that exist on that lease and surrounding that lease. 

Mr. Forsythe. Mr. Langston? 

Mr. Langston. I do not think anyone can argue against due 
diligence. That is what we buy the lease for; we should proceed 
forward with exploring an area. But you do not explore an area by 
lease; you explore by prospect. One prospect might contain 10 
leases, or it might contain several pieces of different prospects. 

So to say you are going to drill on a specific lease at a particular 
time ignores the geologic facts of life. Now, they are asking us — it 
is in the proposed regulations — we will have to file an exploration 
plan in 2 years. Now, if this plan consists of the stuff we have got 
to go through today in filing an exploration plan to get out here 
and drill, the whole industry is just going to be eaten up with 
environmental reports and specifications of rigs; you have to 
commit what rig you are going to drill this thing with. 

There is no question that you can file this enormous document; 
what good is it going to do? In my opinion, he cannot take your 
lease away from you, because you have got a 5-year lease; that is 
what the law gives you, a 5-year lease. 

So we are fussing over something here, and we could all agree 
that we ought to proceed to explore. They want to mandate and 
help you decide how you are going to explore; that is, intolerable. 

Mr. Forsythe. Well, I presume that there may be some think- 
ing — and God forbid that I could really read the minds of the 
bureaucrats downtown — that there will be a shift to some other 
method of leasing that does not have front-end money. I believed 
that the bonus is one of the best incentives to guarantee that 
something will happen on a lease, is it not? 

Mr. Langston. I think so. 

Mr. Forsythe. If you get a lease without putting up a large 
bonus and can wait until you actually begin production, you can 
kind of wait around. 

Mr. Langston. Look at the Baltimore Canyon. When we were 
finally turned loose after litigation and permitting, which is less 



339 

than a year ago, there were 11 wells drilled, 1 discovery, and there 
are 6 rigs operating out there. You know, what is due diligence? 

If you have got front-end money on a thing, you can get on it and 
you process it. That is one of the key parts of front-end loaded 
bidding. 

Mr. FoRSYTHE. We both agree then that regulations on due dili- 
gence, in effect, actually could create less opportunity to produce 
energy than without them, and we would rest at the end of the 5 
years and if you have not then done something, the extension of 
the lease is up. 

Mr. Langston. I think your lease normally has a 90-day drilling 
clause in it. If you are drilling over the term of the lease and it is a 
5-year term, you have to not cease operations for more than 90 
days in between. That is a very expensive way to maintain a lease; 
you just do not do that. 

There is no way you can get on production in these frontier areas 
in 5 yea^s. So there has got to be cooperation between the Depart- 
ment of the Interior and the industry in the decision of what due 
diligence is and what the development plans are; that gives you 
time to design and construct and put the equipment out there 
before you can get on production to hold that lease by production. 

Mr. FoRSYTHE. I had previously asked the gas industry about the 
5-year lease schedule issued by DOI. I do not believe I need to 
repeat what happened last week. However, what is your reaction to 
the lease schedule that was published last Friday, and what effect 
is it going to have in the production of energy over the next 5 
years, as compared to the DOE recommendation of 7 sales a year? 

Mr. Hill. As I have indicated, I do not think we can produce the 
energy we need in this Nation unless we speed up and stick to six 
or seven sales per year. I also have some real problems with an 
optional sale. Does that mean I should get ready for it or I should 
not get ready for it? Do I wait until it has been decided a month 
before it is going to happen or do I sit back and hope that I am 
nearby and can do something about it? 

It is going to be a very difficult plan for that type of a lease sale 
schedule. It should be a firm schedule. It should be planned to 
supply the energy, not planned to take care of the bureaucratic 
workload, let us say. Let us plan it because we need energy, and we 
need energy from these frontier areas very rapidly. We need to get 
on with those areas because of that 6- to 7-year delay. 

We are talking about 1989 to 1995 energy now in some of these 
frontier areas, with that lease sale schedule. 

Mr. FoRSYTHE. Before I turn to Mr. Langston, let me have your 
reaction, Mr. Hill, on Mr. Langston's suggestion that the lease 
schedule should be the sole prerogative of the Department of 
Energy. 

Mr. Hill. I am comfortable with that, if that is the way we go; 
yes. 

Mr. FoRSYTHE. You support that, as opposed to only recommen- 
dations from DOE to Interior? 

Mr. Hill. It should be in one office to make that plan. 

Mr. FoRSYTHE. Mr. Langston? 

Mr. Langston. Well, I guess I could call it no plan if we started 
now, but that might be a little drastic. It is not the number of lease 



340 

sales that is really important; it is the quality of the acreage they 
put up. Where is the potential? 

They asked the industry to submit rankings of the basins. We 
diligently worked on this thing for a couple of months to get it in, 
and then 2 months later they came out with a plan which would 
appear to have taken in all the environmental concerns but none 
of the potential concerns. 

I just cannot imagine why it takes 2 ¥2 years from call of nomina- 
tions to get a sale order. You know, they have got a nice little 
schedule here, but as Hank says, it looks like it is for bureaucratic 
convenience more than it is to try to explore the OCS. 

The last one, for example, was Saint George. Now, I know the 
Saint George Basin is looked at as great fish spawning grounds and 
there are concerns, but some of us feel that it does have high 
potential. By this schedule, from this draft, it is 6 years to sale and 
6 years to study. They even say in the thing that they probably will 
have to postpone it, because they will not have the studies done. 

Even in the Gulf of Mexico, as I indicated, all of their lease sales 
have slipped from the 1977 schedule by approximately 2 to 4 
months. Look at the 1980 sale schedule. What are we going to do 
the first half of the year in 1980? That is the first part of this 
program; the first sale in 1980 is in September and we have all 
four sales in that year — September, October, November, and De- 
cember. 

I do not see how industry or they can hold sales in that kind of a 
sequence, all piled at one end. They are getting themselves room to 
do their studies and their environmental impact statements. 

Mr. FoRSYTHE. I think that before I forget it, I should clarify the 
legislative history of onstructure drilling. 

The House bill is where the mandate was, and that was stricken 
in the conference report. However, it was still left in the definition 
of the bill, so there is confusion because it was not deleted com- 
pletely. But that does not take away from your questions and 
problems with onstructure drilling per se. I just wanted to be sure 
that the argument was not on misinformation as to what did 
happen. 

Mr. Langston. Well, maybe by using the definition — and that is 
what they are doing in the regs, changing the definition — they can 
claim they have rights under that. I would go back to the 1953 OCS 
Lands Act, if they have got any right at all. That is what my 
lawyers tell me; we have read it, too. 

Mr. FoRSYTHE. That is right, yes. I think we have pretty well 
covered onstructure drilling, unless either of you have anything 
you would like to add. 

[No response.] 

Mr. FoRSYTHE. On the delays, this is the DOE production sched- 
ule which indicates, on page 114, that the minimum time in well- 
developed areas is now 31 months to issue OCS leases. They say the 
average in frontier areas would go to 35 for subsequent sales, and 
44 maximum in sensitive areas. Would you agree with that? 

Mr. Hill. It is much too long. 

Mr. FoRSYTHE. Well, would you agree that that is what it is? 



341 

Mr. Hill. Congressman, I have not seen that report. I am aware 
that it is proceeding in that direction, but I have not seen that 
report. 

Mr. FoRSYTHE. Your point is that it is much too long, and that is 
only to get the lease sale. 

Mr. Hill. That is right. 

Mr. FoRSYTHE. What would you add to that 44 months, before 
you could go to production? 

[Whereupon, Mr. Breaux assumed the Chair.] 

Mr. Hill. In the Gulf of Mexico, I think you are talking about 3 
years before the first production will start coming on. In the fron- 
tier area, it depends on where it is. On the north coast of Alaska, it 
may be 15 year from now. 

Mr. FoRSYTHE. Mr. Langston probably has had more experience 
in the frontier area, the offshore areas, and so forth. 

Mr. Langston. Well, we have made estimates. Indeed, this is 
another part of DOE's request; how long would it take to get on 
production and peak production. As I recall the numbers out of my 
head, in most areas, even in the Atlantic, it is going to take 
something like 6 to 7 years from lease sale, and in many of the 
Alaskan waters you are looking at 10 to 12 years, if you find what 
you are predicting that you might find. 

So we are not talking about energy for tomorrow; we are talking 
about energy for 1990. At least our company projects we will be 
importing about 51 percent of our oil in 1990, even if we have an 
aggressive lease sale schedule and can find a good deal and if some 
of these frontier areas do come through. We have 50 percent of the 
domestic production coming out of those kinds of areas by 1990 — no 
way, with this schedule. 

Mr. FoRSYTHE. Your study did not indicate where we are going to 
import that from? 

Mr. Langston. No. We do our balance that way, you know; you 
add what you have got and the rest of it has got to come from 
somebody else. 

Mr. FoRSYTHE. Thank you. 

Mr. Breaux. Thank you, Mr. Forsythe. I apologize for not being 
here earlier. Unfortunately, I was trying to make some sense out of 
Alaska. Do you remember where that is? 

I might cover some things that have already been covered; please 
tell me if they have already been asked. Would you compare the 
lease sale schedule that has just come out with prior lease sale 
schedules released not just by this Secretary but those released by 
other Secretaries, as far as the expedited process that this sale has 
as opposed to previous lease sales? 

I am trying to get a comparison. Is it more accelerated or is it 
slower or is it about the same? 

Mr. Langston. Well, it has got more sales per year than the one 
they had in 1977. It has less sales than the previous administra- 
tion's 10 million lease-type proposal. 

Mr. Breaux. That was probably unrealistic; even industry would 
probably agree with that, is that not correct? 

Mr. Langston. Well, again, Congressman Breaux, I would like to 
point out, it is not the amount of acreage, and we kept trying to 
tell that Secretary that, too. You know, 10 million acres is fine. 



342 

What you really would like to do, though, is be sure and get that 5 
and 6 million acres a year up that has the potential. So it is not 
the amount of acreage; it is the potential you are putting up. 

Mr. Breaux. Is the schedule that we are now looking at from the 
Secretary one that would strain the industry as far as the capabili- 
ties of rig availability and other physical requirements that indus- 
try would have from a technological standpoint? 

Mr. Langston. No. In fact, I am told that the offshore rig 
market is relatively soft right now, worldwide, and in the Gulf of 
Mexico where they are not getting long-term contracts, but two to 
three wells at a time, short-range contracts. 

Mr. Breaux. Assuming there was a more aggressive lease sched- 
ule adopted, would the industry be able to participate in such a 
schedule in the sense of being ready and willing to participate in 
the process of bidding and also, if you get the lease, willing to 

develop it? , , . r 

Mr Langston. I can assure you that speaking for my company, 
we are ready to go forward with this thing at the fastest possible 
rate that we can go through the required processes, and there are 
required steps we are going to have to go through. 

In the rig situation, it only takes about a year to drill an ottshore 
rig— maybe 12 to 18 months. If you start scheduling things out 
here 2 years from now, you can build all kinds of rigs if you know 
you are going to have some use for them 

I would remind you, however, that we built a $50 million rig that 
we ran out of places to use in Alaskan waters last spring. We 
shipped it to Brazil, because the lease sale schedules did not come 
along as we had anticipated. You cannot do that sort of thing. 

Mr Breaux. I read in yesterday's newspaper that Secretary 
Andrus had indicated that he was very disappointed at the lack of 
an aggressive development program on existing leases that the 
companies had. In other words, he was, in a way, throwing it back 
to industry, saying, "It is no use for us to lease any faster, because 
they are not actively exploring the existing leases that they have. 
What is industry's response to his accusation? ^ , ,, t, i^- 

Mr Langston. Again, I cannot talk for industry. But the Balti- 
more Canyon is an example of how rapidly we have gotten going 
after exploring that. In the Gulf of Mexico, I have a list of our 
leases, but by the end of this year, we will not have a prospect that 
has not been drilled— I will not say every tract, but a prospect that 
has not been drilled, except in maybe four or five instances which 
are in our drilling program in the first part of April. 

So we are currently actively carrying seven rigs at about a halt a 
million dollars a day in the offshore. I think we are fairly aggres- 

Mr Breaux. What would prompt him to say that, other than 
just missing the boat and really believing it? Do you have any 
idea*? They published a lease sale and there are four to five to six 
sales a year in these areas, and I guess as a justification tor that 
he is saying, well, industry is not even developing the ones that 

WouW^there be an industry group that could respond to that? I 
hate to let that serious an accusation go by the wayside without 
having someone speak for industry or provide a response to that, 



343 

because that is the key question. We are not going to be able to tell 
them to lease faster if they say, well, companies are not doing 
anything with the leases they already have; why should we go 
faster. 

I think it would be very helpful if industry has that type of 
information, or a summary of it, that could be provided. I do not 
mean today, but I think it would be helpful if that could be put 
together from the industry's perspective. 

Mr. Langston. At the last foray on this due diligence thing, EPI 
sat down and tried to do an industry study. I am sure that that is 
available; it was sent to the Secretary, anyway. I am sure it would 
be available. 

Mr. Breaux. Would that be responsive to his accusation that 
they are not being developed expeditiously? 

Mr. Langston. We thought so, although each company has to 
speak for itself. You can do this kind of as a package, but then 
each company has to reply on these kinds of issues almost individ- 
ually. 

Mr. Breaux. Mr. Hill? 

Mr. Hill. Let me respond a little bit to a portion of that. 

It depends on your preconceived notion of what due diligence is. 
If there is one undrilled lease in the Gulf of Mexico, I believe some 
will say the industry is not diligent. But there are going to be, for 
instance, in the Baltimore Canyon, several undrilled leases because 
of the results of the first drilling. Those leases may not get drilled 
in the first year and they will remain on the books while we 
restructure our leads and determine if we should drill more holes. 
So almost in any period of time, there will be undrilled tracts. 

It does not mean people are not following up and trying to find a 
place to drill. 

I think the API has determined the number and it is a very 
minimal number of tracts that are undrilled at any point in time. 

Mr. Breaux. I think last Thursday, a representative of the De- 
partment was asked how many structure rigs had been planned, 
and he informed the committee that there had only been two plans 
submitted to date. 

When asked why so few plans have been submitted, the answer 
was that you in industry have to clear plans with several different 
shops and agencies. I think one of the intentions of this Congress 
was that it was supposed to be a one-stop process in which you 
would take your information and plans and settle the matter 
within one part of the bureaucracy. 

Has that been a problem? Has the regulatory process had some- 
what of a hampering effect on the exploration plans? 

Mr. Langston. Maybe I can answer, because one of those explo- 
ration plans is an Exxon plan. 

Let me give you our history on that. 

That sale was in March of last year. It was issued in June of last 
year. We had anticipated this plan process to be very effective; you 
go to DOI and you tell them, I am going to drill so many holes to 
try to explore this area. 

Well, in the evolution of this exploratory plan theory, they said, 
no, you have to cite specific environmental reports on exactly what 
you are going to put in that hole. 



344 

You have to have specific regulations of the— specific down to 
the last bolt. Those usually end up without making the two of 
them. Then the exploration, or what I call the guts of the explora- 
tion plan is that they tell us— what the hell are you going to do? 

All of this has been distributed to the States, affected States, 
even though they don't have a coastal zone management plan. He 
is doing this already. You have to have EPA discharge permits, get 
that approved. Then you have to have the Coast Guard and other 
types of approval that I don't think we can ever depend on DOI to 
take care of, all of those things. 

Mr. Breaux. None of those requirements are new requirements, 

are they? ^, ^ „ 

Mr. Langston. I would say they are new. They are new out ot 
regulations that they promulgated just before the Georgia Bank 
sale, which was put off to try to get that lawsuit settled, which a 
number of us attacked. • -n 

We also wanted to satisfy— we can't tell how burdensome it will 
be. This was in anticipation of what you fellows were going to pass 
in the Land Act amendments. 

These amendments are those same ones revised to try to meet 
this What we are trying to do is get out of the way, get out of 
those regulations, those things that we think are overly burden- 
some and really don't have anything to do with what you are 
trying to do, which is find the oil and gas. 

Mr. Breaux. Are there any other statenients? 

Mr. Hughes. I just have one more question. 

Mr. Langston, did Exxon participate in the second lease sale, 
lease sale No. 49, in the mid-Atlantic? 

Mr. Langston. Yes. 

Mr. Hughes. There was some feeling that the lease sale was 
somewhat disappointing because of the interest that was demon- 
strated by the companies. 

Do you agree with that assessment? 

Mr. Langston. If I could put it in some context, we think that 
the major potential in that area, local area, was put up in the first 
sale. The most obvious structures— that is not to say we don t see 
further policy in some of the other tracts with lesser potential. But 
what happens is that it is— it doesn't surprise me when you get $2 
million for a tract and even a structure is going for $100 million. 
So it is a judgment of the quality of the tracts that are being put 
up. So there is no question that the quality has been questioned at 

this point. . . ,,. , . 

We have stated publicly we are not giving up. We are posting 
two rigs out there. We are operating four out of the six. 

Mr Hughes. Did the industry have enough time to study lease 
sale 49? There was a delay of the better part of the year, caused by 
the litigation in the Baltimore Canyon and the second lease sale, 
lease sale 49, was not deferred to adjust for the litigation. There 
was some suggestion by industry that there just wasn t sutticient 
time to assess the information from the first lease sale. 

Do you agree that that was perhaps part of the problem? 

Mr Langston. As long as we are still drilling, there is going to 
be additional information. We have a great deal of information 
because of our aggressiveness in our first operations. 



345 

Mr. Hughes. It was only in December that a cost well was 
determined to contain significant shows of hydrocarbons. Lease 
sale 49 took place within 2 months of that particular show. 

Is that really sufficient time to analyze what that particular find 
might have been? 

Mr. Langston. Certainly for the people that ran the cost well, it 
was. I guess that hasn't been published yet. It has not been pub- 
lished yet. I couldn't comment. 

Mr. Hughes. So you don't feel that timing was a significant 
factor in the lack of interest in lease sale 49? 

Mr. Langston. What? 

Mr. Hughes. The timing? 

Mr. Langston. Cost well timing, no. 

Mr. Hughes. How about general time, insofar as the time be- 
tween onstructure wells that are now in process and lease sale 49? 
Was there ample time to analyze what the industry is securing by 
way of data from present wells that are being sunk in the Balti- 
more Canyon through prior to lease sale 49? 

Mr. Langston. You will never get me to say you shouldn't have 
lease sales as fast as they can. If they can get it up, let it come. We 
will take our chances. 

Mr. Hill. May I respond to part of that? 

You run an additional risk — Texaco announced the second well 
was dry. It would be interesting to see what the lease sale would 
bring today. 

There were a group of people who counted on Texaco to find 
something. That is going to happen all of the time. There are going 
to be successes and failures all along. It is difficult to find a time 
that is good to have a lease sale. If you are going to put that kind 
of money on a lease sale, that money is digested. 

Our company was bitter and a big loser on the first lease sale, 
$85 million, and yet we are back for more of that good deal. It 
doesn't hurt when you have the lease sale. I think we would be 
there if we thought there was any potential in the area. 

Mr. Hughes. That is why we are encouraging some prelease 
exploration so we could save you some money. 

Mr. Hill. The Baltimore Canyon sale would be an interesting 
site to test the offstructure drilling concept. If the first well drilled 
on the crest of stone dome was dry — would the other tracts be 
offered and would the Texaco and the cost well ever be drilled? 

Mr. Hughes. In the Baltimore Canyon, if you are going to find 
anything you have to sink wells onstructure generally. 

Mr. Hill. You sink a lot. 

Mr. FoRSYTHE. As pertains to lease sale 49. 

The removal of those 40-odd tracts from the sale as a result of 
the mudslide situation, did that have a deflating effect on the sale? 

Mr. Langston. Obviously, there would have been companies in- 
terested in bidding on that. Whatever that amount might have 
been, it deflated it that much. Again, I would like to say, these are 
engineering problems We find significant oil and gas, even if there 
are some difficult conditions. You get a platform on here and drill 
on to the bad area. It is overplayed as to how you can engineer 
around those kinds of conditions. 



346 

Mr. Hill. If you are not given any opportunity to develop that 
engineering specialty, it will never be developed. You have to offer 
those tracts at some point in time if you believe there is energy 
there and let the engineers design. If they don't have the chal- 
lenge, they won't design the equipment. 

Mr. FoRSYTHE. Thank you. 

Mr. Breaux. We thank both of you. We think that information 
provided has been very helpful and we appreciate you being with 
us this afternoon. 

Our next group of witnesses will be representatives of the De- 
partment of Transportation and the U.S. Coast Guard. 

STATEMENTS OF A PANEL CONSISTING OF CAPT. FREDERICK 
SCHUBERT, ACTING CHIEF, OFFICE OF MARINE ENVIRON- 
MENT AND SYSTEMS; COMDR. PETER CRONK, MANAGER, 
OUTER CONTINENTAL SHELF PROJECT BRANCH, U.S. COAST 
GUARD 

Mr. Breaux. Chairman Murphy asked you to be prepared to 
answer questions that the committee may have. 

Penrod's Rig No. 30 located in the Gulf of Mexico, right off the 
coast of my congressional district, caught fire on March 5. The 
information we have at the present time is that something like five 
companies were involved with the drilling operations. Unfortunate- 
ly, it was a very serious tragedy, not only due to the loss of 
equipment and operations but also the tragic death of a number of 
men who were operating on that rig. 

Could you give the committee a report of what information you 
have at this point as to the damage and loss of lives? 

Captain Schubert. The investigation is being done by the Coast 
Guard and the Geological Survey as to the cause of it. I believe it is 
somewhat premature to jump to conclusions as to what actually 
happened. 

However, Commander Cronk, of our OCS project is prepared to 
discuss what we know at the present time. 

Commander Cronk. Congressman, presently there is a joint in- 
vestigation by the Coast Guard, formal investigation by the Coast 
Guard and the Geological Survey under the authority of the OCS 
Lands Act. There were 8 dead or missing persons and 27 people 
who survived that casualty. The 27 abandoned the platform safely. 
The purpose of the investigation is to determine the cause and the 
extent of damage and so on; and I don't have that information. 

Mr. Breaux. What was the general extent of the damage to the 
platform? Was it a fixed platform? 

Commander Cronk. It was a platform rig on a fixed platform 
which was drilling a development well. There were other wells in 
service at the time. 

Mr. Breaux. Approximately how long did the fire continue after 
the explosion? 

Commander Cronk. I couldn't say. I don't have that information. 

Captain Schubert. We can provide that for the record. 

Mr. Breaux. At what point are you in the investigation? 

Commander Cronk. There have been a number of supervisory 
people that are part of the drilling operation and platform person- 



347 

nel who have been interviewed, interrogated, at the investigation, 
and they are going through a series of witnesses. 

Mr. Breaux. It is 9 days after the explosion and you don't even 
know yet how long the fire lasted? 

Captain Schubert. We have the information but we don't have it 
at our fingertips. I believe it was 5 days, but I am trying to recall it 
from memory. 

Mr. Breaux. Let's talk about the operation. 

When was the last time that particular rig was inspected at that 
location? 

Commander Cronk. The Coast Guard inspected the platform in a 
routine inspection on January 27. 

Mr. Breaux. It was at that location at that time? 

Commander Cronk. Yes. It was a fixed platform. 

Mr. Breaux. Was that a no-notice inspection or a planned regu- 
lar inspection? 

Commander Cronk. That was a planned, regularly scheduled 
inspection. 

Mr. Breaux. You had never done a no-notice type of inspection 
on that rig? 

Commander Cronk. I couldn't say; may have been. But we 
checked on the inspection date and it was a regular inspection on 
the 27th. 

Mr. Breaux. What were the findings of that rig inspection that 
you had conducted? 

Commander Cronk. I have no information on that, but we can 
provide the information. 

Mr. Breaux. Where do you work? 

Commander Cronk. I work in Washington. 

Mr. Breaux. So you didn't conduct the inspection? 

Captain Schubert. This inspection was conducted by the Marine 
Inspection Office in New Orleans. For the record, the fire occurred 
at approximately 0600 on March 5 and was extinguished at 0830 on 
March 6. 

Mr. Breaux. It lasted for about 14 hours? 

Captain Schubert. Yes. My 5-day estimate came from March 5. 

Mr. Breaux. Has the Coast Guard conducted any inspections of a 
no-notice type on that operation within, say, the last 6 months, not 
on this particular rig, but on the rigs in the Gulf of Mexico? 

Captain Schubert. We have considerably increased the pace and 
scope of our inspection program in the gulf. In the last 3 months of 
last year, over 300 platforms were inspected. Many additional in- 
spections were conducted. Some could have been of the no-notice 
variety. Most were scheduled inspections, though. 

Mr. Breaux. You have, I take it, a planned inspection schedule 
that notifies platforms that you will inspect them, say, on Wednes- 
day of a certain week? 

Captain Schubert. Yes, sir. The inspection team that goes out 
there has an itinerary in advance to handle logistics. 

Mr. Breaux. Of the inspections, what percentage would be regu- 
larly scheduled and what percentage would be no-notice? 

Commander Cronk. For the most part, our intent is to cover 
every platform on the gulf and try to get at least an annual 
inspection requirement. There are occasions when it is necessary to 



49-118 - 79 - 23 



348 

go back to a platform, and that might be done on an unannounced 
basis. But the thrust of our program is to bring all platforms, rigs, 
on the OCS, under an inspection program which is at this point a 
growing program. 

Captain Schubert. I would like to add, as we develop a history of 
inspections, we will be able to detect where the problem situations 
exist to give us a better handle on where we need to conduct the 
no-notice inspections to assure compliance. 

Mr. Breaux. Could you provide, since we are not sure what that 
report indicated, a copy of the report, the last report conducted on 
Penrod's Rig No. 30, the one you had conducted a couple of months 
prior to the accident? 

Captain Schubert. Yes, sir. 

[The information follows:] 

Coast Guard Report on Placid Oil Co. and Penrod's Oil Rigs 

Coast Guard's inspection reports for the Placid Oil Company platform 281-C and 
the platform drilling rig Penrod 30 which were inspected on 26 January 1979. Those 
reports are included in the matters being examined by the investigative body. 



349 



IKSPiCnO:. KJ.'jKI) of An:i?lCIAL I0LA.ID OR FIXED ^ 

r PUciD oj L , 



OOyj-AJlY 

oThUoruni j£.JiG.>KriJU 0- ^ \ - c 

MV.'iSA OP rLATFoK.-.i I:. Jv.-i'LiX [_ 






1. 



2. 



3. 



5^oL, -<i6i- C>0£>^ - Vt/f'i 



A///// PiA/^cP /^[ 6^30 



Time of Inspection 



Owners' designation if different 
tnaj above 



l^aiua of lessee 



Naae of offsnore ares 

i;u-jiber of bloc.t 

Oesl:rnation (if an.,-) 



Above marF.ed in 12" vertical 
blocK -Letters and 'C-j.noers on 
diational corners of structure 
:i.-.d on ualiport 



Ow:.er/Addi-ess 



Op era tor/Age I. t/Ad dress 



7. Structure Type/,-i -i jc tion, 

dillllUb, ^uarteia etc. 



d, i'eisJKo liv ing i aoco n.. on 



Ferson in caar.e/tVtl e 



10. Prl Dary Kea.is of c.-iC^pe 
Fixed strujlure3/r Ue_d ladJeri 



1 1 . Sacnn d- ^ry Xe;m s of Escape/Type 



IJ. Pox iO-.-uol La:.di:.^o/Iiausfer 

?acllltle8/Laiiiln-,s/GUurd3/Kall3/ 
Illauination for Laiiditij^s. 

TT. Guards/Rails ~ ~ 

Perimeter of floors, decks 4 

openings. Un^rotectod 

lerirnet-er of uali-opter deok 

Ti . CAtwalks/Stalrways/ Guards'/ 

Iv^ll s , 

15. 



First All Kit 



lo. Stocas Litter jr substltiite 



^930 



fici^X> S"/7 • 2 ^ f 



pi. /I c I D o,c (T V- 



^c-^^/y /7A^%y^ 



•^ &/ 



/-^ 






^}.C. 



}a'cV~c/'<: ^ r (T- u /i/;t£^s 



Car.^aci t_^ tjumber aboard 






J. .X-a-^^Ui 



•^ 



^ -^M--eX-<.>TL 



^ 



.^' -^^ 



.'^^ 



''<H*^<^ )f^i-~^L .ru^j n^-u. x^-i. ir:i-. 



c-A 



-zr 



.-A 



r ^ z;/^, 



^'A: 



350 



RE1URK3 



fire.Plgiitlng Squlpoient 



HJQUiaSU- 



Lo':;"ATidN iKa^uiRiii'taiT ; iio. 1 CLA33 . :;o. 

Coaitn. ■ |1 All/I50ft. ^1 ' - 



OH HANa 



Corrldo^rs 

Railo Room f Cli/aear exit 



Sleeping 
Accom. 



i 



CLA3S 



^ 



Galley 



Istore 
J Rooms 



I Boilers/ 
blycol 
iieaters 



1 All/ over" 
A bunlcs 






1 B/CII ea. 

2500 3q. ft. 



1 All ea. 
2500 sq. ft. 



2 BII 

1 BIV(lf no flJ^ 
CO 2) 

1' 



Pi- 



^ 



iGenarator I 1 BII ea. e-ifja f. ~n^ 

iRooa i 

'compressor I 1 BII ea. eiiji. 

Irooi 



pump ' 

Room 

' -^ 

ale a:tr3/, 
Gen ( open) 

Int. Comb, 
Eng. In 
jopen 



1 BII ea. eng, 



1 CII ea 2 oitr 



1 BII Ea. 3 




I 



Date dlschait^ed, refilled welsned 
Hydrostatic test date z..-^^. 

l^on-requlred Equlpuient 

Hose stations /// / Type Pump VCCF ^'^^^ Pump Drive P^-W ^ ^, 

Llgiit tfater stations 

Flra extlagulshars In non-required locations 
NO. Type Location 



/'^A' 



AJiM- /'/'/? B/c J^ ^' 



351 



17, Emergency CoiriniJnlC'tloiiS Equip 
halij anj/or w',.re _ '-ile^' n oue 

Jo. Llfepreserveis, nj-r.b.ir. /// 

pr.-par stov.-a e 
Xarrvin - s 

19. 'rforkvests, nu-.uoor 
Separate 3towd;:e 

20. Ring Life Suoys, njuoer 
lilectrlc '.;aterll^;:it v./iaivard 
Fitted in Dracicet 
Arran^e^ont on .)latforc 

."ar'icinr.s 



21. Llfafloats or Allowable 
Substitutes 



Ii\ 



■■•u/.-jJa j..r,.'3Trr 






/ 



I 7. 



■?. 



r^v^vr-^ , 



Ca?suls or Sort ierial ff's 
Loc.tlot (ou tooar i aisles) 
Markim^sf 1>") 



22, Lifefloat ilq Jlp....2h t 
PaliiLer 

iilectrlc vaterli^ .t 
Paiil?s(2) 



l/JAFiK.i 



v//^■ find I o- /fot^Mhii 

-,■1 J< ■ ■l i ! jL_V_ji .ji^ 



FM . 



"^ rw j^^*^/^ 



//// 



7>^ 



^ 



-5 






CcUU^U^ -^c-wr^ ^V-^-^^^V 






^•yi 




?&. 



Geaeral Alarm J^.stec I""- '•*■•/' i^'y f/i/Vt.<;< 

AuJiDlfi in .\\\ j ,.l; of jl^tforcn j/-'*^ A/^/?At-«7 

iV3rkln;-s/D3ll_^^_o . .-iLca l" re.l - ^^CP/^if /}iAfin ':u,rc//es rl^U 4 u IfP l\/ 1 

Ha-.-3rbe;icy Drill HelJ /-».,yL - ■ Co:muent3: 



20. Fo..: oij^nal/Qjer.-itljn^l/T . Ype 

27. Obstruction Ll^.itj 

Humber/opera tion.,1 



^ 



//// 



352 



2o. ■ 



In m^- opinion all provisions of tue a^pll aule regulations have 
been compllel ..itli a:ii t.io 3-irb<i.icy equipment i^ In good 
condition and satisfactory in evary respect^ .a.-x.^U/^ 



cj y^t^tt^L- c'-^M 



)li,aature tST U3Cu Ins.jec 



tor 



29. Additional lUJar'f:^ 



353 



Oa*n KOLA J 0-7 8 



cj.Z. ^w-JZH- 



Ii;4P*;criO:^ RJJ:'KD O? /LitTIPICIAL IJLA.iD OR FIXED 
ar.HUCIUR^ j.« T.ii CUI-n J:'..IIN£^ lAL SHJLF 



■^i-^Y Pv.n^^h Df?i'(^'rvj <^o 



i)Ai'J_2iL_j£lu-_ll 



■:3ja OF PLATfoiL'.o i:. Jv.^lj;x / . , 



Tine of Ins^'ectlon 


O^J.^ 


j^ • 


»*>lj-'' 1 


Owners' designation if dlfierent 


* . 


i;yi:.a of lesaee 


piu . -1 <::';( 



Nace 01 oi'l'a.'iore area 



Jll:^!^ '^v-f.-;' ri^Ur^.,-^ 



Ijus^bor of blociic 

Deslf-.nqll-^n (if 3R./ T 



-fr^. J a / 



1 



Abov* marked in 12" vertical 
block Letters and ICu.noers on 
diagonal corners of structure 
and on r.Bllrort 



<=^ 



Otfiier/Addi^ess 



P.O. 6^» frza6? o.c.-j. 



Operator/AGei.t/Address 



O(i\ci0 O.'L 

P.O. ^<-x V-r^-^ 



(t 



Structure Type/^ioJjctlon, 
dilllinfc, quarters etc. 



Pan"/ lrv«*j / <5v, tf.l^<s 



f 



Persons liv lns i acco m. on 



Carticit:,' guBber aboard . 

ST 3/ li 



Person in cuafL-e/title 



C»^. ici B-;>-/Joir^ iSf , 



♦°«tf>^i^<.H_ 



1 



Pri flary Kea.is of escape 

Fixdi struoture.3/r y.e^J laiieri 



- • kx.- - ~ 



Secondary XeaJis of j;scape/Type 



PC" <i'-nrT 



^rnr\/S^>^r' . 



PeriO-iriol Laudln.'s/Iraiisf er 
?acili ties/Land In.'.s /Guards/Kails,' 
IlluairiHtion for LtuidVuis . 



^iu\Q- 



%r-^ 



M^ 



[ 



5> 






Gu;ird3/Kail3 

PeriHiOtar of floor;, declts 4 

opeain_,3. Un/ro tec led 

p ;ri meter of 'i^l 1 optrir d'-''-'k 

CAtwalks/Stalrways.' tiuui ds/ 

R.iila »__ 



f.,r-«>rml /e.- 



VrJ'rv<. /^/./, » £t.^./ 






^rf^.^rf. 






First Aid Kit 



f.':. 



.''^ O-,-- 



>^^^^</ 



Sto:te3 Litter jr 3i;b:;tit4te 



, / 



5^<^»*ii?i!« ^jr, 'j«.w.r 



354 



R£KAIl£S 



fire Flgiitlng Squlpment 



Kr;,UIREl'.eaJT 



If 



OCATIOU ^ 

oaun. |1 AIl/>50ft 

orrldors ,— - - 

8dlo Room 1 Cll/neai- exit 

T aTi7 over H4il( 
4 bvaiks 



' iJO. CLA33 J XO. I CLk3S1 



leeplng 
ccom. 



alley 



tore 

oome 



ollero/ 

lycol 

eaters 



1 B/CII ea. 
2500 BQ. ft. 



I 



KIT 



I 



1 A.II ea. I 
2300 sq. ft, _/ ;fii:^_j 



3C 



2 BIX 

1 BjvUf no nx ^^^J^^ 



r h BII ea. e.^^."!'^ ^■^^' 
I 
mpressor jl 311 ea. eut;,. 
om j 



•nerato 
con 


CO 

U3ip 

.com 



I 1 BII ea. enij. 



// 






r'A,<(^/ L„.^^^ 



V?i 






^O^^CV't-' 



tit iT '*:^^ 

0«r d<"ltf^ 






;le itrs/ 

en (open) 1 CII ea 2 ctr ^ j 

int. Oomb. I 1 BII Ea. 3 xrv<.TVA.t_ 

ii(t. In I 



• oen 



Date dlscuaraed, refilled weloued _ 
Kjdiostatlc teot date 



L„,_..- -i. .-J 



/<'^..t^/ /, f^-S" " 






lion-requlreJ iqulpj.ent 

ricse stations tM| Type Pump 

Lleint Water Stations ^. ..-,>. 






puap Drlvo r/c-^. 



Fire extinguishers In non-required locatlDns 
KO. Type Location 






f,_Hv.j^,x/^s, Tj..'- AA*'.' /?^^^' 



355 



Jukergeucy CoiDa'.inlc:'tlotis Squip. 
Radio and/or wire ~-.'lep n oue 

Llfepresdrvurs, aj::.64r hUihllifi wf 
pr.-par etowa.e f>^' / (fu) 

^T/ — ^^ 



Xartclno 



If/ R ) 



iforkvasts, naiobor 



, _ . jLiilAfiiLi. 









tf& 



^ 



I'll 



■u\ 



f<i 



RlQg Life Buoys, nj-iDor// 
electric ■./aterll_;nt -../i^i'yara// 
Fitted In Dracice* // 
Arraiiienant oq ^ilatf^rti/ 
"arklnr.s/j '_ 



^5>: 



.J 






Llfaflouts or Allowable 
Substituta.3 






Ii'i;>: 



■:u:--..i:;.-v ca^xChT 



Lf- 
IB 



I 



II 






/ ^f ,^^/ >:'-*- '^ H K /.f-v}^ 5 



^^ 



"l^'I) 



Oaosula' or Bo.-t jerlal ^'s 



Loc.tlot.foutooari sites) ^•^••u- — ■ 

Harkl.r;sh>") ^ 

LVfefloat i;qjlp...e[.t T^TZI^^^"^? J** »'*<i/'A. 

Pal II tar (ft'-.viV-i 0,<^ct 



Paliitar 

lilectrlc -^aterllft.t / 

PaJdl;>s(2) 






,/ f^J^Ls. *•),% 



'd 



Inflatable Llferaits 
Palatdr Len._t:. 



»f DC turer 



JI^M^ 



Ca-. acl ty 



3er-.ice u:ite 



General Alarm J., stem 

Audible ill all iJaJi-j of »latform 

r-:TrK\iv;s./c>; l l ■:< -i ■■■li e n l" rej 






^*' 



^^:f(^' 



at, 



Eierta.icy Drill 
Kec^rds 

_Li_J f J ..,'. - . . 



Heii 



Co.uinento v-^^'Z-'-j 



o^\.^.'^'S / jail tS-./(v iSi *■.'■: ^.V «// f/„/ 

I. » . •: .• . / /; :,^- A.. 



x 



A J 



f^^ 



K f <. s' 



/•/>:r ^L*l>.''^ 



Station Bill 



Fo / 'Jl -,n p 1 /C ) ? r.". 1 1 

Obstruction Ll-.ii.; 
H u:.iO ■-' r/O .■ ■■ i a 1 1 o ii .1 



l/Ty.r.e 



>M 






■^^cz-c 






JlirX-ii±Ul. 



T^/O 



IZ 



356 



In my opinion all provlsloas of t:ie aypll i;ule regulations have 
been compllei wlt-i auJ t.ie as4rt,e-cy equipment Is In good 
condition and aatlsfactory In evary respect^a^^^tj^ <Vi v»nrC>^ 



signature ol UoCu Ins^ 



ctor 



•9, Additional KeiarVcj 

L 







357 



DEPARTMENT OF TRAFiSPORTATION 

MAILING ADDRESS 

UNITED STATES COAST GUARD "s coastguard (■g-CC/104) 

WASHINGTON. D C 20590 

PHONE 202-426-4280 



5700 

■i Ah. l^^S 

Honorable John J. Murphy 

Chairman, Committee on Merchant XH>i*tti 

Marine and Fisheries vMl^- ^^'^ 

U. S. House of Representatives , . 1 

Washington, DC 20515 

Dear Mr. Chairman: 

Thank you for your letter of 21 February 1979 concerning the implementation 
of the OCS Lands Act of 1978. I appreciate the opportunity to address this subject. 
As you know, in the last few years the Coast Guard has been tasked with many 
new duties and responsibilities in the maritime sphere. A partial list would 
include, in addition to the OCS Lands Act Amendments of 1978, the 1977 Presidential 
Initiatives on Tanker Safety and Pollution Prevention (including the Foreign Tanker 
Examination Program), enforcement of the 200 mile fisheries conservation zone, 
the Clean Water Act, the Deep Water Ports Act, the Port and Tanker Safety 
Act of 1978 and a significant increase in our drug interdiction activities on the 
high seas. We have accomplished this partially through new appropriations and 
partially through reprogrammings from existing programs and support activities. 
We cannot, however, continue indefinitely to take on new tasks without the 
accompanyment of sufficient new resources. The OCS Lands Act Amendments 
of 1978 is a case in point. 

We have carefully analysed the impact of this Act on the Coast Guard and have 
developed the budget estimates required for its enforcement. This data, which 
responds to the specific questions addressed in your letter, is attached. 
Our resource estimates are based where possible, on existing experience. However, 
for many of the new tasks included in the Act there is scant experience and 
requirements were developed through, the analyses and interpolation of data from 
similar activities in related fields. Of necessity we are proceeding cautiously 
with this budget request to insure its validity and are carefully assessing the 
impact of these resources on program operations and support activities. There 
is particular concern with this because of the nature of the resources which are 
required. 

The implementation of the OCS program will require the addition of new marine 
inspectors. This is a high skills occupation which normally requires three years 
indoctrination once the prerequisite shipboard training has been obtained through 
sea duty. The time frames specified for the implementation of many of the tasks 
within the new Act do not allow us the lead time necessary to develop qualified 
personnel. At the same time there do not exist outside of the Coast Guard large 
numbers of individuals who possess the necessary marine experience and are available 
for recruitment. 




It's ■ law we 
can live with. 



358 



G-CC/104 

5700 

2 APR 1979 

Subj: Reply to Congressman Murphy's letter dated 21 February 1979 

concerning the Outer Continental Shelf Lands Act Amendments of 1978 

Thus even if all of the new billets which may be necessary to fuUy implement 
the Act were provided in appropriations, we would still be faced with a serious 
reassessment of priorities to determine the other program areas from which to 
draw the necessary qualified personnel. There is concern that a too rapid implemen- 
tation of the new OCS Act may adversely affect our experience level so as to 
warrant serious question as to our ability to accomplish our safety objectives. 

We understand the necessity to expeditiously implement the new OCS Act. You 
are aware that the Coast Guard has taken steps in this direction. We are confident 
that, with receipt of the necessary resources, we can implement the most important 
features of the Act within time frames that will meet the intent of Congress. 
As you requested, our current status and future requirements are summarized 
in the enclosures. The need for a 1980 budget amendment is currently under consid- 
eration in the Department. When final determinations are made under the regular 
budget formulation process, more specific information wiU be provided your committee. 
Additionally, in implementing the provisions of the law over the next few years, 
we will gain the experience essential to establish firm resource requirem.ent costs 
in place of the preliminary estimates we are now providing. 

We look forward to the challenge of this important legislation and to our continued 
cooperation in its enforcement. 

Sincerely, 

J. B. HAYES 
'Admiral, U.S. Coast Guard 
fJommandant ,^ 



End: 

(1) Budget Data, OCSLA 1953 and ongoing activity ('78, '79) 

(2) Estimates of OCSLA future resource requirements 

(3) Budget data, OCSLA Title m 




359 





■- t^ O ^ 


=r 


4J 


CO f\J t- o 


CO 


C 


ON C\J PO 


in 


3 


«» - 


• 




* — 


OJ 


g 




< 







H 



a 








UJ 


,^^ 




Q 







s 







UJ 







2: 


■» 




•«: 






00 


to 


to 


irv 


>H 


c 


cr» 


<c 


0) 




J 


a 




>-■ 


f- 


X 


u, 


cc 


13 


UJ 





«: 







(- 




\ 
Z 


00 

c 





=> 





■r-4 


•a: 


CO 


l-H 


4-> 




H 


CD 


CO 


•a: 


s- 


Q 


n 


ll> 


2 


cc 


a 


<* 


o_ 





J 







CO 


a. 




8 




a- 

< 







(0 




*J 









H 


w 




c 


c 





01 


rH 


•H 


4J 


1— 1 


M 


•r^ 


to 


> 





-iH 



3- 






O 
O 



m 

CM 

t 

X 

I 

t— 



m 

1 

X 

00 



z: o 

■a; o 

ri •. r^ 

UJ CJ^ 0) 

Q t~- C 

2: cn c 

Z3 >- o 

u- \ to 

CO 1- 

>-i t— 0) 

-J CT\ Ol. 
CO ■- 

O >-i • 

HH Lju fCJ 



DC • 

a. '- 



i- 
bO 

o 

t- 

O.f-1 

o 

i- o 
0) s: 
-p o 
a. to 
o 

O bO 

•r-i c 



to 
<u 

-r-l 

■D 

to -o 

c 

C D 
O t« 



to 

c 
o 

4-> 

to 



Q. 

o 

S- 

o. 

Q. 
to 



(0 

cr 

0) 



0) 


c 


to 




x: 


•rH 




M 


-0 


to 


i 


to 

4J 


(i> 


4J 


i- 





to 




bOf-H 


to 


CO 







58 


s- 





to I— I i-H 

I- to -H 

•P D 3 
to O 

•rH •H to 

c > >. 

•H 01 to 

E i- ^ 

T! O. -P 

3 
O 

-a 
c 
to 

to 
c 
o 

.p 
to 
00 



.0 
o 



to 




I- 




x> ' 




5 1 1 00 -P •'^ 




X-0(?1.I ,-Ht„tUCOrH 




•rH C C to •rH rH X: -H tU •H 




t«3rH^rHtU 1 >tU-P>a.E 




OtlJ >E^'HjC toto 

<»->to>ti)^rHOotocx:cvo 






<D t. .P -rH •rH Zr 1 




>.-o tuo --f-Hxrto 




Cr- * ^aJTS tOPtl)<DO» 




rH -0 -r-) C "O H-) •M -rH C t, 




•rHcoajtojDtoccSo^rHa) 




4-).p.PajO totu cj-3 




octo^rH ^-. cPtug 




tuti)t--PELnto^rHcooE"c3 




Q.P(U^rH3CVJ-P-P''-<tO 0) 




tOC»— lrHE»— tUCO T^ T3 




C (UrH^rH-.^rH O CX.-HrH C 




•rHS_OOC .-HtJ tOtU3 




•rH C> to •rH to •rH ,— ( .t- -rH t^-, 




-a>tot«EJ->^Qt-toa)'" 




C C •rH IP -a rH 




toojcco -c>.Poa)i-5J 




tOOCr.3t-3t«u.p c 
CX) ot^ too ""S 






C C C3^ 00-P tU t- 




•Htooo'-c^rHc^oj-pn 




•p •rHr-HtOOD.CtUl. 




foa;>»^>HrH.rH cP"09J 




,-|t„.PC\JU-.-( EtM^rH O^rH (i 




3 (0 •^ •rH to > , 




O0tOi_t„T3l-=T .COtM 




0) OOCT3 COtO-PS-O 




t- to -rH to -t^ •rH Q. 




1_0 (l)C--O.C3L. 




JZ i) Q.0O 00 --H C— >- to 09; 




4_>^ [^-rHCTl •HCO.O 




•rH 3 a>>cr..O'->H^ 00 E 




StOO.-H'-O [j-.QtO -3 




C4JC E>H to^rHg-c 




TDD >• u->.-Piocg 




OJ -0 U-'— < r-HtOTHLr»a> 




oooo) - rHtws-tUi-H -x: 

S-^POt^S-tOOtO CME- 






tO tot^O (UQO0*O 

x:^r-<cnu.-o-o -PC 






OCOQ."- CCC •'-'Q' 
totU^rHtO-O-POO 






to 0) >H • (0 3 C 

•mC-pC to^ oj^p S'-i 00 •H 






to co.cc occ 




-t« Ecot~--Pa)CC^H^H 




(1) rH •H l-H •H 00 E ■'-' -^ ™ 




XJIUrH •P^^Pi -rH CS- 




O.CO to ettO-P-D-P 

utO ••Pto -rHraeoo 




.-hco^he .-Ht.EE'a 




• r-HtOOE^ .£)tl)tOtOC 
COtOOOrHOtOtDCll. to 






•P^rH ^t«E-PO0pW 




• C-PO 4-)t-t0 oc- 




3ti>-H^rHtutooa)ios-oto 




CrH4->0.-Ht« •rHQ.^Ht. 




-•rf Q to I. CL-P hJ J= _ -P tU 
vO^PQ.tU3 tO^H^PT3tO-P 






a-C EOT3--HE C-rHQ. 




Otl)Ot0<l>Q.i-t«t0!-O 




T3c_>x:xi(rc (DO cxo 




C -P t-CI-i^ tOO-H 




tOS- <l> too tUtUU'-H 




^ Tj s: E''^o to •rH Q.aj 

a-3nj rHE a^rH-s 
tD ctUrH -ot-> "O 










to t0O3t0T3a)3-H OJ 




(1)1) •rH -0 ajgiiP-to 




rHx:toto .PCE ocoto 




4J^P-Ha)x)oc<o<i)tocj(i) 
•rH i-ou(i)(0i-x:„O^ 
H c I- to a e opH CO 








33tOCO yi"" 
i- >,OOC3l. Oj=C 






OltOOOtO 'rH Q.* -PO 




■otui-tup t.-.O)!"'-' ■'^ 


• 


C1-tl>l_tOQOS-<"'-IC4J 
33C tO-P (DtOOtD 


c 


to 


•PtUEO tOtUH-) S- 


^1-^ 


-0 3t_)-oct-coa)top 


i-H 


-03tUtl) 0)0(1) P(Dto 


•rH 


s_ i_x:<-H Q)x:^H 3-P (O^rH-H 
ro^ppo^ciop oc-pc 


> 


•rH 


3 to t. .P •rH C 0) -H •rH •rH 





•P ^(l)0'~>'C3i-lE 




0) .a)>>J313.^rHOi-^rH'0 


in| 


■P ^ C Q..O (0 to P S- jO to 




to -rH JJ C -rH OU •H 


•a 


tO£l^rH(«-Ot0^rHtO Otoe 


c 


OO-PO(l)0) 0>> C(0 


to 


tJEtO .P 0)O.-POOl- 




l-H-)O0)O 0)^PQ.aD 


>> 


0)-CO)CO)l-CCt" too 


I. 


x:cQ.O)a.a)0)totpoo>t- 
HraOEto3e-rHt)^ot.Q. 


s 



360 




























\. 





























^1 




.s 


































^1 






















1— 1 






^u 














0^ 







• rH 






=a 


" 












ro 


m 




3 





















-»» 












•a: 






















0" 






OT 

































H 




00 


00 








OS 






2 




PO cr* LTl c^ 


=r 








t-H 






3 




t-- 00 .- 


<- 




a\ 




2 ■ 




nt 






^ 




in 00 








a\ 








OS 




^1 


<« 




«y 














1 




ts 




CO 




rH 
















% 




^ 




UJ 




ra 


ir\ 








lf\ 








^ 




OQ 

2 







?^ 








^ 




■P 

n 
<u 




bu 




UJ 

a. 




f- 


















fe 







a 




















10 

•0 













W 


c 


















00 










2 


ro 


















UJ 


<«■ 




2 





•rH 


















(-• 






M 


l-H 


rH 
















ro > 

C !- 

3 

•rH to 

■rH OD 
T) C 

:3 •'^ 

0) 
0) 

• c 

<-H 00 

c c 
<u 




•a: 
2: 

I— 1 


on 


Q 







■rH 
> 
■rH 


CO 

(M 








loo 
|c\j 




c 


•H 
•P 

5 

C 
.—1 

% 

•H 

1— 1 


e- 


•a: 


I— ( 


UJ 






















f2 
3 

UJ 
Q 


-J 
(-1 


\ 




UJ 

cc 

UJ 


a. 



cu 


I. 

CO 

■u 


1- 












UJ 
< 


H 

< 

M 


U] 
UJ 

cc 
X 
E-" 






•H 

•rH 


00 








C\J 


to 

§ 




a. 
•a: 


















I 


■P 

(D 

•rH 


to t« 
■P 

to 
c 


.2 


















^-* 




D. 






2 


s 


















to 




S- 


>..p 


<» 


















J 




a 


1) 0) 


(0 






















Q. 


> .-H 
























n! 


S- Q. 


to 


i 

3 


















■p 

•rH 





1— t 
ra 


3 E 

to 


QO 


•p 

to 
























cr 


c \~ 




















c 




0) 


■rH 0) 


00 


8 


















"I 






t. .P 


c 


















00 




^ 


OJ tM 


■H 























r-H 
•rH 


<u to 
c 












E 








s 




3 


•H 


3 










rt 


E 






v_^ 






QOIZl 













L. 


"■ 










n 


c 2: 


(U 










bJ 


3 -1-3 




C 


w 




>, 


<u 


t. 













W 




c 


•u 




ni 


.p 












s- 


> 






w 




1— 1 


•0 


-0 










CL 


c/: 




Z 
m 









■p 


C 3 

tn s_ 


5 




s 






L. 


w 




S- 






Q 


J-5 






u 






dJ 


•a 




-iJ 


c 






c to 


•r-l 




f-" 




V 


*J 


s_ 




M 







■0 


c 




M 




-*-3 





u 




■H 


•H 




c 


•H 


4J 








W 










C 


.u 




(D 


-P 


t/) 














4; 




■H 









■H 











tj 


•H 


cc 




E 


:3 




n 

c 


•::;5 


r-H 








f— 1 


(L 


.— 1 




<C 


-p 


t-l 





3 


OJ 








OJ 


d:: 


dJ 


U 


3 


to 


03 


■rH 


cr-o 


c 










■0 


c 


c 

•H 




c 



.P 



-P 


a; 











s 


<u 





c 


l. 





t- 


00 


•t-\ 


4^ 








t/3 


to 


m 


■H 


W 


1 1 




•rH 


oj :3 


•i-t 








I- 


(0 


u 


ra 





0) 




r-H 


■p <y 


"O 








I 


i^ 


c£ 


^ 


!_ 

a. 


Qu 




g 
\ 


CO u 


5 

\ 














'~ 


0. 


(V 


=3- 


in 


vO 






-1 


CVJl 


rol 



361 



ocsu TITLE i:r 

OFFSHORE OIL POLLUTION FUND 

1979 SUPPLEMENTAL/ 1980 BLX-ET REQUEST 

(in thousands of dollars) 



FY 1979 Supplemental 

Budget Request 

Budget Authority 
Appropriation 
Authority to Borrow 
Total 

Personnel 
Military 
Civilian 
Budget Authority/Obligations/Outlays 

FY 1980 Budget Request U 2/ 
Budget Authority 
Appropriation 
Authority to Borrow 
Total 

Personnel 

Military 
Civilian 
Budget Authority/Obligations/Outlays 



To DOT 



5, COO 
55, COO 
60, COO 





28 
9,000 



12,000 



12,000 





28 

12,000 



Approved 
by 0MB 



5,000 
55,000 
60,000 



6 

22 

8,000 



12,000 
2,000 



U,000 



6 

22 

14,000 



1/ 



In the event of a catastrophic spill, additional funds may be borrowed 
but in no event may obligations exceed S50 million. 



- D!^lH^^^^^°'^• ^Z^';^ °^ P^^^^Se of proposed Super fund legislation 
would be to reduce dollar figures by 505. 



Program Justification 

The Outer Continental Shelf Lands Act Amendrr^nts of 1978 requires the Co3<.t 
Sons on ?r'r ^^^i"°"^l M--e safety and Environ^IntarProtectJon mis- 
on nn?i . '^^ Continental Shelf. Title III of the law provides for an 

°tLn i^°"'P^f^^'°" ^""^ ^° P^y compensation for damages, including 
cleanup, resulting from oil spills. j. I'-xuuing 

There are about 2200 platforms on the Ojter Continental Shelf which produce 
approximately 300 million barrels of oil annually. -Jhere are about 1^500 

tha a'bouf .n'n" mi' ' '^''' ^°'""^ °' ^°'°°° bLrels!"lt is estima'ted 
that about 300 spills per year will lead to claims. 



362 

Mr. Breaux. We have problems, at least during the hearings, on 
writing the legislation. Captain Schubert had indicated that you 
felt that there would be some problems keeping up with the sched- 
ule and the intent of the committee and the legislation with regard 
to the amount of inspections we would be having. 

I take it the problems would be with reference to your considera- 
tion about manpower and money in order to do what you have 
been told to do by the Congress. 

Since then, we have been requested by Admiral Hayes, regarding 
the budget request, to provide an adequate budget to achieve the 
purpose that Congress intended you to achieve. 

Could you bring us up on the status of the budget request for 
additional manpower or whatever the request was? First, tell us 
what the request was, not only in dollar terms, but also in terms of 
manpower needs. 

Captain Schubert. An increase of money, especially, and also for 
certain services that would be procured, such as helicopters and 
additional equipment. 

Mr. Breaux. Does the Coast Guard contract out for helicopters? 

Captain Schubert. Yes. 

Mr. Breaux. You don't have any? 

Captain Schubert. We do have several aircraft, but generally 
speaking, we contract for this type of service. 

Mr. Breaux. So the request was for additional manpower, and 
also for additional funds, I guess, to acquire the support necessary? 

Captain Schubert. Yes. 

Chairman Murphy has submitted a letter to the Commandant 
requesting that this information be provided in detail. That letter 
is in the final stages of preparation and we expect to have it soon. 

Mr. Breaux. Where are we with regard to the budget and 0MB 
and the request through the Department of Transportation for 
your additional needs? 

Captain Schubert. We are in the process of preparing with the 
Department of Transportation an amendment to the fiscal 1980 
budget which will reflect a phased program to meet these needs. 

I would like to expand a little bit on the need for a phased 
program, particularly in the area of personnel. 

The type of trained individual that we need to conduct these 
investigations and inspections is not readily available off the street. 
A certain amount of training is required. 

For instance, we have acquired a certain limited number of 
personnel in the fiscal 1978, fiscal 1979 budgets. If my memory 
serves me, we had 51 positions, 46 military, and 5 civilian, provided 
in those 2 fiscal years. 

In the first fiscal year, we had 32 positions. Those people are 
trained and on board right now. However, the remainder, the 
balance of that 51 positions, are in the process of being trained at 
the present time and won't be up to speed and ready to be utilized 
until September. 

Mr. Breaux. What positions? 

Captain Schubert. Inspectors and investigators. 

Mr. Breaux. For 0MB? 

Captain Schubert. For our OCS inspection and investigation 
responsibilities. 



363 

Mr. Breaux. And how many do you have in the total program in 
operation now? How many inspectors, approximately? 

Captain Schubert. We have the 32 that are out there now, plus 
we have additional resources that are provided in 1979 for training. 

Mr. Breaux. How many do you have on line? 

Captain Schubert. Thirty-two. 

Mr. Breaux. Thirty-two in service? 

Captain Schubert. Yes. 

Mr. Breaux. How many additional will you be acquiring when 
you complete the update? How many more will you get? 

Captain Schubert. Nineteen this fiscal year. 

Mr. Forsythe. Earlier today, we heard from Mr. Wallace that 
NOAA, which has authority to conduct a study of diving safety on 
OCS under the provisions of Public Law 95-372, is prepared to 
promulgate regulations on diver safety. 

Under sections 21 and 22 of Public Law 95-372, the Coast Guard 
has clear lead-agency jurisdiction over health and safety and in 
fact has promulgated diver safety standards. 

I would appreciate your comments on this matter and what 
difficulties you perceive in enforcing your standards. 

Captain Schubert. I think there may be a bit of confusion as to 
just exactly which agency is conducting diving studies versus issu- 
ing the regulations. I fully concur with your observation that the 
Coast Guard is the authority to issue the regulations. 

NOAA is charged, I believe, under section 21(e) of the act, to 
conduct studies in cooperation with the Secretary of the depart- 
ment in which the Coast Guard is operating and also, with NIOSH. 
Certainly, the results of these studies would be used as a basis for 
promulgation of any amendments to existing Coast Guard regula- 
tions on the subject. 

However, we would follow the Administrative Procedures Act 
and certainly would invite any input from the public, including the 
industry, that would be necessary. As I understood the comments 
that were made previously, there was some question as to whether 
there would be any industry input on the studies. I believe I would 
have to defer to NOAA on that. Any further regulations them- 
selves, if needed, would be promulgated by the Coast Guard and 
have industry input. 

Mr. Forsythe. You have, of course, been in this field for some 
time, but you would not conceive that you would go into final 
promulgation of the regulations without not only other experts in 
the field, but the industry itself. They have to be a part of this. 

Captain Schubert. No question. 

Mr. Forsythe. Of course, OSHA should be consulted in this area, 
as they were in the promulgation of the Coast Guard's diving 
standards. I would assume you would follow the same proceedure 
in this situation? 

Captain Schubert. They have prepared and have published a 
regulatory package on commercial diving. The Coast Guard also 
has promulgated regulations applicable to commercial diving on 
inspected vessels and the OCS. We are working very closely with 
OSHA and are looking at the possible development of additional 
regulations for medical standards and qualifications. 



U9-118 0-79-24 



364 

Also, we find, as the studies being conducted by NOAA progress, 
there will be areas that may require continuing modifications of 
the existing regulations by the Coast Guard and OSHA. 

Mr. FoRSYTHE. You do not perceive that you may be reaching the 
point of overregulation in this field? 

Captain Schubert. No, sir; I don't think so. We would hope that 
the Coast Guard regulations are, in fact, reasonable and demon- 
strate our interest in the safety of the individuals who are engaged 
in this hazardous occupation, as well as not inhibiting the develop- 
ment of the DCS. 

Mr. FoRSYTHE. You mentioned that OSHA does have lead agency 
jurisdiction for all commercial diving. But who enforces those 
standards, in accordance with Public Law 95-372, do you feel that 
should be in the OCS? 

Commander Cronk. OSHA and the Coast Guard have the re- 
sponsibility to enforce their regulations which are basically similar 
regulations which apply to the commercial diving industry as a 
whole. But the areas of application are different. This is in accord- 
ance with our interagency agreements that we are working on, 
memorandas of understanding, and also in line with our respective 
authorities. 

Mr. FoRSYTHE. So as far as enforcing them on OCS, commercial 
diving — is that your responsibility? 

Captain Schubert. Yes. 

Mr. Forsythe. You do, then, carry enforcement of all deepwater 
diving? 

Captain Schubert. On the OCS. 

Mr. Forsythe. How about deepwater diving not on OCS? 

Commander Cronk. We enforce the Coast Guard commercial 
diving regulations on OCS facilities, on OCS operations where we 
have authority, and on Coast Guard inspected vessels, where we 
also have authority. 

Mr. Forsythe. I know there is no clear answer to this, but is 
there any other commercial diving that you don't cover? 

Captain Schubert. We will have to provide a clearer picture of 
this. I don't think we have it at our fingertips. 

Mr. Forsythe. One of the traps we get into up here on the Hill, 
we duplicate, we complicate for the bureaucracy and the industry 
is at the tail end of it, and we make a mess for them. So these 
kinds of things, I think, are important. 

So I would appreciate an answer on the record. 

[The information follows:] 

Coast Guard Regulations of Commercial Diving Operations 

Coast Guard regulations, do not cover commercial diving operations taking place 
from an uninspected vessel on the waters above the OCS such as salvage diving for 
a sunken Spanish galleon. It is our opinion that OSHA's regulations do not apply 
either. Coast Guard regulations only apply to commercial diving operations taking 
place from Coast Guard inspected vassels anj^where in the world; commercial diving 
operations taking place from any artificial island, installation or other device on the 
OCS or from any vessel engaged in activities related to the OCS; and commercial 
diving operations taking place at any deepwater port or its safety zone, or from any 
vessel connected with a deepwater port or within the deepwater port safety zone. 



365 

Mr. Breaux. We will have some questions we would like to 
submit to you, but I have one question on the manning require- 
ments 

The legislation provides that the Coast Guard must promulgate 
regulations that vessels or other vehicles or structures operating on 
the OCS be manned by U.S. citizens or permanent resident aliens. 

We have information from some newspaper articles in Louisiana 
that indicate to the committee there are foreign-owned construc- 
tion vessels with foreign crews that are designated to work in the 
Gulf of Mexico and are actually working, taking the position that 
crew members are all part of the marine crew and therefore not 
working on the fixed structure and thereby avoiding the manning 
requirements of section 30. 

I guess my general question is, are you familiar with this situa- 
tion and could you give us any indication of what is actually 
happening with regard to the manning requirements that they are 
using in this kind of situation? 

Captain Schubert. I would defer to Commander Cronk. 

Commander Cronk. The manning of foreign vessels is addressed 
in section 30, by section (c)(2). 

Mr. Breaux. Are the regulations complete to implement section 
30? 

Commander Cronk. The regulations are near completion. 

Mr. Breaux. Would they address the type of situation I laid out 
in front of you, whereby they say the workers are part of the 
marine crew and not under the requirement? 

Commander Cronk. Yes, sir, they would. 

Mr. Breaux. If it is a duck we want to call it a duck; that is, if it 
looks like a duck and it walks like a duck. 

Commander Cronk. We have no problem with the interpretation 
and the intent the Congress had in the necessary rulemaking. 

Mr. Breaux. What kind of time frame are you working in? 

Captain Schubert. We are a little behind schedule on those. We 
are looking probably to the end of April as a ballpark guess on it. 

I would like to note here — and it is not intended as an excuse — 
but we have had an extreme regulatory load, particularly in con- 
junction with this legislation. Title 3 poses some new challenges to 
the Coast Guard and we had extensive regulatory processes on- 
going with that section of the law. It gets to the point of how many 
regulations can we process within the given resources that we 
have. 

Mr. Breaux. If we are going to give you additional requirements, 
it is important that you get additional manpower and resources to 
do the job. That is something we have to follow up on, to make 
sure that we follow through with all of the legislation we write 
here, and wrote in the last Congress. That is why the chairman is 
absolutely correct to try to continue this committee rather than 
have you go before 10 or 12 other committees. 

I would rather have you out in the field doing the work than 
testifying before Congress. 

The committee appreciates your appearance and we ask that you 
respond to some additional questions that we will have in writing. 

Captain Schubert. Yes. 

Mr. Breaux. With that, the Committee on the Outer Continental 
Shelf will be in recess until March 20. 

[Whereupon, at 4 p.m., the Committee on the Outer Continental 
Shelf recessed, to reconvene on Tuesday, March 20, 1979.] 



OCS OVERSIGHT OF 1978 AMENDMENTS 



TUESDAY, MARCH 20, 1979 

House of Representatives, 
Select Committee on the Outer Continental Shelf, 

Washington, D.C. 

The committee met, pursuant to notice, at 9:37 a.m., in room 
1334 Longworth House Office Building, Hon. John M. Murphy, 
chairman, presiding. 

Present: Representatives Murphy, Hughes, and Forsythe. 

Staff present: Carl L. Perian, staff director; Lawrence J. O'Brien, 
chief counsel; Thomas R. Kitsos, counsel; C. Grady Drago, minority 
counsel; Thomas Tackaberry, Kate Bonner, Bob Shea, Charles 
Holm, and Bill McGuire, staff. 

The Chairman. The committee will come to order. 

Today is the third day of a series of oversight hearings on the 
implementation of the Outer Continental Shelf Lands Act Amend- 
ments of 1978. Since March 8, we have heard from some 20 wit- 
nesses representing the administration, private industry, trade as- 
sociations, labor unions, and public interest groups. 

As we discovered with the flurry of activity before and after our 
December proceedings, the exercise of congressional oversight can 
bring action where there has been inaction, and sudden concern 
where there has been lassitude or disinterest. It has been the 
intent of these proceedings to compel action, on the one hand, and 
communicate concern on the other. 

Hopefully, the committee's message has been heard — a message 
which has been clear since September 18 when Public Law 95-372 
was signed: We cannot lose a single day in putting the OCS law 
into operation. 

Regrettably, the first 2 days of oversight hearings produced dis- 
turbing evidence of an almost purposive disregard of congressional 
intent, and the possibility of unacceptable delay. 

It appears that there is a fundamental difference between the 
Departments of the Interior and Energy with respect to the rate of 
offshore oil development. At stake is nothing less than our national 
leasing policy for the first half of the 1980's. 

The Interior Secretary proposes a schedule of 26 offshore lease 
sales over 5 years to 1985. The Energy Department, on the other 
hand, urges an accelerated schedule of 28 lease sales in 4 years to 
1984. One administration official has been quoted in the press as 
saying that the issue: "♦ * * could culminate in a Cabinet-level 
debate * * *." 

Since Congress has made its intent crystal clear, there should be 
no need for any debate within the executive branch. Vigorous 
oversight by this committee will insure that the intent is honored. 

(367) 



368 

In provocative statements, witnesses have documented example 
after example of instances in which proposed executive agency 
regulations appear to contradict congressional intent. Indeed, com- 
petent testimony indicates that there may be some instances in 
which there have been deliberate attempts to circumvent the Outer 
Contiental Shelf Lands Act Amendments of 1978. A summary of 
the concerns of non-Government witnesses was testified to as fol- 
lows: 

"The proposed regulations tend to defeat the primary purpose of 
the amendments;" and, "the proposed regulations frequently go 
beyond the scope and intent of the law and, occasionally, are in 
direct conflict with it." 

Representatives of the Association of Diving Contractors alleged 
that the diving industries were intentionally excluded from six 
meetings held in the National Oceanic and Atmospheric Adminis- 
tration to develop regulations which will set standards for commer- 
cial diving operations on the Outer Continental Shelf. The diving 
spokesman also suggested that the National Institute of Occupa- 
tional Safety and Health Administration has been unilaterally 
committing funds for diving research without waiting for the 
NOAA plan. 

Coast Guard witnesses revealed that an inspection had been held 
as recently as late January on the Penrod Oil Co. rig where eight 
workers were killed in a tragic fire last week. The Coast Guard 
also indicated that some 50 additional personnel and extra funding 
are necessary to carry out safety duties on the Outer Continental 
Shelf. One can only hope that the prompt commencement of no- 
notice inspections by the Coast Guard, as required by the act, can 
diminish the number of such tragedies. 

Yesterday, the Comptroller General published a GAO study of 
lease sale 43 on the Georgia embayment, which I requested on 
September 11, 1978. 

The GAO report underscores the absolute need for vigorous OCS 
oversight when it concludes: 

First, that better information on resource potential is needed, 
and second, that subsequent national OCS policy decisions must 
await further experience with alternative leasing systems and de- 
tailed analysis of long-term OCS planning, based on the 1978 OCS 
Amendments. 

As the GAO study makes clear, the passage of the 1978 act was 
just the first step in a lengthy, painstaking process, and the execu- 
tive agencies must realize by now that the Congress is intent upon 
acting as a full partner at every step along the way. 

With 22 percent of this Nation's marketable gas and 9 percent of 
our crude oil now originating on the Outer Continental Shelf, we 
must move ahead quickly without delay or distraction. 

When my colleagues in the House ultimately consent, this com- 
mittee will persist in its effort to carry out the intent of House 
Resolution 97, which established the committee in the 95th Con- 
gress. That resolution authorized continuation of the OCS Commit- 
tee, "* * * through the legislative process," a period which the 
House Administration Committee said "* * * should clearly in- 
clude the oversight and monitoring of the promulgation of rules 
and regulations to implement the 1978 amendments." Only when 



369 

those regulations are in place and in compliance with the will of 
the Congress will that process be complete. 

I would like to yield at this time to the distinguished minority 
member, Mr. Ed Forsythe, of New Jersey. 

Mr. Forsythe. Thank you, Mr. Chairman. I congratulate you on 
your statement. I have one that I would like to read at this point. 

Mr. Chairman, I first would like to thank all of the witnesses 
who have appeared before this committee over the past 4 months. I 
believe that they have come before this committee well prepared, 
and have expressed their concerns succinctly. 

Unfortunately, I find myself in a very unusual position, particu- 
larly for a minority member of this body, by saying that, "I told 
you so." 

As you will recall, I voted against final passage of the conference 
report on S. 9, because I felt that it would create the very problems 
our committee has uncovered. 

For the past 4 months, we have heard that the Federal depart- 
ments and agencies are dragging their feet in implementing Public 
Law 95-372; that there are bureaucratic turf battles being conduct- 
ed; and that actions are being taken contrary to congressional 
intent, and sometimes contrary to the new statute. 

If there was ever evidence uncovered to support the need for 
intensive oversight by congressional committees, we have done so. 

There have been numerous complaints from various witnesses 
that they are having difficulty finding a single source to deal with 
concerning OCS leasing, since the provisions of the act are spread 
over 11 departments and agencies of the Government. I would 
suggest that if it were not for this committee, they would have the 
same problems in the House, since 10 standing committees have 
jurisdiction of various provisions of the bill. 

I have also experienced something during these hearings that I 
have not experienced in all of the years I have been in Congress, 
and that pertains to the statements of the witnesses of the Depart- 
ment of Interior. 

On March 8, Mr. Emery informed the Department of Interior 
witnesses that we knew they had completed their 5-year leasing 
schedule, and that it contained a maximum of five or six lease 
sales a year. They denied that it was completed, and the Director 
of the OCS Program for the Department of Interior stated that 
they did not know what they were going to recommend. 

The very next morning, the staff received from the Department 
of Interior, the release of their 5-year schedule. Not only was Mr. 
Emery correct in that they had indeed finished their schedule, but 
that it did contain a maximum of five or six sales a year. 

I have written Secretary Andrus on this matter, but to date, this 
committee has not received any comment from his office on the 
actions of their witnesses. 

I would like all of the Federal departments and agencies to 
remember one thing. 

This committee was formed and charged with developing and 
implementing an accelerated OCS leasing program. One that not 
only created an orderly program by which OCS energy resources 
could be produced, but we were also responsible for developing 
provisions that would increase competition, protect the human. 



370 

marine, and coastal environments, and provide for a fair financial 
return for the leasing of our Nation's energy resources. In spite of 
the faults of Public Law 95-372, I believe with some changes and 
with proper implementation, we can accomplish this goal. 

However, my biggest concern is for the consumers of this Nation, 
of which I am one. 

When this committee was formed, our Nation had already expe- 
rienced energy problems. Today, we are faced with an energy prob- 
lem greater than was anticipated just a few short years ago. The 
problem is not one of our planet not having enough oil reserves 
and resources, but of the dependence of this Nation on the future 
good will and stability of foreign nations for such a large percent- 
age of our oil. 

If there was some way we could suddenly develop all of the oil 
and gas that existed on the OCS, it would not be enough, in itself, 
to totally solve our problem, even though we have no idea what 
there is on the OCS in the way of hydrocarbon resources. 

But, if you accelerate leasing on the shelf, as three Presidents 
have called for, and combine this with conservation, provide the 
incentives to develop all fossil fuels, proceed with Federal actions 
and policies that will allow the development of coal and shale oil, 
and develop alternative energy technologies, we will go a long way 
toward helping ourselves. 

Mr. Chairman, I know you agree with me that one of the positive 
steps this Congress, particularly the House, can take to at least 
insure that the energy resources on the OCS will be developed at 
an accelerated and orderly pace, is for this committee to continue 
its responsibility of implementing the regulations and programs 
required by Public Law 95-372. 

I thank you, Mr. Chairman. 

The Chairman. Thank you, Mr. Forsythe. 

Our first witness today will be Hope Robertson of the Environ- 
mental Policy Center. Ms. Robertson of the Environmental Policy 
Center has been a consistent and energetic participant in the devel- 
opment of OCS policy. 

STATEMENT OF MS. HOPE ROBERTSON, ENVIRONMENTAL 

POLICY CENTER 

Ms. Robertson. Thank you, Mr. Chairman. 

I first want to extend my apologies for Frances Beinecke, who 
was not able to be here today. She thought she was supposed to be 
here tomorrow, so I got a call last night asking if I would speak 
before you today. 

What I would like to do is submit, in more detail, a statement at 
a later date — since I did not have time between 10 o'clock last 
night and this morning to prepare a detailed statement — and I 
believe Ms. Beinecke would also like to submit a detailed statement 
for the record. 

First of all, I want to thank you for giving me the opportunity to 
appear before you once again on the subject of the implementation 
of the Outer Continental Shelf Lands Act of 1978. As I said, my 
statement today will be very brief, but I would like to make four 
major points. 



371 

First of all, I definitely appreciate this committee's interest in 
OCS implementation. However, I think it is difficult to go into a 
great deal of detail as to how the implementation is going in light 
of the short time period since last December's hearings. 

With a few exceptions, and I must admit, they are important 
exceptions, the implementation process seems to be sticking to the 
estimated schedule that the Department of Interior issued, fairly 
well. 

EPC has commented, and plans to comment on the proposed 
regulations which have been issued by the Department of the 
Interior. Other members of the environmental community are also 
availing themselves of the opportunity to submit criticisms, et 
cetera, for changes in the proposed regulations. 

However, until we see the final form of the regulations, it is 
difficult to Eissess what the Department of Interior is going to 
accept in the way of our suggestions, and what they are going to 
reject. Unfortunately, this is one of those awkward periods where 
we have to sit and wait to hear what the Department of the 
Interior is going to do with our various suggestions. 

However, I would like to take this opportunity to comment on 
two problems that I have seen in the last few months. 

First, the recent announcement for the leasing program, which 
came out of the Department of Interior is, in my estimation, inad- 
equate, and does not meet the requirements of section 18 of the act. 
What was published is really a leasing schedule, and not a leasing 
program. 

We will be submitting detailed comments to the Department of 
the Interior on this, and I would be happy to forward them to this 
committee. I will go into detail on that program in those com- 
ments. 

[The information was not received for the record:] 

Statement of the Natural Resources Defense Council, Inc., on the 
Department of Interior's Proposed 5- Year Leasing Program 

(By Francis Beinecke and Sarah Chasis) 

The Natural Resources Defense Council, Inc. (NRDC), a public interest environ- 
mental organization, with over 40,000 members nationwide, submits the following 
comments on the proposed five year leasing program, released on March 9, 1979. 
NRDC's comments reflect an analysis of the program in relation to the require- 
ments of Section 18 of the Outer Continental Shelf Lands Act Amendments of 1978, 
and to NRDC's preliminary comments submitted to the Department on December 
15, 1978. 

NRDC is concerned that the program presented to the Governors and the public is 
essentially only a schedule. The document prepared by the Department summarizes 
concerns expressed by states and interested parties in response to the Secretary's 
request for comments in December 1978. Although the document contains informa- 
tion on the hydrocarbon potential and general environmental characteristics of each 
of the twenty-two possible sale areas, it does not contain a rationale for the schedule 
chosen by the Secretary or an analysis of how the requirements of Section 18 are 
met by the program. These concerns are discussed in greater detail below. 

Before discussing NRDC's concerns about the draft program, we would like to 
indicate our strong support to the Secretary's decision to modify the options present- 
ed to him and delete Bristol Bay from the leasing schedule, and move St. George 
Basin and Chukchi to contingency sales. The Governor of Alaska's comments on the 
program and those of numerous environmental organizations have indicated that 
Bristol Bay is one of the most productive offshore areas in the world. Governor 
Hammond recommended that leasing there be postponed indefinitely. The con- 
cerned organizations requested that it be deleted from the leasing program. The 
Secretary's decision to omit this sale even though it was included in the staff 



372 

options represents a commitment to meeting the intent of Section 18 to balance oil 
and gas development with environmental concerns. His foresight to omit the highest 
areas of environmental concern will help to avoid future conflict similar to that 
over lease sale 42 on the Georges Bank. 

NRDC's review of the proposed leasing program reveals the following inadequa- 
cies. 

1. There is no discussion of the considerations that caused the Secretary to modify 
the leasing schedule option proposed to him by staff, or a rationale for the option 
which was selected. 

2. The generality of description and large geographic scope of areas included in 
the proposed program run counter to the specificity intended by Section 18 of the 
amendments. 

3. The program describes no procedure for the consideration of marine productiv- 
ity, environmental sensitivity, competing uses, or environmental and predictive 
information as required in Section 18(a)(2) of the amendments. 

4. The program does not include a discussion of the Bureau of Land Manage- 
ment's Environmental Studies Program as a component of the five year leasing 
program. 

5. There is no indication of how the requirements of the National Environmental 
Policy Act are to be met. 

1. Proposed schedule 

The Secretary of the Interior sent to the Governors of affected states a proposed 
leasing schedule on March 9, 1979. This schedule varied in many respects from any 
of the options presented to him by his staff as described in the program document. 
The most noteworthy changes were the deletion of Bristol Bay from the schedule, 
the placement of the Chukchi Sea and St. George Basin in a second, planning 
category, and the moving down in the schedule the two North Atlantic sales. We 
strongly support these changes because they represent a concern for availability of 
information and/or the vulnerability and productivity of those environments. The 
proposed schedule must be presented with an accompanying discussion of the ra- 
tionale behind the choice, including the manner in which the considerations of 
Section 18(a)(2) were treated. As presented, the five-year leasing program is nothing 
more than a schedule, and an exceedingly general one, at that. We believe that a 
discussion presenting the reasoning of the selection in the context of the require- 
ments of Section 18 is necessary for Congress, the states and other interested parties 
to evaluate whether the program obtains "a proper balance between the potential 
fro environmental damage, the potential for the discovery of oil and gas, and the 
potential for adverse impact on the coastal zone." (Section 18(a)(3)). It is not ade- 
quate for officials in the Interior Department to claim that the existence of the 
schedule verifies the fact that Section 18(a) was met. 

2. Geographic scope of proposed areas 

The program describes sale areas in the vaguest descriptive terms possible. Vast 
areas, such as Central and Northern California, the North Atlantic, and the Gulf of 
Mexico are listed in the public notice. We believe that the identification of such 
broad areas does not represent the intent of Congress for a five-year leasing pro- 
gram. As the program document indicates that each sale is intended to cover 
approximately one million acres, we believe it would be possible to split up some of 
the areas into smaller pieces to better educate the public as to the probable location 
of the sale areas. The public is greatly interested in and concerned about the scope 
and potential impacts resulting from these sales. Right now many people in Califor- 
nia are very concerned about the huge area included in Sale 53. Whether or not 
portions of the Georges Bank will be covered in one or both of the North Atlantic 
sales is of very great interest to many people in New England. We believe that the 
Department's tendency towards generality in this program could result in very 
strong opposition from the public, because of what is believed to the an intentioned 
avoidance of addressing conflicts early in the process. 

In the draft program that will be presented to Congress in June, we recommend 
that the schedule be accompanied by a description of the probable scope of each 
area, particularly the areas to be included in the call for nominations for each sale. 
This should include an indication of the general boundaries, particularly the likeli- 
hood of leasing close to shore. This requirement is indicated in Section 18(a) by 
requiring that: "The leasing program shall consist of a schedule of proposed lease 
sales indicating, as precisely as possible, the size, timing, and location of leasing 
activity * * *" (italic supplied). 

The advantage of requiring greater specificity is to provide a context for the 
considerations required by Section 18. To fully balance environmental impacts and 
oil and gas potential, the Department would have to analyze the area likely to be 



373 

impacted. For example prime fishing areas, sea lanes, marine mammal habitat, 
might or might not be an issue, depending on the probable area to be covered. The 
broad areas covered in the proposal, which in fact covers a large portion of the 
offshore waters of the country, would require an analysis of every fishing area, 
every sea lane, every marine sanctuary proposal within the vast areas covered in 
the proposal. To avoid such an enormous analysis, which is probably unnecessary if 
the areas are known more specifically, would be a waste of the Department's staff 
time and resources. However, it cannot be avoided if the program remains as 
presented. 

3. Considerations of Section 18(a)(2) 

Of grave concern to NRDC is the failure of the Department to discuss how the 
required considerations of Section 18(aK2) have been addressed in the development 
of the five-year leasing program. We believe that by listing in detail the issues to be 
considered. Congress intended a thorough analysis of each. NRDC's particular inter- 
est, because of its environmental perspective, is the manner in which competing 
uses, particularly fisheries, and resource concerns, including marine productivity 
and environmental sensitivity, were evaluated. We suggested in our comments of 
December, 1978, that Interior develop a procedure subject to public review, that 
would institutionalize these considerations. 

Although the program document generally describes each area included in the 
schedule, much of the information included is little more than a rehashing of the 
information provided originally by the states and interested parties. In addition, the 
descriptions of competing uses are general and brief. For example, in the description 
of the North Atlantic information on the abundance of fish and birds and the 
promising nature of the geological structure is included for the southeast edge of 
Georges Bank. That information is of little use unless there is an indication of how 
it is to be weighed. 

In NRDC's view, the intent of addressing the considerations outlined in Section 
18(a)(2) is to identify as early as possible what conflicts are likely to occur. Once 
specifically identified, needed studies and mitigating measures can be designed so as 
to avoid conflicts at the time of the actual sale. Furthermore, by providing a 
discussion of the way these issues were considered in the development of the 
program, the Congress and other interested parties can be made privy to how the 
actual balancing occurred. Section 18 contains no language indicating that these 
considerations should not be made public and we think doing so would be very 
advantageous to the successful adoption of the five-year leasing program. 

4- Environmental studies program 

The program document contains no discussion of manner in which the Bureau of 
Land Management's Environmental Studies Program will be integrated into the 
timing and selection of proposed sales in the leasing program. Yet, Section 18 makes 
clear that the availability of and need for collection of data are to be described in 
the program. Section 18(a)(2)(H) requires that the program be based on the consider- 
ation of "relevant environmental and predictive information for different areas of 
the Outer Continental Shelf." Furthermore, Section 18(Tt)) requires that the program 
include estimates of funding and staffing "required to (1) obtain resource informa- 
tion and any other information needed to prepare the leasing program * * * (3) 
conduct environmental studies * * *." These requirements have not been addressed 
in the program sent to the governors. 

At the recent OCS Advisory Board meeting held in Birmingham, Alabama, on 
April 17-18, many Board members expressed concern that the leasing program 
contained no evidence that the redesigned environmental studies program, which 
the Board supports, has been firmly integrated into the decision points of the OCS 
program. This is a major concern as the new focus of the studies program is to 
design studies to be used by decisionmakers in each phase of sale preparation. 

The first decision made in preparing a five-year leasing program is the selection 
of areas to be included. This decision must be based on the availability of informa- 
tion on the different sale areas as well as an identification of studies which are 
needed before a sale can be held. To accomplish this, for each area in the program 
there must be an analysis of available information, additional study needs, length of 
time required for these studies and funding requirements. We recommend that the 
leasing program include this information in the next draft. 

5. National Environmental Policy Act 

Congress, in requiring that the Secretary prepare a five-year leasing program 
based on the considerations and needs described in Section 18 of the amendments, 
made a major commitment to the long-term development of offshore oil and gas 
resources consistent with the protection of the marine, coastal and human environ- 



374 

ment. The Secretary, as indicated in the draft program, has interpreted this direc- 
tive as a mandate to proceed into frontier areas, particularly those off the coast of 
Alaska. In NRDC's view, there is no question but that this commitment by the 
Secretary represents a major federal action significantly affecting the quality of the 
human environment. (Section 102(c) of the National Environmental Policy Act.) The 
Interior Department's 1974 OCS proposal required a programmatic environmental 
impact statement as did its recent coal leasing program, subject to the Court's order 
in NRDC v. Hughes. The Department would seriously violate its legal obligations as 
required by NEPA if a programmatic EIS is not prepared on this program. 

NRDC believes that a programmatic environmental impact statement would be 
extremely beneficial in the development of Interior's policy on OCS leasing. The 
Secretary has a responsibility mandated by Congress to balance energy and resource 
protection needs, as well as mitigate conflicts as they develop in the accelerated 
offshore leasing program. A programmatic EIS is the correct context to describe the 
rationale behind the program, the manner in which the considerations of Section 18 
were addressed, the probable conflicts, the mitigation techniques to be used, and the 
alternatives to the probable impacts of the proposed action. A programmatic EIS 
should explain why one option is preferred over another, including an assessment of 
the benefits and costs of each alternative. The recent history of the leasing program 
indicates that the general public, particularly those concerned with frontier areas, 
has serious questions as to whether Interiors responsibility to resource protection 
is, in fact, being met. The Interior Department is not separate from the public, it is 
in the public's service, and that responsibility requires that major actions, such as 
leasing offshore for five years in every offshore area of the continental United 
States, be described in detail to the public for their review and that of other federal 
agencies. 

In his recent Energy Message, the President cited offshore oil and gas develop- 
ment as a major component of the nation's energy program. His request for Interior 
to develop a program accelerated even beyond what the Secretary proposed, re- 
quires a thorough analysis of the impacts of such an acceleration, an analysis, of its 
feasibility, and an assessment of the costs and benefits resulting from it. A program- 
matic EIS should describe the magnitude of the leasing program, the impacts to the 
environment of developing a larger five-year program, and the alternatives within 
OCS lecising, as well as other sources of energy available. 

NRDC appreciates the opportunity to comment on this program. 

Ms. Robertson. My third point involves the regulations for use 
of new bidding systems. In EPC's estimation these are some of the 
most important regulations in the new OCS Act, and unfortunate- 
ly, they seem to be running into the most difficulty of any provi- 
sion of the act. 

Just as I complained to you at the last hearing that you held in 
December, the bidding systems are still not out. I had hoped, when 
I testified in December, that they would be out in February, and 
here we are toward the end of March and there still is no hope for 
a quick publication of these regulations. These regulations include 
both the general regulations covering the traditional bidding sys- 
tems, and so on, and also the regulations covering a new system, 
profit sharing, and the accounting system for it. 

With each day of delay of the publication of these regulations the 
use of the new bidding systems is postponed. I am very concerned 
that more and more sales will be held without being able to have 
the benefit of using some of these new systems. 

The current logjam seems to be located within the Department of 
the Interior with respect to the general regulations, and in the 
Department of Energy with respect to the accounting systems for 
the profit sharing. 

I hope this committee can do something to encourage both the 
Department of the Interior and the Department of Energy to quick- 
ly get these regulations out. 

I understand that the accounting systems, and the economics for 
the new bidding systems have to be set up very carefully and very 



375 

thoroughly, so we do not have any repercussions from doing a 
sloppy job. 

However, it seems that the delays are not due solely to the 
Department of Energy and the Department of the Interior being 
very thorough in their efforts, but rather to some rather petty 
jurisdictional problems in Energy and Interior, as to who has the 
final say over these regulations. 

I hope that this committee will urge these two Departments to 
overcome these petty issues, and get on to the more substantive 
issues of issuing these regulations. 

My final point deals with reorganization within the Federal Gov- 
ernment. This is a critical period, as you have pointed out, in the 
implementation of this act, and many proposed regulations and 
programs are currently being developed. I am quite concerned that 
if reorganization were to occur in the next few weeks, that many of 
the programs will be delayed, or slip through the cracks. Should 
reorganization occur, I hope that this committee will continue to 
look at what happens to the implementation of this act. 

I do not know what the fate of this committee will ultimately be, 
but either the OCS Committee or separate individual committees, 
such as Merchant Marine and Interior, should carefully monitor 
implementation, because I am quite concerned about what happens 
under reorganization. Finally, I would like to make one point in 
response to something Mr. Forsythe said. 

I find it very interesting that he is commenting on the delays 
that have been experienced due to the implementation of this act. I 
believe that all the sales that were scheduled are still going on. If I 
remember, since we followed the passage of this act for quite a 
while, you were opposed to many of the new provisions in the OCS 
Act, and the most controversial ones are the ones that are suffer- 
ing delays. Since those are the ones that you were most adamantly 
opposed to, I am surprised that you are upset about them. 

But there has not been any delays in the lease sales of the Outer 
Continental Shelf Lands Act. What has occurred is some slow- 
downs on promulgation of some of the environmental programs, 
and some of the bidding systems, as I have mentioned. 

Thank you very much. 

Any questions? 

The Chairman. Thank you, Ms. Robertson. 

Are you aware that in 20 years, the past 20 years, there has been 
no oversight done on OCS by any of the House committees? 

Ms. Robertson. Yes, I am. 

The Chairman. There are 11 committees. The Congress in none 
of them chose to perform any oversight on the OCS activities for 
Lands Act Amendments of 1953? 

Ms. Robertson. However, I might also add that I think there is 
far more interest in OCS development at this point, and what 
happens to it, because of the current energy situation in the 
United States. So I would suspect that committees will be far more 
interested in following the process of implementation because of 
the urgent need to get more petroleum into this country. 

The Chairman. You mentioned the Interior and Merchant 
Marine Committee performing oversight on its own initiatives. 
There are 11 committees involved, Education and Labor carrying. 



376 

of course, the safety burden, and the integration of safety and labor 
rules on the Continental Shelf. 

I would think that, with the jurisdictional jealousies, or preroga- 
tives that exist in the legislative or executive branches, a fragment- 
ed type of oversight would be no oversight, or ineffective oversight. 

Therefore, the report of the Committee on House Administration, 
of March 15, 1978, very clearly stated that the committee should 
stay in existence through the legislative process, and I will quote, it 
says: "This process very clearly should include the oversight and 
monitoring of the promulgation of rules and regulations to imple- 
ment 1978 amendments." 

I wish you would express yourself on that subject, because very 
shortly we may have the Rules Committee in the House itself 
considering whether to continue this committee through that over- 
sight period. 

Ms. Robertson. Well, obviously I think both myself and many 
other members in the environmental community are quite con- 
cerned that Congress keep up a vigorous monitoring of the imple- 
mentation of the act. As long as some type of monitoring occurs, 
and a thorough monitoring, I guess I would prefer not to hazard an 
opinion as to whether this committee should stay in existence, or 
whether it should fall under the various committees. 

However, I think your point is well taken that a fractured juris- 
diction does create problems, and perhaps it is better for it to be 
organized under one committee, but I prefer to let Congress decide 

that. 

The Chairman. Did you participate in any oversight, or hearmgs 
on the Continental Shelf, for your organization, or any environ- 
mental organization, from 1953 until the 95th Congress, when the 
committee successfully completed its amendments? 

Ms. Robertson. The Environmental Policy Center has been 
active on OCS issues for quite a while. To my knowledge, and 
because of the fact that I have only been in the center for 2 years, I 
do not know, but I can find out whether we testified in front of any 
other committees on the subject of OCS development prior to the 
creation of the OCS Ad Hoc Committee. 

I will submit that for the record, if I may. 

[The information was not received for the record:] 

The Chairman. 1 would not want you or the environmental 
community to have to make a decision, or to express an opinion in 
an environmental area, but very clearly, I am asking you if you 
think the environment, and the intent of the bill that was passed 
in the last Congress would be better overseen, or better oversight 
would be afforded if the Continental Shelf Committee that wrote 
those acts, and its staff, continued in existence through the period 
of oversight? . . 

Ms. Robertson. Well, if you look at the various provisions of the 
act, it is quite clear that it breaks down into different subject 

areas. . . „ , , ^ 

The Chairman. I am familiar with all the provisions of the act; 1 

am sure you know I am. 

Ms. Robertson. Yes. But, for instance, I am concerned about the 
environmental provisions among others, many of which would fall 
under the Merchant Marine Committee, from my understanding. I 



377 

would feel comfortable if the Merchant Marine Committee were 
responsible for oversight on the environmental provisions. 

So I would not try to make a choice. 

The Chairman. What about the men who are operating 450 feet 
below the ocean? You do not care about their environment? 

Ms. Robertson. I am not saying that I do not care about them, 
but it is not an issue that we have addressed, or been active in in 
the past. 

The Chairman. Mr. Forsythe? 

Mr. Forsythe. Thank you, Mr Chairman. 

Ms. Robertson, thank you for reminding me of my position on 
the 1978 amendments to the 1953 OCSLA, which I outlined in my 
statement. However, these amendments are not the law of the 
land, and what is happening to those amendments is far more 
serious than I ever anticipated. That is why it is important that 
this committee address some of the things that you are talking 
about in an attempt to make this new act work. 

The projection of this current oil shortage is really ancient histo- 
ry, for all of us, except perhaps you since, as you just mentioned, 
you have only been active in this area for a couple of years. 
Nobody should really have been in the dark since the 1952 Paley 
report pointed to the fact that the United States was going to be in 
an energy crunch within 6 months of the the date of the 1973 
embargo. 

We were on notice but, as the chairman pointed out, nothing 
really happened until the activity of this committee centered in on 
those problems. Therefore I fully agree with the chairman, and we 
are anxiously seeking support from outside the Congress to contin- 
ue this committee on the basis that this committee has a proven 
record it is the only vehicle that will supply the emphasis needed if 
we are going to see the development that you have agreed is 
necessary if the 1978 OCSLA Amendments are going to be imple- 
mented without delay in accordance with congressional intent. 

I do not deny that I was concerned about the provisions of 1976 
act. Frankly, I figured that most of them were already written into 
regulation, and as a result we have created, just what we are 
talking about here, bureaucratic delay, bureaucratic debate among 
the various agencies, all of which is stymying the development of 
several regulations required by the act. 

As I see it, they are very important So I would ask you, since the 
Interior Department was going to be the clearinghouse insofar as 
information was concerned, whether you think that has been devel- 
oped in the way it should have, or do you have to run all over 
downtown to find out what is going on? 

Ms. Robertson. Well, as I commented in December, I have been 
very concerned about the lack of organization of information, both 
on environmental issues and on the resource potential within the 
Department of the Interior. I think there definitely needs to be 
some clear attention by the Department of the Interior in organiz- 
ing their entire information program on the Outer Continental 
Shelf, and this deals not only with the oil and gas resources, but 
fisheries and other resources that may be impacted as a result of 
OCS development. And I would encourage any efforts by this com- 
mittee or other Members of Congress to push the Department of 



378 

the Interior to centralize information so that we can have access to 
it in a more organized fashion. 

Mr. FoRSYTHE. You commented on the regulations on the various 
bidding systems and pointed principally to the Department of the 
Interior, but also the Department of Energy. 

Do you recall that actually the Department of Energy started 
moving proposed regulations in that very area to Interior as early 
as September 28, 1978. I think it is really scandalous that the 
Department of the Interior has not moved forward as these propos- 
als aim. These regulations are important to our future lease sales. 
And so my concern is in a large measure the business of the 
bureaucratic squabbling that you and the chairman have both 
referred to, and I think it is one of the most serious problems that 
we have at this time. I hope that that message is made very, very 
clear as a result of these hearings and, as you say, we can encour- 
age improvement in these areas. 

Ms. Robertson. If I may comment on what you just said, the 
information that was transmitted from the Department of Energy 
to the Department of the Interior 10 days after the passage of the 
act were really just a reiteration of regulations on bonus bid sys- 
tems and systems which were already in place. It required very 
little work on their part to propose these regulations. Those are the 
very general bidding regulation systems. 

Where the Department of Energy may have been at fault, and I 
am not sure whether it is just that they are trying to do a thorough 
job or they are inefficient, but they have been very slow in issuing 
the regulations for the new bidding systems. That fault does not lie 
with the Department of the Interior. There does seem to be some 
problems between the Department of the Interior and the Depart- 
ment of Energy right now over some of the economics and the 
accounting systems which have been proposed by the Department 
of Energy. I believe the Department of Energy sent a proposal to 
the Department of the Interior the first of March, and the Depart- 
ment of Interior is currently going over them. But I have heard 
from sources within DOE and DOI that there are going to be some 
squabbles over the outcome of the new bidding system. But I be- 
lieve much of the delay has been with the Department of Energy 
as well as Interior. 

Mr. FoRSYTHE. Well, I guess there is enough delay for everybody 
to have a full share. 

Ms. Robertson. Right. 

Mr. FoRSYTHE. Our problem is to see what we can do about that. 
I appreciate your comments and look forward to seeing your full 
testimony. 

Thank you, Mr. Chairman. 

The Chairman. Counsel? 

Mr. O'Brien. Good morning. Has your organization taken a 
formal position on the creation of a Department of Natural Re- 
sources within the executive branch? 

Ms. Robertson. We are in the process of trying to figure out 
exactly what the final picture of DNR is going to be. We have had 
numerous meetings with people within the administration on this 
subject, but we have not yet taken a formal position. To my knowl- 
edge, no one really knows what the ultimate details of such a 



379 

program are going to be. There are a number of things we feel 
quite strongly about that would result in us being opposed to any 
creation of a DNR. 

Mr. O'Brien. What are some examples of those? 

Ms. Robertson. Well, one of our biggest concerns is that if 
NOAA is transferred to DNR, that oceans and coastal programs be 
given equal status with other Assistant Secretarial level categories, 
such as land and water and energy and minerals, or Indian Affairs. 
We want oceans and coastal areas to have a equal status with 
those agencies. 

Mr. O'Brien. As you perceive the proposal now for DNR, as you 
know it, do you see oceans or coastal areas receiving the attention 
or status that you think they deserve? 

Ms. Robertson. From what I have understood with meetings 
with Interior last week and with poeople in the White House, yes. 
But I am quite concerned about what internal organization of 
NOAA or the coastal and ocean function is going to be and, in 
particular, what is going to happen with the OCS program. 

Mr. O'Brien. How do you perceive the OCS being treated under 
the present proposal as you understand it? 

You suggest in your opening statement or imply that OCS would 
fall between the cracks — I believe that was your term. Could you 
amplify that and expand on that a bit? 

Ms. Robertson. Well, it has l^een EPC's position that we prefer 
to see a program such as the OCS split between two divisions 
within the Department of Natural Resources rather than falling 
completely under one Assistant Secretary. Our reasons for that are 
that in times of a bad administration, we feel the public has much 
greater access to insure proper implementation and enforcement of 
a law by having two different Assistant Secretaries essentially 
pitted against each other. 

So, as a result, I am not comfortable with sticking the entire 
OCS program, which seems to be the proposal that I have heard 
most recently is really favored, under NOAA. However, much of 
my opposition would really depend upon how they divide it up 
within NOAA. I am worried that some of the more protective 
provisions within the OCS law will be jeopardized if the Adminis- 
trator who is in charge of encouraging development is also in 
charge of protecting the marine environment. 

Mr. O'Brien. Assume for the sake of argument that the Congress 
elected to terminate this committee and referred oversight respon- 
sibility to 11 committees at the same time that the administration 
created a Department of Natural Resources with all of the attend- 
ant disarray that that would create internally. 

What would happen to the implementation of the OCS regula- 
tions that we are talking about here today? Would that process be 
delayed, in your view? 

Ms. Robertson. It depends how quickly the reorganization 
occurs. If this occurs within the next week or two, and put into 
action, for example, then I would be quite concerned. However, 
looking at how quickly reorganization has occurred thus far, I 
seriously doubt that a decision will be made for awhile, let alone 
activated. I do not remember the exact period of time that Con- 
gress has to approve it. Is it 60 days that Congress has? 



U9-118 0-79-25 



380 

Mr. O'Brien. I do not recall it either. 

Ms. Robertson. I think it is 60 days in which case you are 
probably talking about June or July at the earliest that the actual 
process would start. By that time, many of the proposed regula- 
tions will be finalized, so much of the problems could be alleviated. 

As I state, it really is going to depend on what happens and 
when and what form reorganization takes. I am sorry I cannot give 
you a more definite answer. 

Mr. O'Brien. Have you had any input into the efforts of the 
Interior Department to carry out environmental studies under sec- 
tion 20 of the act? 

Ms. Robertson. Not yet. NRDC may have had input. 

Mr. O'Brien. They have? 

Ms. Robertson. Yes, I believe they have. However, I can check 
on that for you. But I have not submitted any formal comments on 
that. 

Mr. O'Brien. Have you had any input regarding the section 21 
requirement that the Secretary of Interior use the best available 
and safest technologies for drilling and production operations on 
the OCS? 

Ms. Robertson. We have, as you know, actively supported that 
provision in the act for years, and although we have not submitted 
formal statements to Interior as yet on those particular provisions, 
we have discussed our concerns with various officials within the 
Department of the Interior in the ^ast. 

Mr. O'Brien. Have you submitted any comment as yet with 
respect to control of emissions on the OCS, and if you have, could 
you briefly outline what the gist of those suggestions were? 

Ms. Robertson. I have not submitted a comment on the Clean 
Air Act provisions because of the fact that — we do not have the 
expertise to talk about some of the technical issues involved How- 
ever, we agree with the comments submitted by the Natural Re- 
sources Defense Council, and I would suggest that you contact 
Frances Beinecke and get a copy of the comments that they sub- 
mitted. 

Mr. O'Brien. Thank you, Mr. Chairman. 

The Chairman. The record will be open for 7 days so that Ms. 
Beinecke's statement can be printed in the record following your 
presentation this morning. 

Mr. Kitsos? 

Mr. Kitsos. I wanted to ask one followup question on this reorga- 
nization business. 

You are familiar, of course, with the Federal consistency provi- 
sion with respect to State certificates of consistency. Does it con- 
cern you at all that if OCS moves into NOAA and NOAA went into 
a DNR, that the Secretary who sells the leases would also have the 
override on State consistency provisions? Have you thought that 
through at all? 

Ms. Robertson. Yes. Members of the environmental community 
have been having meetings within the last few days and discussed 
that issue among others. That is one of the reasons why EPC is 
concerned about putting the entire OCS program under NOAA. 

I believe, quite frankly, that much of the responsibility for the 
OCS should fall under NOAA, particularly some of the oceans 



381 

programs, et cetera, because if you look through the act there are 
so many occasions when NOAA has to be consulted currently by 
the Department of the Interior, that it makes more sense for 
NOAA to have much of the responsibility. However, as I said, I am 
quite concerned about a conflict of interest of putting both develop- 
ments and other activities under the same Administrator. 

Mr. KiTSOS. Thank you. 

Thank you, Mr. Chairman. 

The Chairman. Thank you, Ms. Robertson. 

[The following material was supplied for inclusion in the record:] 

Statement of Frances Beinecke, Atlantic Coast Project, Natural Resources 

Defense Council, Washington, D.C. 

The Natural Resources Defense Council, Inc. (NRDC) appreciates the Committee's 
invitation to comment on the implementation of the OCS Lands Act Amendments. 
Since our earlier testimony in December of 1978, NRDC has reviewed and comment- 
ed on notices and proposed regulations issued by the Interior and Commerce Depart- 
ments pursuant to the new law. We intend to comment on all proposed rules 
pertaining to the environmental sections of the amendments. NRDC's primary areas 
of concern are described below. Our complete comments on proposed regulations are 
attached as an appendix for the Committee's review. 

Before addressing the specifics, we would like to emphasize the importance of and 
need for continuing oversight of the implementation of the amendments during the 
next year. The implementation of the amendments should result in major changes 
in the manner in which the offshore oil and gas leasing program is conducted. 
Continuing oversight is necessary to ensure that the Congressional intent of the 
amendments is fully met. 

Turning to the proposed regulations, we will summarize NRDC's concerns which 
have been transmitted to the Interior Department on the advance notice on air 
emissions, the OCS information program, the regulations covering exploration and 
development and production plans, federal consistency under the Coastal Zone 
Management Act and the proposed leasing program under Section 18. 

Air emissions 

The Interior Department's advance notice for a rulemaking covering the air 
emissions requirement of Section 5(a)(8) in the amendments raised certain questions 
concerning whether the rule should be restricted to a limited geographic area, to 
certain types of OCS operations and to certain emissions. This approach towards 
seeking to limit the scope of the rule prior to gathering basic data on the subject is 
of concern to NRDC. Section 5(a)(8) does not specifically indicate any limitation of 
scope. In fact, it encompasses any situation where a relationship can be shown 
between offshore air emissions and a state's ability to meet ambient air quality 
standards. We believe information on ambient air quality in adjacent states, off- 
shore meterologic conditions and emission sources, types and levels would have to 
be collected before many of the questions addressed in the notice could be resolved. 
We object to the Interior Department attempting to decide on the questions prior to 
a comprehensive analysis of the problem. 

Oil and gas information program 

The proposed rule on the Oil and Gas Information Program does not adequately 
involve the public in the review of available information. There is no procedure to 
acquaint the public on the availability of information; or to provide an opportunity 
to review it. Furthermore, the proposed rule limits even the state and local govern- 
ments involvement by restricting the availability of proprietary and privileged 
information to those states where leasing is proposed within 3 miles of a state's 
jurisdiction. Section 26(d)(2) of the amendments is not so limited, but refers to 
"adjacent" states. 

Exploration, development, and production plans 

NRDC's attached comments on the exploration and development and production 
plans indicate those parts of the proposed regulations which we support as well as 
those sections which are of concern. Specifically, we support the Department's 
decision to include the requirement for an Environment Report to accompany both 
plans. The information required in the Reports we believe will help mitigate envi- 
ronmental impacts associated with offshore operations. Also, by including the Re- 



382 

ports the Department has retained consistency between earlier regulations govern- 
ing exploration and development and production plans and this set. 

To summarize our general areas of concern; the proposed regulations are too 
limiting in the following areas: the information required in development and pro- 
duction plans and the environmental impact statement prepared on such plans; the 
criteria used in deciding whether an EIS should be prepared. There is no system for 
public notice or public comment on exploration and development and production 
plans or on the decision as to whether an EIS should be prepared. 

OCS leasing program 

On March 9, the Secretary issued a draft 5 year leasing schedule as required 
under Section 18 of the amendments. As stated at the December hearings, NRDC is 
concerned that parts (1), (2), and (3) of Section 18(a) which require a consideration of 
competing uses of the OCS including areas of environmental sensitivity and marine 
productivity are not fully addressed. The schedule continues to contain key areas 
where conflicts are known to exist, for example the Georges Bank and the Beaufort 
Sea, without any explanations as to how the evnironmental sensitivity or marine 
productivity of these areas were assessed in the development of the lease schedule. 

Because the amendments specifically state that these factors must be considered 
when developing a leasing program, we maintain that the Secretary must establish 
a procedure that will be used to meet these requirements and that that procedure 
must be presented to the public for review. The Secretary has continued to interpret 
Section 18 as a requirement for a schedule not a program. 

We urge this Committee to ascertain from the Department how these considera- 
tion requirements in Section 18 are to be met in a systematic process which is 
subject to public review. 

Federal consistency 

New regulations issued by the Commerce Department (15 CFR 930.79) to bring the 
timing of state consistency review into conformity with the amendments are con- 
trary to the language and purposes of the Coastal Zone Management Act, as 
amended. The CZMA allows states six months to review a project for consistency, 
yet the new regulation severely limits this period by requiring "the minimum time 
necessary to inform the public, obtain sufficient comment and develop a reasonable 
decision. ' We have recommended deletion of this language to bring the regulation 
into conformity with the amendments and the CZMA. 



Natural Resources Defense Council, Inc., 

New York, N. Y., March 5, 1979. 

Re Federal consistency regulations, 15 CFR section 930.79 (44 Fed. Reg. 3705, Jan. 
18, 1979). 

James P. Lawless, 

Assistant General Counsel, OCZM-NOAA, 

Washington, D.C. 

Dear Jim: I am writing concerning the revision to the federal consistency regula- 
tions issued after passage of the Outer Continental Shelf Lands Act Amendments of 
1978. I believe that the procedures recommended to the states under Section 930.79 
(State Agency Concurrence or Objection) are contrary to the language and purposes 
of the CZMA, as amended. 

The provisions in question provides that the states should: "restrict the period of 
public notice, receipt of comments, hearing proceedings and final decision-making to 
the minimum time necessary to inform the public, obtain sufficient comment, and 
develop a reasonable decision on the matter." 

NRDC submits that this constitutes an attempt to rush the states through their 
consistency review and, in the process, limit to a minimum the time available for 
public review and comment. We believe this to be unwarranted and not in conform- 
ity with the statute. 

The statute gives states with approved coastal zone management programs up to 
six months to make their consistecny determination, unless after the first three 
months they fail to notify the USGC Supervisor and the Assistant Administrator of 
NOAA of the status of their review and the basis for further delay. This regulation, 
however, attempts to rush the states to decision even before the three to six month 
period permitted by the statute. It threatens to cut short the opportunity for public 
review and input. NRDC objects to this. 

We recommend the deletion of the language of the regulation quoted above. The 
regulation absent this language conforms precisely to the statute. 



383 

Thank you for your consideration. We would like to be informed as soon as 
possible regarding your intentions with respect to the regulation. 
Yours sincerely, 

Sarah Chasis, 
Senior Staff Attorney. 



Natural Resources Defense Council, Inc., 

New York, N. Y., March U, 1979. 
Re Proposed rule on the Outer Continental Shelf oil and gas information program. 
Don E. Kash, 

Chief, Conservation Division, U.S. Geological Survey, 
National Center, Reston, Va. 

Dear Don: Following are NRDC's comments on the Proposed Rule on the Outer 
Continental Shelf Oil and Gas Information Program (44 Fed. Reg. 3524, January 17, 
1979). 

We recommend that Section 252.3(a) be revised to require that copies of the data, 
information, interpretations, etc. be provided the Director on a regular and timely 
basis. Unless the Director has the data, etc., he is not required to provide summar- 
ies of such information to the States. Thus, to ensure that the States receive such 
information on a regular and timely basis, the Director must receive it on a regular 
basis. No such provision exists under the proposed rule. 

The summary report, made available under Section 254.4 to affected States and 
local governments, should also be made available to the public. Public notice regard- 
ing the availability of such information should be published in the Federal Register. 
Interested persons who so request should be notified of the availability of such 
reports. 

This section should also provide that data and information developed by USGS 
and furnished by lessees will be analyzed, interpreted and compiled as soon sis 
practicable after collection and receipt so as to ensure the timeliness of the report to 
the States. 

Notice and public availability of the index of lists of information, reports, etc. 
under Section 252.5 should be provided to the public. This index should specifically 
list environmental studies, etc., carried out by DOI or the lessee. 

Section 252.7 providing procedures for making proprietary and privileged data 
and information available to affected States is too limited. It provides for State 
review of such data only where leasing is proposed within 3 miles of a State's 
jurisdiction. Section 26(d)(2) of the Outer Continental Shelf Lands Act is not so 
limited. It provides that the Secretary shall provide privileged information to a 
designated State official regarding any activity adjacent to the State once the lease 
sale has been held in that area. The area "adjacent" to the State is not limited to a 
3-mile area. We believe that the regulation as proposed runs counter to the Act's 
intent. 

Thank you for your consideration of these comments. 
Yours sincerely, 

Sarah Chasis, 
Senior Staff Attorney. 



Statement on Advance Notice for Proposed Rulemaking on OCS Air 

Emissions 

(By Frances Beinecke, Natural Resources Defense Council) 

The Natural Resources Defense Council (NRDC), in response to the Federal Regis- 
ter Notice of December 28, 1978, submits the following comments on the advance 
notice of a proposed rulemaking to control air emissions on the Outer Continental 
Shelf NRDC's interest is to ensure that the proposed regulations are consistent 
with the Congressional intent of Section 5(a)(8) of the Outer Continental Shelf Lands 
Act Amendments of 1978, as indicated in the Conference Report (No. 95-1474). 

Before turning to the questions raised in the notice, NRDC would like to reiterate 
earlier concerns expressed to the Ad Hoc Select Committee on the Outer Continen- 
tal Shelf and to Secretary of Interior Andrus in December of 1978 regarding the 
Interior Department's failure to promulgate regulations required by the Amend- 
ments in a timely manner. Since the amendments were signed in September, few 
regulations have been promulgated, and the schedule for issuing regulations has 
been changed twice. Many sections of the amendments, including Section 5(a)(8) will 
not become operable without the issuance of regulations by the Department. Again, 



384 

we urge the Department to issue all necessary regulations in a timely manner. The 
acceptance of lease sales in frontier areas by NRDC and others is contingent on 
demonstration by Interior to implement the amendments. 

Section 5(aX8) was included in the amendments after a recognition by the confer- 
ees that OCS operations could affect a State's ability to meet national ambient air 
quality Standards. The amendments require that emissions from offshore operations 
must be controlled when such a relationship can be demonstrated. It is the Depart- 
ment's responsibility to collect information from all lessees on projected emission 
levels and existing meteorological conditions in the offshore areas to establish when 
such a relationship exists, and, when emissions must therefore be controlled. 

The first general question raised in the notice concerns the scope of information 
required to make a determination as to the projected emission levels from offshore 
operations affecting onshore air quality. Because offshore sales are now proposed for 
many frontier areas, such as along the coast of Alaska and the Atlantic States, 
where there has been no opportunity to establish whether air emissions in these 
areas would or would not affect an adjacent State's ability to meet national ambient 
air quality standards pursuant to the Clean Air Act, all areas must be assessed. No 
general findings or exemptions as suggested in Question l.d can be made until 
preliminary meteorological data on offshore areas has been collected and until 
lessees submit information on the projected level of emissions from their offshore 
operations. 

The Interior Department should consult with the Environmental Protection 
Agency and air modellers to establish what models would be most appropriate for 
collecting the necessary data base. The lessee should be required to submit informa- 
tion on the chemical composition of the emissions and an estimate of the volume of 
emissions. 

Question l.b in the notice asks whether the lessees should submit information on 
projected emissions with or without abatement technologies. In order to fully assess 
the impact of an operation of air quality, we believe the data should be submitted 
for the base emissions without the abatement technologies. The information without 
the abatement technologies provides the necessary information on the dimension of 
anticipated impact. Once the scale of emissions has been identified, the Interior 
Department must then determining what abatement technologies would be appro- 
priate to prevent emissions from affecting an adjactent State. 

Question l.e asks whether temporary sources, such as drilling vessels, should be 
controlled. NRDC thinks they should be. The amendments do not distinguish be- 
tween short or long term, temporary or permanent, operations in the OCS but refer 
generally to "activities authorized under this Act." As the language does not specify 
one type of activity over another, we believe the proper interpretation is to cover 
any activity which would be subject to Secretarial review at the exploration or 
development stage, if emissions can be shown to affect a State's air quality. It would 
run counter to the intent of this section for the Interior Department to limit the 
applicability of this regulation to some types of OCS activities and not to others. As 
the conference report specifically refers to the Secretary's making a determination 
when an exploration plan is submitted, and as drilling rigs are an integral part of 
exploration, there is no question that they are to be covered by the regulation if an 
impact on an adjacent State's air quality is shown. 

The second general question in the notice relates to national ambient air quality 
standards. We find the question as to whether the amendments mean national 
ambient air quality standards or State standards is more stringent to be unneces- 
sary. The conference report makes clear, as is quoted in the notice, that the 
Secretary must issue regulations which would allow States to meet more stringent 
standards if these were contained in an approved State Implementations Plan (SIP). 

The Clean Air Act in Section 116 clearly establishes that States have the ability 
to implement their own stricter standards. If a State does adopt its own standards, 
and these are more stringent than the national standards, then they in fact become 
equivalent to the national ambient air quality standards if approved as part of a 
State implementation plan by EPA. It is this interpretation that the conferees 
intended under Section 5(a)(8), and that intent is clearly established in the text of 
the conference report (p. 85). We find it specious for the Interior Department to 
even be raising this as a question in the notice as it is so explicitly answered in the 
conference report. 

We think it mistaken for the Interior Department to limit the "significantly 
affect" requirement to non-attainment areas as suggested in the discussion of ques- 
tion 4. This option would narrow the intent of the conference report which specifi- 
cally indicates that attainment or maintenance of ambient air quality standards in 
an area must be considered. The report gives no indication that an area has to be a 
nonattainment area for the regulation to become operable. It is not the intent of 



385 

Congress to allow offshore operations to degrade a State's air quality but to assure 
attainment or maintenance of existing air quality standards. We recommend that 
the Department adopt the third option in Question 4, to regulate all emissions 
impacting onshore air quality no matter whether the area is in attainment or 
nonattainment. 

In answer to question 4(h), we believe that standards for prevention of significant 
deteriorations (psd) are considered to be national ambient air quality standards in 
the Clean Air Act. The Interior Department's choice to use stricter State psd 
standards would be consistent with the conference report's indication that stricter 
State standards should apply when present. Because the report does not identify 
standards for each pollutant, we assume that the reference to national ambient air 
quality standards intends the broad definition contained in the Clean Air Act. 

Question 5 asks whether Interior should adopt EPA's offset policy for nonattain- 
ment areas for offshore operation. We believe that Interior's offset policy should be 
consistent with the EPA policy. EPA's conditions for new sources should be adopted 
by Interior where the relationship has been established that offshore operations 
would contribute to an area's inability to attain and maintain national standards. In 
addition, any offshore offsets required of the lessees must be required in the same 
air sheds as the onshore nonattainment area. 

In answer to question 5(b), EPA's conditions for new sources or modifications of 
existing sources in nonattainment areas should be applied to OCS operations where 
the operation can be shown to contribute to an area's nonattainment. We do not 
believe there is a rationale for Interior to modify EPA's conditions, once a finding 
can be made that the offshore operation contributed to impaired air quality onshore. 

Question 6 addresses the issue of whether existing operations are subject to the 
requirement of Section 5(a)(8). The language of the section refers to "activities 
authorized under the act." As stated earlier, this covers any activity which would be 
subject to the Secretary's review at the submission of exploration or development 
and production plans. Any action which requires such review after the enactment of 
the amendments would be subject to this provision. 

The final question in the notice addresses the role of State and local governments 
in the implementation of this section. We believe that their right to participate in 
this review is detailed in Section 206, OCS oil and gas exploration; Section 19, 
coordination and consultation with affected States and local governments; and 
Section 25, oil and gas development and production. At these stages the States and 
local governments have the opportunity to review the submissions by the lessees 
and alert the Secretary of their concerns. 

As indicated in Section 19, the Secretary has the ability to inter into cooperative 
agreements with affected States for the "formation of joint surveillance and moni- 
toring arrangements" (Section 19(e)). Consistent with this section, it would be appro- 
priate for the Interior Department to enter into such agreements with States to 
monitor how offshore air emissions affect the States and whether the regulations 
are being implemented. 

In conclusion, NRDC believes the Interior Department must strictly interpret the 
requirements of Section 5(a)(8) to control offshore emissions when they can be 
shown to affect a State's ambient air quality. NRDC is concerned that the tone of 
the notice indicates that Interior is inclined to interpret this section in the narrow- 
est manner by controlling only certain activities, limiting control to nonattainment 
areas, and limiting regulations to certain pollutants. We disagree with such a 
narrow interpretation of this section. If a relationship is established between emis- 
sions produced on the OCS and a State's air quality, the Interior Department must 
require the control of these emissions. The Congress did not limit the applicability 
of this section to a level of impact. 



386 

Natural Resources Defense Counsel, Inc., 

New York, N. Y., March U, 1979. 

Re Proposed rule on oil and gas and sulphur operations in the Outer Continental 
Shelf. 

Don E. Kash, 

Chief of the Conservation Division, U.S. Geological Survey, 

National Center, Reston, Va. 

Dear Don: Enclosed are the comments of the Natural Resources Defense Council, 
Inc. and Get Oil Out, Inc. on the Proposed Rule on Oil and Gas and Sulphur 
Operations in the Outer Continental Shelf. 
Yours sincerely, 

Sarah Chasis, 
Senior Staff Attorney. 



Statement of the Natural Resources Defense Council, Inc. and Get Oil 

Out, Inc. 

(By Sarah Chasis with the assistance of Frances Beinecke and Edward H. 

Comer) 

The Natural Resources Defense Council (NRDC), a national environmental organi- 
zation with a membership of over 40,000, submits the following comments on the 
proposed rule on "Oil and Gas and Sulphur Operations in the Outer Continental 
Shelf," which appears in 44 Federal Register 3513-3524 (January 17, 1979). Get Oil 
Out, Inc. (GOO), an environmental organization based in Santa Barbara, California, 
which has been particularly concerned about the impacts of offshore development, 
also joins in these comments. 

NRDC's and GOO's principal points of concern relate to the following: the limited 
scope of information required to be detailed in development and production plans 
and the Environmental Impact Statement (EIS) prepared on such plans; the limited 
and insufficient criteria for deciding when to prepare an EIS; and the failure to 
establish a system of public notice and opportunity for comment on both exploration 
and development and production plans and the decision of whether or not to 
prepare an EIS. NRDC and GOO request that changes be made in the proposed rule 
to address these and other points of concern discussed in detail below. 

Before turning to the specific comments on each section of the proposed rule we 
would like to make one additional general comment. We object strenuously to the 
inadequate public notice of the public hearings held on the proposed rule. Public 
notice regarding the scheduling of three public hearings in late February and early 
March was provided in the February 15 Federal Register, less than two weeks 
before the first hearing was held. NRDC and GOO did not even learn of the public 
hearings until the day of the third hearing. We object to this procedure and believe 
that in the future the Department of Interior must provide notice of such hearings 
at the time the proposed rule is issued and give the public at least 30 days notice 
prior to the holding of the hearing. 

Section 250.34-1 Exploration plan 

The definition of "preliminary activities" which may be commenced prior to 
submission and approval of an exploration plan raises some questions. Physical 
penetration of the seabed of up to 300 feet (of unconsolidated formations) of 50 feet 
(of consolidated formations) to the extent it involves actual drilling, appears to be 
the kind of activity which should be described in and reviewed by the Department 
as part of the exploration plan itself. The statute does not appear to contemplate 
the conduct of such activity prior to plan approval. Section 11(c)(1) of the Outer 
Continental Shelf Lands Act Amendments (OCSLA) provides that: "Except as other- 
wise provided for in this Act, prior to commencing exploration [defined in §2(k) to 
include any drilling] pursuant to any oil and gas lease issued or maintained under 
this Act, the holder thereof shall submit an exploration plan to the Secretary for 
approval." Therefore we recommend that the exception provided be explicitly limit- 
ed to core sampling and exclude any drilling activities. 

We generally support the language in (a)(1) which articulates the scope of the 
exploration plan. However, we have two recommendations to make. First, it would 
be highly desirable to include language that requires the lessee to submit, to the 
maximum extent possible, a plan which covers the maximum number of tracts 
leased by that owner or operator. This would be desirable because then the Director 
(and affected states) could judge at one time the impacts of proposed activities in 
making the decision regarding approval, modification or disapproval of the proposed 



387 

plan. Otherwise, the lessee could submit plans in piecemeal fashion, thus preventing 
effective federal and state review. The requirement would apply only to the extent 
the lessee was preparing to go forward with exploration operations on these tracts. 
The second recommendation is to delete the phrase "to the maximum extent possi- 
ble" in the second to last sentence of the first paragraph of (a)(1). All wells that the 
lessee proposes to drill should be described in the plan. 

We strongly urge that the exploration plan be required to disclose the specifics of 
how the lessee proposes to ensure that the activities described in the plan meet 
applicable requirements of the Clean Air Act, the Clean Water Act, and the Coastal 
Zone Management Act. The same information which the lessee must submit to EPA 
and the states for permit or other approvals under these acts should be disclosed in 
the plan. The Secretary is authorized to require the disclosure of such information 
pursuant to Section 11(c)(3)(D) of the OCSLA and we believe that such information 
would be relevant to the Secretary and the states' reviews of the exploration plan. 

We strongly support the proposal in (a)(2) to require the submission of an environ- 
mental report at the time of submission of the exploration plan, and the proposal to 
treat the report as part of the plan. This represents a sound interpretation of 
§ll(cK3)(D)of the Act. 

The regulations should make clear that for those preexisting exploration activi- 
ties, which are exempt pursuant to § 11(f), the requirements of the preexisting law 
and regulations, as well as applicable permit or plan conditions, continue to apply. 
At present, the regulations are silent as to how these activities are to be regulated. 
Yet, the legislative history of the OCSLA states: "Exploration activities which are 
excluded by this subsection are to be conducted in accordance with existing law and 
regulations and the terms of any existing permit or plan." (H.R. Rep. No. 95-1474, 
95th Cong., 2d. Sess., 100-101 (1978)). The existing regulations referred to in the 
Conference Report were those already appearing at 30 CFR Part 150 (the latest 
were issued on January 27, 1978). Therefore, it should be stated that those prior 
regulations will remain applicable to exploratory activities which are exempt from 
the more recent requirements of the OCSLA. 

No special treatment of exploration activities on Gulf of Mexico leases is warrant- 
ed under § 11(c) and, therefore, we recommend that paragraph (a)(2) be completely 
deleted. 

We strongly recommend that (a)(3) be revised to require the submission on a 
routine basis of a general statement identifying development and production inten- 
tions. State and local governments will benefit from the provision of this additional 
potentially valuable information. At a minimum, the provision should be revised to 
state that the Director will require that such a statement be provided when it might 
provide useful information to affected states and local governments. 

We strongly urge the adoption of procedures for public notice and comment under 
(b). While the proposal provides that the public may obtain copies of plans, the 
absence of any means to notify interested parties of the submission may effectively 
keep the public from analyzing and commenting on these plans in a timely manner. 
Despite the extremely short review period, it is imperative that public notice of 
receipt of the plan be provided, as well as opportunity for comment. Certainly, 
interested members of the public who request notice regarding the submission of 
exploration plans should be notified immediately of the availability of the plan and 
report. We believe the above recommended procedures are necessary to ensure 
adequate public notice and review of this important phase of the OCS leasing 
program. 

With respect to the criteria set out in (e) for approval, modification or disapproval 
of a plan, we have two recommendations to make. The first is to make clear that 
the requirements of NEPA and the requirements of the CZMA (particularly with 
respect to consistency) must be satisfied before a plan may be finally approved. The 
second is to clearly state that in order for a plan to be approved, it must meet the 
criteria in (e)(l)(i) and (ii). This is not stated clearly in the regulations. A situation 
could arise such as this: the conditions of (e)(l)(i) or (ii) cannot be met through 
modification but the criteria in (e)(2)(iii) for plan disapproval are not met either. We 
believe that the regulations should reflect the Act's clear intent that unless a plan 
meets the criteria of (e)(l)(i) and (ii) it may not be approved. See § 11(c)(1). 

In (f), the Director must have the option to require further modification in the 
event that the modified plan which has been submitted still does not comply with 
(e)(l)(i) or (ii). 

The proposal to conditionally approve an exploration plan which a state has not 
yet determined is consistent with its approved coastal zone management program 
makes no sense. Why shouldn't such a plan be automatically disapproved or condi- 
tionally disapproved until the required state consistency determination is made? 
Automatic disapproval is provided in the case of development and production plans 



388 

in this same situation and we recommend that the same procedure be employed 
here. 

Under (h), it should be stated that if the state objects to the lessee's consistency 
certification, if the plan cannot be revised to meet the state's objection, and if the 
objection is not overriden by the Secretary of Commerce, then the Director may not 
approve the plan. 

Subsection (k) should provide that the Director shall review an approved plan not 
only at regular intervals but whenever information on offshore or onshore condi- 
tions suggest a significant change in the effects of or the impacts on exploratory 
activities. Such language is needed in order to provide a standard for when the 
Director will exercise his review authority. 

There should be a provision which clearly states that all exploratory activities 
must be conducted consistent with either an approved exploration plan or approved 
modified plan. Section 11(e)(2) of the Act imposes this requirement. 

We support provisions (m) and (n) of this Section. 

We ask that the types of emergency situations referred to in (o) be described and 
be limited to emergencies such as spills or accidents. 

Section 250.3J^-2 Development and production plan 

We are concerned about the scope of the development and production plan as 
described in (a)(1). To discourage piecemeal submission of development and produc- 
tion plans, we recommend that lessees be required to submit a plan which, to the 
maximum extent possible, covers the maximum number of leased tracts. The re- 
quirement would apply only to the extent the lessee was preparing to go forward 
with development and production of these tracts. The reasons for recommending 
such a requirement are similar to those set out above with respect to exploration 
plans. 

We believe section (a)(1) is ambiguous as to the coverage of the plan. The develop- 
ment and production plan should be required to cover all development and produc- 
tion activities the lessee proposes to undertake through sustained production. The 
third sentence of this subsection is confusing on this point and should be deleted. 

The descriptions called for in the development and production plan should be 
required to be "detailed" to avoid general, uninformative descriptions. 

We believe that the information to be included in a plan should include: all 
activities which take place following the discovery of oil or gas in paying quantities, 
including drilling, pipeline routing and construction, and construction and operation 
of all onshore support facilities (see definition of "development" in § 2(1) and H.R. 
Rep. No. 95-1474, supra at 79); all activities which take place after successful 
completion of means for removal of oil and gas, including the transfer of oil and gas 
to shore (see definition of "production" in § 2(m)), plus the transfer of oil to a 
refinery; and a clear and detailed description of how all these activities will be 
carried out so as to meet the requirements of the Clean Air Act, Clean Water Act 
and Coastal Zone Management Act (including approved state programs). It should 
be made crystal clear that all development and production activities whether in the 
leased area or elsewhere must be disclosed in the plan. 

We support the provision requiring an Environmental Report (ER) to be submit- 
ted with and to be considered as part of the plan. Our reasoning on this is laid out 
in the above discussion of exploration plans and environmental reports. We think 
this provision is crucial. 

We strongly object to provision (a)(2)(ii) which exempts certain classes of leases 
entirely from the ER requirement. While statutory exemptions to the new require- 
ment were created, the new amendments clearly intended to leave in place the 
already existing requirement applicable to those leases. Otherwise, activities under 
those leases would be left in a regulatory twilight zone. The Conference Report (p. 
115) states: "The conferees, by recommending the enactment of Section 25 to the 
Congress, are not approving or disapproving existing requirements for development 
and production. It is hoped that the Secretary of Interior will apply existing law and 
regulation to tracts which have commenced development and production, and to 
other areas in the Gulf of Mexico, where development and production activities 
have been going on for a number of years, in such a manner as to limit bureaucratic 
red tape and otherwise minimize delays in the search for and production of oil and 
gas." 

We believe that consistent with this statement of Congressional intent, previously 
issued leases should continue to be subject to the law, regulations, and approved 
plans in existence prior to adoption of the amendments. We believe this to be 
particularly important for activities in any frontier areas which may be exempt 
from the new requirements. 

In order to satisfy the requirements of § 25(a)(3), the Director should be required 
in (b)(2) to publish a public notice regarding receipt of the development and produc- 



389 

tion plan and its availability for public review and comment. This is the only 
effective way to ensure that the public knows the information is available. In 
addition, copies should be sent within 10 days to interested members of the public 
who have requested copies in advance. The number of persons who have expressed 
such an interest should be taken into account in calculating the number of copies 
required of the lessee under (bKl). 

We recommend that (c)(3)(ii) be struck. Opportuanity should be given to the 
Governor to review the plans on a case-by-case basis. The clearly-stated purpose and 
policy of the new law is to encourage state involvement activity in decisionmaking. 
This provision runs directly counter to the statutory intent. 

We recommend that (e)(2) be revised to provide that the Director require such 
information whenever such information may be relevant to determining whether an 
EIS should be prepared or in actually preparing the EIS itself. 

The criteria under (g)(l)(v) used in evaluating a development and production plan 
should be expanded to include the statutory requirement to eliminate or minimize 
harm to the renewable resources of the OC^) (See Commonwealth of Mass. v. Andrus 
(1st Cir., Feb. 20, 1979)). In order to be consistent with the statutory provisions, the 
Director must also: (1) require modification of any plan which fails to make ade- 
quate provisions for safe operations or for the protection of the human, marine or 
coastal environment, including compliance with regulations issued under § 5(a)(8) of 
the Act (See OCSLA § 25(h)(1)); and (2) require disapproval of a plan which does not 
comply with the requirements of the Act or the applicable federal law, including the 
regulations issued pursuant to § 5(a)(8) (See § 25(h)(1)(A)). Neither of these statutory 
provisions are reflected in the proposed regulations. 

Subsection (h)(1) must include the option of the Director's requiring further plan 
modification in the event the modified plan which has been submitted still does not 
meet the criteria. 

Subsection (i)(2) must make clear that any revised plan must be subject to state 
review for consistency, just as the original plan was. 

We recommend that a standard for review similar to that recommended under 
subsection (k) for exploration plans be incorporated into subsection (k) here. Fur- 
thermore, it must be made clear at the end of subsection (k)(3) that the statute 
requires any revision of a plan determined to be significant to be reviewed in 
accordance with the same requirements applicable to the original plan. Thus the 
criteria in (k)(3) present only some of the criteria which must be met if a significant 
revision is involved, in which case all the criteria set out in (b) through (h) apply. 

There must be a separate provision stating that development and production plan 
activities be conducted pursuant to an approved development and production plan. 
If a lessee fails to do so, the regulations under (1) should spell out not only that the 
lessor may cancel, but that under specified circumstances the lessor will cancel. 
These should include instances in which the activities undertaken threaten serious 
damage to the human, coastal, or marine environment. 

Subsection (m) should be amended to provide for state consistency review of any 
activity not described in detail in a previously-approved development and produc- 
tion plan, prior to the Director's issuance of a permit. 

Again, we recommend a definition of "emergency situation" to prevent unwar- 
ranted deviation from the regulatory requirements. 

Section 250.34-3 Environmental report 

(a) Environmental report (exploration). — We object to the requirement that the 
environmental report be only "summary" in form, with only 'brief descriptions 
called for. We believe these provisions undercut the potentially great utility and 
value of these reports. The term "brief description' connotes that a less than 
thorough and complete disclosure of information is required. Yet unless detailed 
descriptions are provided for under Items (l)(i)(A)-(G), the utility and reliability of 
the report will be limited. Therefore, we recommend deletion of the terms "sum- 
mary" and "brief." We also recommend that, to ensure the accuracy and value of 
these reports, the rationale and methodology by which figures or estimates were 
arrived at should have to be provided. References should be provided. In addition, 
the information in the environmental report should include relevant information 
gathered by the Department of the Interior as part of the Environmental Studies 
Program or as part of any other information-gathering program (e.g., a hazards 
study). The information relied on should not be confined to the geographical area 
covered by the exploration plan since the ER must address onshore as well as 
offshore activities. We also recommend that the following additional information be 
included in the report: identification of precisely how onshore, nearshore and off- 
shore facilities and operations will comply with the Clean Air Act, the Clean Water 
Act and the Coastal Zone Management Act; the location, size, number and land 
requirements (including rights-of-way and easements) of nearshore facilities (within 



390 

the 3-mile limit) such as lightering facilities and pipelines. We also recommend 
dropping the terms "directly" and "general" from the first sentence of (G) and 
adding the term "nearshore" (following "offshore"). 

(b) Environmental repor. (development/production). — The information to be includ- 
ed in the Environmental Report should not be limited to that which is "applicable 
to the geographic area covered by the development and production plan." The 
development and production plan will focus on the offshore areas. Yet the impacts 
of activities conducted in these offshore areas will be felt beyond these areas and 
the Environmental Report which is designed to disclose these impacts and related 
activities therefore must be based on accurate, up-to-date information applicable 
beyond the geographic scope of the development and production plan. As stated 
above under (a), available, relevant information from the environmental studies 
program, hazards studies and other studies conducted by the Department and others 
should be incorporated into the ER. 

For the reasons stated above, the term "brief should be stricken from (T3)(l)(i). 
Additional information which should be provided in the report includes: the loca- 
tion, descriptions (including maps), and size of any offshore, nearshore, and land- 
based facilities to be constructed or contracted for as a result of the proposed 
activity, including processing, refining, and distribution facilities; maps and other 
materials detailing the means proposed for onshore distribution of oil and gas 
resulting from the proposed activity, the routes to be followed by each mode of 
transport and the estimated quantities of oil and gas to be moved along such routes; 
a description of existing land and water uses in and adjacent to the areas proposed 
for facilities and operations; and identification of precisely how facilities and oper- 
ations offshore, nearshore, and onshore will comply with the Clean Air Act, Clean 
Water Act and the Coastal Zone Management Act (including aproved state coastal 
zone management programs). 

The term "production" should be added following the term "development" in 
(b)(1). 

The description of the environment in (1)(F) should not be limited to the offshore 
environment, but must include a description of the nearshore and onshore environ- 
ment affected by activities described in the plan. Thus, to the phrase "leased lands" 
should be added the phrase "lands onshore or offshore which may be affected by 
offshore facilities, pipelines, tankers, and onshore facilities used in development and 
production." The lessee should also be required to incorporate the results and data 
from DOI's own studies of the affected area. 

The discussion of alternatives to the proposed action should not be limited to 
those considered during plan development, but should include all reasonable alter- 
native, and should be specifically directed to include a discussion of alternative 
pipeline and/or tanker routes to those proposed and alternative locations for related 
onshore facilities and operations. 

Section 250.S4-4 Compliance with the National Environmental Policy Act (NEPA) 

Before turning to specific comments on this provision, NRDC wishes to reiterate a 
concern expressed in earlier comments (dated October 27, 1977) which should not be 
overlooked. A specific commitment has been made with respect to preparation of an 
EIS in the Sale 40 area, which may not be forgotten. The Secretary of Interior 
stated on March 1, 1977 that: "If an appeal is successful [of the U.S. District Court's 
decision in County of Suffolk v. Secretary of Interior invalidating Lease Sale 40 on 
NEPA grounds] I intend to require the preparation of an Environmental Impact 
Statement prior to approving developing plans for this lease." In addition, he stated 
that "[a]ll points raised in the suit will be considered prior to approval of the 
development plan and in consultation and review by the affected States and local 
governments. 

The Interior Department was successful in its appeal. In the event oil and gas is 
found in paying quantities in the Lease Sale 40 area, the Secretary must adhere to 
his commitment which requires a pause between the exploratory phase and the 
development and production phases of OCS operations in the Lease Sale 40 area 
while an EIS is prepared. The appellate court cited the Secretary's commitment as 
one of its chief reasons for reversing the District Court: 

"The Secretary has announced that before considering whether to approve any 
such plans [for development] a development plan EIS will be prepared, which will 
include a survey of the environmental consequences and feasibility of specific pipe- 
line corridors and of any other problems relating to specific proposals for transpor- 
tation of oil and gas actually found. 

"With this program for consideration of environmental consequences according to 
development stages in mind, the question upon this appeal is not whether the Sale 
40 EIS failed completely to discuss the environmental risks involved in transporting 
oil to shore from the tracts under consideration for lease but whether a limited 



391 

discussion, with the balance deferred until preparation of a Development Plan EIS, 
satisfies the "rule of reason" by which we are governed in determining whether 
there has been compliance with NEP A."County of Suffolk, et al. v. Secretary of the 
Interior, Slip op. at 15 (2nd Cir., August 25, 1977) (italic supplied). 

In the conclusion of the decision, the court states: "We are satisfied that the 
Department of the Interior, which will have continuous control over the venture, 
will deal with them [environmental consequences of transportation] thoroughly in 
the Development Plan EIS before approving any plans for transportation of such oil 
as may be discovered in the Sale 40 area * * *." Slip op. at 42. 

While the proposed regulations contemplate the possible preparation of an EIS on 
individual development and production plans, they do not assure the fulfillment of 
the Secretary's commitment, relied upon by the court, that there will be a pause 
between the exploratory phase and development and production phases in the Sale 
40 area, at which time an EIS will be prepared before any development plans are 
approved. NRDC requests that changes be made in the regulations to address these 
points of concern. 

We now turn to our more general com.ments on this provision. The regulations 
must provide that no development and production activities proposed by the lessee 
either offshore or onshore, as disclosed in the plan and ER, may be underaken until 
an environmental assessment or EIS has been completed and the development and 
production plan has been approved. Otherwise, the entire environmental review 
process will be thwarted and the Director's responsibility under NEPA and the 
OCSLA to protect the human, coastal and marine environments will be rendered 
meaningless. 

In the assessment preapared by the Director pursuant to subsection (a)(1), it 
should be specifically required that information gathered as part of the Depart- 
ment's environmental studies program as well as information from hazards studies 
and other studies conducted by the Department or other agencies be utilized. 

The factors which the Director should give special attention to should be expand- 
ed to include: the amount and intensity of development and production proposed 
compared to earlier estimates; the location of pipeline routes in areas of potentially 
hazardous natural bottom conditions or in areas where pipeline burial is impossile 
or in areas of high ecological value or sensitivity; the location of structures near 
highly-productive fishery areas; the utilization of tankers near areas of high biologi- 
cal productivity; the location of nearshore or onshore operations or facilities in 
areas of ecological importance. The present list is much too circumscribed. 

We strenuously object to the criterion articulated in (aX4) for when an EIS shall 
be prepared. It is not enough that a prior EIS generally discussed the impacts of 
platforms, pipelines, onshore facilities. It is the specific significant impacts of a 
particular platform ^et of pipelines and onshore facilities in particular locations 
that need to be analyzed and discussed in an EIS. Unless the earlier EIS has 
considered the specific impacts, the fact that generalized considerations of similar 
impacts were discussed should not be found to be an adequate replacement. This 
procedure is consistent with the tiering process described in § 1508.28 of the CEQ 
regulations. 

Further, if an assessment concludes that an EIS is not required, the regulations 
should provide that the procedures recently imposed in Get Oil Out, Inc. v. Andrus 
be followed. Thus, such an assessment must be made available to the public pursu- 
ant to the notice procedures and the public should be provided adequate opportunity 
to comment on that assessment. The Department should then re-examine its conclu- 
sions requiring the need for an EIS in light of the comments. 

Under the proposed rule, the information required to be disclosed in the EIS is 
much less detailed than the ER. This is completely inadequate. If an EIS is pre- 
pared, the information in it must be even more extensive than the information 
required for the ER. The regulation should so provide. This is of crucial importance 
because the EIS is the most significant portion of the decisionmaking process and is 
the only document which provides to the public and that state and federal decision- 
makers independent analysis of the environmental impacts of the proposal. Unless 
the EIS provides the complete analysis of all the impacts of the proposal from 
platform, pipelines, other offshore facilities, onshore facilities, and transportation, 
state, and local governments to which the OCSLA delegate such important roles in 
the approval of these plans will be denied adequate information regarding onshore 
impacts necessary to their analysis. Moreover, the federal decisionmakers will be 
unable to conduct the "big picture" analysis required by NEPA. 

The DEIS must be available before any public hearing is held. 

Where two or more plans from the same area or region have been submitted 
within two months of one another, the Director should evaluate the two (or more) 
together in deciding whether to prepare an EIS. 



392 

Finally, the regulations should reflect Congress' intent that: "NEPA will be 
involved prior to approval of a plan when major or substantial development and 
production activities seem to be indicated for an area or region. In preparing, 
drafting, and reviewing the EIS, the conferees expect the Secretary of Interior to 
consider and address the cumulative effects of past and fufuture OCS activities in 
an area or region." (H.R. No. 95-1474, supra at 117). 

Thank you for your consideration of these comments. 

The Chairman. The next witness is Mr. Edwin Rothschild, re- 
search director, Energy Action Education Foundation. 

STATEMENT OF EDWIN ROTHSCHILD, RESEARCH DIRECTOR, 
ENERGY ACTION EDUCATIONAL FOUNDATION 

Mr. Rothschild. Thank you, Mr. Chairman. I appreciate the 
opportunity to testify before the committee this morning. 

I want to first concur and support a number of points that Hope 
Robertson made regarding the problems that are continuing to 
plague us in the promulgation of bidding systems and the problems 
that are being incurred in the debates, and discussions between the 
Department of Energy and the Department of Interior. 

It is my understanding that they have set up some procedures to 
promulgate these bidding systems and that there are no time con- 
straints on these procedures. They have informal review proceed- 
ings and, at the time they complete those proceedings, they go into 
a formal proceeding where the DOE submits its proposal and DOI 
has 30 days to respond. As yet, there have been no — as I under- 
stand it, formal proposals made. They have remained in the infor- 
mal stage, and these informal stages have no time limits, so this 
haggling goes back and forth. 

It is also my understanding that with respect to the sequential 
bidding systems that has been proposed by DOE, which is still in 
Interior, the people at Interior, the officials at Interior are not 
looking forward to seeing that particular proposal come into effect. 
It is my understanding that they would prefer to see the profit 
share as the first one to come out, but that is still, as you know, in 
the debate stage, the discussion stage. 

It is also our concern, which we expressed to you in the Decem- 
ber hearings, that the competition review regulations, both by the 
Department of Energy and Department of Interior, and as required 
under the act by the Justice Department and Federal Trade Com- 
mission, have not been promulgated. The Department of Energy 
had been considering making a competitive review proposal for 
postsale review where they would announce — ahead of the sales — 
the criteria used to judge the competitiveness of a sale and compe- 
tition for tracts. There has been a letter sent by the Justice Depart- 
ment, it is my understanding, to the Department of Energy, and 
that proposed regulation has been dropped. 

Now, that creates a problem. If there is no competition review 
and the Justice Department makes a decision that it is not going to 
review a sale, then there will be no review of the sale by the 
Department of Energy which has responsibility to insure competi- 
tion on the OCS. I think that it is imperative that the Department 
of Energy have such regulations so that in case the Department of 
Justice decides not to hold a competitive review, that there can be 
such a competitive review made. These problems have come up in 
the past. 



393 

We mentioned the first with respect to sale 65, that there was no 
competitive review, and that the Justice Department did not con- 
sult the Federal Trade Commission as it is directed to in the act. 
We have made that statement for the record. 

Subsequent to our testimony, another lease sale was conducted, 
in the Gulf of Mexico, and the Justice Department merely dis- 
cussed the letter that it sent to the Department of Interior, to 
Secretary Andrus, with the Federal Trade Commission. There was 
also no consultation on that review. 

The Chairman. Is that a written discussion or personal discus- 
sion? 

Mr. Rothschild. As I understand it, it was not a written discus- 
sion. It was a discussion over the phone on the day that they sent 
the letter over to the Department of Interior, the letter was sent 
over to the Federal Trade Commission. It is my understanding, 
subsequent to that, they have now sat down and begun to set up a 
structure and a program whereby they can have full consultation. 

We wrote a letter, and I will submit it for the record, on Febru- 
ary 2 to Mr. Alfred Dougherty, the Director of the Bureau of 
Competition, citing the problems that we saw and asked the follow- 
ing questions: We wanted to know whether or not the consultation 
had taken place with respect to sale 51 and the form of such 
consultation and the number of times as well as hours spent that 
staffs of each agency met to discuss the review of sale No. 51 and 
what procedures were implemented which define the degree, scope, 
and consultation process as it applies to competitive review of OCS 
lease sales. And we requested copies of any documents, analyses, 
and so forth, submitted by the FTC regarding sale 51. 

It is my understanding that a letter in response to our letter is 
now on Mr. Dougherty's desk, and I have an understanding of what 
it contains having had some discussion with officials of the agency. 
They will say that they have had a discussion in the context of sale 
51, even though they did not do a competitive review for that sale, 
and out of that process they thought it would be better to use their 
resources to gather the necessary information in an area of the 
sale. 

It seems that in the Justice Department letter to the Department 
of Interior they had insufficient information to make a competitive 
review and, therefore, they did not make a competitive review. And 
so FTC and Justice decided what they would do would be to put 
together the data base so that in future sales they will be prepared 
to make a competitive review. 

It is also my understanding that the FTC has made some sugges- 
tions to Justice on how they could work together and request data 
from the Department of Interior, and how they would expedite 
such requests. They will also try to work out jointly the data base. 

It is also apparent that without a data base, a 30-day review 
period is insufficient time in which to conduct a proper review. 
They have no time to gather the data that they did not have and 
then to also make a complete analysis. 

It is also my understanding that if FTC and Justice disagree, 
they will both reserve their respective positions. Now, FTC and 
Justice are talking together, but that fact does not explain why 
Justice in two sales failed to consult with the FTC. 



394 

We now have a third sale that has taken place, and given the 
Justice Department's claim in the January 18 letter to Secretary 
Andrus, that it did not have sufficient information to conduct a full 
competitive review, I expect there will also be no competitive 
review for sale No. 49 despite the fact that competition for the 
tracts was almost nonexistent. 

Now, just a few comments on sale 49, the second Baltimore 
Canyon sale. We wrote a letter to Secretary Andrus regarding that 
the holding of the sale was not in line with his previous announced 
August 1977 5-year leasing schedule in which he claimed that there 
should be 3 years between lease sales in frontier areas. As you 
know, the first Baltimore Canyon sale 42 had been delayed and 
drilling had not begun until approximately 18 months after the 
date of the sale, which left a very short amount of time, roughly a 
year, for the drilling to occur. Eleven wells have been drilled. We 
wrote and said that we did not think that the industry nor the 
Department of Interior had sufficient information because of the 
lack of time to do the proper drilling, that the sale, therefore, 
should be postponed until such time that there was adequate infor- 
mation available. We were answered by Deputy Assistant Secre- 
tary Larry Meierotto that they believed that they had adequate 
information to evaluate the sale. I will submit those letters for the 
record as well. 

The sale was held. As you know, there were very few bids, very 
low bidding, not much interest in the sale. Subsequent to the sale, I 
spoke with one high Interior official who said one of the reasons 
for that was there had not been enough time for wells to be drilled. 
Only 11 wells had been drilled. So, after all, we did not have that 
knowledge. But I said that is what we wrote to the Secretary. It 
seems that the Secretary wanted to keep to his schedule, no matter 
what, and that is what he did. I was at an NOIA — that is the 
National Ocean Industries Association — meeting where the Secre- 
tary gave the keynote address, and he said in his new leasing 
plans, he was going to propose new lease sales and that, as in the 
past, he would keep to them and they had his word. And if there 
were any outside groups who came in to oppose the sales or delay 
the sales, he would have four backup sales. 

He also told the industry that he was very firmly committed to 
due diligence, and if any company was granted a lease and did not 
perform within the specified period of time, those leases would 
have to be given back, which I think is an admirable position. But 
we have not yet seen any due diligence regulations from the De- 
partment of Energy. We are still waiting for those as well and, as I 
understand it, the only thing that they are doing right now is 
analyzing the data to see how they are going to fashion due dili- 
gence regulations, if they are going to fashion them at all. 

I think essentially that concludes my statement. I have reviewed 
the points that — excuse me, one other thing is that the Department 
of Energy — Department of Interior, excuse me, has proposed on- 
structure regulations to do onstructure drilling, and we certainly 
applaud that. We think that that should have been in place a long 
time ago so that the Government could have some idea of the value 
of the lands that it is putting up for bid, but it is better late than 
never. Thank you. 



395 

[The following was received for the record:] 

Energy Action Educational Foundation, 

Washington, D.C., December 13, 1978. 
Hon. Cecil D. Andrus, 
Secretary of the Interior, 
Washington, D.C. 

Dear Mr. Secretary: On November 13, 1978 the Department of the Interior 
announced that Sale No. 51 in the Western and Central Gulf of Mexico was to be 
the second sale held under the new Outer Continental Shelf Lands Act Amend- 
ments. The first sale to be conducted under the new Act, Sale No. 65, demonstrated 
that even under new authority, the Department has continued to rely on outmoded, 
ineffective methods which do not assure adequate competition and the receipt of fair 
market value as explicitly required by the OCS Lands Act Amendments. This 
conclusion is obvious from an analysis of Sale No. 65. 

The Department in Sale No. 65 offered 89 tracts estimated to contain "between 15 
and 150 million barrels of oil and 20-175 billion cubic feet of natural gas" (FEIS, p. 
I-l, Vol. 1). Yet, except for two tracts, all of the tracts bid on were evaluated by the 
U.S. Geological Survey to contain little or no oil or gas resources. 33 of the 35 tracts 
bid on by the companies were evaluated by the Survey at the minimum value ($25/ 
acre or $144,000 per standard 5,760 acre tract). In addition, the information used by 
the Survey to make its estimates was of very low reliability. Indeed, the industry 
had as much confidence in the value of the tracts put up for bid as did the 
Department. This is clear from an analysis of the bidding patterns. Of the 89 tracts 
offered, 54 received no bids, 20 received 1 bid, nine received 2 bids, three received 3 
bids, one received 4 bids, one received 5 bids and one received 6 bids. Thus, the 
average number of bids for all tracts offered was 0.7 bids per tract and the average 
for all tracts bid on was 1.8 bids per tract. 

This sale also witnessed the continuing presence of joint venture arrangements 
led by major companies (Mobil/Amerada Hess; Shell, Cities Service and Sun; Chev- 
ron/Southern Natural, etc.). Because of these joint venture arrangements, eight 
potential bidders were eliminated, so that instead of 15 bidders there were actually 
only seven. It is also important to note that the major-led joint ventures tended to 
avoid bidding on the sliding-scale royalty tracts and concentrated most of their 
effort on the low fixed royalty high bonus bid tracts. 

In addition to the small number of bidders (lack of competition for OCS tracts) 
and other potential competitive problems (impact of granting of leases on competi- 
tion in relevant markets), the lack of knowledge of the potential resources in the 
lease area (as evidenced by the large number of minimum evaluations and the fact 
that the average bid exceeded the average evaluation by nearly 950 percent) can 
only result in the public's not receiving fair market value for its resources as well as 
in the misdirection of industry capital. 

In a News Release dated November 16, 1978, the Department announced accept- 
ance of all the bids, but there was no mention that the Secretary had made a 
determination with regard to the competitive review mandated by the OCS Lands 
Act Amendments (Sec. 205(b)(3)). Although the Department of Justice did not con- 
duct a competitive review (see letter dated October 24, 1978) and even though the 
Justice Department did not consult with the Federal Trade Commission, a determi- 
nation by the Secretary must still be made. 

Since Sale No. 51 is being conducted in the same general area in which Sale No. 
47 was conducted in June 1977, it is important to understand some of the results 
that have already been reported from the drilling of tracts from that sale. In an Oil 
and Gas Journal article entitled "Success Ratio High on June 1977 Leases in Gulf' 
(10/30/78), it was reported that: 

"Operators haven t encountered any surprises. They generally have either found 
what their sophisticated exploration programs indicated was there in deeper waters 
or they have drilled discoveries in highly developed shallow-water areas." 

Indeed, on the 29 tracts listed by the Journal the total amount bid was a little 
more than $501 million versus a tJ.S.G.S. evaluation of just over $60 million, 8*72 
times what was bid. Thus, even in an area where the greatest amount of informa- 
tion exists, the U.S.G.S. has been incapable of assuring the public fair market value 
in its pre-lease evaluations. 

We hereby adopt by reference with respect to Sale No. 65 our previous corre- 
spondence to you (our letters of October 28 and 31, 1977, December 9, 1977, January 
23, March 24, March 30, April 12, April 20, May 9, and October 26, 1978) relating to 
previous sales, and hereby formally notify you that for the reasons stated in the 
above-mentioned letters, and in light of the failure to correct the serious legal flaws, 
information gaps, procedural failures and violations of trustee responsibility, we 



1+9-118 0-79-26 



396 

consider any leases let under this system to be presumptively illegal, beyond the 
power of the Department to confer, and potentially the product or result of reckless 
nonfeasance by the Department's officials and/or a continuing conspiracy by the oil 
industry and others to deprive the Federal Government of valuable public resources 
without adequate compensation. In addition the new law adds to or makes explicit 
responsibilities that we believe existed under prior laws, and thus provides addition- 
al grounds for concluding that the Department is not fulfilling its legal responsibil- 
ities. 

For example, in previous correspondence we have pointed out that the Depart- 
ment of Energy Organization Act requires the Secretary of Energy "to prescribe 
regulations" which relate to "fostering of competition for Federal leases" and other 
provisions. Such regulations have never been promulgated and constitute a preexist- 
ing flaw in past leases. Now the OCS Lands Act Amendments explicitly require 
(Section 205(c)(1)) a competitive review by the Department of Justice and the Feder- 
al Trade Commission, yet in the absence of DOE regulations, there are no standards 
or procedures for this vital review process, thus voiding both the review process and 
the leases to which it applies. 

We urge you therefore to postpone Sale No. 51 scheduled for December 19, 1978 in 
New Orleans, Louisiana until the leasing arrangements can be brought into full 
compliance with your legal and fiduciary responsibilities. Failing this we request 
you forthwith to notify all qualified bidders for that sale, either directly or through 
an immediate Federal Register notice, that this claim of presumptive invalidity of 
the proposed leases has been made, and may operate to vitiate some or all of 
purported leasing arrangements if the Department or a court ultimately sustains 
some or all of the bases for the claim. Although we believe that Section 23 of Public 
Law 95-372 has no application to our claims of illegality either under previous law 
or Public Law 95-372, to the extent that Section 23 may be construed to be 
applicable to us or others making similar claims, this letter should be deemed to be 
a notice on our behalf and on behalf of those who may assert similar positions for 
the purposes of Section 23. 



Sincerely, 



Edwin Rothschild, 

Research Director. 



Energy Action Educational Foundation, 

Washington, D.C., December 29, 1978. 
Hon. Cecil D. Andrus, 
Secretary of the Interior, 
Washington, D.C. 

Dear Mr. Secretary: In February 1979, the Department of the Interior intends to 
hold Sale No. 49 in the Mid-Atlantic region. Included in this proposed sale are tracts 
which are adjacent to tracts leased in Sale No. 40 as well as tracts which are to the 
northeast and southwest of the tracts leased in Sale No. 40. When you first an- 
nounced the present five-year leasing plan, you stated: "There is an approximate 
three-year interval between the first sales in a frontier area and subsequent sales in 
the same geological province." and that: "* * * this interval would provide an 
orderly level of activity for both exploration and development and permit the use of 
exploratory results from one sale in making tract selections for a later sale." (News 
release, Aug. 23, 1977.) 

Because acceptance of the bids was delayed by legal action, drilling in the leased 
area did not begin until March 29, 1978. Thus, by the time of Sale No. 49, less than 
a year will have elapsed between the beginning of drilling and the date of the 
proposed sale. Clearly, this amount of time is not sufficient for the collection of 
adequate data on which to base evaluations for Sale No. 49. 

On November 8, 1978, you announced your intention to allow oil companies "to 
drill pre-lease test wells on the Outer Continental Shelf directly on geologic struc- 
tures that could contain oil or natural gas." At that time it was announced by Dr. 
G. William Menard, Director of the U.S. Geological Survey, that "proposed revisions 
to existing regulations will be published in the Federal Register, with adequate time 
for public review and comment." As of today there has been no such notice pub- 
lished in the Federal Register. Therefore, since many of the proposed tracts for Sale 
No. 49 are in areas where there has been no pre-lease exploratory drilling, and since 
with additional time onstructure stratigraphic wells could be drilled, the Depart- 
ment has sufficient reason to wait until the regulations are in place and such wells 
are permitted before tracts are leased. 

It is also our view that there exists a conspiracy by the oil companies to defraud 
the government and restrain competition in their bidding for OCS leases. The 



397 

companies have stated repeatedly that the Government, not the industry, collects 
the lion's share of revenue from the production of oil and gas from OCS when in 
fact the opposite is true. Second, various joint venture agreements and agreements 
between potential joint bidders tend to restrict potential competitors from bidding 
in certain OCS regions. This conspiracy results in a diminution of competition for 
OCS tracts which in turn deprives the public of fair market value for its resources. 

We hereby adopt by reference with respect to sale No. 49 our previous correspond- 
ence to you (our letters of January 23, March 24, March 30, April 12, April 20, and 
May 9, October 26, December 13, 1978) relating to previous sales, and our testimony 
at the Department's E.I.S. hearing on Sale No. 49 at Atlantic City on June 28, 1978, 
and hereby formally notify you that for the reason above, for the reasons stated in 
the above-mentioned letters and testimony, and in light of the failure to correct the 
serious legal flaws, information gaps, procedural failures and violations of trustee 
responsibility, we consider any leases let under this system to be presumptively 
illegal, beyond the power of the Department to confer, and potentially the product 
or result of reckless nonfeasance by the Department's officials and/or a continuing 
conspiracy by the oil industry and others to deprive the Federal Government of 
valuable public resources without adequate compensation. 

We urge you therefore to postpone Sale No. 49 until the leasing arrangements can 
be brought into full compliance with your legal and fiduciary responsibilities includ- 
ing but not limited to completion of the initial drilling program on the Sale No. 40 
leases and issuance and implementation of the on-structure drilling regulations. 
Failing this we request you forthwith to notify all qualified bidders for that sale, 
either directly or through an immediate Federal Register notice, that this claim of 
invalidity of the proposed leases has been made, and may operate to vitiate some or 
all of purported leasing agreements if the Department or a court ultimately sustains 
some or all of the bases for the claim. Although we believe that Section 23 of Public 
Law 95-372, to the extent S. 23 may be construed to be applicable to us or others 
making similar claims, this letter should be deemed to be a notice, for the purposes 
of S. 23, on our behalf and on behalf of those who may assert similar positions with 
respect to Sale No. 49 or future sales. 
Sincerely, 

Edwin Rothschild, 
Research Director. 

James F. Flug, 
Director and Counsel. 



Energy Action Educational Foundation, 

Washington, DC, February 2, 1979. 

Mr. Alfred Dougherty, Jr., 

Director, Bureau of Competition, 

Federal Trade Commission, Washington, D.C 

Dear Mr. Dougherty: On January 18, 1979 Assistant Attorney General John 
Shenefield sent a letter to Interior Secretary Cecil Andrus which purported to 
review OCS Sale No. 51. Mr. Shenefield stated that the Justice Department's conclu- 
sion was that there was an "insufficient basis to warrant a finding that award of 
the leases to otherwise qualified bidders in Sale No. 51 will create or maintain a 
situation inconsistent with the antitrust laws." According to the letter, Mr. Shene- 
field stated "we have discussed our views with the Federal Trade Commission's 
Bureau of Competition." 

Sec. 205 of the Outer Continental Shelf Lands Act Amendments of 1978 states 
with regard to review of OCS lease sales that the Attorney General consult with the 
Federal Trade Commission in a number of specific instances. In explaining the 
meaning of the relevant provisions in Sec. 205, the Conference Report (No. 95-1474, 
August 10, 1978, pp. 96-97) states the following: 

"* * * the Attorney General is to consult with the Federal Trade Commission in 
making any review, in securing information and in making recommendations. It is 
the responsibility of the Secreatary of the Interior to provide such information as 
may be required to conduct any competition review. To avoid delays, and to expedite 
the review process, it is also anticipated that the Secretary will provide all neces- 
sary information (as requested by the Attorney General in consultation with the 



398 

Federal Trade Commission) simultaneously to the Attorney General and the Federal 
Trade Commission. 

"* * * His [the Attorney General's] decision to undertake or not undertake a 
review, and to make or not make any recommendations must be after consultation 
with the Federal Trade Commission. 

"It is anticipated that any report of the Attorney General will include a section 
containing the results of his consultation with the Federal Trade Commission, 
including any specific recommendations and comments submitted by the Federal 
Trade Commission. In the interest of maximizing the time the Secretary will have 
to review antitrust comments and recommendations, the FTC may submit a copy of 
its comments and recommendations directly to the Secretary." 

The Conference Report also noted the FTC's independence in making its own 
investigation and gathering its own data on unfair methods of competition which 
authorities were not limited by the OCS Lands Act Amendments of 1978. 

In view of the above, we would like to know whether or not such consultation at 
the enumerated decision points took place in connection with Sale No. 51. We would 
also like to know the form the such consultation and the number of times as well as 
hours spent that staffs of each agency met to discuss the review of Sale No. 51. In 
addition, we would like to know what procedures, if any, have been proposed and/or 
implemented which clearly define the degree, scope and other parameters of the 
Justice/ FTC consultation process as it applies to the competitive review of OCS 
lease sales. Finally, we hereby request copies of any documents, analyses or com- 
ments submitted by the Federal Trade Commission and/or the Bureau of Competi- 
tion to the Department of Justice and/or the Department of the Interior regarding 
Sale No. 51. 

Sincerely, 

James J. Flug, 
Director and Counsel. 



U.S. Department of the Interior, 

Office of the Secretary, 
Washington, D.C., January 24, 1979. 

Mr. Edwin Rothschild and Mr. James F. Flug, 
Energy Action Educational Foundation, 
Washington, D.C. 

Dear Gentlemen: Secretary Andrus has asked that I respond to your letter of 
December 29, 1978, concerning a postponement of OCS Sale No. 49 in the Mid- 
Atlantic area. You urged that before proceedmg with the sale, the initial drilling 
program on the Sale No. 40 leases be completed and the on-structure drilling 
regulations be issued and implemented. 

We believe there is adequate information to evaluate the Sale No. 49 tracts 
because of the exploratory results from Sale No. 40, the offstructure COST well 
being drilled and the geophysical data which have been collected by the Geological 
Survey and the industry in preparation for Sale No. 49. We are encouraged by the 
hydrocarbon "show" on the stratigraphic test being drilled. While no conclusions 
about commercial discoveries should be drawn until the area is leased, it is impor- 
tant to know if conditions that allow generation of oil and gas are present in the 
area. It also points to the value of offering leases on the Continental Slope in order 
to evaluate further the hydrocarbon potential of the Baltimore Canyon area. 

We also do not share your view that there is a conspiracy by the oil companies to 
defraud the government and restrain competition in their bidding for OCS leases. 
Our position on this issue has been presented in prior correspondence with Energy 
Action. 

In conclusion. Secretary Andrus plans to hold OCS Lease Sale No. 49 this Febru- 
ary. Our nation sorely needs additional, secure supplies of oil and gas and hopefully 
the offering of leases in the Mid-Atlantic will assist in meeting this need. 
Sincerely, 

Larry E. Meierotto, 
Deputy Assistant Secretary, 
Policy, Budget, and Administration. 

The Chairman. Congressman Forsythe? 
Mr. Forsythe. Thank you, Mr. Chairman. 
Thank you for your testimony, Mr. Rothschild. 



399 

Your last comment was in reference to onstructure drilling. I 
would like to point out a story that appeared in the Washington 
Star, in which references to this question appear. Onstructure drill- 
ing really does not give us any information, according to Mr. Gunn, 
head of Petroleum Geologists. He talks about what did happen in 
the 11 wells that you refer to in the Baltimore Canyon. 

Two of these wells were not onstructure, they were offstructure. 
The Texaco well, and the COST well which had significant traces 
of hydrocarbon, were not on the structure. 

The other nine wells under lease were drilled onstructure and 
were absolutely dry. Mr. Gunn's proposition is that the nine dry 
holes drilled onstructure, in the most desirable area of the Balti- 
more Canyon, would not have given the Government more infor- 
mation. Instead they might have blunted information where the 
two finds have been made. 

In view of that kind of information from a person very much 
involved in this industry, do you still think that this pre-lease 
onstructure drilling is really going to provide the kind of informa- 
tion that does contribute to the actual value of resources that may 
or may not be there? 

Mr. Rothschild. I think it will. 

First of all, the onstructure regulations will only allow compa- 
nies to do onstructure. No one is being forced to do onstructure 
drilling. It is discretionary, if a company chooses to do so. 

Second, the industry has always claimed, and so have the geolo- 
gists, most of them, that most of the finds, not all of them, obvious- 
ly, but many of the finds come from structures, and that structures 
are the best geologically defined kind of environment in which to 
find oil and gas. You do not always find it under structures, and 
you do not always find it offstructure. 

If there was an onstructure well that had been drilled, it certain- 
ly would have dampened the enthusiasm, and lowered the evalua- 
tion, because the Department of the Interior would have directed 
its interests elsewhere. 

Mr. FoRSYTHE. If you find something that is good, then that 
enhances the area, and if you do not find something, people will 
say, well, let us look some place else. That is really my very point, 
because as I think we look at other frontier areas, Prudhoe, the 
North Sea, that very rarely are the early wells really the ones, and 
the North Sea, as I recall, it was the 38th well before we made a 
discovery. 

In Prudhoe it was something like 19th. Because we had drilled in 
this so-called onstructure situation, had then diverted and gone 
someplace else, we would never know where we are going in this 
whole field, and it is that kind of concern that I have, that any- 
thing that purports to indicate on a one-hole basis that there is or 
is not hydrocarbons, is really misleading, and the competitive situa- 
tion among the companies that get involved in this, one company 
goes for a cost well, well, they all have to join, because they would 
not dare stay out of that kind of situation. 

So it is an awful lot of money that is really put into the ground, 
perhaps with far less than really good information, or information 
that is leading us where we have to go. We know this is not a 
science, we know that it is really more witch hunting, and we 



400 

would be better off by putting our money in the casinos there, if we 
want better return, than going to the frontier. 

It is that kind of concern that I have, and I grant you that 
insofar as there is not a mandate, but there is a stated purpose by 
the Secretary, that he is going to do this. This is what bothers me, 
and I am just somewhat concerned about the constant thinking 
which we seem to have around, that this is the kind of way that 
you test the resource, and this is the way we know how to proceed 
from here on. 

When I think, time and time again, the proof just does not 
indicate that it goes that way. We know one of those wells onstruc- 
ture in the Baltimore Canyon, that they now believe that they may 
have gone right through. Well, I know instances in the gulf where 
two different companies tried to develop a lease, did not make it, a 
third guy came along and found that they were all going through 
the resource. These kinds of things indicate to me that maybe it is 
better off leaving this in the hands of those who have the expertise. 

Mr. Rothschild. I think you are still — we are still leaving this to 
the people that do the development. It is all being left to the 
companies, it is being left to the companies to choose what kind of 
wells they will drill. 

I still claim that you get a greater amount of information from 
drilling those kinds of wells, whether it is positive or negative, you 
still learn a great deal more that you did not know before, and it 
gives the Government more information, especially information 
that is needed to adequately assess and evaluate that property. 

I think the Government would be violating its trustee responsi- 
bility, the Secretary of Interior would be violating his trustee re- 
sponsibility, to the public to, in effect, lease tracts without having 
any idea what is there, especially with the bidding systems that we 
currently have, which do not return the most value to the public, 
but return the most value to the companies. 

Mr. FoRSYTHE. Well that, of course, gets into another area. But I 
think what you are telling me is that what we should be doing is 
Federal exploration, and only sell the resource, when we know 
what is there. 

Mr. Rothschild. I never said that. 

Mr. FoRSYTHE. Well, you are almost saying that. I did not say 
you said it. 

Mr. Rothschild. No, I think we should leave it to the companies. 
I think the Government should have the kind of authority to get 
information. 

Mr. FoRSYTHE. Well, they have complete authority to get all the 
information from every company that goes down in a lease. 

Mr. Rothschild. I think they should have the flexibility to have 
onstructure, as well as offstructure wells, that is all. 

Mr. Forsythe. Well, we have a difference. 

Mr. Rothschild. We do. 

Mr. Forsythe. That is rather evident. But back to this regulation 
situation. 

I gather that you would agree that getting these regulations 
promulgated is highly essential, if we are going to see a rational 
plan of development on the OCS. 



401 

In other words, we need to keep the heat on the agencies to keep 
this thing moving. 

Mr. Rothschild. Absolutely. Once they agree to the kind of 
regulation they are going to propose, we still have to have 60 days, 
I think for pubhc comment, so we are still quite a ways away from 
the time that we are going to have those regulations in place and 
operating. 

Mr. FoRSYTHE. You are exactly right. As a matter of fact, only 
about a third of those regulations have been published for com- 
ment. So that we still have a long way to go. 

Do you believe that there would be any better way for Congress 
to play the role that it must play through oversight, than a com- 
mittee whose sole attention is directed specifically to this one area? 

Mr. Rothschild. I think in December Mr. Flug answered that 
question, and I think he stated if this committee did not have 
oversight, that one committee would have oversight of this particu- 
lar area so that there would be continuing oversight. 

Mr. FoRSYTHE. Well, there must be one committee having com- 
prehensive oversight. 

Mr. Rothschild. I think it was Mr. Flug's statement in Decem- 
ber that the Congress should decide how it was going to have 
oversight, whether it was a single committee, or a number of 
committees, that was up to the Congress. We would hope that the 
oversight responsibility would be continued, whether it is in this 
committee, or in another committee. 

Mr. FoRSYTHE. You are very helpful in recommending many 
things, but not to help Congress make this decision, I gather. 

Mr. Rothschild. I wish I could be more helpful, but the Energy 
Action Education Foundation, has not taken a position on whether 
this committee or another committee should be responsible for the 
oversight. 

The Chairman. Would the gentleman yield? 

Mr. Forsythe. Yes. 

The Chairman. I think the question is not who performs the 
oversight, but that the oversight is performed, and performed in a 
comprehensive, responsible manner, and what our recommendation 
is, of course, is to have this committee, with its expertise, perform 
the oversight. 

I think there probably will be a jurisdictional question that can 
be crossed at a later time, but I think to permit what we have seen 
happen so far, since October, with the only movement in the execu- 
tive branch precipitated by our first day of the oversight hear- 
ings — we see the flurry in the Federal Register, and we see the 
flack downtown, and we see discussion between departments con- 
sisting of nothing, as you said, but a phone call. 

It is to get this thing off on its right and intended foot; and I 
think that you have taken certainly a much more rational and 
responsible answer than some other people in the environmental 
community. 

We said it should be performed cohesively and rationally. You do 
not have to pick the vehicle for it to have that attitude. You do not 
have to get into jurisdictional personalities of the Congress, or the 
executive branch, for that matter. But I think what you say is 
certainly appropriate. 



402 

Mr. Rothschild. Mr. Chairman, just one comment. 

We are not an environmental group. We are a public interest 
research and education group. 

The Chairman. Counsel? 

Mr. O'Brien. Have you taken any position on the creation of a 
Department of Natural Resources within the executive branch? 

Mr. Rothschild. No, we have not, sir. 

Mr. O'Brien. You heard that earlier testimony where it was 
suggested that the creation of DNR might delay implementation of 
the OCS Act. Would you agree with that statement? 

Mr. Rothschild. I cannot give you any answer, because we really 
have not addressed ourselves to that problem at this point. 

If you would like to have an answer, I will get back to you, and 
submit it for the record. 

Mr. O'Brien. Would you, please? 

Mr. Rothschild. Yes. 

[The answer referred to was not received for the record by the 
time this hearing went to press.] 

Mr. O'Brien. Has the Energy Action Educational Foundation 
done any analysis in response to events in Iran and elsewhere with 
respect to the worldwide oil picture; specifically, have you respond- 
ed to any of the statements made recently by Secretary Schlesinger 
and others with respect to the overall energy supply situation? 

Mr. Rothschild. We are now in the process of doing an analysis, 
yes. It is not complete yet. 

Mr. O'Brien. When will that be completed? 

Mr. Rothschild. I expect it will be completed by the end of the 
week. 

Mr. O'Brien. What would you hope to see, what part or role 
would you hope to see OCS production play in that analysis? 

Mr. Rothschild. We hope that production from OCS will contin- 
ue as it has, in playing an important part in supplying the United 
States with energy. The United States, as compared with other 
countries, for example, Japan, Germany, which import most of 
their oil, and most of their oil from OPEC countries, where they 
are totally dependent upon those sources of supply, they are being 
dealt with rather better than the United States, by its own compa- 
nies, we have seen. Exxon and the other major companies are 
allocating the shortage worldwide, and it seems even though we 
are less dependent than any other country in the world, because 
we have all — we have enormous amounts of our own resources, not 
only oil, and gas, but coal and uranium, as well. We are being dealt 
a more severe cutback than those countries that are more depend- 
ent. So I just caution that swift development of OCS does not 
necessarily mean that we are going to get the energy any quicker. 

In the past we have seen companies, and this is the due diligence 
problem that I alluded to earlier, we have had tracts leased, but no 
development for 5, 6, 10 years, and the companies coming into the 
Department of Interior, getting suspension after suspension, which 
does not get you any more oil and gas. Just because you increase 
the number of lease sales does not mean that you get more gas. 

Competition may decrease, the industry is incapable of going out 
and doing an adequate exploration job for such a large number of 
tracts. So I just throw out this note of caution — increasing the 



403 

amount of tracts per year that are leased does not necessarily 
mean that we are going to get any more oil and gas. Diligence has 
to be performed so that they can produce the oil and gas. 

Mr. O'Brien. How many personnel do you have here in Washing- 
ton in support of your operation, including yourself? 

Mr. Rothschild. Right now we are staffed at the level of four. 

Mr. O'Brien. How many would you say that the Seven Sisters 
have in Washington? 

Mr. Rothschild. In Washington — does that include their staffs 
that they have in their own offices plus the consultants and the 
attorneys? 

Mr. O'Brien. Yes. 

Mr. Rothschild. API and so forth? 

Mr. O'Brien. Yes. 

Mr. Rothschild. Hundreds. 

Mr. O'Brien. How many would you say? 

Mr. Rothschild. I do not know; 300 or 400, 500 probably. 

Mr. O'Brien. How many committees do you now appear before in 
advocating the views that your organization holds? 

Mr. Rothschild. We appear before as many committees as would 
like to hear us. 

Mr. O'Brien. How many would you say that is, roughly? How 
many committees in both the Senate and the House? How many 
appearances are your four people required to make to advance 
their viewpoint? 

Mr. Rothschild. It all varies on what hearings are being held, 
but I would say the Energy Committee in the Senate, the Antitrust 
and Monopoly Subcommittee are the two that we appear before on 
a regular basis. The Energy and Power Subcommittee of the Com- 
merce Committee and this committee, and possibly the Interior 
Committee. 

Mr. O'Brien. So it would make your job considerably more diffi- 
cult if you had to appear before even more committees than you 
have to appear before now? 

Mr. Rothschild. I think the focus of our concerns are so narrow 
that it would be one more committee. I think our concerns would 
be covered by one committee. 

Mr. O'Brien. What committee would that be? 

Mr. Rothschild. I do not know where that — is it Energy and 
Power probably would take that responsibility or Interior? 

Mr. O'Brien. Do you think from your knowledge of groups like 
your own and other similarly situated groups in Washington that it 
would be more difficult as a general rule to appear before 10 or 11 
committees than it would be to appear before this one with respect 
to OCS matters? 

Does it not diminish your effectiveness by subdividing your own 
effort and requiring you to appear before a vast array of panels, 
and does it not really serve the interest of Seven Sisters and their 
representatives who outnumber you 20 or 30 to 1 because they do 
have the money and resources to appear before those groups 
whereas it seems that you have lesser resources? 

Mr. Rothschild. We certainly have fewer resources. I think it is 
true that we are going to be outnumbered. I am not certain that if 
the responsibilities of this committee are transferred to another 



404 

committee, that it will necessarily diminish our ability to testify. If 
it gets beyond one or two committees, certainly we will be under 
more constraint given our limited resources. 

Mr. O'Brien. How do you support the Energy Action Educational 
Foundation? 

Mr. Rothschild. We are supported solely by private donations of 
individual citizens. 

Mr. O'Brien. Thank you, Mr. Chairman. 

The Chairman. Thank you, Mr. Rothschild. 

The next witness is Mr. John H. Lyons, president. International 
Association of Bridge, Structural and Ornamental Iron Workers, 
and he will be accompanied by Mr. William M. Lawbaugh, director 
of legislation, International Association of Bridge, Structural and 
Ornamental Iron Workers. 

It is a pleasure to see you once again. 

STATEMENT OF JOHN H. LYONS, GENERAL PRESIDENT, INTER- 
NATIONAL ASSOCIATION OF BRIDGE, STRUCTURAL, AND OR- 
NAMENTAL IRON WORKERS, ACCOMPANIED BY WILLIAM M. 
LAWBAUGH, DIRECTOR OF LEGISLATION 

Mr. Lyons. Thank you, Mr. Chairman, members of the select 
committee. It is a pleasure to be here before you today. I am 
speaking on behalf of a significant number of the 182,000 Iron- 
workers in the United States and Canada whose jobs in the off- 
shore construction industry are directly and indirectly affected by 
these deliberations here today. 

The matter I bring before you today extends much beyond the 
livelihood of our members. It impacts on the American economy 
and ultimate fairness in U.S. trade policy. 

Specifically, the matter which I bring to your attention involves 
a clear case of special application of trade policy involving millions 
of dollars lost to the U.S. Treasury for two offshore platform jack- 
ets which will soon enter U.S. waters in California. 

On February 28, 1979, President Carter issued an Executive 
order which covered more than 800 changes in the Generalized 
System of Preferences. All of these changes became effective March 
1, 1979, except for the matter at hand. For reasons not set forth in 
the decision, the recommendation to the President by his trade 
advisers, which he signed, removed offshore drilling platforms from 
the GSP in a manner different than the 800 other changes in that 
order by way of establishing an effective date of 1 year later, 
specifically March 1, 1980. Given the unusual nature of a solitary 
exception among 800-plus items, it is apparent that someone or 
some group is seeking special privileges since there is nothing in 
the written record in this case to justify such exception This 
solitary exception deserves your attention and action in order to 
enforce the intent of Congress on this matter and to insure equal 
treatment under the laws relating to U.S. trade policy. This is 
particularly so since the referenced GSP decision related to the 
second of two specific rulings that U.S. Customs made within a 
single document, dated May 11, 1978, pertaining to a specifically 
identified item, whereas this committee held hearings and acted 
upon the first ruling in that document and did not see fit to take 
any exception whatsoever to the effective date of its clarification of 



405 

existing law that was created by the improper ruUng of the U.S. 
Customs Service. 

Following is a brief review within the framework of information 
available to us as to how this strange situation developed. 

Sometime prior to May 11, 1978, two major oil companies solicit- 
ed separate bids for jacket and deck sections to make up three 
offshore platforms to be installed in the Santa Barbara Channel. 
Apparently, after that solicitation, a question was directed to the 
U.S. Customs Service describing two platforms connected together 
with a 200-foot bridged walkway. The platforms described and the 
question presented to U.S. Customs Service appears to be two of 
the three platforms on which bids were requested. 

On May 11, 1978, Salvatore Caramango, Director of the Classifi- 
cation and Value Divisions of the U.S. Customs Service, issued a 
most unusual ruling, again apparently relating to the platforms 
being bid. He ruled that duties are not applicable on offshore 
platforms until two major components of a platform; namely, the 
jacket and deck sections, are assembled together which would 
mean that these multimillion-dollar components could come into 
the OCS duty free. The ruling stated: 

It is our position that each platform will not be considered a fixed structure until 
the jacket and deck are assembled at the site of erection and ready to receive 
outfitting and ancillary equipment such as cranes, towers, elevators, connecting 
steel, walking bridge, and living quarters. Each platform, consisting of jacket and 
deck, will be considered a fixed structure under the Outer Continental Shelf Lands 
Act at this point. Such ancillary equipment, including drilling and production 
machinery, supplies and furnishings, imported to these platforms will be considered 
imported into Customs territory and subject to duty. In the absence of a full and 
complete description of the equipment, we are unable to give you definite advice 
concerning the rate of duty applicable. 

Then Mr. Caramango went one step further in the final para- 
graph of the two-page ruling to say that the 9.5 percent ad valorem 
tariff could be avoided altogether if the platform came from a GSP- 
eligible country like Malaysia. He ruled: 

Merchandise classifiable under item 652.98, TSUS, which is a product of Malaysia 
may be entitled to duty free treatment under the Generalized System of Preferences 
(GSP), if the requirements for eligibility are met. 

Now, you will note in that statement that he did not specifically 
classify that platform under 652.98 TSUS. It had never been classi- 
fied, to the best of our knowledge. That was the only reference 
made to it in the record. 

The bid opening occurred after the Caramango ruling and all 
three jacket section low bids came from Japanese and Southeast 
Asia firms, and they were awarded the contracts. Hundreds of our 
members were eliminated from this potential work as a result. 

We quite naturally were disturbed since, prior thereto, all west 
coast offshore platforms had been fabricated on the west coast and 
the skills of thousands of our members have been utilized in such 
construction. It was not until some time later that we learned of 
the very unusual ruling of the U.S. Customs, dated May 11, 1978. 
When we heard about this ruling, we were disturbed that our trade 
laws apparently could be twisted in such a way as to encourage 
importation of heavy industrial, high technology items such as 
offshore platforms. 



406 

The U.S. Customs ruling was brought to the attention of Con- 
gress and the OCS conference committee held hearings last 
autumn. The conferees determined that Customs misinterpreted 
the law and that normal duties shall apply to offshore platforms, 
stating: 

The Conferees were informed that the United States Customs Service has inter- 
preted existing section 4(a)(1) to mean that foreign-built production platforms are 
not subject to import duties when they are brought into OCS waters and attached to 
the seabed. Specifically, the Customs Service has stated that such platforms are not 
actually being imported to the United States until they are placed on the shelf and 
need not pay customs duties. The Conferees reject this interpretation and believe it 
is contrary to the intent of Congress in enacting the 1953 Act. Moreover, to make it 
explicit that this interpretation should not be continued to be given effect, the 
Conferees state that one of the purposes of this change in 4(a)(1) is to make it clear 
that U. S. custom duties are to apply to platforms built overseas, and brought into 
OCS waters for placement so that it can be used to develop and produce OCS 
minerals. 

The conference committee in this ruling quite properly addressed 
itself to only one of the two parts of the May 11, 1978, U.S. 
Customs ruling. Again, we call attention to the fact that the confer- 
ence committee made no exceptions as to an effective date of its 
clarification. The second part of the ruling did not clearly involve a 
question of law as did the first part, but instead involved a ques- 
tion of appropriate classification under law for which established 
appellate procedures existed. Accordingly, this international Asso- 
ciation protested to the Trade Policy Staff Committee the fact that 
OCS drilling platforms described in the ruling were not properly 
classified by the ruling and did not meet the intent of Congress to 
grant duty free treatment for items imported from less developed 
countries (LDC). We filed a protest petition with the Office of 
Special Trade Representative on October 23, 1978, and requested 
an emergency consideration of the petition. Numerous Members of 
Congress, trade unions, and American manufacturers supported 
our petition, and a hearing was granted to be held on January 24, 

1979. , , 

We contended, and still contend, that offshore platforms were 
never intended to be on the GSP list of items subject to preferen- 
tial tax treatment and asked the Office of Special Trade Repre- 
sentative to recognize that fact. 

As our January 24 hearing approached, we discovered that a 
U.S. company. Brown & Root, Inc., of Houston, Tex., opposed our 
emergency petition along with only one other, the country of Sin- 
gapore. At the hearing before the TPSC, the organizational struc- 
ture of the company performing the work was established and 
identified as an American company; namely. Brown & Root. This, 
we believe, was the first time in history that a U.S. company 
attempted to fabricate offshore platforms overseas that were to be 
installed in U.S. waters, and we contended that the GSP was not 
established to benefit runaway U.S. firms with special tax prefer- 
ence. The Company, at the hearing, did not claim in the recorded 
testimony that it had bid, on behalf of its wholly owned subsidiary 
in Malaysia, with an awareness of possible duty free privileges. 
Further, in the absence of such testimony, the company was asked 
to advise the committee if it had bid anticipating duty-free treat- 
ment. The company, in replying to the question by letter dated 



407 

January 30, 1979, contended it would not answer that question 
since it was "proprietary information." 

No company clearly would make a false statement on such an 
issue. A simple yes, if challenged, would not involve any tax inves- 
tigative process beyond that which any company has undergone on 
numerous occasions. It was most obvious that the refusal to reply 
to the question was a reply in the negative. The company had not 
been misled by interim U.S. Customs ruling that was later over- 
turned. On the other hand, even if they made such contention, 
would that justify an exemption from the application of the law? 
This conference committee, in ruling on the first part of the U.S. 
Customs ruling, granted no exemptions. Further, I can conceive no 
comparable examples where an interim misinterpretation of the 
law, in effect, excuses compliance. 

However, the TPSC, for reasons unknown to us, believed other- 
wise, and in the President's Executive order of February 28 a brief 
paragraph explained the decision: 

1. Drilling platforms (part of 652.98, TSUS), (and I again want to reiterate that 
prior to that letter by Caramango, there had never been any specific classification 
in the record) — these are used offshore to drill for oil and until recently the United 
States was the only country building them in large numbers. Certain beneficiary 
developing countries have the capacity to construct these items, and one developing 
country, Malaysia, plans to ship two structures to the United States this year. The 
petitioner, the Bridge, Structural and Ornamental Iron Workers Union, fears a loss 
of contracts and jobs if GSP duty free treatment continues on this item. Petitioner 
is widely supported by organized labor as well as by a large number of Congress- 
men. It is recommended that this item be removed from GSP effective March 1, 
1980. This compromise will not penalize the beneficiary developing country which 
has let contracts this year with the understanding that they would receive GSP 
duty free treatment. At the same time, the compromise is responsive to the petition- 
er's request. 

It should be noted that certain parts of the decision quoted above 
are inaccurate. Specifically, the country of Malaysia did not let 
contracts this year with the understanding that they would receive 
GSP duty-free treatment. The award was made to a U.S. company, 
Brown & Root, Inc., not Malaysia; last year, not this year; and, as 
Brown & Root's testimony of January 24 clearly shows, not with 
the understanding of duty-free treatment. 

We contend that this most recent of a series of loopholes in trade 
policy is not the intent of Congress. The facts are very clear in this 
matter. Special interest application of trade law has been attempt- 
ed since May of 1978, and it is incumbent upon this subcommittee 
to act quickly and evenhandedly to clearly set forth the intent of 
Congress or the applicable law and eliminate loopholes that can be 
generated by an effective date. The country of Malysia will not be 
affected one way or another. No one has claimed damage. However, 
the U.S. Treasury stands to lose perhaps millions of dollars if the 
OCS and trade laws are not properly interpreted. 

Thank you, Mr. Chairman. 

The Chairman. Thank you, Mr. Lyons. I certainly appreciate 
your very forthright statement detailing this issue, and I joined 58 
of my colleagues in January in writing to the President concerning 
this obvious loophole. 

Mr. Forsythe? 

Mr. Forsythe. Thank you, Mr. Chairman. 



408 

Mr. Lyons, there is an area that you did not go into in your 
statement, but is of interest to this committee. I am not sure if you 
are completely familiar with the subject. I want to ask you to 
comment on it, and if you care, you may respond in writing. 

On March 8, this committee informed the Department of Interior 
witnesses, that we knew they had completed their 5-year leasing 
schedule and that if contained four or five sales a year. They 
denied this, and the next morning they released the 5-year sched- 
ule, which did indeed recommend the four or five sales year. 

The Department of Energy recommended seven sales. They in- 
formed us that the difference between Interior's and their sched- 
ule, represented a loss of 1 billion barrels of oil every 5 years. 

Do you have any idea what this loss will be to your union? 

Mr. Lyons. The difference between the 5 and the 7 years? 

Mr. FoRSYTHE. That is correct. If you lost 8 billion barrels of oil. 

Mr. Lyons. I have not had any thoughts, prior to this, on that 
question, but I would indeed have an investigation made with 
respect to, at least within our capabilities of responding to it, and 
give you our reply. 

Mr. FoRSYTHE. It obviously is less jobs. If you can, I would appre- 
ciate a response. 

Mr. Lyons Yes, sir. 

[The following was received for the record:] 

International Association of Bridge, Structural and 

Ornamental Iron Workers, 
Washington, D.C., March 24, 1979. 

Hon. Edwin B. Forsythe, 

Ad Hoc Select Committee on the Outer Continental Shelf, 

Washington, D.C. 

Dear Congressman Forsythe: I am pleased to respond to your twofold question 
issued during the oversight hearings Wednesday, March 20, 1979, regarding leasing 
sales. 

As I understand the situation, the number of lease sales must strike a balance 
between energy needs and environmental risks. While I do not, in this instance, 
speak for nonunion elements in this industry, I can assure you that union journey- 
men Ironworkers have a proven record on the West Coast of doing the jobs of 
fabrication and installation of offshore platforms with the greatest ofease, safety 
and ecological care. The enclosed issue of The Ironworker magazine for October of 
1977 will serve to demonstrate the successful, safe and clean work of our members 
in this vital industry. 

It is impossible to pinpoint exactly the effects of unemployment and oil-loss of an 
additional lease sale of one or two per year on our members, but both would be 
considerable. I tend to support DOE recommendations of seven lease sales per year, 
given the current Iranian oil situation and impending restrictions expected with full 
implementation of the Clean Air Act. I encourage you and the Ad Hoc Committee to 
eliminate unnecessary delays in offshore exploration, frivolous legal actions and 
administrative roadblocks. At the same time, I encourage you to consider safety, 
health and environmental safeguards. But in the balance, present conditions do 
warrant additional lease sales. 

I am informed that we have a ready and capable workforce centered in Rhode 
Island to handle the Baltimore Canyon with qualified, but unemployed, journeymen 
Ironworkers. Situations such as that which I described to you Wednesday have 
resulted in idled but capable workforce ready for offshore work on the West Coast. 

The matter I brought before you Wednesday reflects your concern for law enforce- 
ment to Secretary Andrus on March 19. Since the Administration agrees that 
offshore platforms should not be on the GSP eligibility list, and never should have 
been, simple justice demands even-handled, undelayed action. I anticipate that the 
Ad Hoc Committee will soon call Administration officials to justify their action to 
delay that simple one of the 800-plus action of February 28. We cannot allow the 
Administration to give special treatment to runaway firms when our own U.S. 



409 

industrial capacity must be utilized, now and in the future, to keep alive the 
technology and manpower needed for energy independence. 
Sincerely yours, 

John H. Lyons, General President. 



[From the Ironworker, October 1977] 

Offshore Drilung for Oil 

Nineteen seventy-seven started out to be a good year for offshore drilling, begin- 
ning a new era in North American energy development. On the West Coast, an 
eight-year delay in offshore drilling for oil and natural gas was ended as drilling 
resumed off the shores of Southern California and Alaska. On the East Coast, 40 oil 
companies secured the leases to drill on 96 selected tracts offshore. 

While the West Coast drilling activities picked up, the East Coast plans came to a 
halt when U.S. District Judge Jack B. Weinstein ruled that the Interior Secretary 
had violated the Environmental Policy Act in selling the offshore leases for $1.13 
billion. The affected area, known as the Baltimore Canyon oil field extending from 
Maryland to New York, was expected to produce as much as 1.4 billion barrels of oil 
and more than 9 trillion cubic feet of natural gas. 

Then, just a few weeks ago, a higher court overruled Judge Weinstein and 
declared that the sale was legal. As a result, companies could begin exploration in 
the Baltimore Canyon by the end of this year. 

At about the same time, the Interior Department slated 15 new offshore lease 
sales for 1979-1981, supplementing the current schedule of leasing new tracts in the 
Gulf of Mexico and Alaska's Cook Inlet this year. A complete illustration of offshore 
areas under or to be leased by 1981 is presented in drawings on these pages. 

To give an idea of how much construction work is involved, Alaska and California 
can serve as examples. In just those two areas, as many as 171 platforms involving 
2,820,000 tons of steel and 180,000,000 manhours of work are scheduled for 1977- 
1987. In addition to this work, several marine terminals will have to be built for 
crude oil and liquified natural gas. 

LEGISLATIVE CHANGES 

As this issue goes to press, Congress is debating amendments to the Outer Conti- 
nental Shelf Lands Act (H.R. 1614 and S. 9). While big oil companies are bitterly 
opposed to the Act because of federal regulation and delays, enactment is all but 
certain. And, despite objections to the contrary, the new OCS Act may even expedite 
offshore drilling and development. One congressional committee chairman told this 
magazine that Judge Weinstein's blockage of East Coast development would have 
been impossible had the OCS bill been enacted Icist year. 

However, disturbing reports are on the horizon, possibly meaning an erosion of 
American and Canadian jobs and a new flood of imported fabricated steel. Just a 
few weeks ago, some oil companies on the West Coast invited bids from Japanese 
and Korean steel fabrication and construction companies, suggesting a pattern of 
imports followed on the Alaska Pipeline Project. Nippon Steel Corporation of Japan, 
for example, produced, fabricated and loaded out four massive crude oil loading 
seaberths in Valdez Bay offshore Alaska. And from West Germany comes a report 
that new techniques for offshore liquified natural gas processing plants can allow 
"the fabrication of the process facility to be accomplished in one country and towed 
to the site, reducing tremendously the cost and expense of importing skilled expatri- 
ate construction labor." The Nippon platforms were towed all the way from Japan 
also. 

At this writing, building trades officials throughout the country are trying to 
muster Congressional support for a "Build American" clause in the OCS Act, an 
amendment that would not be passed through House committee earlier but is 
expected to be introduced from the floor during debate. Naturally, some American 
oil companies, seeking maximum profits with cheap foreign labor and materials, 
oppose the "Build American" amendment, so a vigorous lobbying fight is expected. 
Great Britain and Denmark have similar citizen-preference clauses in their offshore 
work. 

MODEL AGREEMENT 

Anticipating the work opportunities for organized labor in this expanding field 
seven building and construction trade unions, including the Ironworkers, ironed out 
a milestone West Coast agreement with the offshore industry's prime contractors. 



410 

The model agreement, which went into effect January 1, 1977 for two years, has 
been adapted for East Coast operations as well. General President John H. Lyons 
serves on the President's Offshore Construction Committee and General Organizer 
Jake West serves as Chairman of the Agreement's Policing Committee. Presently, 
with no-strike and no-lockout guarantees, Ironworkers are on the rigs for 14 days 
and off seven days as work picks up in California. With the new leases in the Gulf 
and Atlantic, employers can be sold on the recent success of the West Coast 
Agreement. 

Domestic steel producers inland and the maritime trades also greet the new surge 
in offshore oil and gas development. Both industries presently face a severe down- 
turn in production and employment. The Seafarers joined in the General President's 
Offshore Construction Agreement and work is picking up for their members. The 
steel industry, mainly on account of cheap imports of basic and fabricated steel, 
continues to suffer. In the past few weeks, Bethlehem shut down plants in New 
York and Pennsylvania, suspended operations of four other mines and plants. The 
Johnstown Flood meant a cutback of 3,000 workers, and plans to build a $70 million 
basic oxygen furnace there have been abandoned. Kaiser Steel shut down three steel 
plants and U.S. Steel has cut back its workforce drastically. The major reason: 
imports of steel from Japan and other countries, more than 3.6 million tons in May 
and June. A full push for offshore development could turn that situation around, 
especially with a "Build American" amendment in the OCS Act. 

WEST COAST OPERATIONS 

With the lifting of Judge Weinstein's ban on offshore drilling, construction activi- 
ty along the East Coast has not yet begun. However, the West Coast operations were 
in full swing, and hundreds of Ironworkers were fabricating and erecting the huge 
platforms for oil and natural gas exploration. 

The West Coast operations, too, were held up by a federal ban that lasted for 
eight years. In 1975 the moratorium was lifted in California's Santa Barbara Chan- 
nel, and severe shortages of oil and natural gas finally prompted the Ford Adminis- 
tration to speed up the projected lease sale schedules and granting of drilling 

permits. r- . i i 

By 1976, offshore construction began to pick up, and mdustry hopes to find 14 
billion barrels of oil and 28 trillion cubic feet of natural gas in the field off shore 
California, and Alaska is expected to yield 45 percent of the OCS oil by 1985 
according to a recent Bureau of Land Management report. (The Pacific Coast will 
yield 22 percent, the Gulf 15 percent and the Atlantic 20 percent by 1985.) 

Hondo 

About 20 miles out from Santa Barbara stands the world's largest offshore drill- 
ing structure, the "Hondo," Spanish for "The Deep." Requiring over a million 
manhours to build and erect with members of Local 378 of Oakland and Local 433 of 
Los Angeles, Hondo can house 44 workers. 

The platform jacket or structure weighs approximately 12,000 tons, has eight 
main legs, and is framed with X and diagonal bracing. The plan dimension at the 
water line are 45 feet by 125 feet and the base dimensions are 168 feet by 232 feet. 
The eight legs are 54 inches in diameter and the twelve skirt pile sleeves are 63 
inches in diameter. The deck has three levels, 87 feet by 170 feet, with a total deck 
area of 40,000 square feet. It is comprised of six modular units and weighs about 
1,600 tons. The height from the mudline to the top deck is 945 feet. The jacket was 
assembled in a horizontal position and in two section so that it can be transported 
by barge to the erection site. The top section weigh approximately 5,000 tons and 
the bottom section weighs approximately 7,000 tons. The jacket will be anchored to 
the ocean floor by 49 inch diameter main piles which will be driven through the 
legs and twelve 54 inch diameter skirt piles. J. Ray McDermott & Co., Inc. contract- 
ed with Exxon to perform the water phase of the work. 

Steel used in the jacket was produced by Kaiser Steel Corporation at its Fontana 
Mill. The steel was transported to Kaiser's Napa and Fontana shops for forming and 
rolling into tublar sections. The tubular sections were fabricated into subassemblies 
which were then transported to Kaiser's Oakland Assembly Yard. 

Sedco 

The Gulf of Alaska is the site where the twin Sedco drilling vessels are now 
exploring the oil-rich area which may yield nearly half of all the OCS oil, which 
may reduce our import requirements for crude oil by as much as 30 percent within 

The Sedco 706 and 708 are two identical semi-submersible drilling vessels Kaiser 
Steel has fabricated and assembled for Sedco Maritime, Inc., Dallas, Texas, Sedco 



411 

Maritime is a subsidiary of Sedco, Inc. of Dallas, the largest offshore drilling 
contractor in the U.S. 

Each vessel contains 8,000 tons of structural steel fabricated at Kaiser Steel's 
plants in Napa and Fontana, California. Earl and Wright, Sedco's engineering 
division, designed the vessel and is the naval architect on the job. 

The vessel's lower structure consists of two compartmentalized hulls 295 feet long. 
These hulls are designed to be flooded for drilling operations with the vessel sub- 
merged at 80 to 90 feet draft. Each hull is the base for four legs: two cylindrical-type 
caissons 30 feet in diameter and two intermediate caissons 18 feet in diameter. The 
295-foot by 245-foot deck is 130 feet above the bottom of the hull. The vessel holds 
quarters for 96 men as well as drilling pumping equipment and a helicopter deck. 
With its derrick in upright drilling position, the vessel stands 330 feet high. 

The derrick is designed to withstand the high winds and heavy icing that may be 
encountered off Alaska. A block in the derrick will hold the drill pipe. Riser- 
tensioners positioned around the drill floor will be connected to the riser pipe that 
brings up the cuttings. The riser-tensioners are puUy-like mechanisms that hold the 
riser pipe steady as the vessel moves up and down. 

The vessel has a system of eight anchors, each suspended by 2,000-foot lengths of 
chain. This system, plus a complex heave compensator, will work to maintain 
stability so drilling operations can continue in up to 50-foot seas. 

Both vessels will also be well-prepared to handle the constant threat of a 
"blowout". A highly sophisticated blowout preventor (BOP), as big as an ordinary 
room, will sit on the ocean bottom immediately above the drilling operation. It 
would act as a shutoff valve at the wellhead. The BOP can be activated hydraulical- 
ly from any of three control points on the vessel if a blowout seems imminent. 

The vessels also have a helicopter landing pad for easy accessibility when operat- 
ing in remote waters. Equipment also includes a highly sophisticated diving bell and 
compression chamber, so drilling personnel may have a firsthand view of operations 
on the ocean floor. 

Drilling vessels such as the Sedco 708 tj^iically operate 24 hours a day. Between 
shifts, crews will spend its time in the two-story quarters building. Crew members 
will live in semi-private cabins. Recreation facilities on board will include ping p>ong 
and videotape movies. Four meals a day will be served in the 36-man mess hall. 

Water for cooking, drinking, showering and laundry can be distilled on board at a 
rate of up to 1,200 gallons per hour. The quarters building will also contain the 
engine room, boiler room, machine shop and three diesel-powered electric gener- 
ators, rated at 2,875 HP apiece. 

Mr. FoRSYTHE. I thank you very much. 

Thank you, Mr. Chairman. 

The Chairman. Counsel? 

Mr. O'Brien. Mr. Lyons, from the point of view of the Iron- 
workers, is the issue which you just spoke to, now closed? 

Mr. Lyons. Unless this committee can evaluate the issue that we 
have presented, and identify it within the framework of the OCS 
law as being contrary to the intent of Congress, which I do think 
they can, and instruct the TPSC Committee that the written record 
would not support a ruling that — which would give duty free pref- 
erence, and request that they supply this committee with whatever 
material is in the record to support such an allegation. 

I believe that that is within the prerogative of this committee, in 
overseeing the development of the OCS, whatever the items of 
importation, that trade policy is evenhandedly determined, so that 
there is not unfair competition in relationship to the items that are 
fabricated and installed in the OCS. 

The competitive nature of these items is very tight. The differ- 
ences between bids in American fabricating firms sometimes runs 
less than one-half of 1 percent difference, and if any favortism can 
be obtained by way of duty-free treatment, or by way of interpreta- 
tions, or misinterpretations of existing law, it would indeed be to 
the advantage, substantial advantage of any fabricator who would 
seek some loophole in the law, whether that loophole was a proper 
loophole, or improper loophole. 



49-118 0-79-27 



412 

It is our view that there was no loophole here at all, prior to the 
May 11 ruling, there had never been anything in the record that 
would indicate what would be the classification on import of an 
offshore platform. 

Mr. Caramango merely said that if it was in that classification — 
and came from a less-developed country — it could receive duty-free 
treatment. He did not say clearly — and there was no other record — 
that that was the proper classification, but it was implied, and it 
was this implication that we requested our hearing to upset, and 
we successfully did upset that. We established that it was not the 
intent of Congress in supplying the advantage to a less-developed 
country, by granting them duty-free treatment of the products they 
manufacture, to even slightly indicate that a very high-technology 
item, such as an offshore drilling platform, would be in that catego- 
ry. 

Malaysia does not even have a steel industry. I think we estab- 
lished that it was a subterfuge to circumvent the law, and there- 
fore they removed it, and placed it in a classification that that 
could not happen, but they set a date a year later, which means a 
windfall of about $3.5 million to somebody at the expense of the 
American taxpayer. 

I believe that this committee has both a responsibility and an 
entitlement to request from this TPSC that they supply this com- 
mittee with the information in the record that would justify ex- 
tending this for 1 year, which would, in effect, make an uneven- 
handed treatment of tax law in this one case, on this $30-plus 
million contract. 

Mr. O'Brien. Was construction in Malaysia done by a wholly 
owned foreign subsidiary? 

Mr. Lyons. Of Brown & Root. 

Mr. O'Brien. One hundred percent ownership was in Brown & 
Root? 

Mr. Lyons. Brown & Root testified to the organizational struc- 
ture of both the company in Malaysia and the steel company in 
Japan, both of which were in some various percentages or owner- 
ship by Brown & Root, Inc., of Houston, Tex. Their statements are 
in the record. We can make them available to you. That would be 
their description of the organization. 

Mr. O'Brien. I appreciate that. 

When did you first become aware that this was a wholly owned 
subsidiary of the corporation, and that activity was underway? 

Mr. Lyons. In the hearing held January 24. 

Mr. O'Brien. Were those witnesses there under oath? 

Mr. Lyons. I do not recall. 

Mr. Lawbaugh. No, I do not think there was sworn testimony. 

Mr. O'Brien. Are there any other loopholes similar to the one we 
are discussing here today, that you are aware of— attempts to 
circumvent the statute with respect to foreign employment? 

Mr. Lyons. This was the first one that was ever imported into 
the United States from a foreign country, and there was two efforts 
at loopholes on that one. So I do not know how many other loop- 
holes are out there, but I suspect somebody will be out there 
looking for them. 



413 

Mr. O'Brien. We have been approached by private sector repre- 
sentatives of private corporations who have indicated that we 
should scrutinize closely the regulations to be promulgated under 
new section 30 of the act, which speaks to the issue of manning and 
crewing on the OCS. 

In fact, there has been one suggestion that foreign nationals who 
are not permanent resident aliens or U.S. citizens may be using a 
loophole in section 30 to bring foreigners in to work on the OCS. 

The question is is this something that will be of interest to you, 
and will you be looking at those regulations that are coming out 
under section 30 in this particular matter? 

Mr. Lyons. Yes, sir, because the east coast developments of the 
OCS, like the west coast, will produce many fabricating yards, to 
fabricate the components of the offshore drilling platforms, they 
will create many ancillary equipment and manning yards to fur- 
nish supplies back and forth, there will be substantial development 
on the east coast, which will be of great benefit to the east coast, 
which, as we all know, is seriously distressed because of runaway 
shops and fabricators to the Sun Belt. 

This will be a great advantage to the economy of the east coast, 
and to our members, who fabricate both the deck sections, and the 
leg sections of these platforms. We will indeed watch very carefully 
these developments, to anticipate in fact that much of this would 
be subverted away to other lower labor rate countries. 

Mr. O'Brien. Last week we had the vice president for exploration 
of the Exxon Corp. testify that it takes from 1 year to 18 months to 
build a rig. Under the Department of Energy's proposed acceler- 
ated leasing program, which calls for seven sales per year, will the 
shipyards and labor unions have the capacity to continue to pro- 
duce rigs within that time frame? 

Mr. Lyons. Absolutely. 

Mr. O'Brien. Are those figures accurate, is it 12 to 18 months? 

Mr. Lyons. That is approximate. That is very close, and the 
fabricating will be performed in either existing facilities in ship- 
yards, or shipyards that have, shall we say, been abandoned, or 
they will be fabricated in newly created facilities that will be built. 
They will be spread all the way from probably the Carolinas to 
New Hampshire on the east coast, as it develops in the same 
manner as they are on the west coast. 

Platforms are fabricated all the way from the State of Washing- 
ton down to different parts of California. 

Mr. O'Brien. One final question. 

What was the differential in terms of what the actual construc- 
tion cost in Malaysia? How much did they save there? 

Mr. Lyons. That type of question was asked at the hearing, to 
the best of my recollection, and they would not — could not give 
specific figures. 

Mr. O'Brien. Do you have a view on that, based upon your 
knowledge of prevailing wages here? 

Mr. Lyons. We obtained pictures of that yard in Malaysia, and 
actually made accusations that they were, in effect, abusing the 
least-developed countries by having workmen under hazardous con- 
ditions. That would not be tolerated in the United States, with 
scaffolding, ladders scattered all over the legs. When the jackets 



414 

are assembled they are possibly 80 feet apart, and therefore they 
are about 80 feet in the air, the top two legs, and the bottom two 
legs are laid horizontal. The jacket section is assembled in a hori- 
zontal position, and then floated on barges, assembled together, 
and welded at the shore. The conditions of employment that were 
involved is scandalous, in fact it would do great harm to the 
American image of exploitation of human beings. 

Mr. O'Brien. Thank you very much. 

Thank you, Mr. Chairman. 

The Chairman. Thank you, Mr. Lyons. We certainly appreciate 
your testimony this morning. 

[The following letter was received for inclusion in the printed 
record:] 



415 

Brown C^^ROOtJnC. 1730 PKode IsUnd Avenue N.W., Washington, D.C. 70036 




January 17, 1979 



Chairman, GSP Subcommittee 

Trade Policy Staff Committee 

Office of the Special Representative 

for the Trade Negotiations 
1800 G Street, N.W. 
Washington, D.C. 20506 

Subject: Response to petition for Review of 
Product Eligibility under the 
Generalized System of Preferences 
of Offshore Drilling and Production 
Platforms (TSUS 652.98) 
Case No. 78-180. 

Dear Mr. Chairman: 

This memorandum is submitted by Brown & Root, Inc. in 
opposition to the petition filed by the International 
Association of Bridge, Structural and Ornamental Iron Workers 
for the withdrawal of offshore drilling and production plat- 
forms (TSUS 652.98) from the United States Generalized System 
of Preferences (GSP). 

Brown & Root, Inc., a Texas corporation with headquarters 
at 4100 Clinton Drive, Houston, Texas is an international 
engineering and construction company specializing in heavy 
construction. Since the inception of offshore drilling tech- 
nology, Brown & Root has been a leader in the manufacture of 
offshore drilling and production platforms. Over these years 
Brown & Root has built and maintained permanent fabrication 
yards for offshore platforms in various areas of the world. 
One such location is Malaysia, home of Brown & Root (Labuan) 
Sendirian Berhad, a Malaysian corporation which was incorporated 



416 

August 30, 1971 with offices at 104 Chartered Bank Chambers, 
Kota Kinabalu, Sabah Malaysia. At present Brown & Root (Labuan) 
Sendirian Berhad is owned 100 percent by Brown & Root, Inc. As 
of December 31, 1978 the nationality of the employees of 
Frown & Root (Lubuan) were: American - 10, British - 3, 
Australian -1 and Malaysian - 621. Brown & Root is presently 
working with the Malaysian authorities to work out a plan to 
diver.t part of the ownership of this company to Malaysian citi- 
zens in accordance with their national goals to eventually have 
citizen ownership amount to more than 50 percent of all Mala.ysian 
corporations. 

Discussion of P etiti on 

^ • Petitioners a llege that the Oute r Cont in ental Shelf 
Land s Act A mendment s of 197 8 suppor t removal of TSUS 
652.98 from th e Generalized System of Preferenc e 7 

The petitioner has requested emergency 
action regarding the duty free treat- 
ment of offshore drilling and production 
platforms under the Generalized System 
of Preferences, The request is pursuant 
to the enactment of the Outer Continental 
Shelf Lands Act Amendments of 1978, Public 
Law 95-375, which overturned a May 11, J978 
ruling by the Customs Service that such 
platforms were duty free. This * 



•Committee note: Only two pages were supplied for inclusion in the record. 



417 

The Chairman. Our final witness this morning is Mr. Gregory 
Sovas, chief, Outer Continental Shelf section, New York State De- 
partment of Environmental Conservation. 

Welcome to the committee. 

STATEMENT OF GREGORY SOVAS, CHIEF, OCS SECTION, NEW 
YORK STATE DEPARTMENT OF ENVIRONMENTAL CONSERVA- 
TION, ON BEHALF OF GOV. HUGH L. CAREY AND COMMIS- 
SIONER ROBERT F. FLACKE 

Mr. Soyas. My name is Gregory Sovas, director, office of Outer 
Continental Shelf development. 

On behalf of Gov. Hugh L. Carey and Commissioner Robert F. 
Flacke, I am presenting a statement today representing the New 
York State position on the implementation of the Outer Continen- 
tal Shelf Lands Act Amendments of 1978 by the Department of the 
Interior and the Department of Commerce. 

This statement extends testimony presented to this committee in 
December by former Commissioner Peter A. A. Berle. 

I would like to thank the ad hoc committee for this opportunity 
and I would like to reiterate our earlier congratulations to the 
Committee and especially Chairman Murphy for their fine work 
and perseverance in the passage of these needed reforms. As you 
know, the State of New York has vigorously supported enactment 
of the amendments as being necessary to insure a meaningful role 
for the States in the Federal leasing process. 

We appreciate the efforts made by Secretary Andrus and the 
Department of the Interior in implementing the OCS Lands Act 
amendments and in working with coastal States to help resolve 
their concerns. Nevertheless, several important problems addressed 
in our earlier testimony remain critical today and must be resolved 
if the act is to be implemented as intended by Congress. 

First, OCS grants — one of the most important of these is the 
status of funding for the OCS grants amendment, first proposed by 
New York State in testimony before the ad hoc committee in May 
1977 and introduced in Congress by Chairman Murphy. The 
amendment authorizes very moderate but necessary funding to 
coastal States to undertake their responsibilities under the OCS 
Lands Act amendments. 

We regret the lack of inclusion of funds for the OCS grants in 
the administration's 1980 budget request. States are being hard 
pressed to provide review, comment and information being request- 
ed by the Department of the Interior. Many States have been 
forced co use their own funds not so much to further the economic 
benefits of their State, but to protect their interests and existing 
industry. In short. States have had no choice but to participate in 
the Federal leasing program. Failure to provide funding to the 
States will seriously handicap their efforts to comply with and 
participate in the administrative, policy, operational and manageri- 
al aspects of the Federal leasing program. 

Because of the urgent need for assistance to the States, because 
of the limited time available for action under the congressional 
budget process, and because of the proposed inclusion of the Na- 
tional Oceanic and Atmospheric Administration in the Department 
of Natural Resources under the President's reorganization plan, we 



418 

urge the committee to continue all necessary steps to make certain 
that the OCS grants amendment receives the supplemental appro- 
priation. We greatly appreciate the diligent efforts Chairman 
Murphy and the committee have taken to date in support of the 
grants amendment. 

Second, regulations for exploration and development plans — in 
our December testimony, we expressed concern over the suspension 
by the Department of the Interior, without consultation with the 
States, of State review of exploration plans. We have been pleased 
by the subsequent cooperation of the Department of the Interior in 
the interim in furnishing States with copies of exploration plans, 
although the 30-day period allowed under the legislation for Feder- 
al approval seriously limits the ability of States without approved 
coastal management programs to provide effective review and par- 
ticipation. In proposed regulations. Interior has attempted to re- 
spond to inconsistencies between the Outer Continental Shelf 
Lands Act amendments and Coastal Zone Management Act by 
providing for conditional approval of exploration plans within the 
30-day period, while still providing for distribution of copies of 
exploration plans to the States. 

The constraints of the 30-day period remain a problem. We ques- 
tion whether the Department of the Interior will be able to provide 
effective reviews and give conditional approval within this time 
frame. For this reason, and because the time limit effectively elimi- 
nates State review and participation for those States without ap- 
proved coastal management programs, we believe that the 30-day 
time period in the legislation should be changed to 90 days to 
conform with the Federal consistency provisions of the Coastal 
Zone Management Act. 

The artificial distinction between States with and without ap- 
proved coastal management programs has resulted in reducing the 
review period for States without coastal management programs to 
a period less than the 90-day review allowed under the Federal 
consistency provisions of the Coastal Management Act. The Outer 
Continental Shelf Lands Act amendments policies and purposes 
refer to all the coastal States potentially affected by OCS develop- 
ment; whether or not a State has an approved coastal management 
program is irrelevant. For this same reason, we also believe that 
the OCS grants should be made available both to States with and 
without approved coastal management programs. 

I should add that since our December testimony, we received one 
exploration plan for review, and we wanted to see how the review 
could be accomplished within the 30-day period. We had approxi- 
mately 14 days to distribute the exploration plan and the environ- 
mental report to the affected parties, to coordinate all the com- 
ments, and to submit our response back to the Department of the 
Interior. 

The content of exploration plans and environmental reports pre- 
pared under regulations in effect before enactment of the amend- 
ments has frequently left much to be desired. Although some com- 
panies have done an excellent job of addressing the problems asso- 
ciated with drilling in the specific tracts described in the plans and 
reports, other companies have provided no more than the general 
information contained in environmental impact statements pre- 



419 

pared before the lease sale. Certain geologic information presently 
classified as proprietary — for example, shallow seismic surveys un- 
dertaken before the exploration plan is submitted — is really envi- 
ronmental data that should be supplied to States for evaluation of 
geologic hazards. The Department of the Interior is preparing new 
regulations which we hope will help to resolve these problems. 

On the matter of Federal consistency, we also believe that there 
is a need for a deadline for the Secretary of Commerce in acting on 
appeals of State-Federal consistency determinations. If the Depart- 
ment of the Interior gives conditional approval to an exploration or 
development plan, but a State determines it is inconsistent with 
the State's approved coastal management program, the company 
would have two options — to appeal to the Secretary of Commerce 
with an open ended time period for the resolution of issues, or to 
litigate. Given the lack of a deadline for action by the Secretary, it 
is not unreasonable to expect the company to litigate in such a 
case. We do not believe such a result was intended by the Congress. 

Third, oilspill contingencies New York State's marine tourism 
and recreation industry is highly vulnerable to the adverse effects 
of offshore oilspills. A major spill could have substantial and long- 
term economic and environmental consequences. For this reason, 
as we pointed out in our December testimony, we are increasingly 
concerned by the fact that oilspill contingency planning is frag- 
mented among the Environmental Protection Agency, the Coast 
Guard, and the U.S. Geological Survey. The review of exploration 
plans and accompanying oilspill contingency plans is accomplished, 
in most part, by USGS field personnel with little or no opportunity 
for input from EPA or the Coast Guard. 

Further, it is difficult for States to determine the capabilities of 
industry oilspill consortia. It appears that these consortia are not 
regulated by any agency. In terms of meeting Federal consistency 
requirements especially with regard to assessing cumulative im- 
pacts, we believe that this situation could pose a problem in the 
future and may hamper the efforts of industry to explore and 
produce in a diligent manner. 

We would like to see the law changed to include definitive roles 
of EPA and the Coast Guard, and in all oil spill contingency 
planning matters, and administrative procedures established in the 
interim to undertake a coordinated review with the respective 
agencies. 

In conclusion, I would again like to thank the committee for this 
opportunity to present New York State's concerns regarding the 
offshore leasing process. Throughout the efforts to achieve passage 
of the Outer Continental Shelf Lands Act Amendments of 1978, the 
committee has consistently recognized that among the many 
needed reforms in the OCS process was the need to assure the 
States, and through States, local governments, opportunity to par- 
ticipate in policy and planning decisions relating to management of 
the resources of the Outer Continental Shelf. The enactment of the 
OCS Lands Act for the first time assures the States a role as efforts 
continue to develop the Nation's offshore energy resources in an 
environmentally sound manner. We commend the ad hoc commit- 
tee and the chairman for the efforts they have made on behalf of 
the coastal States. 



420 

At the same time, we recognize that achievement of these and 
other important reforms of the offshore leasing and development 
process did not end with the passage of the amendments, but 
requires continuing administrative efforts by the Federal agencies 
involved. We believe the committee should continue to exercise its 
oversight function to insure that Federal agency actions are car- 
ried out in accord with congressional intent. The need for a con- 
tinuing oversight role has become still more significant in view of 
the President's proposed reorganization plan, which would combine 
the ocean-related functions of the Commerce Department's Nation- 
al Oceanic and Atmospheric Administration with the OCS and 
other resource management responsibilities of the Department of 
the Interior into a new Department of Natural Resources. 

We continue to believe, as we stated in our December testimony, 
that the committee has a responsibility to States to: (1) Insure that 
the mandates of the law are carried out with due diligence; (2) 
become a focal point within the Congress for the real concerns of 
the coastal States; (3) return fair market value for the Nation's 
energy resources; and (4) to assure that adequate Federal funding 
is made available to coastal States to carry out their mandates 
under the Outer Continental Shelf Lands Act Amendments of 1978. 

The act establishes a process for the balanced and orderly devel- 
opment of the resources of the Outer Continental Shelf that will 
make these resources available to meet national needs, while at 
the same time protecting the human, marine and coastal environ- 
ments. New York State looks forward to continuing cooperation 
and participation in this most important task. 

Thank you. 

The Chairman. Thank you, Mr. Sovas. 

Unfortunately, the bulk of Congress failed to ask 0MB for $4 
million that is necessary under the act to assist the States in 
carrying out their responsibilities that we required. I hope the 
State of New York has expressed its feelings on that matter to the 
Department of Commerce. 

Mr. Soyas. We have, both at the staff level, and at the executive 
level. There is presently a letter in draft form that will be signed 
by the Governor, and will be sent out in the next day or two. In 
addition, we have taken action with other coastal States along the 
east coast and through the National OCS Advisory Board. 

As you know, we had two resolutions in favor of the OCS grants 
provision and the need for funding; both passed the National OCS 
Advisory Board by wide margins. We have been working with the 
New England River Basins Commission the coalition of Northeast 
States Governors, to gain their support. 

Next week I have a meeting with the Mid-Atlantic Governors 
Coastal Resources Council and this will be an important item on 
the agenda. We intend fighting for this appropriation, and it will 
be a major point of discussion at the National OCS Advisory Board 
next month in Birmingham, Ala. 

The Chairman. Mr. Hughes? 

Mr. Hu