House of Representatives
Committee on Science
Subcommittee on Energy
on the Fiscal Year (FY) 2002 Budget Request
for the Department of Energy (DOE)
well over a century, the United States has enjoyed inexpensive
and abundant supplies of energy. Access to energy has
made us the most advanced nation on Earth and the only
current superpower. Energy impacts every facet of the
U.S. economy and daily life.
well over a century, the United States has also enjoyed
the luxury of having the private sector fund research,
technology, exploration, production, transportation, and
marketing of the energy that we all consume. In addition,
the people of the United States have benefited greatly
from the tremendous, and often industry-specific, taxes
(e.g., excess profits tax, severance tax) that the U.S.
petroleum industry has paid to State and Federal governments,
and employment opportunities in the energy sector.
the U.S. petroleum resource base has matured, the major
industrial players have moved operations offshore, and
independent operators now provide the majority of exploration
and production activities in the United States. The independents
cannot fund the research that will be required to produce
the remaining resources, and in many cases, they do not
have the in-house expertise required. Without the application
of advanced technology, many of the remaining reserves
will not be produced.
United States of America is at a crossroads. The 107th
Congress and the Bush Administration are faced with the
potential of a major energy crisis. In fact, in California,
the crisis is already here. Decisions made by this Subcommittee
on Energy of the Committee on Science, Congress, and the
Administration will have a lasting impact on the U.S.
economy, the U.S. and world markets, and every citizen
of the United States. Energy "drives" this nation.
shows that a spike in energy prices has preceded every
U.S. recession in the past 25 years. An energy crisis
negatively impacts every citizen, business, and government
entity in the country, as well as world markets and the
global environment. The cost of an energy crisis is similar
to the worst form of a regressive "tax," because
energy costs are applied across the board to every citizen,
regardless of income.
for every major source of energy, except nuclear, is increasing
in the United States, which underscores the importance
of a balanced, environmentally sound energy policy. I
believe it is possible to transition smoothly from a carbon-based
economy to other sources over the next 50 or more years.
But this transition must be made with all of the facts
in hand, so that the situation in California, which was
predictable and in fact predicted, does not happen across
the United States.
am not here today to discuss the details of a balanced
energy policy. However, I do believe that conservation
is a critical piece of that policy, as is access to certain,
but certainly not all, off-limits lands, and limited well-defined
incentives for exploration and development. What is commonly
left out, perhaps because it is assumed, in the discussion
regarding energy policy is the significant role that research
and technology have played, and must continue to play,
in the energy landscape of the future. We can no longer
assume that the private sector will provide the necessary
am here to discuss the importance of oil and gas research,
and the critical need for the Federal Government to step
to the plate and fund that research. To illustrate the
importance of oil and gas research, I will discuss four
1: Btu = OGC (oil, gas, coal).
For the next 20 years or more in the United States, Btu
= OGC (oil, gas, coal). In 1999, 79% of U.S. Btu production
and 84% of U.S. Btu consumption (Figure 1) were in the
form of oil (39%), natural gas (23%), or coal (22%). These
OGC percentages have remained relatively constant for
the past 50 years and are predicted to remain similar
for the next 20 years (Figure 2).
2: The game has changed.
John Rockefeller must be smiling. Standard Oil Company,
separated into seven Standard Oil Company "sisters"
in 1911 by the Supreme Court of the United States, has
begun a family reunion. Recent mergers include Exxon and
Mobil, BP, Amoco, and ARCO, and Chevron and Texaco (not
an original sister). This creation of "jumbo"
oil companies has resulted in a change in market and industry
structure realities. There has been a significant reduction
in earth scientists and petroleum engineers over the past
decade, resulting in very "lean" technical staff
within each company. Graduate students in universities
have recognized this shrinking job market and lack of
research funding and are now choosing other disciplines.
There has been an extreme divergence in "economic
class" between the jumbos, who drill for oil and
natural gas in the United States mainly in the deep offshore,
Alaska, and on Wall Street through acquisitions of smaller
companies, and the independents, who drill for oil and
natural gas in the shallow offshore and onshore. With
the exception of Exxon, the private sector has eliminated
or diminished the once-great research and development
laboratories (Figure 3), and R&D expenditures are
half of what they were a decade ago (Figure 4).
No longer will the private sector fund the research that
has built the oil business to where it is today. There
are many reasons for this exodus from research, but the
main one is that average payout time for research (10+
years) now significantly exceeds the length of oil and
natural gas price cycles (3 years) (Figure 5). The cost
simply cannot be justified on a quarterly basis to stockholders.
Is this a shortsighted approach by the private sector?
Not when the option is survival in an ever-competitive
equity marketplace. It is today's reality. What is also
a reality is that the supply forecasts (Figure 2) are
unlikely to be achieved with this dramatic decrease in
private sector research and development funding, and the
proposed 50% reduction in DOE oil and gas research funding.
The game has changed (Figure 4), and the stakes of significantly
decreased supply are very high.
Point 3: O&G research works.
My testimony will focus on an analysis of Federal investment
in natural gas research, although a similar proven track
record and future potential for oil research and technology
application can be made.
Natural gas production in the United States was able to
keep pace with consumption until the mid-1980's (Figure
5). Today, natural gas imports have risen from around
4% in the mid-1980's to more than 15%. We now import more
than 3 Tcf of natural gas annually, and that number is
increasing. A large percentage of the U.S. imported pipeline
natural gas comes from Canada. Liquefied natural gas (LNG),
largely from Algeria and Trinidad, accounts for most of
the remaining natural gas imports.
Forecasts for annual U.S. natural gas production indicate
natural gas supply will grow from 21 Tcf in 2001 to around
27 Tcf by 2015. Demand is projected to exceed 30 Tcf by
2015 (Figure 5). Whereas most of the historical U.S. natural
gas has come from associated, high-permeability, and shallow
offshore sources, around 50% of the produced natural gas
in 2015 is forecast to come from deepwater, subsalt, and
unconventional (tight gas, shale gas, and coalbed methane)
Historical analysis indicates that the unconventional
gas supply curves benefited greatly from natural gas research,
the successful application of technology, Federal incentives,
and a significant private sector investment in exploration
The tight gas production curve shows a large positive
increase in slope (Figure 6) in 1985 following $165 million
of combined investment in research by the DOE and the
Gas Research Institute (GRI). Combined with Federal and
State tight gas production incentives and investments
in exploration and production by private sector operators,
the DOE and GRI investments in research produced 11 Tcf
of incremental natural gas through 1996 (Figure 6).
drilling activity and heightened producer interest in
the potential of the Greater Green River Basin of Wyoming
made it an ideal location for testing the application
of new technologies for tight gas reservoir exploitation.
The Emerging Resources research in the Greater Green River
Basin Project was initiated in 1994, with goals of defining
the technical and economic barriers to efficient gas production
in the basin, and developing the technologies to overcome
them. The data, information, and analysis that result
from each of the demonstration activities will be made
available to producers in the basin and other basins through
topical reports, Internet access, a CD-ROM, focused workshops,
and technical presentations. By providing timely information
relevant to the application of new technologies, GRI and
DOE can help producers quickly climb the learning curve
for implementing these new strategies. Included in the
project is a gas atlas on CD-ROM, an accessibility atlas,
techniques for slim-hole drilling and sweet-spot identification,
numerous publications, and a workshop.
The new "Portfolio of Emerging Natural Gas Resources-Rocky
Mountain Basins," produced with the help of Advanced
Resources International, Inc., and Barlow & Haun,
Inc., continues that trend. This three-part portfolio
addresses underdeveloped natural gas basins in a comprehensive
manner but goes beyond the perspective of "this is
what the plays are" to "this is what they could
be," helping to define the resource potential for
The shale gas production curve shows a large positive
increase in 1985 following more than $90 million of investment
in research by the DOE in the prior decade (Figure 7).
Another surge in production from shale gas followed $6
million of additional investment by GRI beginning in 1990.
Combined with investments in exploration and production
by private sector operators, these investments in research
produced more than 2 Tcf of incremental natural gas through
1993 to 1995, GRI's Michigan Antrim program focused primarily
on advancing technology development in the areas of restimulations,
recompletions, and hydraulic fracture design. Other studies
focused on advancing reservoir engineering methods and
identifying production trends through gas and water compositional
and GRI research investments resulted in the following
new methods to drill and complete Antrim shale wells:
· cased-hole completions
· two-staged stimulations
· dual-zone completions
· use of proppant consolidation material in fracturing
· beam pumps/cavity pumps/modified plunger lifts
to pump off the wells more efficiently
Combined, these methods resulted in more economic drilling
and completion of Antrim shale wells. Fewer wells are
drilled to maintain the same production levels. The same
techniques are currently being transferred and used to
drill Devonian-age shales in the Illinois basin.
The coalbed methane production curve shows a large positive
increase in slope in the late 1980's following $82 million
of combined investment in research by the DOE and GRI
in the preceding decade (Figure 8). Combined with Federal
and State production incentives, and investments in exploration
and production by private sector operators, these investments
in research have produced nearly 5 Tcf of incremental
natural gas, and production continues to rise.
the late 1970's (DOE) and early 1980's (GRI) the Federal
Government invested in CBM research as an important near-
and mid-term supply resource. In 1983, in an effort to
develop new and improved methods to increase coalbed methane
production and reduce production costs, private sector
partners in Alabama and Colorado established field laboratories
to evaluate stimulation (fracturing), completion, and
production processes. Over the next decade, research played
a major role in transforming CBM production from a high-cost
operation to a competitive, main-line gas resource.
key driver in the research program was to develop methods
to stimulate multiple coal seams in a single wellbore
to maximize production and recovery. Advances in CBM stimulation
have helped industry to be more aware of stimulation issues.
A key goal is to ensure that CBM wells are producing at
the potential of the reservoir and if not, to determine
how production can be increased through low-cost remediation.
The observations related to fluid damage have increased
the awareness of the entire natural gas industry regarding
the importance of stimulation treatments for all types
of gas reservoirs.
In addition, DOE and GRI research partnerships with the
private sector resulted in an improved analysis protocol
for determining the reservoir parameters used for calculating
the gas-in-place volume of coalbed reservoirs. There are
additional research opportunities to develop new or improved
completion fluids and recompletion approaches for a variety
of different reservoir settings and for tapping additional
reserves behind pipe that can be connected to the existing
In the early 1980's, GRI began a comprehensive research
effort to evaluate and enhance technologies associated
with hydraulic fracturing. Through a series of cooperative
research and Staged Field Experiment (SFE) wells, GRI
collected evidence that challenged traditional hydraulic
fracturing methodologies and theories. By analyzing detailed
reservoir data and real-time fracture treatment data,
new insights into the fracturing process were gained,
and critical factors associated with successful fracture
treatments were identified. These insights formed the
core of GRI's Advanced Stimulation Technology (AST) deployment
is a methodology that centers on the analysis of actual,
or "real," treatment data using advanced 3-D
hydraulic fracture models in real time. Several of the
critical concepts involved in Advanced Stimulation Technology
include (1) real-time data analysis, (2) quality control,
(3) stress profiling, and (4) rock mechanics (nonlinear
rock response). Together, these technologies represent
a new hydraulic fracture process and improved understanding
of hydraulic fracturing.
main objective of GRI's AST deployment project was to
disseminate information on methodologies for improving
hydraulic fracturing results throughout the gas-producing
industry. GRI transferred the technology in several ways,
including the development and distribution of educational
material, industry workshops and users' groups, and hands-on,
field application programs with natural gas producers
and service companies.
Point 4: Oil and gas research is a wise Federal investment.
The term "corporate welfare" makes for a good
media sound bite. Unfortunately, the use of the term propagates
a myth that is farcical. The danger of the myth is that
because it is spoken by our Federal and State legislators,
and published in our national and local press, it is believed
by most U.S. citizens.
us examine the facts, and then put the corporate welfare
myth to rest.
I will use unconventional natural gas. Federal investment
(DOE) in unconventional natural gas research has been
approximately $241 million since 1970, and GRI invested
an additional $140 million in the last 20 years (Figures
6, 7, 8). As we have seen, that investment, combined with
Federal and State production incentives, and an estimated
$23 billion in private sector investment, resulted in
nearly 18 Tcf of incremental unconventional natural gas
production through 1996 (Figure 9), a number that has
grown since that time. Incremental production is natural
gas that is unlikely to have been produced otherwise.
the $241 million Federal investment corporate welfare?
It represents only 1% of the private sector investment
required to explore for and produce the gas. But this
alone does not exclude the welfare label. Welfare implies
a gift or investment with no expectation of financial
return on the investment. The Federal Government of the
United States has received approximately $62 billion return
on its $241 million investment (257%!). Average return
on investment in the FRS oil companies for the past 25
years has been 10%, with a decreasing trend (Figure 10).
The private sector received approximately $2.5 billion
on an investment of $23 billion (0.1%). In other words,
for a Federal investment 1% of the size of the private
investment, the Government received a return 30´
larger (Figure 9).
simple fact is that Federal funding of oil and gas research
is a wise investment for the citizens of the United States.
Of equal importance to the remarkable financial return
on investment is the natural gas energy return. For a
$241 million Federal investment, the people of this country
received nearly 18 Tcf of incremental natural gas through
1996, energy that we would not otherwise have had.
available energy is what helped the U.S. economy enjoy
a decade of prosperity in the 1990's unlike any that preceded
it. The Federal investment in research is hardly welfare!
To the contrary, it is a Federal duty to make wise investments
in energy that will ensure the prosperity and security
of every U.S. citizen.
proposed 2002 DOE Total Budget is more than $19 billion
(Figure 11). Of this total budget, only $744 million (4%)
is dedicated to actual energy research, of which only
$51 million (0.3%) is dedicated to oil and gas research.
In 1999, 62% of U.S. energy demand was satisfied by oil
and gas (Figure 2). The proposed DOE funding of 0.3% for
oil and gas research is dramatically out of proportion
with regards to current near-term demand, and unrealistic
with regards to what is necessary to maintain a balanced
energy program, especially in a time when private sector
oil and gas research and development have diminished greatly.
the short term (25 years), oil, gas, and coal will be
the major sources of U.S. energy. If the proposed DOE
2002 budget is approved, it will force a decline in oil
and gas research, and most likely a near-term decline
in U.S. oil and gas production that could be devastating
to U.S. energy supply (Figure 12).
Part of the difference could and should be made up in
conservation. However, there are few, if any, current
sources of energy other than oil and gas that could fill
the energy demand gap in the short run. It will be difficult
to create the infrastructure to increase gas imports (as
LNG) in that time frame, which leaves limited alternatives:
import huge volumes of oil, accelerate the construction
of nuclear power plants, or brace for significant energy
shortages and associated brownouts, blackouts, and a likely
recession. None of these alternatives are attractive,
and none are necessary.
advocate leaving the support for coal, nuclear, and renewables
unchanged but increasing the level of funding for oil
and gas by $400 million, which would increase the total
level of energy research funding to approximately $1.1
billion (Figure 13). A funding level of $400 million per
year for oil and gas research represents only approximately
20% of the $2.5 billion private sector annual reduction
in R&D annual expenditures over the past decade (Figure
the basis of the four major points I have presented-(1)
Btu = OGC, (2) the game has changed, (3) O&G research
works, and (4) oil and gas research is a wise Federal
investment-the path is clear. The Federal Government must
invest on the order of $400-$500 million annually in oil
and gas research over the next 25 to 75 years. This investment
will support a realistic transition from a carbon-based
energy society to a hydrogen and renewable energy society
(Figure 14) and will also signal a commitment to a balanced
approach to energy policy.