U.S. House of Representatives
Committee on Science
Subcommittee on Energy

Hearing on the Fiscal Year (FY) 2002 Budget Request
for the Department of Energy (DOE)

April 26, 2001

For 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.

For 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.

As 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.

The 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.

History 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.

Demand 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.

I 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 research.

I 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 major points.

Point 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).

Point 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) sources.
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 and development.

Tight Gas
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).

Strong 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 explorationist.

Shale Gas
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 1996.

From 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 analysis.

DOE 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.

Coalbed Methane (CBM)
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.

During 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.

A 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 infrastructure.

Advanced Stimulation
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 program.

AST 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.

The 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.

Let us examine the facts, and then put the corporate welfare myth to rest.

Again, 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.

Was 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).

The 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.

Affordable, 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.

Summary

The 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.

In 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.

I 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 5).

On 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.

Thank you.