(b) Desirability of pipelines-to-shore vs. offshore tanker loading transportation systems;

(c) Desirability of unitizing operations;

(d) Number and placement of platforms;

(e) Number and placement of ocean bottom production units;

(f) Number, size and routing of ocean bottom pipelines to onshore facilities; and

(g) Number, location, capacity of onshore processing facilities and the economic and environmental impacts of same.

Without the initial availability of a one-, five-, and 10-year planning framework, we will be repeatedly faced with the "urgent necessity" to approve construction of this facility or utilization of that process to support some activity for which we had given prior approval on a random basis.

2. The four-hour reaction time of Clean Seas, Inc. from the Santa Barbara harbor is not sufficient. Containment and cleanup must be immediate. Some of the most lethal and ecological effects result from the readily soluble and very toxic aromatic portions of crude petroleum.

3. There is not enough good research information available on the long-term effects of these soluble toxic substances and not enough data on the long-term effects of crude oil deposits on beaches.

4. Prevention of spills is the best method. Some of the fail-safe equipment on the drilling platforms looks very good. However, there is no comparable information available on the technology presently available to prevent submerged pipeline rupture during an earthquake, for example, or on the safety of the completely self-contained ocean bottom production units.

5. There is insufficient experience with floating booms and vacuum devicesthe containment/skimmer systems-used to clean the oil slick off the surface of the ocean. There have been no satisfactory tests in any situation beyond eight foot waves and a 20 knot wind. Indeed, testimony was presented of the inability to clean up a recent oil spill off Monterey in choppy seas. The effects of heavy currents also deserve much further study.

6. There has been no assurance received that ocean bottom completion and production equipment (although apparently technologically feasible) will be required to reduce the visual pollution of above-the-surface drilling platforms.

HOW SHALL WE PROCEED?

In a phrase: With all deliberate caution.

Caveat venditor

All of the citizens of the United States are now the owners and potential sellers of a valuable natural resource--the Southern California OCS oil lands. We are dealing with a relatively small number of extremely large and economically powerful buyers. In this instance we should do a turnabout on that ancient and venerable maxim of every introductory economies course-Caveat Emptor (let the buyer beware). In our dealings with the giant oil companies we should observe the converse of this maxim-Cavett Venditor (let the seller beware). We should not confuse our economic or environmental interests with those interests of the giant oil companies-as the government agencies so readily do.

It should be noted in passing that our cautious behavior as sellers in this instance will go a long way toward setting the competitive conditions and economic structure of the industry which plans to resell our own natural resource back to us as finished, refined petroleum products. Our care as sellers will help to assure us of effective, competitive prices as we function in our roles as buyers of gasoline.

Interior Department responsibility in public land management

The Department of the Interior is charged with the responsibility of managing the public lands of the United States for the maximum benefit of the general public. The Act establishing the Public Land Law Review Commission states: "It is hereby declared to be the policy of Congress that the public lands of the United States shall be (a) retained and managed or (b) disposed of, all in a manner to provide the maximum benefit for the general public."

Public policy has long acknowledged the necessity for multiple use of public resources. An Act for the classification of public lands, passed at the same time 32 43 U.S.C. § 1391 (1964).

as the act creating the Public Land Law Review Commission, defined multiple use as follows:

"The management of the various surface and subsurface resources so that they are utilized in the combination that will best meet the present and future needs of the American people; . . . and the harmonious and coordinated management of the various resources, each with the other, without impairment of the productivity of the land, with consideration being given to the relative values of the various resources, and not necessarily the combination of uses that will give the greatest dollar return or the greatest unit output." 3

This clearly allows for the consideration of that combination of uses providing both optimum economic and optimum environmental benefits.

Under present operating policies, it is almost impossible for these two objectives to be realized.

This is true because the Bureau of Land Management, Department of the Interior, has inadequate information concerning the characteristics of the tracts put up for leasing to discharge its land management function satisfactorily. Inadequate government data collection procedures

Under existing procedures, private corporations are granted licenses and permits for geological surveys and geophysical surveys well in advance of the lease sales. The United States Geological Survey (USGS) of the Department of Interior does practically no independent survey work. Almost all of such work is done by the private corporations, although there may be a USGS agent present at the time data is collected. The USGS does not do any independent data evaluation and does not require submission of raw geophysical data (geological data is submitted) nor is any interpretive or evaluative information required. All of the information and interpretive conclusions gathered by the prospective bidders is considered proprietary information and is therefore not divulged either to competitors or to the Federal government-our agents for the sale of

our resources.

Krueger's Study of the Outer Continental Shelf Lands of the United States has this comment:

"Both the federal government and industry have had less than complete information regarding the extent of the resources at the time of the sale .

"It clearly appears to be less than efficient resource management for the Secretary of the Interior not to obtain geological and geophysical information that could be required from permittees and lessees which would enable USGS and consequently BLM to adequately evaluate proposed lease areas and any bids received therefor. . . In view of the extremely high cost of proving the existence and extent of an oil and gas resource with existing technology, it would not appear to be feasible for either the federal government or industry to have complete knowledge of the resource at the time of lease sales. It would be feasible and desirable, however, to have a partially knowledgeable buyer and an equally informed seller.” “

This is the single most repeated recommendation throughout Krueger's study. This lack of information available to USGS and BLM has a number of injurious environmental and economic consequences. Conversely, a program which would provide this information would produce a number of benefits.

Pre lease sale data collection by government agencies is required

The lense sale of Southern California OCS land should be postponed until an extensive survey program is done by or for USGS to provide significant additional Information upon which to base an effective leasing and development program. This survey program can be done by the USGS or the regulations can be amended to require submission of data by the prospective bidders prior to the awarding of the production leases,

An exploration program by the USGS prior to the lease sale would not unduly delay the ultimate development of the OCS oil and gas resources if it were subsequently determined that such development should proceed under national energy and environmental policies,

As we saw in an earlier section of this report, the companies themselves now take two to six years after acquisition of a lease to perform this exploratory work. This work could proceed just as effectively before the granting of a final production lease.

38 43 U.S.C. § 1415(b) (1984). Emphasis added.

84 Krueger, op. cit., pp. 604 03.

Industry objections to government data collection

The private oil and gas industry opposes both exploratory work by the USGS and divulging information to the Federal government.

"Generally the oil and gas industry does not object to the present system of tract selection . . .

"Representatives of major oil companies are opposed to any exploration activities by the federal government of the type now conducted by industry. The apprehension has been stated that such activities would permit the federal government to direct the course of mineral development on the Outer Continental Shelf."

This objection by industry is invalid on its face. The Department of the Interior has the legal responsibility to manage or dispose of the public lands, "all in the manner to provide the maximum benefit for the general public." Clearly this would encompass directing the course of mineral development on the Outer Continental Shelf.

Recently the Department of the Interior proposed changes in the regulations to require disclosure of offshore exploration data. These changes were met with massive resistance from industry. It was claimed that such required disclosure would (1) be a confiscation of proprietary rights to confidential data; (2) exceed the limits of the Outer Continental Shelf Lands Act; and (3) choke off technological innovation by the private sector.

Considering these objections:

First, this information is gathered from public lands under permits issued by a public agency. There is ample precedent from the field of Defense Department contracting to provide for data acquisition by the Federal government. Also, in almost every other instance of mineral exploration except petroleum, a prospector working under an exploration permit must "prove up" the claimed prospect. That is, he must supply definitive data prior to the award of a production license or lease. Oil is the only mineral with which the government "plays blind." Certainly these related mineral development procedures can also be applied to oil prospecting and leasing. In any event, competitive confidentiality is a specious argument in the light of the widespread joint venture practice in the industry. These same giant companies who do not want this data disclosed to their "competitors" share this information with their joint venture partners prior to bidding anyway.

Beyond this exchange of geological data among the joint venture partners in the pre-bidding phase, there is another aspect of joint venture negotiations which further limits competition. The joint venture partners have a prior understanding that limits their possible competition with one another. If, in the course of the discussions, they are not able to reach a consensus for a single bid amount on a given tract, then the partner with the originally suggested high bid is free to bid alone for this tract. And the other partners have agreed not to enter a higher bid for this tract in competition with the initial high-bid partner.

Second, the Outer Continental Shelf Lands Act can and should be amended if such is determined to be in the public interest.

Third, this argument does not necessarily stand up in the face of recent North Sea exploration and leasing experience. These companies-the same companies which are now protesting the requirement to divulge data to the United States government-have been providing this same type of data to the governments of Norway, the United Kingdom and Denmark as a routine condition of their exploration, development and production contracts and licenses. Far from choking off technological innovation, significant advances have been made in the North Sea in at least two instances: (1) the utilization of reinforced concrete structures for offshore platforms and storage tanks and (2) the development of the turbodrill for directional drilling of the deviated portion of the hole.38

Thus we see that the collection of data by the USGS prior to final lease or license need not delay a comprehensive development plan; can be and should be done in the interest of greater public benefit; and already is being provided

25 Krueger, op. cit., p. 609. Emphasis added.

36 Deposition of Otto Miller (Chairman, Standard Oil Co. of California) January 4. 1974, pp. 38-50. In the Superior Court of the State of California in and for the County of Sacramento. In the Matter of the Petition of the Subcommittee on Crude Oil Pricing of the Joint Committee on Public Domain of the California Legislature (Petitioner), To Compel the Production of Books and Records by Harold Severance, Winfred O. Plant, and Donald Marshall, (Respondents), No. 241,392.

37 See Appendix II for a description of information required by the North Sea countries during the non-drilling exploration stage. White, Irvin L., op. cit., pp. 58-9, Table 5 88 White, Irvin L., et al, op. cit., p. 64.

to other governments by the same companies which so arrogantly protest granting this information to our government.

Inadequate data results in inadequate environmental impact statements

The lack of this information clearly prevents the preparation of an adequate Environmental Impact Statement as required by the National Environmental Protection Act. Without adequate seismic data and coring samples, adequate definition of reservoirs is not possible. This leads to inadequate findings and under-estimation of requirements for platforms, pipelines, onshore facilities, etc. This could also result in the pumping of oil from reservoirs subsequently determined to lie under State sanctuaries, thus violating these sanctuaries.

Such an inadequate EIS actually occurred in the 1968 Santa Barbara Channel lease sale. The Santa Ynez field was stated to be a single field. Subsequent evploration revealed three separate fields in these geologic structures. Inadequate data results in dominance of major oil companies in OCS activity

The lack of adeqaute pre-lease sale data also directly contributes to the economically disadvantageous situation wherein the giant oil companies dominate the bidding and tract awards. It puts a premium on the gathering and interpreting of exploratory data which many of the smaller companies can ill afford. This allows the large companies successfully to out-bid the smaller ones.

Government collection and publication of this data would allow completely different bidding procedures to be utilized.

With the availability of such data, the present bidding system of "front money" cash bonus-plus-royalty could be and should be eliminated. In turn, the elimination of cash bonus bidding would itself do away with the "competitive necessity" that such information be kept confidential in the first place.

The availability of adequate data would also allow for the creation of an overall, long-range development program consistent with optimum economic and environmental needs.

Adequate pre-lease data wouid allow profit participation contracting

Within such a long-range development program based on the prior availability of adequate information, "net profits" or "profit participation” bidding could be successfully utilized. In this system, the bidder who offers to share the highest percentage of net production profits with the government wins the award. This was used successfully in the instance of contract awards for the East Wilmington field (Long Beach) on state-owned submerged lands. In this case the field was reasonably well known in advance. Extensive preliminary exploratory activity, including seismic work and deep core drilling, had been performed by a public agency.

Similar extensive work should be done by or for the USGS and BLM prior to any lease sales in the Southern California OCS lands.

"Net profits" or "profit participation" contracts are used extensively throughout the world and increasingly so in all areas except the United States.

Indonesia and Burma recently awarded contracts calling for a 70-30 participation split: 70% to the host government and 30% to the contracting oil companies. The Middle East nations have long used this approach. Norway is using it and receiving 5%-40%, The United Kingdom is proposing a 51% participation.

Largely as a result of habit, institutional lethargy and inadequate data availability, the Federal Government has never used any bidding system other than the "front money” cash bonus-plus-royalty in 20 years of operating under the OCS Lands Act. The royalty requirement has never been other than 162% %. The 16%% royalty provision was established mostly through default and copying the 1954 practice of Texas and 1 ouisiana rather than through conscious choice.*

Profit participation bidding would provide greater flexibility than the rigid and unthinking adherence to a fixed 16as, royalty provision. It would also provide greater economic return to the government over the life of the oil resource. Profi participation bidding and the elimivation of “front money" bonus bidding would also provide two additional benefits.

First, it would allow for greater participation by the smaller independent producing companies in OCS exploration and development activity. With the elimination of the prohibitive “vuriy five" and the relative assurance of oil prospects based on adequate preliminary information, the smaller companies could secure bank financing for actual empital investment in development projects.

Second, the capital investment dollars could then be employed directly "in the ground" on drilling and related projects rather than be diverted as a bonus to the Federal Treasury general fund as an additional "overhead" levy on the developer.

For example, the approximately $2 billion received from a recent lease sale in the Gulf of Mexico could have financed the drilling of 26,000 dry land wells or 3,000 offshore wells.

It must be emphatically stated at this point that there is an absolute prerequisite condition which must be met in order that a profit participation development program on the Southern California OCS can function fairly, equitably and with optimum benefit to the public. That is that the artificial market and pricing control now exercised by the major oil companies over California production, pipelines and refining must be eliminated. This system of artificial economic control has been discussed in detail in other reports issued by this Committee. This artificial economic control has been allowed to subvert the objectives of the net profits contracting system in the East Wilmington leld. It must not be allowed to subvert any possible future Federal oil development program on the Southern California OCS.

Alternate sources of petroleum are available for intermediate-term needs

It is an axiom of the oil industry that if you want to produce immediate crude oil you drill and pump from fields already known to have oil rather than begin extensive exploration and wildcatting programs in places where you believe oil might be.

This is exactly what is happening in California now. There is an enormous amount of oil still in existing fields under the dry land portions of California. At the low posted prices for crude oil which have been in existence during recent years, it simply was not economically feasible to produce this oil. The costs of operations have been higher than the available posted selling prices. The Committee has received testimony that the low prices posted by the giant oil companies have actually prevented domestic crude oil production in California which has, in turn, driven many independent producers out of business.

Now this seems to be changing. With the higher prices currently available for "new and released" oil, drilling activity in California has almost doubled in the past year. The California Division of Oil and Gas has reported that the number of permits for new oil and gas wells has increased to 1,250 from 650 a year ago. This oil is immediately available and can lessen the impact of reduced supplies from other sources.

Standard Oil Co. of California has made recent discoveries in the Tule Elk field. This oil, too, would be available long before OCS oil.

Exxon has made significant discoveries in the Santa Ynez field it has been developing as a result of the 1968 Santa Barbara Channel lease sale. By 1977-78 this field is scheduled for production of 100-150 thousand barrels per day.

Refinery capacity is being enlarged in California. SoCal is now embarked on the construction of two refineries-one in Richmond and one in El Segundo. Each refinery will process 175,000 barrels per day. A number of other expansions of refinery capacity are currently being planned by other companies in the range of an additional 20-40 thousand barrels per day of capacity for each expansion project.

The most significant source of additional oil for the West Coast is the Alaskan oil. Originally planned schedules called for shipments through the Trans-Alaskan pipeline of 600,000 barrels per day in 1977; 1.2 million barrels per day by 1978; and 2 million barrels per day by 1980.

Recently, however, the two companies controlling most of the Alaskan North Slope crude oil, ARCO and SOHIO (Standard Oil Company of Ohio), have called for a significant acceleration of this schedule. They propose to double the initial schedule to 1.2 million barrels per day in 1977; reaching capacity of 2 million barrels per day by 1978-79. ARCO and SOHIO control over half of the oil resources on the North Slope and have approximately a 60% interest in the pipeline."

Crude oil in this quantity would more than meet the West Coast demand. In fact, SOHIO has recently announced that it has begun a feasibility study for the construction of a pipeline from California to the Midwest to dispose of what it already calls the "surplus" Alaskan oil.

40 Los Angeles Times, June 7, 1974, Part III, p. 16.