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ENERGY FORUM

The Ammonite Energy Forum web page is designed to be a site for what we hope will be a lively exchange of ideas between energy professionals concerning current energy matters. Visitors are encouraged to send us their opinions, editorial comments, and replies to whatever is discussed on these pages, for posting on the Ammonite Energy Forum.

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ENERGY INFORMATION ADMINISTRATION
ENERGY FORECAST

For a direct link to the latest 2000-2020 forcast for USA energy supply click here

http://www.eia.doe.gov/oiaf/aeo/index.html

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LAST YEAR'S
CALIFORNIA ENERGY MESS

January 16, 2001

IN THE PAST DECADE, according to the Census 2000 figures released last month, California added more residents than any other state in the nation --- 4.1 million. Unfortunately, in that same decade, the state sacrificed intelligent growth on the altar of environmental extremism. That decision helped produce the energy crisis that is gripping the state now, and is one that Georgia would do well to learn from as it faces an onslaught from some of the same forces.

News reports have trumpeted the "failed deregulation" of California's electricity market. But as this page has noted, for a concept to be declared a failure it ought actually to be tried first. Contrary to the popular notion, government in California has not embarked on real deregulation to produce the results that market forces can bring about. Instead, the state has maintained a constricting chokehold on the process, subsidized costly "green" power (solar power is 10 times as costly as coal) and deprived consumers of the true benefits of a competitive market.

At the root of the problem is California's environmental regulation minefield, a primary reason that not one major power plant has come on line since the early '90s. In an over-the-top crusade for clean air and water, federal and state agencies have been manipulated by unelected but vocal environmental groups determined to banish fossil fuels from California. As a result, the state mandates the toughest environmental regulations in the nation, cramping residents' choices and snowballing the cost of living and doing business in California.

It's difficult to feel sympathy for people who gripe about high utility bills and outages when they meekly swallowed --- indeed encouraged --- the power grab by not-in-my-backyard "consumer" groups and environmental zealots touting wind farms and solar power. Utilities are businesses, too. They're image-conscious and they want to do the right thing: Customer satisfaction is good for business.

And they tried in California, forgoing cheap coal and oil for clean-burning plants. But it's risky to put all your eggs in one basket. All 14 plant proposals under review before the California Energy Commission are for -fired power plants. Yet energy experts say U.S. gas production capability has fallen nearly 7 percent since 1997. Environmentalists are resisting further exploration, including sensible proposals such as exploration on federal lands in the West. Add to the mix the extremes of weather, and demand outstrips supply, resulting in shortages and higher costs that California's utilities, under deregulation, weren't allowed to pass on to consumers.

At the same time, utilities are mired in layers of overlapping regulations by numerous state and federal agencies, spurred in part by environmentalist- induced hysteria about the "evil" utilities. Obtaining all the permits lengthens the plant construction process by as much as three years.

The result of all of this, according to the California Public Utilities Commission, is that California added just 2 percent to its generating capacity between 1996 and 1999, while demand grew at 4 percent to 6 percent a year in the state, compared with 2.4 percent nationally. But that's not all in California: NIMBYism: Everybody wants cheap and abundant electricity, but nobody wants the gas pipeline, the plant, the transmission lines or the substations.

Calpine Corp.'s proposed 600-megawatt plant in San Jose --- one of the areas most critically short of power and most vulnerable to system failure --- was vital for Silicon Valley, the high-tech capital. The city voted down the plan in November after neighbors and the city's biggest employer, Cisco Systems, which recently won city approval for a 20,000-employee high-tech campus near the plant site, opposed it as visual pollution. The state energy commission is considering whether to overturn the city's decision.

PG&E was thwarted by environmentalists when it sought to ease the summer power crisis with a temporary jet-fuel-powered electricity generator on a barge in San Francisco Bay. Opponents said it would be too noisy. Unintended consequences: An environmental group's logging lawsuit forced a biomass plant --- which burns trash to generate electricity --- to shut down this month in Susanville, Calif. The plant had no wood waste to burn for fuel after the feds agreed to a 90-day moratorium on logging on federal land. The state's 30 wood-burning plants not only serve the needs of more than 300,000 households, they also burn about 5 million tons of waste that otherwise would end up in landfills.

The danger of caving in to California-type zealotry cannot be emphasized enough in Georgia, already maligned by the environmental community and Carol Browner's Environmental Protection Agency. Water quality and quantity, air quality and transportation issues are all being influenced by special- interest groups with questionable motives; lawmakers and state officials must maintain a balanced perspective. California provides an ongoing lesson in the wisdom of examining with a sharp, questioning eye the extremist agenda of some groups, of analyzing all options and of balancing the costs of regulations and their supposed benefits.

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NATURAL GAS SUPPLY

On July 26, 2000, Ammonite Managing Partner Skip Hobbs testified before the United States Senate Committee on Energy and Natural Resources. The subject of the hearing was the natural gas supply situation, and access to gas resources on public lands. The details of Skip's testimony and the written text of his testimony follow our commentary on high prices . The speech contains a wealth of useful energy statistics.

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US ENERGY POLICY

Cartoon

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THE ENERGY CRISIS:
WHY HAS IT HAPPENED AND
WHAT CAN WE DO ABOUT IT?

G. Warfield "Skip" Hobbs
President

DIVISION OF PROFESSIONAL AFFAIRS
American Association of Petroleum Geologists

Managing Partner

AMMONITE RESOURCES COMPANY
New Canaan, Connecticut

www.ammoniteresources.com

Presentation to the

Pittsburgh Association of Petroleum Geologists
Pittsburgh, Pennsylvania

Thursday, October 12, 2000

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High oil and gas prices, and the prospect of possible shortages of natural gas and heating oil this winter are making headlines. Energy is finally an election issue. I am disappointed, however, in the superficiality of the energy recommendations of both presidential candidates. But what can we expect. After all, there has been no comprehensive energy policy for over a decade. America has become addicted to cheap energy.

The public will be howling for relief, and for an explanation. Politicians will once again be pointing the finger of blame at the oil and gas industry, not at themselves.

As petroleum geologists, the pending energy crisis presents a tremendous challenge, and a great opportunity. We must be able to explain, as scientists, why there is an energy crisis, and what rational solutions exit to remedy the situation.

On July 26th, in my capacity as President of the DPA, and as a spokesman for the AAPG, I was invited to testify before the US Senate Committee on Energy and Natural Resources concerning the issue of natural gas supply, rising prices, and access to public lands. I want to share with you what I had to say to Congress in late July, and I would also like discuss my thoughts on energy policy going into the election.

My speech is full of useful statistics, and recommendations for a National Energy Supply Policy. So listen well, and take notes, because I want you to make the same arguments before the public in your own communities.

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IS THERE A SUPPLY CRISIS?

Is there really a pending energy crisis? The statistics point to a very serious problem. Demand has finally caught up with supply, as the recent run-up in commodity prices so profoundly demonstrates. Complacency and addiction to cheap energy have prevailed for the past 15 years. This is now about to end, not with a whimper, but a gigantic thud!

Crude oil prices have more than tripled from about $10/bbl in late 1998 to more than $30/bbl this year. The average NYMEX spot gas price at the Henry Hub was $2.25/MMBTU in 1999. Spot natural gas prices have doubled this year alone to more than $5.50/mcf for winter delivery, and could spike to over $7.00/mcf. According to EIA projections, residential gas prices are expected to average $8.58/mcf, up 29.5% from last winter's average of $6.61/mcf. At current prices, residential gas consumers can expect a $200 to $300 increase in their winter gas-heating bill; and some can ill afford that cost.

The NYMEX 12 month and 24 month futures prices in excess of $4.60/mcf and $30/bbl indicate the market makers believe high oil and gas commodity prices are going to be the norm for the next two years.

Commodity prices have skyrocketed because the market perceives supply to be restricted. Is this truly the case?

Recent studies by the EIA, Gas Research Institute, and the National Petroleum Council (NPC), indicate annual demand will grow to as much as 32 TCF over the next 15 to 20 years. In its 1999 study, the National Petroleum Council projected annual demand to reach 29 TCF as early as 2010. At 32 TCF/year consumption, currently proven reserves represent only a five-year gas supply.

Gas demand is soaring, particularly as a "clean" fuel for electric power generation. Security analysts at Dain Rauscher Wessels, Inc. estimate that more than 275 new gas-fired power plants are planned to begin operation by 2006. These new electric power plants are expected to consume an additional 8.5 TCF/year.

Proven gas reserves in the United States have dropped 43% during the past 30 years, from 290 TCF at year-end 1970, to only 164 TCF now. In a report issued in late May, the EIA forecast that the nation's proved reserves would decline a further 2% during 2000, due to increased demand, and the very low drilling levels of the past few years. This may now turn around slightly with current higher commodity prices.

According to the recent EIA October Energy Report, working natural gas inventories in storage as of the October 1st beginning of the winter heating season were estimated at 2,530 bcf, or 227 bcf below the five year (1995-1999) average of 2,757 bcf. Below-average stock levels are a result of lagging USA production due to low commodity prices and increasing gas demand for power generation. Increases in summer gas power generation for air conditioning in the Southwest this year, helped constrain inventory accumulations to half the normal rate. Operators of gas storage facilities were also reluctant to purchase gas at the unusually high prices that prevailed in the late spring and early summer, on the unfulfilled expectation that gas prices would decline over the summer.

EIA believes there will be adequate gas supplies if a "normal" winter occurs. However, end of season stocks next spring will be at the lowest level since 750 bcf was reached in 1996. There is now no marginal supply for extended cold weather demand, or any significant gas production or deliverability disruption this winter. If we have a "cold" winter, and it is about time, regional supply disruptions are likely in my opinion. Schools and factories may be shut to conserve gas for electric power generation and residential heating.

The supply situation in the winter of 2001 could be worse than this coming winter if we have a cold winter scenario, hence the high 24 month NYMEX option prices. The public must be made aware of the seriousness of the gas supply situation, and prepared for significant price increases and possible regional gas curtailments.

OIL SUPPLY

World demand for petroleum was 74.8 million barrels per day in 1999, and is expected to rise to 75.9 MM bbl/day this year. The United States consumes 26% of the world's petroleum, or 19.5 MM bbl/day.

In 1999, the USA produced 5.88 MM bbl/day of crude oil and lease condensate. Crude plus natural gas liquids production totals 9.0 million bbl/day. In order to meet our 19.5 MM bbl/day petroleum demand, the U.S. now imports about 56% of its crude oil and refined product needs. This demand means that USA energy policy very definitely impacts world oil markets and national economies.

Crude oil production in the US has declined 33% since 1985, from 8.9 million barrels per day (MM bbl/day) to 5.9 MM bbl/day. At the same time, however, domestic petroleum demand has increased 23% from 15.90 MM bbl/day to 19.58 MM bbl/day.

Throughout 1999, domestic crude oil production declined 370,000 BOPD, or 5.9% from the 1998 average. Production is expected to climb somewhat this year and next, as new fields are brought on stream in Alaska and the Deep Water Gulf of Mexico.

In the face of rising domestic demand, and decreased levels of investment and exploration success, proven USA crude oil reserves have declined 26% from 28.4 billion barrels in 1985 to 21 billion barrels at year-end 1999. After the giant Prudhoe Bay Field discovery in 1970, US proved reserves reached a peak of 39 billion barrels.

In 1999, there were only 20,770 oil and gas well completions in the United States. This is a pathetic shadow of the 70,000-85,000 wells drilled per year in the period 1980-1985, when we were able to actually increase deliverability and make significant new reserve additions beyond just replacing annual consumption.

RIG COUNT

The average drilling rig count was only 623 per week in 1999, an all-time low since the 1940's. In 1982 there were over 4,000 drilling rigs at work in the United States. The rig count is a little over 1000 now, but that is not adequate to significantly increase domestic oil and gas deliverability, nor make a long-term increase in year-end reserves.

In its July 17, 2000 Energy Equity Research report, security analysts Raymond James & Associates, Inc. stated that there are only about 1,000 U.S. drilling rigs available to go to work on short notice (800 onshore and 200 offshore). An additional 100 to 150 rigs could be refurbished for service at an additional investment of about $1 million per rig. Therefore, the analysts conclude, a sustained rig count of no more than 1,100 is unlikely to be achieved before 2001. Finding and training crews to operate these rigs is a serious obstacle. An article on page one of the October 11th issue of the Wall Street Journal highlighted the serious shortage of rigs, rig equipment and supplies, and personnel.

SHOULD WE WORRY ABOUT DOMESTIC OIL SUPPLY?

Should we worry about the decline in our domestic oil reserves and crude deliverability? The answer is a resounding yes! The US, from a strategic point, has become dangerously dependent on crude oil imports form politically unstable countries. At the time of the 1973 Arab oil embargo, the US imported only about 35% of its crude requirements. At a current 56% import level, we are significantly more vulnerable to a supply disruption.

The Middle East produces about 20 million barrels of oil per day, and has proven reserves of 673 billion barrels, representing about 65% of total world proven reserves. Saudi Arabia alone has reserves of 259 billion barrels and produces 8 million barrels per day. It is entirely possible that we could wake up one morning to a news report that the King of Saudi Arabia has been assassinated by an anti-Western fundamentalist Muslim terrorist group, and that the rebels will destroy the principal Saudi oil export terminal with a weapon of mass destruction, unless certain demands are met. A world supply and price panic would explode on the news of the threat alone.

The West can no longer take access to unlimited Middle Eastern and Central Asian oil for granted. We have competition from the developing economies.

Worldwide petroleum demand is climbing at about 2.4% annually, and will likely take off when the Asian economy moves once again into high gear. There is a new and fast growing "consumer class" in the emerging economies of the world. Here is a very scary statistic - the USA has less than 5% of the world's population, yet consumes 26% of the world's petroleum (and mineral) resources. We use approximately 24 barrels of crude oil per capita per year. China, India, Pakistan and Indonesia, with 40% of the world's population use less than 1 barrel per capita/year. Asia is entering the mass consumer age where everyone wants electric power, consumer items and motorized transportation. How will the world supply the raw materials for these economies? We have already found the easy stuff.

China realizes that it must access international crude supplies to meet its growing domestic demand. The Chinese national petroleum company has actually outbid major western oil companies for oil field development projects in Kazakstan and Iran. Pipelines are being planned to bring Caspian and Siberian oil to China. The country is also building a modern guided missile equipped navy to protect its sea-lanes. The Chinese will be competing head-on with our children for Middle Eastern, Central Asian, and Siberian oil. The competition has already begun. India is also in the race, and is actively pursuing exploration and development projects in the Middle East.

Venezuela has always been a fallback position to Middle Eastern oil. However, under the leadership of President Chavez, the USA must also not take uninterrupted supply from Venezuela for granted.

An important aspect of America's foreign policy is unequivocal support for Israel. Israeli control of Jerusalem, a place that is also sacred to Muslims, is presently a flash point that could engulf the Middle East in another war. We must have a balanced policy with regard to Israel and the Muslim oil producing nations, or run the risk of another embargo. In my opinion, unless Jerusalem is made into an independent city-state, open to all, and under the governance of the United Nations, lasting peace will never come to the Middle East. Continued oil volatility will prevail without peace.

In addition to the national security issue, the United States also must be concerned about the fact that crude oil imports are the largest component of the significant USA balance of trade deficit. Last March, the USA had a record trade deficit of $30.2 billion, when the nation's foreign crude oil bill hit a then record high. The EIA estimated total 1999 oil imports at $66.9 billion. This year that bill will be significantly higher.

HEATING OIL

Of more immediate concern, and perhaps a major factor in my "crisis" characterization of the national energy situation, is the winter heating oil supply.

Very strong demand for gasoline this year, coupled with high prices, has resulted in refiners working flat out this past summer to meet gasoline demand. Significantly less distillate was produced as a result.

According to the EIA, distillate stocks are currently about 25 million barrels, or 21% below the middle of the distillate stock range. On the East Coast, where thirty-six percent of homes use heating oil, stocks are 40% below 1999 levels. In the New England states, where a cold snap last winter caused supply disruptions and huge price spikes, stocks are 65% below 1999 levels. God forbid should we have a really cold winter in New England!

EIA's base case winter fuel distillate requirement for 2000 is 3.88 MM bbl/day, assuming normal winter weather. In order to assure supplies in the Northeast, the president has established an emergency heating oil reserve of 2 MM bbl/oil in New England. This could backfire, if private suppliers cut back on their storage levels because they do not want to stock their tanks with high price fuel oil, and then have the price collapse when the emergency reserve is released.

GASOLINE SUPPLY

Forty-three percent of the nation's crude oil is refined into motor gasoline. Last year this amounted to 8.4 MM bbl/day. After the crude oil price spike in the 1979-1981 period, the nation responded by boosting average automobile mileage to over 20 gallons per mile. This was an important conservation measure, but it has been counteracted by the fact that there are now twice as many cars on the road.

Motor gasoline demand has increased 28% from 6.58 MM bbl/day in 1981 to 8.47 MM bbl/day, despite our conservation efforts.

This past summer price spikes and supply disruptions were experienced in California and the Midwest. This was due in part to the June 1st deadline to sell reformulated gasoline, rising crude oil prices, plus a refinery fire in California.

Our gasoline worries are not over. In its infinite wisdom, the EPA mandated the addition of MTBE to gasoline in 1992 and 1995 to reduce emissions. Unfortunately, MTBE is now causing serious groundwater pollution. California has banned MTBE as of January 1, 2003. EPA would like to ban MTBE nationally by 2005. According to refinery consultants Purvin & Gertz, the U.S. refining industry has developed a substantial reliance on MTBE, particularly on the East Coast and West Coast. If MTBE use is eliminated, refiners will have to compensate for the loss of its octane, volume, and other properties through expansion of refining facilities and higher-cost processing operations. Billions of dollars were spent by the refiners to comply with the original MTBE requirement. For What?

The EPA is also mandating reductions in motor fuel sulfur content. Diesel fuel, which currently has a sulfur content of about 500 ppm, is supposed to have only 15 ppm sulfur by 2007. The Federal program to reduce the sulfur content of all U.S. gasoline will require significant refining investment. Increases in refining costs and the tighter gasoline supply/demand balance will have their greatest impact on gasoline prices and octane values in the U.S. market, with further effects in other world markets.

The public can expect further gasoline price spikes and supply disruptions as a result of the EPA action on MTBE and sulfur. Will anyone accuse the EPA of price gouging?

USA REFINING CAPACITY

Since 1981, the number of operating refineries in the United States has declined 47% from 324 to 174, representing a loss of over 3.0 million bbls/day of capacity. Refinery utilization has increased from 69% in 1981 to 96% in 2000.

Refinery closings were caused by deregulation (elimination of price controls and allocations), and the cost to retrofit older refineries to meet current environmental regulations. There have been no new grass-roots refineries built in more than a decade. According to the EIA' April, 2000 Energy Report, "financial, environmental, and legal considerations make it unlikely that new refineries will be built in the United States."

In an October press release in response to Vice-President' Gore's characterization of "Big Oil" as "gougers" and "profiteers", ExxonMobil said that it makes a profit of five cents on every gallon of gasoline it sells, while Federal and State Governments take an average of 40 cents in taxes for every gallon sold. The ExxonMobil press release went on to point out that:

"Since the end of World War I, inflation-adjusted gasoline prices have steadily declined, interrupted only by a few peaks and valleys. Through the end of World War II, when average real incomes for Americans were much lower than they are today, gasoline prices varied between $2.00 and $2.50 per gallon ($1999). The price then dropped steadily to about $1.50 per gallon before the oil shocks of the 1970s and early 1980s drove prices temporarily higher, peaking at over $2.50 in 1981. The lowest gas prices of the period occurred in 1998, when low crude prices drove gasoline near, and in some parts of the U.S. below, $1.00 per gallon. Prices have moved up sharply in 2000, but from a very low level and continue to be below historical levels.

The declining price of gasoline has contributed to the growth of our standard of living over the years. In 1966, the average American family spent each year a total of about $35,000 (in $1999), of which about three percent went for gasoline. Today, the average American family spends over $60,000 each year, with only two percent on gasoline. Over the same period, the vehicle fleet (cars, vans, light trucks and SUVs) increased from 91 million to over 200 million, and the average number of miles driven annually per vehicle rose from 9,500 in 1966 to almost 12,000 today. With vehicle efficiency improving from about 13.5 miles per gallon in 1966 to nearly 20 mpg today, the average cost of driving one mile has fallen from over 12 cents in 1966 to about six cents in 1999. Recent gasoline price increases have brought that cost back to only about seven cents per mile.

In its October, 2000 Energy Report, the EIA said "Regular unleaded, self-service retail motor gasoline prices hit their highest monthly level ever, in nominal terms, averaging $1.63 per gallon in June. Still, in real terms (adjusted for inflation) that price was about 40 percent lower than the price experienced in March 1981."

Crude oil prices over the past 10 years have consistently lagged the consumer price index inflator. The average price from January 1990 through August, 2000, has been $19.95. The price spiked over the CPI during the Persian Gulf War, briefly in late 1996-early 1997, and recently in 2000. Crude oil prices rose from an inflation adjusted 53-year low of $8.03/bbl in December, 1998 to an average price of $22.55/bbl in December, 1999.

Consumers are screaming about high gasoline prices, but are quite willing to pay $3.50/gallon for premium bottled water. At $30/barrel, crude oil costs 71 cents per gallon at the wellhead. If after transportation, refining, storage, marketing, insurance and environmental compliance costs, Exxon makes only 5 cents per gallon profit on its gasoline, imagine the margin of Perrier on a gallon of water! Do you remember what you paid for a can of soda or newspaper in 1981, versus today?

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PETROLEUM INVESTMENT

A number of factors are responsible for the decline in USA oil and gas production and reserves since the mid-1980's. Low, and unstable commodity prices have discouraged new investment. The stock market has been a much more rewarding area for "risk" capital. Frankly, wildcatting with a "dot.com" stock, where one could have a 25% stop loss order to limit the downside, and instant liquidity, is a lot less risky than drilling a hole in the ground.

According to the Financial Reporting System, the 23 largest producers reported an average return on assets of just 5.4% over the 12-year period from 1986 through 1997.

During the past decade, the average oil industry return on capital employed has been only a meager 7-8% due to low commodity prices. With these returns, why would anyone want to invest in the upstream energy sector? Adequate new capital has not come into the industry, which explains in part, why the supply side of the equation has deteriorated so badly.

The December 1999 National Petroleum Council study concluded that the growth in natural gas demand will require funding of approximately $1.5 Trillion (in 1998 $). This includes $700 billion for operating expenses, and $658 billion dollars in upstream capital expenditures from 1998 through 2015. This latter figure includes all exploration, development, production, and gathering capital expenditures. In order to satisfy supply growth an increased annual average capital expenditure of $39 billion per year is required from 1999 through 2015, versus an average of $27 billion from 1991 through 1998. However, these needed levels of investment will take place only if investors have confidence that competitive rates of return will be earned. This will require an entirely new "attitude" toward the petroleum industry in Washington.

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DOMESTIC PETROLEUM RESOURCES

The public is wondering whether the United States has enough oil and natural gas domestically, to meet future demand?

Some energy analysts will argue that the United States has exhausted its petroleum resources, and that there are no significant new reserves to be found. This is categorically at odds with the facts.

The most recent resource assessments of the US Geological Survey (USGS), Minerals Management Service (MMS), EIA, and the National Petroleum Council, confirm that the United States has huge remaining oil and gas resources.

According to the USGS, the technically recoverable onshore U.S. oil resource base is 110 billion barrels. This is five times our onshore and offshore proven reserves of 21 billion barrels.

The 1999 National Petroleum Council (NPC) study concluded that the United States has a remaining gas resource base in the Lower 48 States of 1,466 TCF. It should be noted that only 157 TCF, or just 10% of the identified resource, is considered proven. There are an additional 313 TCF in Alaska; however, this gas is useless without a pipeline to the Lower 48 markets. The total identified USA gas resource, including Alaska, is a whopping 1,779 TCF. Even at 32 TCF/year consumption, there is more than a 50-year supply. Cumulative domestic production over the past hundred plus years is estimated to be about 890 TCF.

The United States has the potential to be self sufficient in natural gas supply well into the 21st Century. We have significant oil resources, but they are not likely to be adequate to satisfy future demand. However, unless the petroleum industry is allowed access to the areas where the remaining resources are located, the domestic energy "crisis" will become worse.

WHERE ARE THE REMAINING RESOURCES?

There are significant remaining known oil and gas resources in the traditional onshore producing areas of the Gulf Coast, West Texas and in the Mid-Continent. However, these areas are now intensely drilled and blanketed with 3-D seismic, and are not yielding the large new discoveries required to replace the nation's depleting proven reserves. Major oil companies and large independents are exiting onshore exploration and moving their operations into the sparsely drilled waters of the Deep Gulf of Mexico, and overseas.

Many small oil and gas companies, and the majority of the independent prospect originators, are having trouble finding partners, as well as the capital, to drill the smaller reserve exploratory prospects that remain in the traditional producing areas. Higher oil and gas prices have significantly increased the drilling rig count; however, over 90% of the current drilling activity is for the development of known reserves.

The 1999 NPC report concluded that the most prospective areas for major new discoveries, particularly natural gas, are on public lands in the Rocky Mountain sedimentary basins, offshore in the Gulf of Mexico, in the Eastern Gulf of Mexico, and on the Atlantic and Pacific OCS. Despite the huge potential of these areas, Federal law presently prohibits exploration on the Atlantic and Pacific OCS, and in the Eastern Gulf of Mexico. Access to much of the remaining resource potential of the Rocky Mountain basins is restricted or closed.

Exhibit 1 is a map from the NPC report that shows the resource potential of the Lower 48 public lands that are closed and/or subject to severe restrictions. The total estimated gas resource of these areas is 213 TCF, or a nine-year supply at current rates of gas consumption. It is likely that with further exploration, these resource figures would increase significantly.

The total area of the U.S. Federal offshore, including Alaska, to the 200-mile economic limit, is about 2 billion acres. Only 2 percent has been leased. In its 1995 study, the Minerals Management Service assessed a mean undiscovered recoverable resource of 46 billion barrels of oil and 268 trillion cubic feet of natural gas in the Federal OCS. This is 2.5 times the offshore reserves found to date.

The next slide shows the USA offshore where the MMS estimates these potential resources. On June 12, 1998, By Presidential "Decree", all but the Central and Western Gulf of Mexico were excluded from leasing until 2012.

The previous NPC map does not include Alaska. In its 1995 National Oil and Gas Assessment of Onshore Federal Lands, the USGS estimated that the Northern Alaska province accounts for more than half of the of the undiscovered conventional gas assessed on onshore Federal lands. As previously stated, Alaska's total gas resources were cited in the NPC report as 313 TCF. This represents a 14-year supply!

There is a huge domestic gas resource, yet access to much of this remaining resource is either closed, or so restricted that development is not economic.

Chevron Corporation, for example, has a 1 TCF dry gas discovery in the Eastern Gulf offshore Florida. The company has been prohibited from developing this giant gas field by federal and Florida State regulators.

Not included in the gas resource figures, is the potential of shallow gas hydrates on the Outer Continental Shelf. Although we do not presently have the technology to recover them, gas hydrates are another major future potential energy resource. In its 1995 assessment of gas hydrate resources for the Atlantic OCS, the USGS estimated a potential resource in the range of 6,000 to over 100,000 TCF. These figures dwarf the NPC conventional resource estimate. Coalbed methane, another unconventional gas resource, which was included in the NPC study, has risen from nil to about 6% of domestic gas supply over the past 15 years. I firmly believe that gas hydrates will, like coal seam methane, also be commercialized, probably within a decade.

THE NEED TO PROVIDE ACCESS TO GAS RESOURCES ON PUBLIC LANDS

Natural gas is cited as a cleaner, more environmentally benign, energy resource to fuel our economy. However, the public has not had the will to permit access to the huge gas potential of its undeveloped public lands. Additionally, a federal regulatory maze has been created that discourages domestic petroleum exploration operations and investment.

As a result of more than a decade of US neglect in implementing a comprehensive National Energy Supply Policy, and the environmental protection priority of the public, gas demand has finally caught up with, and probably overtaken, peak demand supply. This situation cannot be blamed on "Big Oil and Gas", nor the distribution companies.

The United States cannot depend on gas imports from OPEC to meet rising demand. Natural gas is a North American commodity that is locked into a pipeline infrastructure. As much as 14% of supply will come from Canada over the next 15 years. Imports from Mexico will be minimal. The 1999 NPC study projected LNG imports of less than 1% of supply through 2015. Accordingly, the United States must develop its own gas resources to meet future demand. This requires access to the public lands that are deemed most prospective for natural gas.

Conservation and renewable energy resources are cited by the opponents of access to public lands as the solution to our energy requirements. They are out of touch with reality. Energy conservation has been effective in certain areas, particularly in regard to increased mileage per gallon for automotive engines. Nevertheless, demand for transportation fuels continues to rise. Despite DOE expenditures of over $9 billion since FY 1980 on solar and other renewable energy research, these alternative energy resources still provided only 0.2% of primary energy supply in 1999, exclusive of traditional hydroelectric power (3.8%). Research must continue on alternate energy resources. The fact is, however, that our economy will continue to depend on fossil fuels for the majority of the nation's primary energy requirements for many more decades.

Improving access to natural gas-prospective public lands, is the most practical way to assure that the nation has the natural gas it requires to fuel our economy, and to keep its citizens warm in the winter and cool in the summer.

ENVIRONMENTALLY RESPONSIBLE RESOURCE DEVELOPMENT

Development of the oil and gas resources in environmentally sensitive areas of the Rocky Mountains, the North Slope of Alaska, the Eastern Gulf of Mexico, and the Pacific and Atlantic OCS, can be done in an environmentally responsible manner, with no lasting harm.

Over the past 25 years, the environmental lobby in the United States has convinced the public that resource development necessarily means that the environment will be degraded and forever altered. Drilling, production, and environmental impact mitigation technological advances, as well as a new corporate environmental attitude that "Green" is good business, have made this perception obsolete. Oil and gas are produced every day in an environmentally responsible manner in environmentally "sensitive" areas all over the world. The greatest threat to the environment comes from the movement of oil to market by tankers, not by pipeline.

To illustrate that drilling and production can take place in a safe and environmentally sensitive manner; we can look to the East Coast of Canada. For more than thirty years, offshore exploration, and now production, have calmly co-existed in the Canadian Maritimes with tourism and commercial fishing, in a cooperative, and even supportive environment, for the betterment of all concerned communities. More than 300 exploratory wells have been drilled within the offshore outer continental shelf waters of the Canadian Atlantic. At least 12 trillion cubic feet of natural gas and 2 billion barrels of oil have been discovered so far. More than 125,000 barrels of oil and 400 million cubic feet (MMcf) of natural gas are being produced per day within the prime commercial fishing waters and the pristine tourist coastlines of Eastern Canada. Much of this new gas is now flowing to New England.

There is a major new deep Jurassic Age reef trend discovery offshore Nova Scotia. If successfully delineated, this new field alone could add an additional 400 MMcf/day gas production. Incidentally, John Hogg, the former chairman of the AAPG House of Delegates, and a Canadian, originated the new gas discovery.

Petroleum geologists believe that the same types of oil and gas accumulations that exist in the Eastern Canadian offshore, may extend south along the U.S. Atlantic Coast, from George's Banks to the Carolina Trough, a distance of almost 1,000 miles

The Canadians have also successfully developed and have been producing natural gas from their portion of Lake Erie since the 1950's. The US portion of Lake Erie has a thicker sedimentary section, and would likely be more productive. New Yorkers could use the gas. United States law, however, prohibits exploration in the Great Lakes.

Brazil is successfully exploiting its substantial Atlantic OCS petroleum resources in an environmentally responsible manner. In doing so, it has become the world leader in ultra-deep water production technology.

New technologies also now permit oil and gas development in a way that minimizes onshore surface disruption in environmentally sensitive areas. The British, for example, who are even more fussy about open spaces then we are, agreed to develop the giant Wytch Farm Oil Field under Poole Harbour, smack in the middle of the most heavily visited coastal zone of the South of England. At the Wytch Farm development, long reach deviated wells are drilled in a radial pattern from a camouflaged central well pad onshore, to locations up to seven miles out into scenic Poole Bay.

Opponents to petroleum development cite old operating practices, and prior environmental abuses, that are simply out of touch with modern reality. Just like the Canadians, British, Brazilians, Norwegians, Qataris, Thais, Australians, and many other petroleum producing nations, Americans likewise can develop their offshore and onshore energy resources in environmentally sensitive areas in a safe and rational manner. To believe otherwise is simply inconsistent with what is being done every day all over the world.

As someone who vacations on the New England coast, and loves to sail and fish in Long Island Sound, and in the Gulf of Maine, I have a vested interest in the environmental consequences of petroleum operations in the Atlantic OCS. I can truthfully testify that I have no fears, and am confident that the environmental risks of exploring for oil and gas offshore New England are minimal, and acceptable. Experience in the Gulf of Mexico has demonstrated the best fishing is actually right around the artificial reefs created by offshore oil and gas production platforms.

* * * * * *

PETROLEUM SUPPY POLICY RECOMMENDATIONS OF THE AAPG

The petroleum industry can and will be able to provide the oil and gas supplies needed to maintain the economic stability and security of the United States. However, to do so, the nation must address three critical issues. These are: 1) Improved access to public lands; 2) Reform of the regulatory process; and 3), Fairer tax treatment to stimulate capital formation and investment.

A. Public Lands Access

In regard to the public lands access issue, the AAPG recommends the following:

1. Lifting of the Moratorium on OCS Exploration and Development in areas where it exists today.

2. Opening of the Eastern Gulf and Atlantic Margin OCS to Area-wide Leasing.

3. Reform of the Dept. of Interior Policy regarding access to public lands in the Rockies.

4. Opening the 1002 Area of the Arctic National Wildlife Refuge to Exploration.

5. Amendment of the Federal Antiquities Act to prevent its misuse in restricting access to public lands.

6. Balancing the needs of all stakeholders in shaping public lands policy.

7. Assurance that there is no net loss of state and private land in creating new land restrictions.

B. Regulatory Reform

Reforms are needed to streamline the federal petroleum regulatory and permitting process to stimulate natural gas exploration and production. Rules and regulations must be based on scientific reality, not on popular environmental misconceptions. The practical economic impact of all regulations must be considered. In this regard, the AAPG recommends the following:

1. Reform the Clean Water Act and Endangered Species Acts, especially those sections that pertain to wetlands.

2. Reform the procedures used by the Department of the Interior in managing energy resources on public lands in the Rocky Mountain region and elsewhere.

3. Limitation of the extensive delays of the permitting process.

4. Limitation of the ability of the EPA to regulate drilling muds and hydraulic frac fluids as "hazardous wastes".

C. Tax Reform

The independent petroleum industry has historically drilled over 80% of the nation's oil and gas wells. However, over the past 15 years, low oil and gas prices, changes in the tax code, and the attraction of alternative higher yielding investment opportunities, has resulted in capital starvation for independents. Petroleum exploration and production are extremely capital intensive and high risk. In order to get the independents back to work finding and developing the nation's gas resources; we must stimulate capital formation.

Technology and dot.com stocks have peaked. With high gas prices, investors in New York and elsewhere are now beginning to look for direct investment opportunities in natural gas. However, most non-industry investors are deterred by the liability exposure of a direct working interest in a gas well. They would prefer to be limited partners, and be rewarded through tax benefits for assuming exploration risk to drill for a depleting asset.

The role of taxation is critically important to the development of oil and gas resources. However, the U.S. Tax Code currently contains provisions that serve as major disincentives to petroleum investment. While we currently enjoy significant budget surpluses, Congress can afford to reform the tax code.

The AAPG recommends the following tax reform legislation to stimulate the investment needed to increase domestic natural gas supply.

1. Restoration of the write-off of intangible drilling costs for the passive investor. This tax deduction was eliminated by the Tax Reform Act of 1986, and effectively wiped out the major source of drilling capital for small independent oil and gas exploration companies. Billions of dollars of new drilling capital would quickly become available to the industry through restoration of the Intangible Drilling Cost (IDC) tax deduction for passive limited partnership investors.

2. Elimination of the onerous Alternative Minimum Tax.

3. Allow expensing of delay rentals in the year incurred, not capitalizing them as currently required.

4. Allow expensing of geological and geophysical costs in the year when the costs are incurred.

5. Make permanent the suspension of the net income limit for percentage depletion on marginal properties.

6. Raise the depletion allowance provision to previous levels.

CONCLUSION

The United States has abundant petroleum resources. However, absent access to these resources on public lands, and regulatory relief and tax incentives to stimulate domestic petroleum exploration and development, the nation will face a serious gas supply shortage, and will continue its dangerous reliance on imported crude oil.

The AAPG recommends that Congress focus its attention on the energy issue without further delay. Presidential candidates also need to respond realistically to the energy crunch, because high prices and supply disruptions will be front-page news in November. Politicians must also realize that kicking the petroleum industry in the shins and shaking fists at OPEC, makes for good press, but is no solution to the pending natural gas supply crunch.

A National Energy Policy that balances the interests of all stakeholders, should be developed and implemented as quickly as possible. If this is not done, and soon, some Americans will truly run the risk of "freezing in the dark". Time is running out! The proverbial "doo doo" is hitting the fan as we speak.

* * ** * *

Skip Hobbs is Managing Partner of Ammonite Resources Company, a firm of international petroleum technical and business consultants that Mr. Hobbs formed in 1982. Ammonite is headquartered in New Canaan, Connecticut and has associate offices located in the oil patch of the United States, in Canada, the United Kingdom, and Argentina. The "Energy Forum" webpage on the <www.ammoniteresources.com> website contains numerous articles and statistics on energy issues.

THIS PAPER MAY BE FREELY REPRODUCED AND DISTRIBUTED. I URGE ALL AAPG MEMBERS TO SPEAK TO LOCAL COMMUNITY GROUPS AND THEIR LEGISLATORS ABOUT THE ENERGY SITUATION.

* * * * *

2 figures

As an addendum, I have attached comments regarding several issues that Vice President Gore has incorporated into his "energy policy". At the risk of being somewhat partisan", I suggest that the Republicans confront the Democrats with some of the statistics and issues which follow.

* * * * *

ENVIRONMENTAL MYTHS - ANWR

The AAPG believes that the 1002 area of the Arctic National Wildlife Refuge (ANWR), and the similar coastal plain area of the National Petroleum Reserve-Alaska (NPRA), should be opened to exploration and development. A study recently released by the United States Geological Survey (March, 1998) cites potential economically recoverable oil resources beneath the ANWR Coastal Zone 1002 Area of 5.7 to 16 billion barrels of crude oil, with a mean expected resource of 10.3 billion BO. Mean peak production rates of 1.0 to 1.35 million BOPD are expected. The 1002 Area represents only 8% of ANWR's 19 million acres. Less than 1 percent of the land within the 1002 area would be affected by petroleum exploration and development activities. Parts of the coastal plain of the NPRA, held back by the Bureau of Land Management (BLM) from the 1999 lease sale at the instruction of the Secretary of the Interior, contain an estimated minimum of 1.5 billion barrels.

The major objection to development of the Prudhoe Bay Field and Trans Alaska Pipeline was the potential threat of the development to Caribou migrations. According to the US Senate Committee on Energy and Natural Resources, the Prudhoe Bay herd, also known as the Central Arctic Herd has increased from 6,000 in 1978 to 19,700 in 2000. The caribou are not bothered by the petroleum development infrastructure - in fact they prefer it to the prospect of having their calves devoured by wolves.

Opponents of ANWR development say that it is not worth forever despoiling ANWR for a few month's of oil supply. This is a specious argument that assumes that supply from all other sources ceases during the life of the ANWR reserves. According to Government studies, the 2001 area of ANWR, could produce over 1.0 MMBO per day. Like the Prudhoe Bay area, production operations will likely run for more than 25 years, providing vital crude oil and natural gas for the nation's economy, significant employment in Alaska and in the Lower 48 from production operations and equipment supply, hundreds of millions of dollars of annual state and federal tax and royalty income, as well as a reduction in the outflow of funds for the purchase of imported crude oil.

During this year Secretary of Energy Bill Richardson has repeatedly been on his hands and knees before the Arab OPEC producers to beg for production increases of initially 200,000 BOPD and then 800,000 BOPD. This is a humiliating gesture for the United States, the most powerful nation in the world. The current supply/demand balance is so precarious now, that even the threat of a storm in the Gulf of Mexico causes oil and gas prices to shoot up momentarily. An incremental 1 million barrels of oil per day from ANWR for a sustained period of at least 10 years would make a huge difference in the supply side equation.

During 1999, according to the EIA, the US obtained 23% of its oil imports of 10.6 MM bbl/day, or 2.43 MM bbl/day, from the Persian Gulf Region. If one were to use the same argument as the ANWR opponents about supply, development of potential ANWR reserves of 10+ billion barrels would eliminate 11 years of dependency on imports from the dangerously volatile Middle East.

The giant Alaskan Prudhoe Field went into production in 1977, and produced its 10 billionth barrel of crude oil in May, 2000. The field reached a regulated peak of 1.5 million barrels per day in 1979, and produced at this rate through 1988. Production is now in a steep decline.

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THE MYTH OF ALTERNATIVE ENERGY

Vice President Gore believes United States Energy Policy should focus on conservation and alternate energy, not increased supply. Here are the statistics regarding sources of primary energy and electric power.

Total U.S. Energy Consumption by Primary Energy Source, 1998
(EIA Sept. 1999)

Petroleum 40.7%
Natural Gas 24.1%
Coal 23.3%
Nuclear 7.9%
Hydro 3.8%
Other 0.2%
Total: 100.0%

USA Electicity Supply By Source in 1999
(Calculated from EIA, October 2000 data)

Coal 50.6%
Nuclear 19.6%
Natural Gas 15.0%
Hydroelectric 8.3%
Petroleum 3.8%
Geothermal, Solar, Wind 2.4%
Other gaseous fuels 0.3%
Total: 100%

Since FY1980, the US Department of Energy has provided over $9 billion in research funding for alternative energy projects, yet alternate energy still provides significantly less than 1% of domestic primary energy demand.

Alternate energy is wonderful, and necessary long-term, but simply not practical nor presently economically competitive. Fossil fuels will continue to power the economy for another generation!

Conservation is great, but despite almost doubling average automobile mileage in the past 20 years, demand for transportation fuels has skyrocketed. Motor gasoline demand has increased 28% from 6.58 MM bbl/day in 1981 to 8.47 MM bbl/day, despite our conservation efforts. Americans want mobility! How does Mr. Gore propose to provide Americans with the freedom of movement they demand and expect?

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GLOBAL WARMING MYTHS

The earth has warmed and cooled over geological time, and has experienced significant climatic changes over the past 10,000 years of human history.

Temperatures are rising, and have probably been doing so since at least 1850, certainly since the depths of the Little Ice Age around 1600. However, there is no concrete, or generally accepted scientific evidence that the current global warming episode is due to anthropogenic causes. Solar, orbital, and tectonic effects, and their combined impact on the world's oceans are the most powerful climate drivers.

In the August issue of Nature, researchers Paul N. Pearson and Mark R. Palmer, cite recent scientific evidence that carbon dioxide levels during the Cretaceous Period were over 2000 parts per million, and that "normal" CO2 might be about 500 ppm. The current level of CO2 is about 360 ppm. Emissions from fossil fuels may, in fact, cause no climate change due to increased solar reflectivity.

The United States is being asked to accept the terms of the Kyoto Protocol. Under this international agreement, 38 developed nations must reduce their greenhouse gas (CO2, CH4, N2O, HFC, PFC, and SF6) emissions by an average of 5.2% below 1990 levels during the 2008 to 2012 timeframe. Unless there are some major technological break-through in alternate energy resources, combustion, and emission control technologies, American citizens will have to make significant adaptations to their life-styles to achieve compliance. In the end, these efforts may have no impact what-so-ever on global warming!

Global warming is a fact. Rather than spend a decade arguing over percent industrial CO2 reductions, and who is to blame, scientists and politicians alike should focus their efforts on how to solve and mitigate the social impact of the significant regional climatic changes that will result. These will include drought, famine, and sea level rises that will cause massive human dislocations.

Mr. Gore is a very strong proponent of the Kyoto Protocol. Does he have an electric car, and power his house with solar panels?

Energy Crisis2.doc

* * * * *

HOBBS TESTIMONY BEFORE
UNITED STATES SENATE
COMMITTEE ON ENERGY AND NATURAL RESOURCES

JULY 26, 2000

On July 18th, Ammonite Resources Managing Partner, Skip Hobbs received an invitation to testify on the natural gas supply issue before the US Senate Committee on Energy and Natural Resources. The invitation from Senator Frank Murkowski (R, Alaska), read "Your unique position as an experienced independent petroleum geologist from New England, as well as your AAPG credentials, make you a very credible witness on energy supply matters."

On June 26th, Hobbs, in his capacity as President of the Division of Professional Affairs, of the 29,000 member American Association of Petroleum Geologists, testified in Washington, D.C., at the hearing on natural gas supply. Skip presented the AAPG position regarding the pending natural gas supply crunch; that there are abundant domestic gas resources; and the need to open access to gas resources on public lands. If the United States is to escape a natural gas supply crisis, it must open its Outer Continental shelves, the sedimentary basins of the Rocky Mountains, and the North Slope of Alaska to the petroleum industry. Gas development can be done in environmentally sensitive areas, using new technologies and an environmental consciousness, without any lasting harm to the environment. This is done every day around the world.

The full witness list is cited below.

Senate Committee on Energy and Natural Resources
An oversight hearing on America's natural gas supply
Wednesday, July 26, 2000 SD-366 - 9:30 a.m.

Panel 1:

The Honorable David Hayes
Deputy Secretary
Department of the Interior
Washington, DC

The Honorable T.J. Glauthier
Deputy Secretary
Department of Energy
Washington, DC

Panel 2:

Mary Hutzler
Director, Integrated Analysis and Forecasting
Energy Information Agency
Department of Energy
Washington, DC

G. Warfield "Skip" Hobbs
President, Division of Professional Affairs
American Association of Petroleum Geologists
New Canaan, CT

Michael L. Johnson
Vice President and General Manager
Conoco, Inc.
Houston, TX
on behalf of the Natural Gas Supply Association

Paul Kelly
Senior Vice President
Rowan Companies, Inc.
Houston, TX
on behalf of the National Petroleum Council

Matthew R. Simmons
President
Simmons & Company International
Houston, TX

The Deputy Secretaries of the Department of Energy and of the Department of the Interior, as well as the head of the EIA forecasting group, testified on behalf of the Clinton Administration. As expected, they focused on how the resource base is growing with new technologies, and that gas production from federal lands has increased from 13% to 25% during the past decade, and that activity is booming in the Gulf of Mexico deep water OCS. The number of CBM drilling permits in the Powder River Basin was touted. They completely ignored the fact that access to much of the resource base is closed or restricted, and that the traditional onshore gas producing regions of the country are mature and not attracting significant exploration capital because of the low remaining reserve potential. The EIA is using a price deck in its near term forecasts in the $2-$3 range that ignores the significantly higher public market forecasts as reflected in the NYMEX 12 and 24-month futures prices.

Energy Committee staff members commented after the hearing that they very much appreciated having the "scientific" (versus "Big Oil") input to energy issues that the American Association of Petroleum Geologists provides.

The text of Skip Hobbs's written testimony follows. The testimony of each witness is reproduced on the Energy Committee's website at: http://energy.senate.gov.

Senate photo

The United States Has Abundant

Natural Gas Resources:

It Lacks Only the Public Will to Develop Them

G. Warfield Hobbs IV
President, Division of Professional Affairs
American Association of Petroleum Geologists

Testimony Presented to the

UNITED STATES SENATE
COMMITTEE ON ENERGY AND NATURAL RESOURCES

July 26, 2000

Thank you, Mr. Chairman. My name is G. Warfield "Skip" Hobbs. I am an independent petroleum geologist from New Canaan, Connecticut. I am also President of the Division of Professional Affairs of the American Association of Petroleum Geologists (AAPG), an international professional organization composed of more than 29,000 geologists, including 22,000 petroleum geologists in the United States. We are the scientists whose job it is to find the oil and natural gas, coal and other energy mineral resources that our nation depends on to fuel its economy.

The AAPG, founded in Tulsa, Oklahoma in 1917, was chartered to serve the geoscience profession through the identification and application of new science and technology for the discovery and production of hydrocarbon resources. The application of new exploration and development concepts and technologies has led to more efficient practices that have lowered the cost of produced energy, and significantly reduced the environmental consequences of energy production. The membership of AAPG is proud of their contributions in supplying the world with reliable and inexpensive energy, in developing new ways to do that job better, and in the education of new geoscientists to carry on the tradition.

I would also like to note that the AAPG is affiliated with the American Geological Institute. The AGI is an umbrella organization headquartered in Alexandria, Virginia that represents over 100,000 geoscience professionals. I want to acknowledge their assistance in preparing this testimony.

You did hear me correctly. I am not from Texas, and I do not work for "Big Oil". I am a bona fide New Englander - raised in Connecticut, and educated at Yale College. This gives me a slightly different perspective than most oil industry spokesmen. It is perhaps because I live in New England, at the end of the energy supply line, that I especially welcome the opportunity to testify here this morning.

Why We Have Convened Today

This hearing has been convened to address an issue that directly impacts the continued economic well being and security of the United States.

Natural gas presently supplies about 25% of the nation's domestic energy requirements. Last year, gas consumption in the United States was approximately 22 Trillion cubic feet (TCF). According to the Department of Energy Information Agency (EIA), proven domestic gas reserves as of December 31, 1999 were 164 trillion cubic feet (TCF). At a consumption rate of 22 TCF/year, proved reserves represent only a 7.4-year supply. Gas demand is skyrocketing, particularly as a "clean" fuel for electric power generation. Recent studies by the EIA, Gas Research Institute, and the National Petroleum Council (NPC), indicate annual demand will grow to as much as 32 TCF over the next 15 to 20 years. In its 1999 study, the National Petroleum Council projected annual demand to reach 29 TCF as early as 2010. At 32 TCF/year consumption, currently proven reserves represent only a five-year supply.

This summer, instead of being injected at a normal seasonal rate into local storage sites in the Northern States for winter use, natural gas is firing electric power plants in the torrid Gulf Coast and Southwest to run air conditioners. Storage levels are well below where they should be this time of year. There may be no margin now for extended cold weather demand, or any significant gas production or deliverability disruption next winter.

The dynamics of the current supply/demand equation for natural gas have resulted in surging natural gas prices. Last year, the average NYMEX spot price at the Henry Hub was $2.25/MMBTU. This year, the Henry Hub spot market price has soared over $4.50/MMBTU. The NYMEX 12 and 24-month futures prices indicate that industrial gas consumers and traders alike believe that strong demand will continue to keep pressure on supply for the foreseeable future.

Some market analysts are predicting that a cold winter this year could result in a gas price spike over $7.00/MMBTU. At current prices, residential gas consumers can expect a $200 to $300 increase in their winter gas-heating bill; and some can ill afford that cost.

The public must be made aware of the seriousness of the situation, and prepared for significant price increases and possible regional gas curtailments.

Gas Supply

The Senate Energy Committee's principal question today is, do we have enough natural gas to meet future demand, and where will we get this gas?

As the spokesman for the geologists who assess the nation's fossil fuel resources, I can unequivocally answer in the affirmative. Yes, the United States has abundant natural gas resources to fuel the country well into the 21st Century.

It is my understanding that the Senate Energy Committee has received copies of the most recent resource assessments of the US Geological Survey (USGS), Minerals Management Service (MMS), EIA, and the National Petroleum Council. The AAPG has not made a recent independent natural gas resource assessment of its own. I would like to point out however, that many of the geoscience professionals that prepared the resource reports for the organizations just cited, are members of the AAPG. For example, the Director of the United States Geological Survey, Chip Groat, is a long-standing, and highly respected AAPG member. The AAPG Committee on Resource Evaluation was formed specifically to assist the USGS and MMS in the assessment of the undiscovered oil and gas resources of the United States. Our Resource Committee has recommended and evaluated methodologies, identified experts for each sedimentary basin, and has reviewed the resource estimates of the USGS and MMS.

Where is the Gas?

There are significant remaining known gas resources in the traditional onshore gas producing areas of the Gulf Coast, West Texas and in the Mid-Continent. However, these areas are now intensely drilled and blanketed with 3-D seismic, and are not yielding the large new discoveries required to replace the nation's depleting proven gas reserves. Major oil companies and large independents are exiting onshore exploration and moving their operations into the sparsely drilled waters of the Deep Gulf of Mexico, and overseas.

Many small oil and gas companies, and the majority of the independent prospect originators, many of whom are AAPG members, are having trouble finding partners, as well as the capital, to drill the smaller reserve exploratory prospects that remain in the traditional gas producing areas. Higher oil and gas prices have significantly increased the drilling rig count; however, over 90% of the current drilling activity is to develop known reserves.

The AAPG concurs with the 1999 NPC report conclusion that the most prospective areas for major new gas discoveries are on public lands in the Rocky Mountain sedimentary basins, offshore in the Gulf of Mexico, in the Eastern Gulf of Mexico, and on the Atlantic and Pacific OCS. Despite the huge potential of these areas, Federal law presently prohibits exploration on the Atlantic and Pacific OCS, and in the Eastern Gulf of Mexico. Access to much of the remaining resource potential of the Rocky Mountain basins is restricted or closed.

The NPC map does not include Alaska. In its 1995 National Oil and Gas Assessment of Onshore Federal Lands, the USGS estimated that the Northern Alaska province accounts for more than half of the of the undiscovered conventional gas assessed on onshore Federal lands. As previously stated, Alaska's total gas resources were cited in the NPC report as 313 TCF. This represents a 14-year supply!

There is a huge domestic gas resource, yet access to much of this remaining resource is either closed, or so restricted that development is not economic.

The Need to Provide Access to Gas Resources on Public Lands

Conservation and renewable energy resources are cited by the opponents of access to public lands as the solution to our energy requirements. They are out of touch with reality. Energy conservation has been effective in certain areas, particularly in regard to increased mileage per gallon for automotive engines. Nevertheless, demand for transportation fuels continues to rise. Despite DOE expenditures of over $9 billion since FY 1980 on solar and other renewable energy research, these alternative energy resources still provided only 0.08% of primary energy supply in 1999, exclusive of traditional hydroelectric power (4.5%). Research must continue on alternate energy resources. The fact is, however, that our economy will continue to depend on fossil fuels for the majority of the nation's primary energy requirements for many more decades.

Environmentally Responsible Resource Development

It is the firm belief of the AAPG that development of the natural gas resources in environmentally sensitive areas of the Rocky Mountains, the North Slope of Alaska, the Eastern Gulf of Mexico, and the Pacific and Atlantic OCS, can be done in an environmentally responsible manner, with no lasting harm.

There is a major new deep Jurassic Age reef trend discovery offshore Nova Scotia. If successfully delineated, this new field alone could add an additional 400 MMcf/day gas production. Incidentally, a former executive officer of the AAPG, a Canadian, originated the new gas discovery.

Petroleum geologists of the AAPG believe that the same types of oil and gas accumulations that exist in the Eastern Canadian offshore, may extend south along the U.S. Atlantic Coast, from George's Banks to the Carolina Trough, a distance of almost 1,000 miles

GAS SUPPY POLICY RECOMMENDATIONS

OF THE AAPG

The petroleum industry can and will be able to provide the gas supplies needed to maintain the economic stability and security of the United States. However, to do so, the nation must address three critical issues. These are: 1) Improved access to public lands; 2) Reform of the regulatory process; and 3), Fairer tax treatment to stimulate capital formation and investment.

1. Public Lands Access

In regard to the public lands access issue, the AAPG recommends the following:

* Lifting of the Moratorium on OCS Exploration and Development in areas where it exists today.

* Opening of the Eastern Gulf and Atlantic Margin OCS to Area-wide Leasing.

* Reform of the Dept. of Interior Policy regarding access to public lands in the Rockies.

* Opening the 1002 Area of the Arctic National Wildlife Refuge to Exploration.

* Amendment of the Federal Antiquities Act to prevent its misuse in restricting access to public lands.

* Balancing the needs of all stakeholders in shaping public lands policy.

* Assurance that there is no net loss of state and private land in creating new land restrictions.

2. Regulatory Reform

* Reform the Clean Water Act and Endangered Species Acts, especially those sections that pertain to wetlands.

* Reform the procedures used by the Department of the Interior in managing energy resources on public lands in the Rocky Mountain region and elsewhere.

* Limitation of the extensive delays of the permitting process.

* Limitation of the ability of the EPA to regulate drilling muds and hydraulic frac fluids as "hazardous wastes".

3. Tax Reform

The AAPG recommends the following tax reform legislation to stimulate the investment needed to increase domestic natural gas supply.

* Restoration of the write-off of intangible drilling costs for the passive investor. This tax deduction was eliminated by the Tax Reform Act of 1986, and effectively wiped out the major source of drilling capital for small independent oil and gas exploration companies. Billions of dollars of new drilling capital would quickly become available to the industry through restoration of the Intangible Drilling Cost (IDC) tax deduction for passive limited partnership investors.

* Elimination of the onerous Alternative Minimum Tax.

* Allow expensing of delay rentals in the year incurred, not capitalizing them as currently required.

*Allow expensing of geological and geophysical costs in the year when the costs are incurred.

* Make permanent the suspension of the net income limit for percentage depletion on marginal properties.

* Raise the depletion allowance provision to previous levels.

CONCLUSION

The United States has abundant natural gas resources. However, absent access to these resources on public lands, and regulatory relief and tax incentives to stimulate domestic petroleum exploration and development, the nation will face a serious gas supply shortage.

Thank you for giving the American Association of Petroleum Geologists the opportunity to present to the Senate Committee on Energy and Natural Resources, the views of the professionals whose job it is to find the nation's natural gas resources. The full text of the Position Papers of the AAPG on energy supply and public land withdrawal policy are attached as exhibits to this testimony.

* * * *

About the Speaker:

G. Warfield "Skip" Hobbs is the Managing Partner of Ammonite Resources, a petroleum consulting firm that Hobbs founded in 1982 in New Canaan, Connecticut. He received his BS. Degree in Geology from Yale College in 1969, and an MSc. Degree in Petroleum Geology from the Royal School of Mines, Imperial College, London. Prior to forming his consulting company, Hobbs worked internationally as an exploration geologist for Texaco and Amerada Hess. Mr. Hobbs was the 1993-1995 Secretary of the American Association of Petroleum Geologists, and is the current president of the AAPG Division of Professional Affairs.

Any questions or comments regarding this testimony can be directed to SkipHobbs through his firm's website at: www.ammoniteresources.com.

* * * * *

EDITOR'S NOTE: In response to the Democratic claims that the oil industry is responsible for high oil prices and is "gouging" the public, ExxonMobil issued the following press release:

EXXONMOBIL MEDIA RESPONSE STATEMENT
VICE PRESIDENT GORE'S ENERGY INDUSTRY COMMENTS

The use of the terms "gougers" and "profiteers" are not only totally untrue -- and numerous U.S. government investigations have exonerated the industry of such charges -- the terms are misleading in that they obscure the real issue facing the American public, which is the need for a coherent, economically and environmentally-sound energy policy.

Concerning home heating oil supplies, ExxonMobil has increased production and is already manufacturing 10 to 15 percent more than a year ago. We have also taken steps to improve our ability to move heating oil from our Gulf Coast refineries to the Northeast. We fully expect to meet all our contractual demands this winter.

It must be kept in mind that the energy business is highly competitive and consumers are best served by the forces of a free marketplace and not government intervention. For example, the current patchwork quilt of gasoline regulations has put a great strain on gasoline supply and prices in the U.S. that lead, in part, to the surge of prices in the Midwest earlier this summer. A comprehensive energy program that encourages market-based solutions to supplies of clean-burning gasolines could have prevented that situation.

National Energy Policy

Energy is strategically important to the U.S. and its continued economic growth. ExxonMobil believes our nation's leaders should work with industry to develop a united, cohesive energy policy. Contrary to accusations that the industry is at odds with the American people, just the opposite is true. We have worked for decades to ensure energy supplies are sufficient to support economic growth that improves people's quality of life. We have encouraged responsible use of energy in order to fulfill society's expectations for energy security, environmental performance and energy efficiency; and we have supported basic and applied scientific research in all of these areas.

In all energy sectors, the market must be allowed to work. Past government intervention to artificially manipulate the oil and gas markets have led to distortions, exacerbated shortages and actually driven up prices. A myriad of environmental regulations and permitting issues in the U.S. have prevented any significant additional expansion of U.S. refineries, which today are operating with nearly no spare capacity to meet the country's growing energy needs.

ExxonMobil supports a strong commitment to environmentally sound operations, but the regulations should be guided by a science-based, cost-benefit approach. Government policies, laws and regulations affect all aspects of energy -- development, supply, price, use, and international politics. There are no simple, quick solutions. This is a serious matter that all parties must address, taking into consideration domestic and international concerns.

Some Key Facts About Energy Prices

Since the end of World War I, inflation-adjusted gasoline prices have steadily declined, interrupted only by a few peaks and valleys. Through the end of World War II, when average real incomes for Americans were much lower than they are today, gasoline prices varied between $2.00 and $2.50 per gallon ($1999). The price then dropped steadily to about $1.50 per gallon before the oil shocks of the 1970s and early 1980s drove prices temporarily higher, peaking at over $2.50 in 1981. The lowest gas prices of the period occurred in 1998, when low crude prices drove gasoline near, and in some parts of the U.S. below, $1.00 per gallon. Prices have moved up sharply in 2000, but from a very low level and continue to be below historical levels.

ExxonMobil makes about a nickel for every gallon of gasoline it sells; Federal and State Governments take in an average of 40 cents in taxes for every gallon sold.

For additional information about energy prices, supply, and the need for a comprehensive U.S. energy policy, reporters, consumers, and politicians are urged to log on to ExxonMobil's web site at www.exxonmobil.com and click on the Oil and Gasoline Economics section.

Editor's Note: Click here to go to ExxonMobil website:

http://www.exxonmobil.com

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FACTOID: According to the EIA (April 2000 monthly report), between 1981 and 1989, the number of U.S. refineries fell from 324 to 204, representing a loss of 3 million bbl/day in operable capacity. Since 1989, an additional 30, mostly small, refineries have been closed. The cost to meet environmental compliance requirements, as well as deregulation of price controls has been responsible for most of the closings. There have been no new "green field" refineries build in the United States in more than 20 years. Refinery utilization has risen from 69% in 1981 to 96% in 2000. There is simply no spare capacity remaining. During 1999, 8.4 million BOPD, or 43% of total consumption of 19.5 million barrels/day of petroleum and refined products, was for motor gasoline. Imports of refined products have soared to keep up with rising demand. In 1999, the United States imported 10.6 million BOPD, representing 54% of total U.S. Demand. The cost of imported petroleum is the largest component of the U.S. trade deficit.

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Editor's Note: In the interest of providing "grist " for informed debate on energy issues, we reprint the following article from the September 17, 2000 issue of the Washington Post newspaper. The author advocates turning the Arctic National Wildlife Refuge Coastal Plain (ANWR 1002 Area) into a National Monument by presidential decree. In a study released in March, 2000, the United States Geological Survey, cites potential economically recoverable oil resources beneath the ANWR Coastal Zone 1002 Area of 5.7 to 16 billion barrels of crude oil, with a mean expected resource of 10.3 billion BO. Mean peak production rates of 1.0 to 1.35 million BOPD are expected. Less than 1 percent of the land within the 1002 area would be affected by petroleum exploration and development activities. ....................

Want a Legacy? Here's 1.5 Million Acres' Worth

Dennis Drabelle

Sunday, September 17, 2000; Page B02, Washington Post. On a visit to Alaska late last month, Jimmy Carter found himself sparring with a surprise foe: the state's governor, fellow Democrat Tony Knowles. The former president had traveled to Anchorage to mark the 20th anniversary of the Alaska National Interest Lands Conservation Act (ANILCA), which preserved 104 million acres as national parks, wildlife refuges and other conservation areas in the nation's largest state--a transaction so breathtaking that it more than doubled the size of the national park system. Carter incurred the governor's wrath when he urged President Clinton to embellish this record by unilaterally recasting the coastal plain of the Arctic National Wildlife Refuge as a national monument (tantamount to a national park).

Carter is right. The Arctic Refuge coastal plain is ripe for decisive executive action. Like many conservation issues, this one has been kicking around for decades, and polls show that most Americans want it resolved in favor of preservation. Alaska's congressional delegation has made its objections known, and no amount of further argument is likely to clarify the matter. Sometimes presidential fiat is good, and this is one of those times.

The 1.5 million-acre coastal plain is the ecological heart of the 19.6 million-acre refuge. Often compared to Africa's Serengeti, the plain is most famous for the herd of 129,000 caribou that uses it as a calving ground each spring, but it is also coveted by developers for its oil deposits. Although the "refuge" classification offers the plain some protection, refuges are not as sacrosanct as one might suspect; in some of them, oil drilling is allowed. But if Clinton were to take Carter's suggestion and create a Coastal Plain National Monument, it's highly unlikely that oil deposits there could ever be tapped.

That prospect angers some Alaskans, including the pro-development governor. "Alaskans welcome visitors to the 49th state with warmth and hospitality," Knowles told Carter in an open letter. "However, I feel you abused this welcome by your [recommendation]."

Carter was drawing on long familiarity with Alaska. Not only had he fought for ANILCA and signed it into law as president; he had pressured Congress to pass it by first resorting to the very mechanism he was commending to Clinton: the 1906 Antiquities Act, which enables the president to transform federal lands into national monuments if they have "historic or scientific interest."

On Dec. 1, 1978, as the legislation to create new parks in Alaska languished, Carter acted. With a signature, he used the Antiquities Act to proclaim 56 million acres of federal land as national monuments. That galvanized Congress, which superseded his action by passing ANILCA in 1980. But the question of whether to develop the coastal plain's oil was left undecided. Now, a generation later, it's still hanging around, debated to a fare-thee-well but unresolved.

Clinton is no stranger to the Antiquities Act. He has wielded it several times during his two terms, notably in 1996, when he established the 1.7 million-acre Grand Staircase-Escalante National Monument in Utah. Included was the Kaiparowits Plateau, an area long coveted by both developers, for its coal deposits, and environmentalists, for its wild beauty. As with the Arctic coastal plain, the Kaiparowits issue had been kicking around forever--since at least the mid-1970s, in fact, when I worked on it as a lawyer at the Interior Department.

In these situations, the Antiquities Act can be a last resort, to be applied to federal land when, like weary boxers, the parties with a stake in the land's future have exhausted themselves without a decision.

The act has been a prerogative cherished by presidents from both parties. It came into being during a Republican administration, that of Theodore Roosevelt; was first invoked by a Republican president (Roosevelt again); and, shortly before Carter's dramatic use of it, had come into play during the final days of another Republican administration, Gerald Ford's.

The Antiquities Act harks back to the Progressive Era, when bringing order to federal land management was a good-government priority. The act created broad presidential power to set aside "historic landmarks, historic and prehistoric structures, and other objects of historic or scientific interest."

Roosevelt took due notice of that flexible language. He began on a small enough scale, establishing the 1,153-acre Devils Tower National Monument in Wyoming on Sept. 24, 1906. Note that this first use of the act preserved an area valuable not for its antiquities but for its role in history (as a landmark for westward settlers) and its natural qualities, especially the eye-catching beauty of its namesake monolith, which were deemed sufficient to meet the act's "scientific interest" criterion. But by 1908, Roosevelt felt confident enough to establish an 800,000-acre Grand Canyon National Monument, the forerunner of today's national park.

Hal Rothman, the Antiquities Act's foremost historian, calls it no less than "the most important piece of preservation legislation ever enacted by the United States government," noting that "without it, many areas of outstanding natural and cultural significance would have been lost as a result of congressional inertia and indifference."

Republican and Democratic presidents have resorted to the act's power with roughly equal zest: Roosevelt 18 times, Taft 10, Wilson 13, Harding eight, Coolidge 13 (including a sprawling 2.3 million-acre Glacier Bay National Monument in Alaska, the precursor of today's Glacier Bay National Park), and so on.

It's December of 1976. Carter has just been elected president, and the Ford administration is wrapping up its business. It's been a sleepy couple of years in the White House--arguably what the country needed after the drawn-out trauma of Watergate. The president's own children have been urging him to be "greener," and he has an eleventh-hour opportunity to do just that. As a lawyer on the staff of Nathaniel P. Reed, assistant secretary of the Interior, I am asked to draft a memo urging the lame-duck president to use the Antiquities Act to create one or more national monuments; among the choices we outline are several in Alaska.

Reed takes the memo to the president's domestic council, where it meets with enthusiasm. But days go by, then weeks, and nothing happens. A few days before Christmas, we learn that Ford is not even aware of our idea. Said by his aides to be depressed by his defeat in the election, he has gone to Vail, Colo., for a rest. His aides have decided that he should not be bothered with policy initiatives until he returns. We argue that Ford will have the remainder of his life to rest up (how prescient we were), but his people are unmoved. The proposal is bucked to the Office of Management and Budget, which stalls it to death. Ford may never have known a thing about it.

Two years go by. Now working at another federal agency, I get a call from my old secretary, who typed that policy memo but can't find a copy in the files. Do I have a copy, and would I be willing to share it with the current regime at Interior, which is considering recommending the Antiquities Act to President Carter as a device to break the logjam on Alaskan park proposals? My answers are yes and hell, yes.

Carter recognizes opportunity when he sees it. He "monumentizes" more federal land than all other presidents before him combined, causing the kind of splash that Ford may not have even realized he had the heft to make.

Will Bill Clinton go out with a flourish at the end of his presidency? According to his spokeswoman on environmental matters, no such action is planned for the Arctic refuge, but an activist president like Clinton may be hard-put to resist the temptation to flex executive muscle one last time, especially if George W. Bush wins the election. The refuge is a case where Clinton should indulge himself.

Should he do so, he will undoubtedly further infuriate Knowles and the Alaska congressional delegation. In his open letter to Carter, Knowles blasted the Antiquities Act process as "executive action at the midnight hour instead of an open, public, democratic process of carefully weighing values in the light of day." In 1996, Bill Howell, executive director of the Utah Association of Local Governments, waxed medieval in excoriating the president's proclamation of Grand Staircase-Escalante National Monument: "The only comparable act I can think of is when a country is ruled by a king and he sweeps his hand across a map and says, 'It will be thus!' "

But what Knowles wants has already happened: The fate of the Alaska Refuge has been carefully weighed. Over the past two decades, proposals to open up the coastal plain to oil exploration and development have repeatedly surfaced on Capitol Hill, sometimes in the form of riders tucked into other legislation without benefit of hearings (so much for the "open, public, democratic process" and "the light of day"), and each time rejected. The refuge has also been the subject of innumerable editorials and op-ed pieces, and both major-party presidential candidates have taken a position on it (Bush is for extracting the oil, Al Gore against).

Having been debated close to death, the coastal plain issue fits historian Rothman's criterion of an area that might be lost owing to "congressional inertia." The same was true of the coal-vs.-wilderness stalemate over Utah's Kaiparowits Plateau, which Clinton finally ended in 1996. Though my former colleagues and I have been away from Interior for almost 25 years, sometimes it seems as if we could walk into our old offices and pick up just about where we left off, trying to protect the same places that were being fought over back then, because so many of them remain in limbo. The coastal plain has been twisting in the wind long enough, and putting the issue to rest would allow developers and conservationists alike to concentrate on those disputes that could benefit from having more light shone upon them.

Further discussion is not likely to clarify the preferences of Alaskans: A midsummer poll by Ivan Moore Research showed the state about evenly split, with 49 percent of respondents in favor of oil development, and 45 against. Keep in mind, too, that it's federal land across which that hand would be sweeping, as much your property and mine as that of anybody living in Alaska. Nationwide polling consistently shows Americans opposed to oil development in the refuge by margins of 3 to 1 or more. Estimates of how much oil could be recovered from the coastal plain have fluctuated, but according to the U.S. Geological Survey, the most that can reasonably be expected is enough fuel to run the nation's engines for six months. But what of the caribou and other wildlife in that fragile area? A 1995 study by the U.S. Fish and Wildlife Service argued that "the irreplaceable and enduring value of the Arctic Refuge to the nation as a world-class natural area and wilderness is far greater than the short-term economic gain to be garnered from industrial development."

It's time for the 20-year-old paralysis over the Arctic Refuge to end.

Presidents have traditionally used the Antiquities Act in cases just like this one, stepping in where the democratic process has run its course without a denouement. In deciding whether to invoke the act one last time, Bill Clinton should listen to his conscience, weigh the interests of all Americans, note the example of his forbears, Democrats and Republicans alike--and bear in mind that he will have plenty of time to rest once he's out of office.

Dennis Drabelle, a former Interior Department lawyer, is a contributing editor for The Post's Book World section.

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FACTOID: The caribou herd in the Prudhoe Bay area is now significantly larger than it was before development of the North Slope oil production facilities. A major contributing factor to the population increase is that the caribou are calving near, in and among the production facilities, as wolves, their principal preditor, steer clear of humans.

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Public Lands Access and Consumer Prices Are Related

Lee C. Gerhard , Lawrence, Kansas

and Logan MacMillan, Littleton, Colorado

Energy prices are soaring, a direct reflection of increased global and national demand, decreased domestic oil production, and decreased natural gas storage rates. Meeting the national demand for oil and gas is getting to be very difficult. The future looks even more difficult.

Traditionally, geologists have been the "responsible party" for supplying society with its sustaining resources. The job has been become more difficult as society has become more urban and consequently, less knowledgeable about the origin and supply of resources. Urban demands for-ever-increasing restrictions on public access to federal lands have been met with increased withdrawals of public lands. Presidential designation of national monuments and U.S. Forest Service and Bureau of Land Management administrative withdrawals have restricted public access, and importantly, mineral and energy access to what was the energy resource base of the United States. The coastal waters of the eastern and western seaboard, northern Alaska, and the Gulf of Mexico off Florida have been administratively excised from the national natural gas resource base. According to the recent (1999) National Petroleum Council report on natural gas, more than 200 trillion cubic feet of potential national gas resources are non-accessible from lower 48 states coastal waters and the Rocky Mountains.

The large amount of the non-accessible reserve base precludes meeting long term future demands for natural gas, and perhaps, even short term demands of a colder than usual winter. Other factors affect supply, including price, diversion of supplies to electrical generation, pipeline capacity, storage amounts, and commodity traders. The current futures price of about $4.50 per MCF is indicative of an impending fall and winter 2000-2001 domestic home heating price shock.

It is too late to counter any natural gas supply problems for this year. Natural gas storage now is 25% below last year's level on comparable dates.

To minimize future problems, it is necessary to address access to the domestic resource base. If the United States has difficulty producing and delivering an estimated 22 TCF in 2000, how can the industry deliver 29 TCF in 2010 or 31 TCF in 2015? The answer lies in accessing the resource base that is now off limits.

Environmental activists have long argued that most human activities should be banned from federal lands, especially those related to resource exploitation. By and large, they have succeeded. Although their complaints are largely about esthetics, recreation, and scenic vistas, nonetheless, many resource activities have been banned from what were public lands. Attacks on the mining law, restrictions on leases, outright bans on access, and other devices have been successfully employed to reduce access for resource development.

These may be altruistically valuable and socially sustainable access issues. However, most people assume that environmental costs are borne by corporations. Therein lies the fallacy for the people. Gasoline prices reflect domestic production declines and lack of refining capacity. Price of natural gas now reflects the growth of the market because of environmental demands to replace electrical generation coal with natural gas, and an increasing dependence on gas as a boiler fuel and for home heating. The public is correctly told that there are huge resources of natural gas to supply this country for years to come.

What the public has not yet been told, but will see in their home heating bills this fall, is that someone has to pay the costs of the environmental decisions made in Washington. That someone is the public natural gas consumer. Curtailments are likely in addition to higher costs. The alterantive fuel option is home heating oil, which is more costly now also.

Earth resources are the basis of our society whether we like it or not. The internet will not heat your home, fuel your automobile, nor supply your electricity. It is crucial that geologists carry the message to the people that they must establish a balance between their esthetic desires, their physical comfort and convenience, and their pocketbooks. The people make the decisions. So far, they have voted for scenery and wilderness. Now the piper is due to be paid.

We wonder what the choice will be. Maybe it will be to access some of the natural gas resource base.

Lee Gerhard and Logan MacMillan are AAPG Certified Petroleum Geologists.

Submitted September, 2000

Energy and Foreign Policy Issues

Commentary By

Gregory Moroney,

Managing Director

Project Finance - Oil & Gas Group

Deutsche Bank Securities Inc, New York

My single biggest concern about the upcoming federal election is the lack of concern and focus on the country' s energy policies. All the statistics show that our demand for energy is growing faster than our supplies, increasing our reliance on imported energy. Thus energy policy issues become entangled with foreign policy issues, especially as they relate to events in the Middle East region.

Saudi Arabia has been stable and supportive of western interests for many decades now, but what will happen in the next 2-3 years if King Fahd dies? Although I am not an expert on events in the Kingdom, I am lead to believe by people who cover that Region - that the internal situation in Saudi Arabia is less than stable, and the succession plan to King Fahd is not clear. Apparently the economic and social tensions developing among the younger generation, a substantial portion of which is under 25 years of age, are very likely to conflict with the fundamentalist efforts of the conservative parts of the older generation. These issues, combined with a major change in leadership of the country are likely to create a level of instability for a period of time. This could then lead to a higher level of unpredictability relating to the positions the Saudis would take on their own energy and economic policies towards the West.

Add the unpredictable and hostile actions of Iraq to the equation, and it is not difficult to believe that we are likely to experience some rather challenging times in the near future. This-at a time when we are more dependent on imported oil from the region than ever before. In addition, our ability to rely on increased production from Venezuela, as a hedge to supply interruptions from the Middle East, may also become less predictable under President Hugo Chavez.

It is my personal opinion, that while domestic polices on economics, education and Medicaid are not unimportant issues to the American electorate-energy policy and foreign policy dealing with energy supply, are equally important. More specifically, whereas voters may have a difficult time distinguishing between the qualifications of Bush-Cheney vs. Gore-Lieberman on domestic policies-there should be no debate needed to distinguish between their relative credentials on energy policy or experience in dealing with Saudi Arabia and major events in the Middle East. I hope that some of these issues get surfaced before it is too late.

Submitted October 1, 2000

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DOMESTIC ONSHORE OIL SUPPLY: A SHORT TERM OPPORTUNITY

Commentary submitted by

Bob Ehrlich,

Geology Professor and VP of Residuum Oil Inc.

Salt Lake City, Utah

My partners and I have been tracking the consumption / production data for the past few years and have concluded that there will be a short term (10 years) opportunity for profitable onshore hydrocarbon exploration. We strongly agree with Skip Hobbs that more oil can be found in semi-mature basins. Accordingly we have formed a company to exploit this. We are just a year old and are now in phase 1 of our business plan. We are not the only ones. We have heard of several small outfitsconstructing barge-mounted rigs for re-exploration in the shallow off-shore of the Gulf coast. Our approach is to re-explore onshore basins by digitally mining the databasesto provide rapid assessments. Our targets are small fields with 2-10 wells each producing 150-300 bbl/d.

I don't think that the US govt. can legislate its way out of the present situation. A steady encouragement of energy efficiency and conservation is advisable to moderate demand.

Submitted: September 10, 2000 <bobehrlich@home.com>

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MORE CONFUSION IN THE GASOLINE MARKETS DUE TO EPA WISDOM REGARDING MTBE. WILL THE EPA BE ACCUSED OF "PRICE GOUGING" ?

News and Opinion Item Submitted by Steven P. Zody, principal of Zody Geoscience and Rustic Resources, Wooster, OH 44691

The EPA mandated the use of MTBE as part of their grand reformulated gasoline plans (regulations) in 1992 and 1995....... now this, just when we need to develop a comprehensive national energy policy. How's about some science folks?! I'm sure the oil industry will still be accused of "price gouging" by the Al Gore's of the world who politically mandated these moves with "junk science."

Aug. 31 /PRNewswire/ via NewsEdge Corporation -

California's decision to ban MTBE as of January 1, 2003 appears to be proceeding as planned. MTBE continues to come under political fire as a gasoline component, and a number of other states and the EPA have announced their intentions to restrict or eliminate the future use of MTBE. These developments increase the uncertainty regarding the continued use of MTBE in U.S. gasoline. The rest of the world looks on with high interest but still considers MTBE a valuable gasoline component, and has not yet moved against MTBE to the same degree as the U.S.

To better understand the potential implications of restrictions on MTBE use, energy consultants, Purvin & Gertz, Inc., and petrochemical consultants, Chemical Market Associates, Inc. (CMAI), have collaborated on a joint study entitled "MTBE Phaseout -- Global Impact on the Petroleum & Petrochemical Industries." Due to the current uncertainty in future MTBE regulations, the study researches three potential scenarios. These range from a "Phaseout" scenario with a complete MTBE ban by 2005 throughout the U.S., to a "Status Quo" scenario with a California-only ban and no change in Federal regulations.

According to Blake Eskew, Senior Principal with Purvin & Gertz, the U.S. refining industry has developed a substantial reliance on MTBE, particularly on the East Coast and West Coast. If MTBE use is eliminated, refiners will have to compensate for the loss of its octane, volume, and other properties through expansion of refining facilities and higher-cost processing operations. At the same time, the current Federal program to reduce the sulfur content of all U.S. gasoline will require significant refining investment. Increases in refining costs and the tighter gasoline supply/demand balance will have their greatest impact on gasoline prices and octane values in the U.S. market, with further effects in other world markets.

Chris Geisler, CMAI Project Manager, Proprietary Services, expects that significant impacts on the global petrochemical industry will follow if MTBE use is phased out in U.S. gasoline. North American MTBE and methanol producers will be hard hit with world trade significantly impacted as a result of reduced demand. Increased octane values will drive propylene, butylene and aromatics prices higher. Regional differences in octane values could affect U.S. petrochemical producer's competitiveness in world markets.

The "MTBE Phaseout -- Global Impact on the Petroleum & Petrochemical Industries" is available in book or CD-ROM format.

Founded in 1947, Purvin & Gertz is an independent consulting firm providing technical, commercial and strategic advice concerning the oil, gas, chemical and power generation industries. Purvin & Gertz specializes in serving clients involved in the production, processing, transportation and marketing of crude oil, petroleum products, natural gas and gas liquids. CMAI is a petrochemical consulting firm servicing a wide range of companies all over the world. With expertise in all facets of the chemical business, CMAI, since 1979, is recognized for its market analyses based on extensive databases, technology evaluations, and project feasibility studies in the worldwide petrochemical, plastics, fibers and chlor-alkali industries. For more information on the "MTBE Phaseout -- Global Impact on the Petroleum and Petrochemical Industries", visit CMAI's website at www.cmaiglobal.com or Purvin & Gertz' website at www.purvingertz.com.

Submitted 9/5/00

For comments regarding the impact on refiners of the EPA proposal to limit vehicle sulfur emissions to 15 ppm, please see John Powell's report on the "From the Trenches" webpage. John's comments on the MTBE issue are as follow:

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THE FLIP-FLOP ON MTBE:

IT COST MONEY TO START AND IT COST MONEY TO STOP

Commentary by John Powell, Ammonite Resources
New Canaan, Connecticut

I've got a friend who used to work here in town. When he got a job in the city he told his wife, "The job's better, but I'll have to take the bus and spend more money on commuting." A few years later, the bus line canceled his bus service. He told his wife, "Since I can't use the bus, I'll have to buy a car and drive to the city. The job will be the same, but commuting by car will cost more than by bus." His wife didn't understand, when her husband started taking the bus, commutation cost more; now, he' going to stop taking the bus and commutation is going to cost more again.

While my friend's situation is all too obvious, the non-obvious but identical situations existed in the past with lead in gasoline, and now with MTBE in gasoline. The lead example is about as simple as my friend's bus problem. The public demanded higher-octane gasoline. The solution was to add lead to the existing quality gasoline, raising its octane and cost. When lead was banned by the EPA, refiners needed to find alternate sources of octane to meet the demand. These alternate sources, like buying the car, required a capital investment and increased the cost of producing gasoline.

The MTBE case is only slightly more complicated. The EPA mandated that refiners produce reformulated gasoline. This gasoline required the inclusion of oxygen through blending an oxygenated compound with the hydrocarbons that made up normal gasoline. MTBE was chosen by many refiners to meet this need, but it added a costly blending component to the gasoline raising the gasoline's cost.

Now the EPA is considering banning MTBE from gasoline. The complication with MTBE is that the quality of the gasoline refiner must produce is not just staying the same, but the quality requirement is going up with the EPA's Phase II Regulations. Removal of MTBE from gasoline will require the refiner to invest in facilities to replace MTBE's good qualities (high octane, contributes to product volume, no sulfur, no olefins, no aromatics) , and Phase II will require investment in facilities to raise the overall quality of the gasoline produced.

Like my friend's commutation situation, one should expect the price of gasoline to go up when MTBE is added to gasoline, and to go up again when MTBE is removed from gasoline.

Submitted 9/7/00

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FOR IMMEDIATE RELEASE SEPTEMBER 8, 2000 BY THE GOVERNMENT AFFAIRS COMMITTEE OF THE AAPG DIVISION OF PROFESSIONAL AFFAIRS

AN IMPENDING NATURAL GAS SUPPLY PROBLEM EXPECTED TO RAISE HOME HEATING COSTS THIS WINTER

In early 1999, during a period of low energy prices for oil and natural gas, the public was warned by many energy analysts of a potential future shortage of natural gas. No one was listening. Despite an overall very mild winter in 1999-2000, we now face the looming reality of a natural gas shortage, as suppliers struggle to fill gas storage facilities in preparation for the peak usage winter heating season.

Why does the nation face a potential supply shortage? The primary reason is that average capacity to produce natural gas at the wellhead (productivity) in North America has declined significantly in the past decade. This has occurred at the same time that demand has increased at an unanticipated pace, particularly for electric power generation. Further, low commodity prices and regulatory roadblocks, have discouraged investment in new wells to replace depleting reserves. Decreasing deliverability of gas from lower productivity wells makes it very difficult to fill storage rapidly, even during the traditionally low demand summer season. These factors have now created the potential for a price shock for consumers, and supply interruptions for industry, during the coming winter heating season.

Prices for natural gas have doubled in the past year. Uncharacteristically, the price spiked this year in the late spring, and during the summer months, when gas is injected into storage for the upcoming winter. In April, approximately one trillion cubic feet was in storage, down 400 billion cubic feet from last year, and at the low end of normal spring storage levels. Historically, storage is filled from April lows, until October, when maximum storage typically ranges from 2.6 to 3.0 trillion cubic feet. The ability to refill has declined from 2.05 trillion cubic feet added to storage during these months in 1996, to 1.6 trillion cubic feet added in 1999. This year, additions to storage have averaged 300 billion cubic feet per month since April, and total storage is now at least 436 billion cubic feet less than last year, well below normal. Assuming last year's fill rate, gas in storage by October will be 2.6 trillion cubic feet or less, the lowest volume since 1996.

Gas withdrawals have ranged from 1.6 trillion cubic feet in the mild winter of 1998-99, to 2.6 trillion in 1995-96 and 1997-98. Assuming a very mild winter similar to last year, we could end up with less than 500 billion cubic feet remaining in storage by next April. But, with even a moderate winter, similar to the relatively mild winter of 1997-98, we could be facing the total depletion of this summer's storage.

Although the North American rig count has now nearly doubled to 1000 rigs since the historic lows of 1998-99, it remains far short of the 4,000 working drilling rigs when the petroleum industry was robust in the early 1980's. The effects of new drilling on overall deliverability of gas will be minor with this number of working rigs, because sufficient wells with high productivity to offset normal decline, will not be drilled. The industry is still constrained by a lack of capital, manpower, and equipment, and the results of punitive and shortsighted policies of taxation, over regulation, market manipulation and restricted access to prospective lands by government.

Even removing the Alaskan North Slope from consideration, over 200 trillion cubic feet of gas could be found and developed in areas where exploration and production are prohibited or severely restricted (Source: MMS, USGS). Although abundant gas reserves clearly exist, the industry will not be able to significantly increase deliverability this winter, and possibly not by next winter. Industry can increase supply deliverability of natural gas in the future, but only with changes in government policy to encourage and restore a healthy industry.

For consumers, the price of natural gas for home heating this winter will significantly increase. Since March, the wellhead cost of natural gas now being placed in storage, has doubled to over $4.50 per thousand cubic feet. Although the actual fuel cost is only a fraction of what consumers pay at the burner tip, varying by local utility, additional fuel cost surcharges can be anticipated. Some analysts are predicting that the typical consumer may see a $200 to $300 increase this winter in gas their bills. For electrical customers the price shock could occur even sooner, as natural gas is an increasing component of the fuel source mixture for power generation. This is particularly true for peak-use generation. Should late summer 2000 be hotter than normal, as is proving to be the case, gas use in peak electric demand periods can draw only on the supply of high-cost gas, causing consumers to see the effect almost immediately.

More ominous, is the possibility of a cold winter with high demand on natural gas after a hot summer. In this scenario of storage depletion, significant industrial disruption from electrical shortages, gas curtailments, and even cold homes could occur. Natural gas prices could be expected to significantly increase even from this summers high levels in this scenario, as utilities scramble to secure supply. For this reason, we urge that consumers:

1) Budget for higher fuel costs

2) Insulate or check insulation in homes; conservation is important!

3) Check furnaces and replace with more efficient units or repair damaged units

4) Raise thermostats in summer and lower them in winter

5) Be prepared for disruptions in the worst case scenario

Twenty-five years ago, we were faced with similar short term supply shortages of natural gas. Poor government policy, coupled with a false belief that we were running out of natural gas, directly contributed to the decline of domestic natural gas production . In less than a decade, production declined from 22.6 to 15.8 trillion cubic feet per year. During the late 1980s, government usage and price controls were removed, and the industry responded with increased drilling activities, propelled by the application of new technologies. Last year, domestic natural gas production increased to 19.6 trillion cubic feet. Imported gas from Canada supplied the balance of gas needed for U. S. domestic consumption.

Government should encourage both conservation and new gas development. It must recognize that energy drives our economy, and damage to the energy industry, will damage the overall economy. The United States has abundant undiscovered and undeveloped natural gas resources. It is poor policies that have led to a potential supply crisis, not the lack of natural resources.

We can overcome the potential shortage of natural gas supply in the United States. To do so, government, industry and the public must work together to develop our precious resources in a safe, timely and rational manner.

For further information contact Richard Green, LaRoche Petroleum Consultants, Inc., 4600 Greenville Ave., Dallas, TX 75206, 214-363-3337, or Lee Gerhard, Kansas Geological Survey, 1930 Constant Avenue, Lawrence, KS 66047, 785-864-2195.

This information bulletin was prepared by the Government Affairs Committee of the American Association of Petroleum Geologists as a public service. Permission is granted to republish this document.

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A Six Percent Cut In Crude Oil Supplies Last Year Tripled The Price! WOW!

Commentary by Jay Hansen

Retired Systems Analyst, Kailua-Kona, Hawaii

ENERGY SOURCES

Energy is the capacity to do work (no energy = no work). By definition, energy "sources" must produce more energy than they consume, otherwise they are called "sinks" (this is known as the "net energy" principle). Moreover, physical constraints limit how "fast" energy can be produced from a nonrenewable natural resource (the "peak" principle). One can only extract it at a certain rate, the rate peaks, and as the source empties, the rate falls off.

THE GLOBAL OIL "PEAK"

Published petroleum experts Colin Campbell, Jean Laherrere, Brian Fleay, Roger Blanchard, Richard Duncan, and Walter Youngquist all expect a "peak" in "conventional oil" around 2005. Moreover, the CEOs of Agip (Italian oil company) and Arco have both published estimates of peak in 2005. So it seems like a reliable estimate.

Campbell and Blanchard say that Norwegian production (the second largest export) is at "peak" now and set to enter long-term decline. Colombia and Venezuela are apparently well past their peaks, and now in long-term decline. Mexico will probably peak this year at the midpoint of depletion.

THE US NATURAL GAS "CLIFF"

Gas production is better described as a "plateau" followed by a "cliff" due to the high mobility and recovery of gas. Whereas oil declines slowly as it moves through the porespace of the rocks under declining pressure, the decline of gas is a cliff -- not a slope. The gas market gives no warning of the cliff because it is no more expensive to produce the last cubic foot than the first.

US gas production is at or near its "cliff" now. Canada currently makes up about 13% of the U.S. gas supply -- and Canada may already be past its cliff in natural gas production. Canadians export most gas to the US under short-term contracts. Moreover, a vague law allows them to rein in the petroleum trade whenever it appears to be in their interest (and making the US pay dearly was in their interest in the late 70s).

Campbell says that it is not practical to make up the US gas shortfall by shipping it in from the Middle East. However, the construction of a new gas line to Alaska and the Canadian arctic where there probably are large untapped deposits could temporarily mitigate the US gas cliff.

CANADIAN OIL SANDS (BITUMEN)

The Alberta Energy and Utilities Board estimates that production from Canada's oil sands will be extremely slow (100 to 200 years for all of it). It is also worth noting that the processing of heavy oil and bitumen in Canada has used cheap, stranded gas. This gas is probably not going to be stranded or cheap much longer, which will reduce the economics of the heavy oil and bitumen extraction.

US COAL

US coal is expected to become an energy "sink" -- not worth digging out of the ground -- by 2040.

OCEANIC HYDRATES

Laherrere has provided a new paper that shows that there is no evidence from all the worldwide research and extensive coring for any massive hydrate deposits. http://dieoff.com/page192.htm

POSITIVE FEEDBACKS -- WITH NEGATIVE CONSEQUENCES

The rising energy costs (increasing extraction effort) and rising economic costs of oil set up a positive feedback loop: since oil is used directly or indirectly in everything, as the costs of oil increase, the costs of everything else increase too -- including other forms of energy. For example, oil provides about 50% of the fuel used in coal extraction.

OTHER ENERGY ALTERNATIVES

H.T. Odum's eMergy calculations show that the only other forms of energy that can survive the exhaustion of fossil fuel are biomass (burning wood, animal dung, or peat), hydroelectric, geothermal in volcanic areas, and some wind electrical generation. Nuclear power could be viable if one could overcome the shortage of fuel. No other alternatives (e.g., photovoltaics) produce a large enough net eMergy to be worth pursuing.

[ If you are interested in more specific details, read the messages at http://www.egroups.com/messages/energyresources].

A LETHAL EDUCATION

Economic students are taught that banks "create" money every time they make a loan, and that the economy is powered by money instead of energy. The juxtaposition of these two data (the first is true, the second is false) leads even Nobel Prize-winning economists to conclude they have discovered a perpetual-motion machine!

No person has had a greater influence on the thinking of experts who have become government regulators of the world's oil and gas industries than economist Morris Adelman: "There are plenty of fossil fuels and no limit to potential electrical capacity. It is all a matter of money." But Adelman -- and every government regulator he has ever influenced -- is wrong. It is a matter of energy! (The only source of energy in money is the medium itself, and a $100 bill contains no more energy than a $10 bill.)

ENERGY LAWS: PERPETUAL MOTION IS IMPOSSIBLE

Although economists treat energy just like any other resource, it is not like any other resource. Available energy is the prerequisite for all other resources. Moreover, universal energy laws tell us that the economist's perpetual-motion machine is impossible.

To lift 15 kg of oil 5 meters out of the ground requires 735 joules of energy just to overcome gravity -- and the higher the lift, the greater the energy requirements. The most concentrated and most accessible oil is produced first; thereafter, more and more energy is required to find and produce oil. At some point, more energy is spent finding and producing oil than the energy recovered. Thus, Adelman is wrong: it is not all a matter of money.

Neither capital nor labor nor technology can "create" energy (the first law of thermodynamics). Instead, available energy must be spent to transform existing matter (e.g. oil), or to divert an existing energy flow (e.g., wind) into more available energy. The engines that actually do the work in our economy (so-called "heat engines"; e.g., diesel engines) waste 50 percent of the energy contained in their fuel (the second law). Thus, Adelman is wrong again: there is a physical limit to potential electrical capacity.

Economists everywhere are wrong: perpetual economic motion is impossible!

NEARLY EVERYONE IS WRONG!

Nearly everyone in the world (all governments, and all but a handful of scientists, etc.) has accepted the economists' perpetual-motion machine. Even the Energy Information Administration (EIA) of the US Department of Energy has no idea how much energy is required to produce energy ("net energy"). Nor does the EIA have any idea how fast energy can be produced ("peak")!

But even a child can understand that machines do not run on money -- they run on energy ("daddy's car needs gas!") -- and available energy is a prerequisite for producing more energy.

Once the truth is told, no one will ever believe that the energy experts in the Clinton Administration were just too stupid to see it coming; too stupid understand these simple energy principles that can be taught to a child...

SURPRISE!

The sudden -- and surprising -- end of the fossil fuel age will stun everyone -- and kill billions. Once the truth is told about gas and oil (it's just a matter of time), your life will change forever.

Envision a world where freezing, starving people burn everything combustible -- everything from forests (releasing CO2; destroying topsoil and species); to garbage dumps (releasing dioxins, PCBs, and heavy metals); to people (by waging nuclear, biological, chemical, and conventional war); and you have seen the future. Envision a world utterly destroyed by a lethal education.

Submitted August 29, 2000 (Permission to reprint granted by Mr. Hansen).

Editor's Note: Jay found the Ammonite website while surfing the internet, and submitted his commentary for publication. Mr. Hansen publishes an energy newsletter on his website at <http://www.dieoff.org>. His articles are packed with statistics and voluminous references concerning future oil and natural gas, and other energy resource supply. Jay's articles express a very pessimistic view concerning the eventual consequences of human consumption of the earth's resources, destruction of the environment, climate change, and over-population. Ammonite Resources does not endorse the Die-Off website, nor do we necessarily agree with Mr. Hanson's conclusions. However, we do recommend a visit to the website, as it provides a lot of "food for thought."

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RE: GLOBAL WARMING

The Climate Debate Becomes Scientific, Finally.

Lee C. Gerhard

Principle Geologist

Kansas Geological Survey, Lawrence, KS 66047

After years of enduring one liners, bits of personal beliefs, philosophy, and political spin, the debate about whether people cause climate to change is finally turning scientific. Recently, the government scientific leader of people-caused climate change, James Hanson, published a new spin on the issue, arguing that the emissions from fossil fuels caused no climate change because of feedback from increased reflectivity. About the same time, a paper in Nature documented that carbon dioxide levels during the Cretaceous Period were over 2000 parts per million, and that "normal" might be about 500 ppm. The current level is about 360 ppm. These two papers disposed of the "highest levels of carbon dioxide in history" histrionics of some political persons, and carbon dioxide from people's use of fossil fuels as the cause of climate change. We now are able to talk about what the real climate changes are and what may cause them.

There are some principles upon which all sides of the argument can agree. First, and foremost, the laws of physics apply equally to all sides. As I recently wrote to Sen. John McCain,

" The laws of physics apply to all of us equally. Therefore, the debate must be constrained by the laws of physics. Anthropogenic emissions of excess carbon dioxide must have some effect as a greenhouse gas. At the same time, the cooling of the lower troposphere coupled with warming of the earth's surface specifies that these emissions are not the driving force behind climate change…."

This statement draws on the collected works of Richard Lindzen, M.I.T., who has argued, without detractors, that any human-induced greenhouse effect would be seen first in the lower troposphere, based on the physical principles. Since well-vetted satellite data shows that there has been no temperature change in the lower troposphere, then there can be no human climate effect. The recent Hanson paper shows that the effects of increased carbon dioxide from fossil fuels is entirely offset by the particulate reflections of solar energy. We have honored the laws of physics, without a human-induced climate change.

The second principle, upon which almost all scientists who have reviewed the data would agree, there is some global warming taking place, starting at least by 1850. The changes in temperature of the earth are hard to measure, they take place in irregular sawtooth jumps and slower swoons, but the general trend for the last 150 or more years is upwards. Warming from the depths of the Little Ice Age probably started by 1600 or so.

The third principle is one that geologists understand best. Climate varies all the time, at all scales, in both directions. There is no "normal" climate in earth's history. Geology is the only discipline that routinely works backwards in time to study real variability of processes. All studies of past climate demonstrate that climate varies naturally, over many scales, at all times.

There are some other statements that are germane to the debate, but not everyone will subscribe to these. These statements are developed from the studies I and my colleagues have undertaken in the past decade, and reflect the current collective wisdom of this group.

1. Natural climate variability greatly exceeds any human-induced effect. We cite all the time-temperature curves published, detailing climate over the last 600 million years. While most would agree with the statement, the argument that current temperature changes are greater than natural variability persists, and we can only wait and see if this is true.

2. The earth's atmosphere/ocean system is exceedingly complex and has never been successfully modeled by any computer system. There are insufficient data and insufficient understanding of the complex interactions of the system to permit computer modeling without bias. Dr. Fred Singer made a valid point when he stated that "climate model exercises are not evidence." They are human intellectual concepts set to mathematical algorithms.

3. The ruling paradigm of environmental science currently is anthropocentric, that is, human activity is the dominant force in all environmental change. Most geologists reject this hypothesis, but it permeates the climate debate. Those of us who believe that natural dynamic systems' energy dwarfs human enterprise are not as vocal as our colleagues.

4. Climate drivers are numerous. Solar, orbital, and tectonic effects and their combined effects on the world oceans are the most likely major climate drivers. The geologic prognosis is that climate will episodically grow warmer for 200 years or longer, then become much colder. This cycle will likely continue until the next glacial age. We have been in this interglacial age for about as long as any preceding interglacial (10,000 years). Sea level is likely to rise towards previous post-glacial levels without any interference by humans.

5. Politics are way out in front of science on this issue because of the tremendous implications of dependence on fossil fuel imports for the United States and Europe, and the costs of maintaining those supplies. Further, all of the proposed human solutions to the proposed human-caused problem of climate change are additonal tax revenues to federal governments.

If temperatures are going to get warmer, and there is little we can do to forestall that eventuality (and if it is natural event, there is nothing we can do), then we had better look at the natural episodic changes in climate and forecast what is going to happen. We have forecast up to several hundred years of warming is likely, based on statistical analysis of past events. The longer term prognosis is for the world to fall back into a prolonged cold spell, perhaps even another glacial age.

There is little question that the earth will fall back in temperature along the way over the next several hundred years - temperature changes are well demonstrated to be episodic, with rapid warming and slower cooling. The most recent episode before now was the warming of the 1930's, followed by the 50 years of cooling. We do not understand the amplitude or the duration of cycles. It is as likely that the next cold snap will be hundreds of years in total duration as 50 years.

The problem remains, then, how would we feed 10 billion people on a colder earth? I think this is a far more serious problem than continued warming. The Viking agricultural communities on Greenland starved to death when the Little Ice Age onset replaced the Medieval Climate Optimum. What will we do?

(Author's note; some of the material upon which this essay is based will appear in the forthcoming book "Global Climate Change: Geologic Perspectives" published by the American Association of Petroleum Geologists. It should be on book shelves by mid-December.)

Submitted September 28, 2000

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ENERGY STATISTICS

This information has been compiled so that our website visitors can be armed with accurate statistical information to document their discussions regarding energy policy. Unless otherwise noted, all energy statistics are from the database of the US Energy Information Agency (www.doe.eia.gov). 1999 figures are actuals, and 2000 figures are projections. The weekly "Industry Scoreboard" in the Oil & Gas Journal is a good source for additional statistics.

Total U.S. Energy Consumption by Primary Energy Source, 1998 (EIA Sept. 1999)

Petroleum 40.7%

Natural Gas 24.1%

Coal 23.3%

Nuclear 7.9%

Hydro 3.8%

Other 0.2%

Total: 100.0%

USA Electricity Supply by Source in 1999 (Calculated from EIA, October 2000 data)

Coal 50.6%

Nuclear 19.6%

Natural Gas 15.0%

Hydroelectric 8.3%

Petroleum 3.8%

Geothermal, Solar, Wind 2.4%

Other gaseous fuels 0.3%

Total: 100%

PETROLEUM DEMAND (million barrels oil per day)

1999 2000

World Petroleum demand 74.8 75.9

USA Petroleum Demand 19.52 19.58

USA demand as % World Total 26% 25.8%

USA CRUDE OIL & LEASE CONDENSATE PRODUCTION (million barrels per day) 1970 1980 1999 2000

9.6 8.6 5.88 5.84

USA CRUDE AND NGL PRODUCTION (million barrels per day)

1970 1980 1999 2000

11.1 10.1 9.0 9.1

The U.S. now imports about 56% of its crude oil and refined product needs; therefore USA energy policy impacts world markets and economies.

Crude oil production in the US has declined 33% since 1985, from 8.9 million barrels per day (MMBOD) to 5.9 MMBOD. At the same time, however, domestic petroleum demand has increased 23% from 15.90 MMBOD to 19.58 MMBOD.

USA PROVEN OIL RESERVES

USA Proven Oil Reserves @ 12/31/99: 21.0 billion barrels

USA Proven Oil Reserves @ 12/31/85: 28.4 billion barrels

Proven oil reserves have declined 26% since 1985. Following discovery of the giant Prudhoe Bay Field in Alaska in 1970, USA proved oil reserves were 39 billion barrels as of year-end 1970.

MIDDLE EAST COMPARED TO USA

During 1999, according to the EIA, the US obtained 23% of its oil imports of 10.6 MM bbl/day, or 2.43 MM bbl/day, from the Persian Gulf Region.

During 1999, OPEC supplied 29.4 million BOPD, or 39.7% of total worldwide supply of 73.9 million BOPD.

CRUDE OIL IN 1999 WAS USED FOR:

8.4 MM bbl/d (43%) for motor gasoline;

3.6 MM bbl/d (18%) distillate fuel;

1.7 MM bbl/d (9%) jet fuel;

840,000 bbl/d (5%) residual fuel;

5.0 MM bbl/d (26%) "other oils"

USA NATURAL GAS DEMAND (Trillion cubic feet)

1985 1999 2000

17.3 21.36 22.22

Natural gas presently supplies about 25% of the nation's primary domestic energy requirements.

Gas demand is skyrocketing, particularly as a "clean" fuel for electric power generation. Recent studies by the EIA, Gas Research Institute, and the National Petroleum Council (NPC), indicate annual demand will grow to as much as 32 TCF over the next 15 to 20 years. In its 1999 study, the National Petroleum Council projected annual demand to reach 29 TCF as early as 2010.

Security analysts at Dain Rauscher Wessels, Inc. estimate that more than 275 new gas-fired power plants are planned to begin operation by 2006. These new electric power plants are expected to consume an additional 8.5 TCF/year.

USA NATURAL GAS PRODUCTION (TCF)

1973 1983 1985 1990 1995 1999

22.6 16.8 17.2 17.8 18.6 18.7

USA NATURAL GAS RESERVES (TCF)

1970 1999

290 164

Proven gas reserves in the United States have dropped 43% during the past 30 years, from 290 TCF at year-end 1970, to only 164 TCF now. Approximately 14% of the nation's natural gas supply is presently imported from Canada. The NPC estimates that LNG imports will supply less than 1% of natural gas demand through 2015.

OIL AND GAS WELLS DRILLED

POTENTIAL UNDISCOVERED USA OIL AND GAS RESOURCES

The most recent assessment by the U.S. Geological Survey demonstrates that the petroleum and natural gas resource base is large enough to sustain an active domestic petroleum industry for many decades. The technically recoverable onshore U.S. resource base is estimated to be 110 billion barrels of oil and 1,015 trillion cubic feet of gas.

The National Petroleum Council (NPC) in its 1999 study concluded that the United States has a remaining gas resource base in the Lower 48 States of 1,466 TCF. It should be noted that only 157 TCF, or just 10% of the identified resource, is considered proven. There are an additional 313 TCF in Alaska; however, this gas is useless without a pipeline to the Lower 48 markets. The total identified USA gas resource, including Alaska, is a whopping 1,779 TCF. Even at 32 TCF/year consumption, there is more than a 50-year supply. Cumulative domestic production over the past hundred plus years is estimated to be about 890 TCF.

WORKING DRILLING RIGS

The number of drilling rigs working on a daily basis has decreased from over 4000 in 1982 to an average of only 623 in 1999.

USA REFINING CAPACITY

Refinery closings were caused by deregulation (elimination of price controls and allocations), and the cost to retrofit older refineries to meet current environmental regulations. There have been no new grass-roots refineries built in over a decade. According to the EIA' April, 2000 Energy Report, "financial, environmental, and legal considerations make it unlikely that new refineries will be built in the United States."

CRUDE OIL PRICES

GASOLINE PRICES

In an October, 2000 press release ExxonMobil said that it makes a profit of five cents on every gallon of gasoline it sells, while Federal and State Governments take an average of 40 cents in taxes for every gallon sold. The ExxonMobil press release went on to say:

In its October, 2000 Energy Report, the EIA said that "Regular unleaded, self-service retail motor gasoline prices hit their highest monthly level ever, in nominal terms, averaging $1.63 per gallon in June. Still, in real terms (adjusted for inflation) that price was about 40 percent lower than the price experienced in March 1981.

Motor gasoline demand has increased 28% from 6.58 MM bbl/day in 1981 to 8.47 MM bbl/day, despite conservation efforts.

BALANCE OF TRADE DEFICIT

The largest component of the projected 2000 foreign trade deficit of $387 billion is imported crude oil and refined petroleum products. In 1973, at the time of the Arab Oil Embargo, the United States imported 35% of its petroleum requirements. That figure now stands at 56%.

The EIA estimated total 1999 oil imports at $66.9 billion. This year that bill will be significantly higher.

INVESTMENT CONSIDERATIONS

According to the Financial Reporting System, the 23 largest producers reported an average return on assets of just 5.4% over the 12-year period from 1986 through 1997. During the past decade, the average oil industry return on capital employed has been only a meager 7-8% due to low commodity prices.

REASONS FOR DECLINE IN DOMESTIC DELIVERABILITY AND RESERVES

1. Low and volatile commodity prices discouraged investment.

2. Low return on investment compared with other economic sectors.

3. More attractive alternate investment opportunities for private capital (stock market).

4. Access denied to most prospective exploration areas on environmental grounds.

5. Regulatory disincentives.

6. Tax disincentives.

ARCTIC NATIONAL WILDLIFE REFUGE (ANWR)

Ammonite Resources believes that the 1002 area of the Arctic National Wildlife Refuge (ANWR), and the similar coastal plain area of the National Petroleum Reserve-Alaska (NPRA), should be opened to exploration and development. A study recently released by the United States Geological Survey (March, 1998) cites potential economically recoverable oil resources beneath the ANWR Coastal Zone 1002 Area of 5.7 to 16 billion barrels of crude oil, with a mean expected resource of 10.3 billion BO. Mean peak production rates of 1.0 to 1.35 million BOPD are expected. The 1002 Area represents only 8% of ANWR's 19 million acres. Less than 1 percent of the land within the 1002 area would be affected by petroleum exploration and development activities. Parts of the coastal plain of the NPRA, held back by the Bureau of Land Management (BLM) from the 1999 lease sale at the instruction of the Secretary of the Interior, contain an estimated minimum of 1.5 billion barrels.

Opponents of ANWR development say that it is not worth forever despoiling ANWR for a few months of oil supply. This is a specious argument that assumes that supply from all other sources ceases during the life of the ANWR reserves. According to Government studies, the 2001 area of ANWR, could produce over 1.0 MMBO per day. Like the Prudhoe Bay area, production operations will likely run for more than 25 years, providing vital crude oil and natural gas for the nation's economy, significant employment in Alaska and in the Lower 48 from production operations and equipment supply, hundreds of millions of dollars of annual state and federal tax and royalty income, as well as a reduction in the outflow of funds for the purchase of imported crude oil.

During this year US Secretary of Energy Bill Richardson has repeatedly been on his hands and knees before the Arab OPEC producers to beg for production increases of initially 200,000 BOPD and then 800,000 BOPD. The current supply/demand balance is so precarious now, that even the threat of a storm in the Gulf of Mexico causes oil and gas prices to shoot up momentarily. An incremental 1 million barrels of oil per day from ANWR for a sustained period of at least 10 years would make a huge difference in the supply side equation.

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