[House Document 110-149]
[From the U.S. Government Publishing Office]
110th Congress, 2d Session - - - - - - - - - - - - House Document 110-149
CONTINUED PRODUCTION OF THE NAVAL PETROLEUM RESERVES BEYOND APRIL 5,
2009
__________
MESSAGE
from
THEPRESIDENTOFTHEUNITEDSTATES
transmitting
NOTIFICATION OF HIS DECISION TO EXTEND THE PERIOD OF PRODUCTION OF THE
NAVAL PETROLEUM RESERVES FOR A PERIOD OF THREE YEARS FROM APRIL 5,
2009, THE EXPIRATION DATE OF THE CURRENTLY AUTHORIZED PERIOD OF
PRODUCTION, PURSUANT TO 10 U.S.C. 7422(c)(2)(B)
October 3, 2008.--Message and accompanying papers referred to the
Committee on Armed Services and ordered to be printed
To the Congress of the United States:
Consistent with section 7422(c)(2) of title 10, United
States Code, I am informing you of my decision to extend the
period of production of the Naval Petroleum Reserves for a
period of 3 years from April 5, 2009, the expiration date of
the currently authorized period of production.
Attached is a copy of the report investigating continued
production of the Reserves, consistent with section
7422(c)(2)(B) of title 10. In light of the findings contained
in the report, I certify that continued production from the
Naval Petroleum Reserves is in the national interest.
George W. Bush.
The White House, October 2, 2008.
Continued Production of the Naval Petroleum Reserves Beyond April 5,
2009
background
The Naval Petroleum Reserves Production Act of 1976 (Pub.
L. 94-258) directed that the Naval Petroleum Reserves be
developed and produced at their maximum efficient rates for an
initial 6-year period beginning in April 1976. Pub. L. 94-258
authorizes the President to extend production in increments of
up to three years provided that he first requires an
investigation of the necessity for continued production; that
he submits to the Congress, at least 180 days prior to the
expiration of the current production period, a copy of the
report on the investigation, along with a Presidential
certification that continued production is in the national
interest; and that neither House of Congress adopts a
resolution, within 90 days of receiving the report and
certification, disapproving further production.
President Reagan exercised his authority to continue
production on three occasions; President George H. W. Bush
exercised his authority once; President Clinton, three times;
and President George W. Bush, twice, in 2002 and most recently
in 2005. As a result, production from the Reserves has been
continuously authorized since 1976 and is currently authorized
through April 5, 2009.
Under Pub. L. 94-258 the President may:
Continue production at the maximum efficient
rate for up to three years beyond April 5, 2009, or
Shut in production at a level that would
protect the reservoirs from ultimately losing oil
reserves, perhaps indefinitely or until a national
defense emergency required activation of the Reserves.
This report addresses the continuation of production
operations at Naval Petroleum Reserve No. 3 (NPR-3, Teapot
Dome) a small, mature stripper field located near Casper,
Wyoming. NPR-3 is the only remaining Naval Petroleum Reserve
administered by the Department of Energy under the Naval
Petroleum Reserves Production Act of 1976.\1\ The Strom
Thurmond National Defense Authorization Act for Fiscal Year
1999, Pub. L. 105-261, authorizes DOE to dispose of NPR-3 by
sale, lease, or transfer to another Federal agency, after
abandoning oil and gas operations in accordance with commercial
operating practices.
---------------------------------------------------------------------------
\1\The Department of Energy (DOE) divested its interest in Naval
Petroleum Reserve No. 1 (NPR-1, Elk Hills, in Kern County, California)
in 1997. In addition, section 331 of the Energy Policy Act of 2005
transferred administrative jurisdiction and control over all public
domain lands in Naval Petroleum Reserve No. 2 (NPR-2, Buena Vista
Hills, in Kern County, California) (with certain limited exceptions)
from DOE to the Department of the Interior for management in accordance
with laws governing management of the public lands. Therefore,
continued production from NPR-1 and NPR-2 is not analyzed in this
report.
---------------------------------------------------------------------------
CONTINUED PRODUCTION OF NPR-3
Economics and assumptions
NPR-3 is a mature crude oil stripper field (i.e.,
production averages under 10 barrels per day per well). It is
nearing the end of its economic life (the time during which
revenues from the sale of produced oil exceed the costs of
production to yield a positive net cash flow). Estimated
average production from all wells during FY 2008 is projected
to be 230 barrels of oil per day (BOPD).
With a projected average crude oil sales price of $95.79
per barrel, FY 2008 revenues from the sale of the produced oil
would exceed $8.0 million. The crude oil sale price for June
2008 exceeded $120 per barrel, thereby making the projected
revenue stream somewhat conservative. In FY 2008, direct and
overhead operational costs will be about $5.0 million, thereby
resulting in estimated net revenues to the U.S. Treasury of
$3.0 million.
NPR-3 will generate revenues that exceed the operational
costs through the period of this report and for several years
beyond. The primary assumptions of this forecast are:
Straight-line funding consistent with the
2009 budget request, which allows production of about
60 percent of the economically producible wells at NPR-
3;
The average sales price for crude oil for FY
2009 is equal to the average projected price for FY
2008, estimated to be $95.79 per barrel. Projected oil
prices for FY 2010 and beyond are adjusted per the
Energy Information Administration (EIA) crude oil price
forecast found in its FY 2008 Annual Energy Outlook;
No capital investment projects are
undertaken;
Overhead is, allocated between the Rocky
Mountain Oilfield Testing Center (RMOTC), production
operations, and environmental restoration proportional
to costs, consistent with standard accounting
practices;
An annual production decline rate of 11%
throughout the projection period with the exception of
FY 2010 in which there will be no decline from FY 2009
as a result of wells which had been temporarily been
shut-in being returned to production. Beginning in FY
2011, the decline rate will return to 11%, which is
based on recent production history from 2004 to the
present; and
All costs are in current year dollars.
Profitable operations are projected to continue through at
least FY 2012. Cash flow projections for continued operations
of NPR-3 for the four fiscal years which encompass the three-
year continued production period that is the focus of this
report indicate that profits from the oil production will
average $1.3 million per year.
The cash flow calculation for NPR-3 reflects an allocation
of overhead costs proportional to direct operating costs. The
other activities supported by NPR-3 overhead are environmental
restoration and RMOTC. Some overhead costs will shift between
production operations, environmental restoration, and testing
as the level of effort shifts between these programs.
Co-located at NPR-3, and utilizing the same production and
processing facilities, is RMOTC, a program initiated by DOE in
1994. Conducted largely in cooperation with private industry
and academic institutions through cost-shared projects, RMOTC
provides for the development and demonstration of enhanced oil
recovery techniques, production tools and processes, and
environmental compliance technologies that can be transferred
to and utilized by the domestic oil and gas industry. An
additional benefit to NPR-3 is that testing successful
technologies provides increased production and reduced
operating costs directly to NPR-3, thus positively impacting
the economic performance of the field.
Impacts
While the revenues from production operations at NPR-3 are
not significant in the context of the overall federal budget,
crude oil sales nonetheless provide income to the U.S.
Treasury. Discontinuing production at NPR-3 would result in the
loss of revenue from oil sales. Similarly, discontinuation
would accelerate the government's cost obligations associated
with the abandonment, restoration, and reclamation of the field
which are estimated at $112.7 million over a 6.5 year period to
comply with state and federal regulations. However,
discontinuing production and accelerating environmental
restoration at NPR-3 would accelerate realization of
environmental benefits.
Given the nature of its crude oil reservoirs, production at
NPR-3 is unlikely to resume if its wells are plugged and
abandoned and the field restored. Environmental regulations
require wells that are shut-in for more than a short, fixed
amount of time must be permanently abandoned. At that point,
the reserves can be recovered only through drilling new wells.
Drilling new wells or re-drilling cemented wells in a stripper
oilfield is uneconomic for the foreseeable future. Once shut-
in, the field would remain closed, and more than 400,000 of
barrels of economically recoverable oil will become much less
economic. Closing the field also significantly increases the
cost to produce some of NPR-3's remaining 200 million barrels
of presently non-recoverable oil resources. The amount of this
resource that could be economically recovered either before or
after shut-in varies as the economics continue to change based
on the price of oil and the cost of recovery.
Emergency preparedness
NPR-3 provides less than 0.002 percent of daily domestic
crude oil consumption and would have no measureable effect on
mitigating supply interruptions. Although NPR-3 production
rates are so small that there is no defense value or other
national benefit in conserving the oil field for future use, it
is important in the local, state, and regional context.
CONCLUSION
Given that the revenues generated and deposited into the
U.S. Treasury exceed the cost to operate the Teapot Dome Field,
continued production of Naval Petroleum Reserve No. 3 beyond
April 5, 2009, is in the national interest.