APTD-1461
AN ANALYSIS
OF THH
REGULATORY ASPECTS
OF FUEL OIL SUPPLY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Air and Water Programs
Office of Air Quality Planning and Standards
Research Triangle Park, North Carolina 27711
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APTD-1461
AN ANALYSIS
OF THE
REGULATORY ASPECTS
OF FUEL OIL SUPPLY
by
Foster Associates, Inc.
1101 Seventeenth Street, N.W.
Washington, D. C. 20036
Contract No. 68-02-0640
EPA Project Officer: Frank Collins
Prepared for
ENVIRONMENTAL PROTECTION AGENCY
Office of Air and Water Programs
Office of Air Quality Planning and Standards
Research Triangle Park, North Carolina 27711
March 1973
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The APTD (Air Pollution Technical Data) series of reports is issued by
the Office of Air Quality Planning and Standards, Office of Air and
Water Programs, Environmental Protection Agency, to report technical
data of interest to a limited number of readers. Copies of APTD reports
are available free of charge to Federal employees, current contractors
and grantees, and non-profit organizations - as supplies permit - from
the Air Pollution Technical Information Center, Environmental Protection
Agency, Research Triangle Park, North Carolina 27711 or may be obtained,
for a nominal cost, from the National Technical Information Service,
5285 Port Royal Road, Springfield, Virginia 22151.
This report was furnished to the Environmental Protection Agency by
Foster Associates, Inc., Washington, D.C. in fulfillment of Contract
No. 68-02-0640. The contents of this report are reproduced herein
as received from the contractor. The opinions, findings, and con-
clusions expressed are those of the author and not necessarily
those of the Environmental Protection Agency. Mention of company
or product names is not to be considered as an endorsement by the
Environmental Protection Agency.
Publication No. APTD-1461
11
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TABLE OF CONTENTS
I. INTRODUCTION
II. CONCLUSIONS AND RECOMMENDATIONS, LOW SULFUR FUEL OIL II-l
III. REGULATORY BODIES AFFECTING THE SUPPLY OF OIL III-l
A. Background Information III-2
B. State Regulation III-7
1. Conservation Regulation III-8
2. Leasing Authority III-10
3. Zoning and Building Permits 111-14
C. Federal Regulation: Executive Office of the President 111-15
1. Office of Emergency Preparedness III-16
2. Oil Policy Committee III-19
3. Council of Economic Advisers III-20
4. Domestic Council III-21
5. Office of Science and Technology III-21
6. Council on Environmental Quality 111-21
7. Office of Management and Budget 111-22
8. National Security Council III-22
9. Cos of Living Council III-22
10. Office of the Special Representative for Trade
Negotiations III-25
D. Federal Regulation: Executive Departments 111-25
1. Department of Interior 111-26
2. Department of State III-31
3. Department of Defense 111-31
4. Department of Commerce 111-34
5. Department of Justice 111-36
6. Department of Treasury III-37
7. Department of Transportation III-37
E. Federal Regulation: Independent Agencies 111-38
1. Interstate Commerce'Commission 111-38
2. Export-Import Bank of the United States III-38
3. Federal Power Commission II1-38
4. Environmental Protection Agency 111-38
5. United States Tariff Commission III-39
6. Federal Maritime Commission 111-39
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TABLE OF CONTENTS
IV. MANDATORY OIL IMPORT PROGRAM IV-1
A. Origin of Mandatory Oil Import Program IV-3
B. Establishment of and Changes in Mandatory Oil
Import Program IV-8
C. Framework of Present Program IV-13
D. Treatment of Residual Fuel Oil Under MOIP IV-21
1. Sources of Residual Fuel Supply IV-22
2. MOIP Regulations Affecting Residual Fuel Oil IV-27
E. Alternatives to MOIP IV-31
V. REGULATORY MEANS OF INCREASING LOW SULFUR FUEL SUPPLY V-l
A. Supply, Demand and Price Trends for Oil in the
United States V-l
B. Analysis of Existing Regulations V-14
1. Crude Oil Supply V-15
2. Fuel Oil Supply V-16
C. Regulatory Means of Increasing Crude Oil Supply V-20
1. Increasing Domestic Crude Oil Supply V-20
2. Increasing Foreign Crude Oil Supply V-24
D. Regulatory Msans of Increasing Low Sulfur Fuel
Manufacture V-25
1. Increasing Domestic Manufacture of Low Sulfur Fuel V-25
2. Increasing Foreign Manufacture of Low Sulfur Fuel Oil V-27
E. Legislative Means of Increasing Crude and Fuel Supply V-27
VI. COST EFFECTIVENESS AND TIME REQUIREMENTS FOR ALTERNATIVE
REGULATORY STRATEGIES TO INCREASE LOW SULFUR FUEL SUPPLIES VI-1
A. Increasing Low Sulfur Fuel Oil Supply Short Term VI-1
B. Increasing Low Sulfur Fuel Oil Supply Longer Term VI-3
C. What EPA Can Do VI-5
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INDEX OF TABLES
Page
Map Coordination Districts for Petroleum Industry IV-2
Table Presidential Proclamations Creating and Modifying
Mandatory Oil Import Program IV-10
Table Summary of Oil Import Allocations Under Mandatory Oil
Import Program in Districts I-IV (1970-1972) IV-17
Table U.S. Residual Fuel Oil Supply by Sulfur Range and PAD
District, 1971 and 1972 IV-24
Table U.S. Oil Supply-Demand Balance as Projected by National
Petroleum Council V-4
Table Estimated Canadian Production Capacity and Production V-8
Map Where the Oil Is V-ll
Map 1985 U.S. Dependencey on Oil Imports V-12
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CHAPTER I - INTRODUCTION
The fundamental objective of this study is to assist the
Environmental Protection Agency in finding ways to increase the nation's
supply of pipeline quality gas and low sulfur fuel oil for stationary
utilization, by reference to government regulation which attend these
fuels.
This report deals only with the regulatory situation pertaining
to the supply of low sulfur fuel oil. The gas portion of the study was
submitted in March 1973.
In this study, Foster Associates first reviews the current
regulatory picture affecting the supply and distribution of low sulfur
fuel oil. Second, possible changes in this regulatory picture are
analyzed. Finally, alternate regulatory strategies which could bring
about increased supplies of these clean-burning fuels are appraised.
The contents of this report are current as of January 1973.
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CHAPTER II - CONCLUSIONS AND RECOMMENDATIONS, LOW SULFUR FUEL OIL
One of the most important regulatory influences on crude oil and
fuel oil supply in the United States in recent years has been MOIP
(Mandatory Oil Import Program), which, among other things, has in conjunc-
tion with state prorationing held domestic oil and most product prices
well above world levels and has guaranteed a market for at least part of
any oil discovered. Whether this has led to a really substantially greater
supply of domestic oil has been widely debated, but it is certain that
domestic supply is at least significantly greater than it would have been
without it. MOIP, obviously, has not resulted in adequate fuel oil sup-
ply right now, especially on the East Coast but also in the Middle West
and the Gulf Coast as well. MDIP is discussed in depth in Chapter IV,
page IV-L Also important has been state and federal leasing of oil
properties, which has led to very large oil discoveries in Alaska and sub-
stantial discoveries in the U.S. Gulf (.see Chapter III, Section B-2, page
111-10}. Of current importance but relatively little historical influence
is the Economic Stabilization Program (see Chapter III, Section C-9, page
111-22).
Overriding the domestic low sulfur fuel oil situation later in
the 1970Ts is the impending crisis of excessive dependence on imported
energy, especially oil. Foreign oil imports are rising rapidly, as are
foreign oil prices. The amount we will be paying for foreign oil unless
we change our course becomes very large, even in just a few years, and the
balance of payments outflow which results is enormous. Also, our dependence
on foreign oil becomes so great as to pose critical national security as
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well as supply security risks. In our view, this crisis of dependence on
foreign oil is the worst of all the energy crises we face as a nation --
balance of payments consequences alone will soon become almost intolerable.
What this crisis of dependence on foreign oil means is that
later in this decade, although not necessarily very much later, we will
have to change our course in energy and develop adequate additional
domestic supply to keep foreign dependence within bounds. Since there
is a long lag time in most measures which would achieve adequate domestic
supply, and since we have not yet changed our course, there is likely to
be a period in the late 1970's when we do not have enough domestic energy,
and cannot tolerate importing enough energy (mainly as oil) to meet pro-
jected needs. This is, in our view, what will ultimately limit low sulfur
fuel oil supply (as well as supply of all petroleum products) later in
the 1970's.
Short term (to about the end of 1975), we think the optimal
regulatory changes which would tend to increase supply of low sulfur fuel
oil are:
1. Raise domestic low sulfur fuel oil price ceiling permitted under
Phase III to encourage domestic manufacture of low sulfur fuel oil
(Phase III does not control price of imports).
2. Adopt a "bonus" and/or "drawback" plan under MOIP to encourage
domestic manufacture of low sulfur fuel oil in Districts I-IV.
3. Remove import restrictions on low sulfur fuel oil in Districts
II-V under M3IP.
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4. Offer import ticket bonuses under MOIP for newly discovered
domestic crude oil and for domestic crude oil which would otherwise be
uneconomic to produce.
Of course, the regulatory agencies involved would be the Cost
of Living Council for higher prices, and the Oil Policy Committee for the
rest.
The amount of low sulfur fuel oil which would be immediately
forthcoming with these measures is likely to be small.
The additional domestic low sulfur fuel oil generated by these
measures in a year or two may also, unfortunately, be small, though imports
into Districts II-V might become significant.
Longer term (from about 1976 on), we think the optimal regula-
tor)' changes which would tend to increase supply of low sulfur fuel oil
include all the short term measures except removing import restrictions
(item 3), plus the following:
1. Accelerate offshore leasing.
2. Limit or reduce imports of low sulfur fuel oil, but on a
specified long term phased in basis.
Accelerating federal offshore oil (and gas) property leasing will
increase crude and potential fuel oil supply, and probably at relatively
low cost compared with other domestic options.
Longer term, unfortunately, using import tickets as incentives
to increase low sulfur fuel oil manufacture and to increase crude oil
reserves may not be very successful due to the great uncertainty in the
longer term value of these tickets.
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We did not include letting crude oil prices rise substantially
under Phase III (or its successor), because this option does not appear
to be politically viable. Letting crude oil prices rise across the board,
compared to specified incentives for newly discovered oil or oil that
would not otherwise be economic, does not appear consistent with solving
the currently critical problem of inflation. A specific, controlled
increase in price of a single product such as low sulfur fuel oil which
is needed to meet pollution control objectives is not in the same
category. Given the likelihood of strong inflationary pressures in the
U.S. for the foreseeable future, it is hard at this time to see any
Administration permitting large increases in domestic crude oil prices
across the board.
Barring a large domestic crude price increase, the quantity of
low sulfur fuel oil generated longer term by all of the regulatory measures
above will likely be limited by availability of domestic crude oil, and
availability of domestic crude oil will not be much affected by these
measures. As noted above, if we do not alter our present course on
domestic oil, and this is, in our view, mainly a legislative matter, the
availability of low sulfur or any other fuel oil may be very limited
indeed later in this decade.
Optional regulatory changes are discussed in Chapter VI,
Sections A and B, with a general discussion of regulatory means of
increasing low sulfur fuel oil supply given in Chapter V.
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It is apparent that the regulatory options for increasing low
sulfur fuel oil supply are very limited. In our view, it is mainly up to
Congress to provide the incentives and the stable investment climate to
develop the domestic oil base needed to assure availability of low sulfur
fuel oil. Although legislative options were beyond the scope of this study,
this subject is discussed briefly in Chapter V, Section E, page V-27.
Nevertheless, we think EPA can make a significant contribution
to increasing low sulfur fuel oil supply long term by doing the following:
1. Encourage and support legislation now which will eventually
increase domestic oil supply. Optimal legislation from the standpoint of
both developing low sulfur fuel supply and political viability would
seem to be selective new incentives (a) to develop new or otherwise
uneconomic oil, and (b) to develop supplemental oil supply from shale
and/or coal. Selective new incentives are differentiated from across the
board incentives which would increase prices on oil already discovered.
2. Use the influence of EPA as an independent agency to publicize
the environmental tradeoffs involved in running short of low sulfur fuel
oil versus increasing our domestic oil supply.
3. Use the influence of EPA to try to achieve the goals of environ-
mentalist groups with minimal court or other delay of domestic oil projects.
4. Use the influence of EPA to tell the story of environmental con-
sequences of domestic energy measures in a balanced and level headed manner,
rather than letting the extremists and alarmists of the environmental move-
ment dominate the scene.
There is some additional discussion of these points in Chapter VI,
Section C on page VI-5.
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CHAPTER III - REGULATORY BODIES AFFECTING THE SUPPLY OF OIL
The purpose of this chapter is to identify, and briefly describe,
the role of the principal state and federal regulatory agencies which
affect the supply of oil in the United States.
The legal systems of the world as they treat oil may be
divided into two groups: (1) those in which the underground petroleum
belongs to the owner of the surface; and (2) those in which all sub-
surface minerals belong to the nation as a whole, rather than the owner
of the surface. The former is representative of the United States, while
the latter is representative of most of the oil producing nations of the
world.
This multiple individual ownership of a vital national resource
has led to a multiplicity of governmental agencies that attempt to influ-
ence policy regarding all facets of the industry. The remainder of this
chapter is a listing of the various state and federal organizations that
influence, regulate, or contribute to oil policy. It should be noted that
not all of the listed agencies choose to exercise the perogatives of their
office to the fullest extent. Moreover, many of the agencies listed are
interested in a single aspect of the total industry. Still, it is an
unwieldy number of agencies with some obvious overlapping of interests
and functions. This situation underscores the need to establish a single
policy-making body not just for petroleum but all energy-producing
resources. This is, of course, an obvious suggestion to improve our
energy situation.
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A. Background Information
Before getting further into the regulatory aspects of low
sulfur fuel oil supply, some background information may be helpful to
readers who are not familiar with the oil industry.
Oil is discovered in the ground by drilling wells, then addi-
tional wells are generally drilled to develop the discovery. Generally,
gas is discovered with oil, and is produced with it. Or, gas may be dis-
covered instead of oil. The "crude oil" from the wells moves to refin-
eries for conversion into finished products and finally moves to the
customer through gasoline service stations, etc. The movement of
petroleum and its products is by pipeline, tanker, barge, and/or truck.
The major segments of the industry are, thus, exploration, production,
refining, and marketing, and these are linked together by transportation.
In its details, the oil industry has become very complex
indeed. Its great size -- each man, woman, and child in the United States
consumes an average of more than three gallons per day of petroleum
products -- and its vital contribution to practically every segment of
all developed economies has very much entangled the industry in both
domestic and international politics.
The United States for many years was totally or nearly self-
sufficient in oil. However, in the late 1950fs, cheap foreign oil became
available in almost unlimited quantities (compared to relatively much
lower consumption at the time), and in 1959 the Mandatory Oil Import
Program (MDIP) was established to preserve the domestic industry in the
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interest of national security. This program is discussed in depth
later in this study.
We are now, as a nation, however, in the situation where domestic
production of oil has peaked out -- we have no surplus capacity, and aside
from the North Slope of Alaska, no major new source of conventional oil is
in sight. Domestic demand is, nevertheless, continuing its inexorable
rise, so our foreign dependence is skyrocketing. By 1975, we are likely
to be about 50%— dependent on foreign petroleums, and over 60%— by 1980,
barring massive new action to change this trend. It is true that the U.S.
does have options in the form of supplemental ("synthetic") oil from shale
or coal, but, again, barring massive new programs they will not contribute
much by 1980.
There are currently two problems relating to oil in domestic
refining. One is an actual shortage of physical domestic capacity, which
will riot really be upon us for perhaps a year or two, and the other is
lack of utilization of capacity already in place. The product supply
problem was felt this winter in distillate, with a very tight supply situa-
tion and some actual shortfalls in meeting needs. The reasons for lack of
utilization of available domestic capacity are several, one of which is a
temporary snortage of crude oil particularly for inland refineries.
Crude oil as it comes from the well generally contains a wide
range of components ranging from those that are gaseous at ordinary condi-
tions to black solids. Ideally, crude oil is nearly pure hydrocarbon.
I/ National Petroleum Council "U.S. Energy Outlook" December 1972, page
262, Case IV, with 1980 adjusted slightly by Foster Associates.
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However, most crude oil also contains impurities that must be partly or
totally removed before use. Particularly important is sulfur, which if
not removed will pollute the atmosphere when the oil is finally burned.
Some crudes, such as much of Venezuelan oil, have high metals content,
which makes sulfur removal much more difficult. Typically, crude oils
contain nitrogen and other chemically combined impurities as well as
sulfur. Also, crude oils generally are physically contaminated with
water, salt, and sediment which must be removed in refining. Crude oil
from different areas varies widely in composition and impurities content.
Crude oil, its components, and its products are generally
classified according to their range of boiling temperature. Products such
as gasoline, with lower boiling ranges are generally described as "light,"
while high boiling range materials such as residual fuel oil are referred
to as "heavy." Light products are "clean," a residual oil, where the term
residual means that it has not been distilled, is generally "dirty."
Heavy products are generally more viscous than light, and may be solid at
ordinary conditions.
The term "fuel oil" generally includes both "distillate" and
"residual" fuel oils. Distillate, as the term is commonly used, is a clean,
distilled oil that is heavier than gasoline. It is also called No. 2 oil,
and generally includes both home heating oil and diesel fuel. Distillates
are typically free flowing liquids except in extreme cold conditions.
Residual fuel oil, which is often called No. 6 oil, contains undistilled
"bottoms," and is generally a heavy, viscous, dirty product that ordinarily
has to be heated to be used. Residual fuel oil is used for such things as
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electric power generation, large industrial boilers, ships bunkers, etc.
The sulfur content of distillate is generally quite low. If it is not, it
is relatively simple to process it to a low sulfur content. On the other
hand, sulfur and metals in crude oil tend to concentrate in residual fuel.
Therefore, a high sulfur crude oil will generally yield an even higher
sulfur residual fuel oil unless a special desulfurizing step is added to
refining. And, metals also concentrate in residual fuel, so a high
metals, high-sulfur crude oil will be particularly costly to refine into
low sulfur residual fuel oil because metals interfere with the desulfuriza-
tion step.
Distillate is generally considered a premium product vs. residual
oil -- distillate can often be used in place of residual but the reverse
is not the case. The term "gas-oil" generally refers to a refinery inter-
mediate --a semi-refined product that is heavier than gasoline.
The amount of any product that can be made from a given crude
oil depends on refining facilities available. The relative value of the
products will determine the actual product mix at a refinery. Generally,
the more sophisticated refineries typical of the United States versus the
rest of the world offer more flexibility in product mix. However, there
is not total flexibility in product mix -- usually crude oil contains
light (more volatile) components not suitable for fuel oil but usable for
gasoline or other products. Therefore, most refineries have to make some
other products besides fuel oil. There is generally not a lot of flexi-
bility in the amount of distillate than can be made in a refinery, even
with substantial changes in processing. On the other hand, residual fuel
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oil capability is more flexible, and processing can be varied to vary
residual yield over a wide range. This is in large part because residual
specifications are less stringent, and if one wants to put more valuable
components into residual fuel it can be done within broad limits. In fact,
with some modifications of storage and facilities, it is possible to burn
whole crude oil in installations designed for residual fuel oil, and this
is practiced in some parts of the world, especially Japan.
The U.S. oil industry consists of the following major segments:
1. The large international oil companies.
2. The large domestic oil companies.
3. Independent producers.
4. Independent refiners.
5. Independent distributors and marketers.
The first two groups together account for most of the domestic refining,
marketing, and transportation operations in the U.S. and account for
most of the producing. Independent producers sell about one-third
of tae oil produced in the U.S. Domestic gasoline marketing is
dominanted by the large companies in the sense that they own most
of the gasoline stations and use their brand names. The degree of
integration of functions varies for the large companies, but most
are substantially integrated.
The oil industry is also characterized by massive investment
requirements in all phases of the business. It is also an industry of
long lead times -- the time between the initiation of an exploration pro-
gram and the first oil coming to market is generally in the two to five
year range, and for engineering efficiency reasons, it generally takes in
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the range of 10 to 25 years or even longer to produce the recoverable oil-' in a
given field. The lead times for building refineries, pipelines and tankers
are generally measured in the one to five year range, depending mainly on
the size of the project. The consequence is that it is not easy to change
direction quickly in this business. We are now realizing the consequences
of past actions, and we will in the rest of this decade and beyond reap the
consequences of action or inaction now.
Federal and local government have an unusually large influence on
the oil industry. The federal government, among other tnings, regulates
oil imports through MOIP, gives special tax treatment to oil producers
(depletion allowance and intangible writeoff), regulates interstate trans-
portation of oil, and controls leasing federal property. State governments,
particularly in Texas and Louisiana, influence oil production through con-
servation and "market demand pro-rationing" laws. The latter has been a
subject of much controversy in the past, but has now become academic
because these states are operating at essentially 1001 of productive
capacity.
B. State Regulation
The supply of oil is affected by three types of state control:
conservation regulations, the leasing of lands, and local ordinances
regarding land zoning and building permits. At the present time, neither
of the first two types of state regulation can be said to hamper supply.
However, to the extent which public opposition in coastal states has been
able to block leasing, drilling, construction of deepwater terminals and
_!/ Generally, the maximum amount of oil that can be economically recovered
in a given field amounts to only in the order of one-third or so of all
the oil in the ground.
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refineries on environmental grounds, intrastate regulation can be said to
affect supply.
1. Conservation Regulation
Virtually all producing states exercise a variety of conservation
regulations aimed at preventing the physical waste of oil and gas. Another
purpose is to protect the correlative rights of property owners. The regu-
lations relate, among other things, to well completion techniques and
equipment; spacing of wells; limitation of production to reasonable market
demand; allocation of allowable production to pools and among wells in a
pool; secondary recovery operations; and protection against land and water
pollution as a result of oil and gas drilling and production.
State conservation laws date from 1878 when Pennsylvania passed
the first statute dealing with the casing and plugging of individual wells.
More comprehensive regulation developed in the early 1930's when excess
supply became a chronic problem in the major oil producing states and
crude prices dropped sharply. Large new discoveries, especially in
Oklahoma and Texas, aggravated the marketing chaos. For example, following
the huge oil discovery in East Texas in 1930, the price of oil dropped from
$1.30/bbl. to 10
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recovery of oil that would go with it. In Texas, for example, the con-
trolling agency is the Texas Railroad Commission which meets monthly for
the purpose of establishing the allowable number of producing days for the
following month. This prorationing of productive capacity is really a
quota system for the producer based on short range market demand estimates
of the industry. Prorationing measures were also adopted in other pro-
ducing states with capacity in excess of requirements.
However, prorationing is not a factor in the current fuel
shortage because excess productive capacity no longer exists. In the two
principal producing states, Texas and Louisiana, monthly allowable produc-
tion of oil has been authorized at maximum efficient producing rates— of
the wells for several months (with the exception of a few fields held to
lower rates because of reservoir problems, the need to avoid flaring of
associated gas or certain other reasons). Three other states (Oklahoma,
Kansas and New Mexico) have been producing essentially at 1001 -- or more
— of maximum efficient well rates for two or more years.
The need for a better understanding of the causes of waste, and
a knowledge of the effective legal remedies in which all oil producing
states should be interested, was also a prime factor leading to the creation
of the Interstate Oil Compact Commission. Established by Congress in 1935
and ratified initially by only six states, the IOCC is now supported by 29
states with two additional states having associate membership. Representa-
tives from the Federal Power Commission and the Departments of Defense,
I/ The maximum rate at which oil can be produced without excessive
decline or loss of reservoir energy. If rate is exceeded, lower
ultimate recovery of oil will result.
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Interior and Justice are welcomed as observers. The goal of the IOCC is
"to conserve oil and gas by the prevention of physical waste thereof,
from any cause."—
The IOCC is not a regulatory body and must rely upon persuasion
as a means for accomplishing its purpose. This is done by developing and
disseminating information relating to effective conservation methods.
Meetings, open to the public, are held twice yearly during which conserva-
tion problems are discussed in special reports and studies prepared by
various standing and special committees. These materials are then published
and made available for all who are interested in the conservation of oil
and gas.
2. Leasing Authority
Producing states all have authority to lease state lands. In
general, leases are awarded at public auction to parties offering the
highest cash bonus, and provide for a fixed royalty to the state on all
oil and gas produced.
In some states, royalties from production on state lands are a
significant source of state revenue. In Texas, for example, certain state
agencies own substantial producing acreage, and the income is used to
support the educational system of the state. The same is true in New
Mexico which owns about 9 million acres of lands.
The State of Alaska represents a somewhat special situation.
Among other things, the amount of state-owned lands in known petroleum
I/ Statement from original Compact to Conserve Oil and Gas in 1935.
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producing basins is many times larger than that of any other state. In
addition to offshore lands covered by the Submerged Lands Act of 1953,
Alaska was granted the right to select about 103 million onshore acres of
land from the Federal Domain by the Alaska Statehood Act of 1959. During
the early and mid-1960's, Alaska selected about 28 million acres, including
that portion of the Arctic Slope where the Prudhoe Bay Field was subsequently
discovered in 1968. Selection of the remaining 75 million acres is presently
still in abeyance due to a freeze imposed by the Federal Government in 1966
on further cessions of land to the state (and further leasing of federal
lands) pending settlement of Alaskan native land claims.
In September 1969, the State of Alaska held the largest lease
sale in U.S. history (until the last federal lease sale in the Gulf of
Mexico in December 1972), receiving nearly $900 million in bonus money for
450,000 acres in the Prudhoe Bay area. A large part of this acreage had
previously been offered for sale by Alaska in 1964 and 1965 -- prior to the
Atlantic Richfield and Humble discovery in 1968 -- but received no bids at
that time. A drawback to immediate further leasing of North Slope acreage
is the continuing uncertainty over the proposed trans-Alaskan pipeline and
the lack of market outlets until that or some other pipeline is built.
In general, a basic objective of the states in the past has been
to lease lands in order to maximize revenues. Except perhaps for local
situations, there has been little pressure to restrict leasing and develop-
ment of potential oil and gas lands. Recently, however, environmental con-
siderations -- the threat of oil spills in particular -- have caused state
legislatures in various West and East Coast states to seek to halt or ban
leasing and drilling activities on certain offshore lands.
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On the West Coast, environmental concern in California dates
back to 1955 when, as a result of conservationist pressure, the state
created an offshore marine sanctuary out to the three-mile limit and for
16 miles along the Santa Barbara coast.— However, in the ensuing years,
California leased nearly all state offshore lands outside the sanctuary
between the Ventura County line and Point Conception, as well as other
submerged lands off its coast.
In early 1969, after a major oil spill on a federal lease in the
Santa Barbara Channel, the State of California declared a moratorium on
well drilling in all waters under its jurisdiction. Several operators have
applied in recent months to conduct further drilling on state leases in an
attempt to end the ban. In support, they stress major improvements since
1969 in techniques and equipment to contain and clean up any oil spill
which might occur, as well as a greatly improved capability to drill in
offshore areas with little risk of accident. Given the development of
these techniques, they contend that further prohibition of offshore
drilling is indefensible, especially in view of California's critical
need for oil and gas supplies. Nevertheless, the State Lands Commission
- while permitting some sidetracks (wells bottomed less than 100 feet
from the original hole) and some redrills (wells bottomed more than 100
feet from the original hole) -- has thus far granted permits for the
drilling of only two new wells (both infill development wells).
I/ Cunningham-Shell Tideland Act, Section 6871.2, California Public
Resources Code (1955).
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Moreover, in the City and County of Los Angeles where large oil
and gas pools (both offshore and onshore) are located, public opposition
to recent applications for drilling permits in coastal areas has been
intense. For example, it took many months of effort before Occidental
Petroleum finally won permission from the Los Angeles City Council in
October 1972 to drill a well in the Pacific Palisades area near the
coastline -- this permission having first been denied in an action
reversed by Mayor Yorty.
On the East Coast, similar pressures are now building up against
offshore leasing and drilling. For example, in New York, several bills
were introduced in the State Legislature during the past year to ban oil
and gas well drilling in the Atlantic Ocean off Long Island and/or adopt
other measures aimed at environmental protection of offshore lands.—
Two of these bills were passed last spring by both houses of the New York
Legislature but subsequently vetoed by Governor Nelson Rockefeller. One bill
would have prohibited the leasing of any offshore lands for oil or gas
extraction within three miles of the New York coastline (or such other
boundary as may be ultimately determined to be subject to state jurisdiction).
In vetoing this bill, Governor Rockefeller stated that the nation's growing
energy needs may make it desirable to permit drilling off New York shores at
I/ From a geological standpoint, the sedimentary structures of greatest
interest in the Atlantic offshore area are substantially seaward of
the three-mile limit generally applied to state lands. However,
the Original Thirteen States presently have a suit pending in the
U.S. Supreme Court before a Special Master claiming that, under their
original charters from England, their marine boundaries extend as far
as 100-200 miles from their coastline.
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some future time, and that the State Commissioner of Environmental Conserva-
tion has adequate powers to insure that any such drilling will be consistent
with the need to protect the state's marine sanctuaries and recreational
areas.
The second bill passed by the New York Legislature authorized the
adoption of regulations for the protection of marine fishery resources within
a distance of 200 miles from the New York coastline or to a depth of 100
fathoms, whichever is the greater. This bill was vetoed by the Governor in
view of current litigation concerning the reach of national and state juris-
diction over territorial waters.
As indicated in another section, environmental opposition to
federal sales of offshore oil and gas lease sales has been a cause of delay
in petroleum development in the past few years. Opposition of the more
vocal conservationist groups has been widely publicized. The above-
described recent experiences in California and New York illustrate that,
on a state level as well, public opposition on environmental grounds poses
a significant barrier to the development of offshore hydrocarbon supplies.
3. Zoning and Building Permits
State and local officials have the right to impose restrictions
on private property, and these restrictions are accomplished through local
zoning ordinances. Generally, areas are divided into residential, commer-
cial and industrial zones. In recent years, local courts have upheld
zoning restrictions for reasons of public health, safety, general welfare
or aesthetic purposes.
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Port and terminal facilities, and frequently also refining
facilities (refineries require sizeable amounts of fresh water during
processing), are located on or near water. The dearth of available
waterfront property, inland and coastal, has been well documented.
From a siting standpoint, this problem has been compounded by attacks
on the industry in the public news media emphasizing only the polluting
aspects of oil. The net result has been a delay in the construction of
new facilities. In the face of protests from the environmentally con-
cerned, local officials have yielded to protests and refused the neces-
sary zoning and/or building permits for energy producing facilities.
Significantly, the State of Delaware in 1971 passed a law prohibiting
the building of any new refinery or superport within that state.
C. Federal Regulation: Executive Office of the President
On the federal level, oil supply is influenced by several
councils or other bodies within the Executive Office of the President,
by at least seven Executive Departments and by a number of independent
agencies. The more important of the various organizations, together with
a rough outline of the organizational structure, are depicted on the chart
following this page.
Within the Executive Office of the President, the Office of
Emergency Preparedness and, more recently, the Oil Policy Committee have a
major role in policy decisions which can affect the supply of oil and oil
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products. However, petroleum supply is also influenced in varying degrees
by the activities of several other offices as well.—
II
1. Office of Emergency Preparedness—
The Office of Emergency Preparedness (OEP) is the successor to
the Office of Defense Mobilization (ODM) which was created by the Defense
Production Act of 1950. Under that Act, OEP was given responsibility for
development of emergency plans; for coordination of military, industrial
and civilian mobilization, including programs and policies for the effective
use of the nation's material and industrial resources in the time of war;
and for the direction of short supplies to meet essential national defense
needs, including the allocation of production and distribution facilities.
Various trade acts in the 1950's provided that the Director of OEP,
either on the request of another agency or on his own motion, advise the
President whenever, in his opinion, an article was being imported into the
United States in such quantities or under such circumstances as to threaten
I/ The description in the following pages of organizations within the
~~ Executive Office of the President affecting the supply of oil is
applicable at the date of submission of this report (end of January
1973). However, the lineup of organizations is now subject to change
as a result of a Reorganization Plan submitted by President Nixon to
Congress on January 26, 1973. Among other things, the Reorganization
Plan -- which becomes effective July 1, 1973 unless overruled by
either the House or Senate -- would abolish the Office of Emergency
Preparedness and the Office of Science and Technology.
2/ Under the Reorganization Plan submitted by the President to Congress
~~ on January 26, 1973, the Office of Emergency Preparedness would be
abolished. Its activities relating to investigation of oil imports
which might impair national security would be transferred to the
Department of Treasury, while other functions would be shifted to
the General Services Administration and the Department of Housing
and Urban Development.
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to impair the national security -- with the President thereafter authorized
to adjust imports or take other remedial measures deemed necessary to remove
this threat.— Acting pursuant to Section 8 of the Trade Agreement Extension
Act of 1958, the OEP Director reported to the President on February 27, 1959
as follows:
"Finally, it is apparent to me that in the current world
over-supply situation, excessive quantities of low-priced
oils from offshore sources are seeking a U.S. market. In
such a situation, without control of production in rela-
tion to demand by the countries of origin, it is to be
expected that there would be substantial economic incen-
tives to increase imports into the United States.
"The consequences would continue to upset a reasonable
balance between imports and domestic production, with
deleterious effect upon adequate exploration and the
development of additional reserves which can be generated
by a healthy domestic production industry.
"Accordingly, as a result of my investigation pursuant to
Section 8 of the Trade Agreement Extension Act of 1958,
I advise you of my determination that crude oil and principal
crude oil derivatives and products are being imported in
such quantities and under such circumstances as to threaten
to impair the national security." 2/ 3/
The above finding by OEP preceded Presidential Proclamation
3279, dated March 10, 1959, which established the Mandatory Oil Import
\l This authority is currently embodied in Section 232 of the Trade
Expansion Act of 1962. Pursuant to this Section, the Director of
OEP -- upon a finding of threat to the national security and absent
a contrary determination by the President -- may himself take action
to adjust imports. OEP and the President are directed to consider,
among other things, domestic production needed to meet projected
national defense requirements, the capacity of domestic industries
to meet such requirements, the close relation of the nation's
economic welfare to national security, and the impact of foreign com-
petition on the economic welfare of individual domestic industries.
2/ OEP report to the President, dated February 27, 1959.
3_/ Oil is the only commodity as to which OEP has ever made a finding that
imports threatened to impair the national security.
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Program. As part of that Proclamation, the Director of OEP was directed
to maintain a constant surveillance of imports of petroleum and its
primary derivatives in respect to national security and to inform the
President of any circumstance which, in the Director's opinion, might
indicate the need for further Presidential action. Such surveillance
was to include a determination of whether any increases in the prices of
crude oil or its products occurring thereafter were necessary to accom-
plish the national security objectives of the Proclamation.
In addition to this surveillance function as to the national
security aspects of oil imports, the Director of OEP presently acts as
Chairman of two important inter-agency committees: the Oil Policy
Committee and the Joint Board on Fuel Supply and Fuel Transport. The
Oil Policy Committee was established by the President on February 20,
1970 -- following a report by a Cabinet Task Force Committee created
the previous year to study the oil import program --to provide overall
policy direction, coordination and surveillance of the oil import program.
The purpose of the Joint Board on Fuel Supply and Fuel Transport
is to identify emergency problems in fuel supply and fuel transport and to
coordinate prompt and appropriate remedial action by federal agencies.
The members of this Board are the Secretaries of Interior and Commerce,
and the Chairmen of the Council of Economic Advisers, Council on Environ-
mental Quality, Interstate Commerce Committee, and Federal Power Commission.
The Board is also assisted by representatives of agencies concerned with a
particular problem under consideration. In addition, OEP has established
Field Boards to help implement the decisions of the Joint Board, and to
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assist with fuel and energy problems at the local level. The Field
Boards are composed of field representatives from selected departments
and agencies, and the OEP Regional Office Director who coordinates the
activities of the federal and state governments and works with industry
representatives during fuel, power and other resource emergencies.
The Director of OEP is also a member of the Domestic Council
Subcommittee on the National Energy Situation -- formed on July 20, 1970
to develop possible federal programs and/or activities for alleviating
fuel shortages and insuring an adequate fuel supply for the next five
years.
Recently, the OEP has established an Oil and Energy Working
Group, which makes independent studies on oils and energy problems for
the Director of OEP. This is a continuing group which may, from time to
time, ask assistance from other departments and agencies.
Finally, the OEP has instituted a program for obtaining pricing
information from residual fuel oil importers on a monthly basis. This
information is then released to the public.
2. Oil Policy Committee
As noted, the Oil Policy Committee was established shortly after
release of the final report by the Cabinet Task Force on Oil Import Control
in February 1970. The Committee is charged with the policy direction,
coordination and surveillance of the oil import program. At present, it
is the principal oil policy formulation body in the Federal Government.
While responsibility for the administration of the oil import program
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remains with the Secretary of the Interior, all Interior regulations
dealing with oil imports must be cleared with the OPC.
Members of the Oil Policy Committee include the Secretaries of
Interior, Defense, State, Commerce and Treasury, the Attorney General, the
Chairman of the Council of Economic Advisers, and the Director of OEP. The
last acts as Chairman.— Normally, observers sit in the Committee from the
White House and the Office of Management and Budget. The interrelation-
ships of the Oil Policy Committee to the Domestic Council (discussed later)
is substantial, largely due to overlapping membership.
The Committee has met a few times a month since its formation.
However, a working group chaired by the OEP representatives and including
members of all principal participants in the OEP meets continuously and,
from time to time, sets up sub-groups to work on specific oil problems
such as low sulfur residual fuel oil, No. 2 fuel oil, petrochemicals, etc.
The working group performs all the detail work in conjunction with oil
import problems. It obtains assistance from other agencies and bureaus as
needed.
3. Council of Economic Advisers
The Council of Economic Advisers consists of three members appointed
by the President. The Chairman of this Council also chairs the Domestic
Council's Subcommittee on the National Energy Situation and serves as a
member of the Oil Policy Committee.
I/ Under the Reorganization Plan proposed by President Nixon on
January 26, 1973, the Deputy Secretary of the Treasury would
replace the Director of OEP as Chairman of the Oil Policy Committee.
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4. Domestic Council
The Domestic Council is composed of the President, Vice President,
Attorney General, the Secretaries of Agriculture, Commerce, Health, Education
and Welfare, Housing and Urban Development, Interior, Labor, Transportation
and Treasury, the Director of the Office of Management and Budget, the
Chairman of the Council of Economic Advisers, and such other persons as the
President may designate. This Council enables the President to respond
quickly to urgent domestic problems. The Council may form ad hoc committees
with agency experts and other departmental staff support.
5. Office of Science and Technology-^
The purpose of this office is to provide the President with advice
and assistance in the development of policies and coordination of programs
to assure the effective use of science and technology in the interest of
national security and the general welfare. OST includes an Energy Policy
Staff whose function is to study means of coordinating the government-wide
energy matters.
6. Council on Environmental Quality
The Council, consisting of three members appointed by the President,
formulates and coordinates government activities which promote the improvement
of the quality of the environment. It influences petroleum policy in that the
manufacture and transportation of petroleum products affect the environment.
V The Office of Science and Technology would be abolished under the
Reorganization Plan submitted by President Nixon on January 26, 1973.
The primary role for coordinating governmental science policy would go
to the National Science Foundation.
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7. Office of Management and Budget
The Office of Management and Budget controls the funds for all
agencies. It also participates as an observer in oil policy formulation
through the Oil Policy Committee. Finally, as part of its function to
coordinate federal statistical services, OMB approves all statistical and
reporting forms relating to administrative record keeping for government
programs concerned with oil.
8. National Security Council
The National Security Council, consisting of the President, Vice
President, Secretaries of State and Defense, and the Director of OEP, is
primarily concerned with domestic, foreign and military policies that
relate to the national security. In this regard, the Council reviews
studies assessing the ability of the nation to provide for gas and
petroleum needs in time of national emergency. It also considers the
petroleum aspects of all governmental policies related to the national
security.
9. Cost of Living Council
The Cost of Living Council (COLC) was first established by
Executive Order 11615, issued August 15, 1971, which imposed a 90-day
freeze on prices, rents, wages and salaries. The COLC was charged with
primary responsibility for administering the price-wage freeze program.—
I/ The legal authority for imposition of this initial program -- plus sub-
sequent phases thereof -- was the Economic Stabilization Act of 1970
which granted the President authority to issue and enforce regulations
over prices, wages and rents to control inflation. The Act, originally
scheduled to expire on April 30, 1972, was extended by Congress for one
year to April 30, 1973. The President has recently requested another
one-year extension to April 30, 1974.
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The 90-day freeze (which ended November 13, 1971) was followed
by Phase II of the Economic Stabilization Program which imposed mandatory
price (and wage) controls on most sectors of the economy. In Phase II,
the COLC was given responsibility for establishing overall goals and pro-
viding policy guidance. However, the formulation and implementation of
specific criteria to govern price adjustments in particular industries
was delegated to the Price Commission. The Price Commission, created by
Executive Order 11627 of October 15, 1971, consisted of seven public mem-
bers appointed by the President on October 22, 1971. At the same time, a
15-member Pay Board was established to develop standards for wage and
salary increases.
Phase II of the Economic Stabilization Program was replaced by
Phase III on January 11, 1973. As of that date, the President (Executive
Order 11695) terminated the mandatory price-wage controls in effect in
Phase II for all but a few sectors of the economy and substituted instead
a "self-administering" system of price restraints based on voluntary com-
pliance. The COLC was directed to oversee this program and given authority
to establish mandatory standards if considered necessary to assure that
future actions in a particular industry are consistent with the national
goal of reducing the rate of inflation to 2.51 or less in 1973. Both the
Price Commission and Pay Board were abolished.
Under the latest Executive Order, the COLC presently consists of
--in addition to the Secretary of the Treasury who serves as Chairman --
the Secretaries of Agriculture, Commerce, Labor, Health, Education and
Welfare and Housing and Urban Development, the Director of the Office of
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Management and Budget, the Chairman of the Council of Economic Advisers,
the Director of OEP, the Special Assistant to the President for Consumer
Affairs, and such other members as the President may designate from time
to time. The Director of the COLC, appointed by the President, is also a
member of the Council.
During the approximately 14 months of the Phase II period, the
prices of crude oil and major petroleum products -- such as gasoline, No. 2
fuel oil, and residual fuel oil -- were effectively held by the Price
Commission to their levels during August of 1971. These restrictions are
considered to have had a considerable impact on petroleum supply, particu-
larly the supply of No. 2 fuel oil which, in the particular base period,
was priced fairly low relative to gasoline and other refinery products.
Accordingly, refineries were reluctant to increase their distillate yields
without an increase in the price of No. 2 fuel oil. This is a major
reason ascribed for the development of No. 2 fuel oil shortages in the
current winter.
The effect of Phase III of the Economic Stabilization Program
on heating oil and other petroleum prices is not yet clear. The general
price standard prescribed by the Cost of Living Council is that prices
may be increased after January 10, 1973 to reflect increased costs, so
long as no increase results in the seller's base period profit margin.
Alternatively, a seller may increase prices by a weighted annual average
of 1.51 over those in effect on January 10, 1973 to reflect increased costs
without limitation as to profit margin. A further provision states that:
"Adjustments in excess of the [above] standard may be made only as necessary
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for efficient allocation of resources or to maintain adequate levels of
supply."
This last provision -- allowing for adjustments "as necessary
for efficient allocation of resources or to maintain adequate levels of
supply" -- was recently interpreted by George Lincoln, outgoing Director
of the OEP, as lifting price controls on No. 2 fuel oil. Several com-
panies have recently announced price increases for this product,
apparently taking a similar view. However, no opinion has yet been
expressed by the COLC on this matter.
Also, the effect of the new voluntary price control program on
crude oil and other petroleum prices is unclear at this time.
10. Office of the Special Representative for Trade Negotiations
This office consists of three persons with ambassadorial rank
and a professional staff. It is responsible for directing the U.S. parti-
cipation in, and supervision of, negotiations and agreements with other
countries. The tariff on oil and oil products is negotiated by this office.
D. Federal Regulation: Executive Departments
At least seven departments within the Executive Branch affect
some aspect of petroleum supply. Some -- such as Interior, State, Defense,
and Commerce -- obviously have a greater impact than others. Nevertheless,
others can and do play a substantial role. The description below—
I/ No attempt has been made to identify every office within every Depart-
ment with some function pertaining to oil.
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illustrates the diffusion of responsibility within the present Federal
Government structure for formulation and administration of policies and
activities relating to the supply of oil.
1. Department of Interior
The Interior Department exerts a major impact on oil supply through
its administration of the Mandatory Oil Import Program, leasing and adminis-
tration of public lands, and through a variety of other programs as well.
a. The Office of Oil and Gas administers the oil import program.
In so doing, it issues import licenses annually to eligible companies,
issues amendments as appropriate to the Oil Import Regulations, and con-
ducts a surveillance and field inspection program to make sure that com-
panies are complying with the MOIP. In addition, OOG publishes monthly
reports showing volume of imports by type (crude-unfinished oil, No. 2
fuel oil, residual fuel oil, and shipments received from Puerto Rico) and
the name of the company making the importation or shipment. Yearly, OOG
publishes a compilation of the country of origin of imports by type,
volume and district of importation, including Puerto Rico.
In administering the MOIP, OOG obtains assistance from, among
others, the Bureau of Mines which forecasts needs for domestic crude
petroleum production in Districts I-IV to aid in setting the level of
imports for these districts. It also forecasts the supply-demand gap
for District V which is used as the basis for setting import level in
that district.
The M3IP, and its administration, are described in greater
detail in the next chapter.
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b. The Bureau of Land Management issues mineral leases (oil, gas
and oil shale) for lands in the public domain, as provided for in the
Mineral Leasing Act, the Acquired Lands Act, and the Outer Continental Shelf
Act.
Under the Mineral Lands Leasing Act of 1920, leases are granted
both by competitive bidding and by a simultaneous filing system. The latter
is used in areas where research or exploration is required before the
presence of minerals can be anticipated. Competitive bidding is required
when land is within the known geologic structure of a producing oil or gas
field prior to the issuance of a lease.
Under the Outer Continental Shelf Act of 1953,- all oil and gas
leases are issued on a competitive bidding basis. The present system involves
cash bonus bidding by sealed bids, plus payment of a fixed royalty (set at
16-2/31 for all OCS leases issued to date.) Since passage of the DCS Act,
BLM has conducted 26 sales of offshore oil and gas leases, including 12
drainage sales (in proven areas) and 14 general sales (in unproven areas).
_!/ The OCS Act provided for federal jurisdiction over the submerged lands
lying seaward of those granted to the states. The latter had been
generally determined by the Submerged Lands Act of May 22, 1953, which
gave the coastal states jurisdiction over such lands to a distance of
three miles from their coast lines into the Atlantic and Pacific Oceans
and up to nine miles into the Gulf of Mexico if a state's historic
boundary prior to joining the Union had been more than three miles
from shore or if such a boundary had previously been approved by
Congress. (The States of Florida and Texas are in this category.)
However, to date, the boundaries of the federal and state segments of
the OCS, and hence of the respective jurisdictions, have not yet been
precisely defined. The seaward limits remain imprecise, and even the
location of the shoreward boundaries is, in some cases (such as off
Louisiana), still in dispute. Litigation is currently pending with
respect to the jurisdictional limits of the Atlantic States, Florida,
Louisiana, California and Alaska.
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All sales have been in the Gulf of Mexico, except for six off California.
The last sale was conducted on December 19, 1972 and netted the Federal
Government nearly $1.7 billion in cash bonuses, a record high. In the
aggregate, the sales have yielded the United States Government cash bonuses
in excess of $6.7 billion.
In President Nixon's Clean Energy Message to Congress on June 4,
1971, the Secretary of Interior was directed to accelerate oil and gas
leasing on the Outer Continental Shelf both in the Gulf of Mexico and in
other promising areas, and to publish a five-year schedule of lease offer-
ings. Pursuant to this mandate, Interior released a tentative five-year
DCS leasing schedule contemplating 10 sales in the Gulf of Mexico through
1975 and public hearings on possible leasing in the Gulf of Alaska and
Atlantic Ocean sometime prior to 1976. Some delay in this schedule has
already occurred (due to court litigation brought by environmental groups) ,
and BLM is currently updating and revising the leasing schedule. Present
plans call for two general sales of 300,000 - 600,000 acres each per year
over a five-year period in the Gulf of Mexico. Development of the acreage
involved is estimated to require the drilling of 3,500 to 4,500 wells
which, in turn, are estimated by Interior to result in an increase in crude
oil reserves of 2.5 to 5.0 billion barrels and an increase in gas reserves
of 20 to 40 trillion cubic feet. BLM also contemplates offering further
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leases in the Gulf of Mexico if no sales of DCS lands in the Gulf of Alaska
and the Atlantic region are held by 1976.-
c. The Geological Survey regulates operating practices on federal
oil, gas and oil shale leases. In addition, it is responsible for geological
and geophysical exploration on OCS lands. Information provided by the
Geological Survey, along with other information, is evaluated prior to
leasing in order to identify promising acreage and appraise potential
resources. In large part, the Geological Survey purchases geological and
geophysical data from private surveyors. The Survey also collects the
royalties from mineral leases and supervises the development of fuels and
minerals under lease on Indian, OCS and other federal lands. The USGS
maintains field offices throughout the United States which handle directly
the mineral leases.
d. The Bureau of Mines collects, analyzes and publishes technical
and economic materials on petroleum production, trade and consumption. The
Bureau also conducts basic research on oil shale and synthetic fuels, advises
other government agencies on fuel burning equipment, and disseminates informa-
tion relevant to health and safety programs for the petroleum and gas
I/ Two major roadblocks could possibly delay or, in certain areas, actually
~~ prevent future OCS oil and gas leasing. First, resolution of federal
versus state jurisdictional disputes over offshore boundaries, or
negotiation of interim zone arrangements, is necessary before major
leasing actions can be undertaken. Second, opposition by conservation
and environmentalist groups has already delayed leasing of OCS lands,
and court suits to block further sales could cause additional delay.
Legislation introduced in the last Congress suggests the probability
of strong opposition in coastal states to any leasing of OCS lands in
Atlantic offshore areas. In California, moreover, there is presently
a moratorium on all offshore leasing, the result of public reaction
following the widely publicized oil spill in the Santa Barbara Channel
in January 1969.
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industries. The Bureau of Mines, also has field offices and laboratories
that handle petroleum matters.
e. The Bureau of Indian Affairs has trusteeship responsibility
in the leasing of tribal lands and for the monies that are derived from oil
and gas leases. These leases, however, are administered by the Geological
Survey.
f. The Office of Coal Research conducts research directed toward
developing processes for converting coal to clean forms of gaseous and
liquid fuels, finding more efficient systems for generating electric power
without pollution and utilizing coal in conventional form without environ-
mental damage.
g. Office of Territories serves as the principal staff office
for the Secretary on all territorial matters involving the Trust Territory
of the Pacific Islands, Guam, American Samoa, and the Virgin Islands. The
Virgin Islands is presently a major source of low sulfur fuel oil and is
the location of a 400,000 bbls/d refinery operated by Amerada-Hess. In
early January 1973, the local legislature of the Virgin Islands granted
permission to the Italian national oil corporation (ENI) to build a second
energy refinery. Guam has a 30,000 bbls/d refinery operated by Guam
Refining Company.
h. The Oil Import Appeals Board of the Office of Hearings and
Appeals is composed of one representative each from the Departments of
Commerce, Justice and the Interior. This Board considers petitions and
appeals from persons adversely affected by the oil import regulations.
The Board is authorized to modify allocations granted by the Office of Oil
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and Gas on grounds of hardship or error; to grant allocations for crude
oil and/or finished products in special circumstances; and to review the
revocation or suspension of any allocation or license. The decisions of
the Board are final.
2. Department of State
The Secretary may influence oil policy as a member of the National
Security Council or as a member of the Oil Policy Committee. This Depart-
ment plays a very active role within the Oil Policy Committee and, in
general, has supported the development of a strong and centralized U.S.
energy policy, both domestically and abroad.
The Office of Fuels and Energy, within the Bureau of Economic
Affairs, consists of principal foreign policy personnel who are responsible
for coordinating departmental activities and policies in all matters per-
taining to petroleum and petroleum products. In addition, Petroleum
Attaches are maintained in the embassies of all major oil producing and
consuming countries.
The Department takes an active interest in negotiations with
the National Energy Board of Canada regarding the level of Canadian crude
oil to be imported into Districts I-IV, as well as in negotiations aimed
at formulating an acceptable overall energy policy with Canada.
3. Department of Defense
The Department of Defense (DOD) is a major contributor to U.S.
oil policy, a sizeable importer of foreign oils (over 60,000 b/d) and
a consumer of both domestic and foreign oils. (In fact, the military
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purchased over 750,000 b/d of petroleum products in 1972.) The
DOD through the Navy Department has responsibility for administering the
Naval Petroleum Reserves in California and Alaska. The DOD is also respon-
sible for the maintenance of a sizeable stockpile of petroleum products
both inside and outside the U.S. Storage facilities are well dispersed
throughout the world.
The Secretary of Defense influences oil policy as a member of
the Oil Policy Committee and the National Security Council.
In the Office of the Assistant Secretary of Defense, Installa-
tions and Logistics, the Special Assistant for Petroleum Matters is the
senior petroleum advisor in the Department regarding programs, systems and
procedures for making available petroleum products under conditions of
peace and war. He also acts as a coordinator with other concerned agencies
and foreign governments with regard to petroleum policy.
The Joint Chiefs of Staff monitor the requirements for petroleum
products in relation to strategic and logistic plans, and also provide
policy guidance for the Joint Petroleum Office.
The Defense Fuel Supply Center (DFSC) within the Defense Supply
Agency is responsible for the procurement of fuel, petroleum products and
contracts for commercial petroleum services for the military and federal
civil agencies. The Center coordinates the movements of bulk petroleum by
the Military Sealift Command with the needs of the military services, and
administers the oil import allocation to DOD issued by the Office of Oil
and Gas, Department of the Interior. The DFSC also maintains stocks of
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bonded fuel oil and jet fuel for use by the military in operations outside
U.S. boundaries.
Moreover, within the Department of Defense, the Departments of
Army, Navy and Air Force are vitally involved in matters of oil supply.
In the Department of the Army, the Secretary is a member of the
Foreign Trade Zone Board, and the Deputy Chief of Staff for Logistics
establishes policies and priorities regarding the allocation of petroleum
products to installations throughout the world.
Other than the above, the most important oil-related agency in
the Department of the Army is the Corps of Engineers which has responsi-
bility for the design and construction of petroleum storage, distribution
and dispensing systems at Army installations. The Corps is also responsi-
ble for water resources development activities, including river and harbor
development and maintenance. More recently, the Corps has become involved
in the proposed development of super-tanker ports within the U.S. and the
expansion of oil transportation on the intercoastal waterways.—
In the Department of the Navy, the Office of the Chief of Naval
Operations provides logistic guidance for petroleum products for operating
forces and shore establishments, coordinates participation in interagency
petroleum programs, and establishes the war reserve levels of supply for
the principal petroleum products. The Navy also maintains a sizeable
tanker fleet for transporting oil for all the services.
I/ "Deep Water Port Policy Issues," Hearings before the Interior and
Insular Affairs Committee, United States Senate, Serial No. 92-261,
April 25, 1972.
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The Office of Naval Petroleum and Oil Shale Reserves is responsi-
ble for developing and maintaining reserves for the production of petroleum
and shale oil when required in times of national emergency, and also serves
as the Department advisor on matters pertaining to oil shale and crude
oil, domestic and foreign. The Navy has two sizeable oil reserves, one in
Northern Alaska (Point Barrow) and the other at Elk Hills, California. The
reserve at Elk Hills has been fully developed and is now maintained in a
stand-by condition. The Elk Hills field is capable of producing over
100,000 bbls/d of crude oil. The Navy also has a large shale oil reserve
in western Colorado.
The U.S. Navy Fuel Supply Center administers the supply system
for all petroleum products but does not maintain physical stocks of
material.
The Department of the Air Force is the predominant military user
of petroleum, accounting for over 50% of all petroleum products purchased
by the military. The principal product used by the Air Force is jet fuel.
Headquarters, USAF establishes policies to provide the Air Force
with petroleum products.
Headquarters, Air Force Logistics Command is responsible for
establishing requirements, and administering the distribution and quality
surveillance of petroleum products.
4. Department of Commerce
The Secretary may influence oil policy as a member of the Oil
Policy Committee, as a member of the Domestic Council or as Chairman of
the Foreign Trade Zone Board.
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The Office of Import Programs is the principal agency within the
Department concerned with special problems involving industries affected
by import competition. With regard to the Mandatory Oil Import Program,
it participates at both staff and policy levels.
The Foreign Trade Zone Board consists of the Secretaries of the
Treasury, Army and Commerce. The Secretary of Commerce serves as Chairman.
The purpose of the Board is to enable private corporations to establish
Foreign Trade Zones on U.S. soil in the interest of encouraging inter-
national trade.
The Bureau of Domestic Commerce is dedicated to the promotion of
U.S. industry and commerce through business and governmental cooperation.
The Bureau also develops plans for industrial mobilization in time of national
emergency. Within the Bureau, the Petroleum and Coal Division provides
information to individuals, governmental agencies, and industry relative to
petroleum production, manufacture and consumption. The Division is particu-
larly interested in petrochemicals; and it also furnishes staff assistance
for the Deputy Assistant Secretary for Resources in the discharge of his
duties as a member of the Oil Import Appeals Board.
The Maritime Administration is responsible for the development,
promotion and operation of the U.S. Flag Merchant Marine. It also has the
responsibility for organizing and directing emergency ship operations,
including tankers. An additional function is to grant subsidies for the
construction of tankers.
The National Oceanic and Atmospheric Administration was formed
in 1970 from three agencies: National Weather Service, National Ocean
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Survey and the National Marine Fisheries Service. One purpose of NOM is
to explore, map and chart the global oceans, and hence to establish seaward
boundaries in offshore lease areas when problems of jurisdiction occur.
With regard to climatological data, heating and cooling degree day statistics
are published for a selection of U.S. cities and used to analyze local fuel
requirements and conditions which produce fuel shortages, and to predict
total fuel requirements (in conjunction with population and industrial pro-
jections) .
The Office of Foreign Direct Investment administers and enforces
Executive Order 11387 which established a mandatory system to restrict the
dollar outflow for direct investments abroad in order to help correct the
balance of payments deficit. These regulations apply both to individuals
and to companies engaged in petroleum production and/or distribution.
5. Department of Justice
The Attorney General may influence oil policies as a member of
the Domestic Council and also the Oil Policy Committee.
The Assistant Attorney General of the Civil Division handles
all litigation in petroleum matters on behalf of the government.
The Assistant Attorney General in the Antitrust Division
enforces the various statutes designed to prevent restraint of trade
through monopoly or cartel and issues consent decrees for the merging of
petroleum companies. This Division also furnishes one member of the Oil
Import Appeals Board.
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The Assistant Attorney General in the Land and Natural Resources
Division establishes rights to mineral leases, and supervises suits to
abate water and air pollution.
6. Department of the Treasury
The Secretary, as a member of the Oil Policy Committee, advises
the Director of the Office of Emergency Planning on policies related to
the oil import program. The Secretary may also influence petroleum policy
as a member of the Domestic Council.
The Bureau of Customs enforces oil policy by acting as the field
policing agent in the implementation of oil allocation licenses issued by
the Office of Oil and Gas of the Department of the Interior. The Bureau
also assists the U.S. Coast Guard of the Department of Transportation in
enforcing the Oil Pollution Act which prohibits the discharge of oil and
refuse upon coastal waters. The Bureau also collects all import informa-
tion for the Bureau of Census.
7. Department of Transportation
The National Transportation Safety Board investigates accidents
involving the transportation of petroleum or gas in pipelines or other
modes of transport. This Office also undertakes special studies regarding
pipeline safety and the transport of petroleum products.
The Federal Highway Administration compiles data pertaining to
motor vehicle fuel consumption.
The U.S. Coast Guard enforces the Oil Pollution Act of 1961
together with the Bureau of Customs, U.S. Treasury Department.
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E. Federal Regulation: Independent Agencies
In addition, the supply of oil is affected directly or indirectly
by several independent agencies.
1. The Interstate Commerce Commission is an 11-member commission
charged with regulating common carriers subject to the Interstate Commerce
Act. Among other modes of surface transport, its jurisdiction extends to
oil pipelines and water carriers such as barges on inland waterways.
2. The Export-Import Bank of the United States provides financing to
facilitate the exchange of commodities such as crude oil and/or petroleum
products between the U.S. and any foreign agency or individual. The favor-
able financing available through the Bank has been a contributing factor to
the proliferation of oil refining facilities in the Caribbean.
3. The Federal Power Commission is charged with the administration
and enforcement of the Natural Gas Act. Its activities are indirectly
related to fuel oil. (This agency is discussed in detail in the gas portion
of this study.)
4. The Environmental Protection Agency coordinates governmental
efforts to abate and control pollution. EPA analyzes data pertaining to
the effect of product quality, quantity, availability, demand and con-
sumption, for the purpose of determining the impact of fuels upon air
quality; and is responsible for protection and enhancement of the nation's
waters, coastal and inland. EPA is also concerned with prevention and/or
redress when oil is spilled during use, exploration, production, transport
or storage.
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5. The United States Tariff Commission consists of six members
appointed by the President to serve as an advisory fact-finding agency
on tariff, commercial property, and foreign trade matters. The Commis-
sion advises in regard to, and administers, the tariff on crude oil
and all other petroleum products except asphalt. Currently (1972) , the
tariff on crude oil and most petroleum products in the most-favored
nation is 10.5
-------
Originally, the rationale for the Jones Act was the need to
develop and maintain a merchant marine fleet which could be used by the
government during a national emergency. However, a major effect has
been to place refiners on the Gulf Coast at a distinct disadvantage with
foreign-based Caribbean refiners (including the refinery in the U.S.
Virgin Islands) who can take advantage of the cheaper foreign flag
tanker rates.
In recent years, several large refineries have been constructed
in eastern Canada, the Bahamas and the Virgin Islands, and still more are
scheduled to be built in those areas. Aside from the availability of deep-
water harbors, a primary reason for these locations was the fact that products
can be moved to U.S. markets in foreign flag ships. An additional factor
is that MOIP, while regulating imports of crude and unfinished oils, does not
control shipments of residual fuel oil to the East Coast area.
In some instances, certain American companies have registered
tankers under a "flag of convenience," i.e., Panama, Liberia or Honduras.
These tankers are owned, either directly or indirectly, by a subsidiary of
the U.S. corporation. Some control over these vessels is maintained by a
statute enabling the Secretary of the Commerce to requisition vessels when
a state of national emergency is proclaimed by the President. From time
to time, attempts have been made to amend the Jones Act and permit the
"flags of convenience" to engage in commerce between the U.S. mainland and
Alaska, Hawaii and Puerto Rico. However, in 1956, the Congress reaffirmed
the principle of coastwise American shipping in Public Law 714, which made
clear that even a vessel originally built in the U.S. but rebuilt abroad
would lose the right to coastwise shipping.
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CHAPTER IV - MANDATORY OIL IMPORT PROGRAM
The Mandatory Oil Import Program (MOIP), established by
Presidential Proclamation 3279, is probably the most important Federal
Government program affecting the supply of oil. As noted in the previous
chapter, it was created in 1959 following an opinion by the Director of
the Office of Defense Mobilization (now Office of Emergency Preparedness)
that imports of crude oil and crude products at that time were such as to
threaten to impair the national security. The MOIP is thus predicated on
a national security rationale --a basis which has been, and continues to
be, a subject of considerable dispute both with respect to the overall
program and to various aspects of its implementation.
At the present time, the policy direction of the MOIP is provided
by the Oil Policy Committee --an interdepartmental group which is chaired
by the Director of OEP and includes the Secretaries of State, Treasury,
Defense, Interior and Commerce, the Attorney General and the Chairman of
the Council of Economic Advisers. The day-to-day administration of the
program is performed by the Office of Oil and Gas within the Department of
Interior. The Office of Oil and Gas succeeded the Oil Import Administration
in this function.
For purposes of applying the MOIP, the U.S. is divided into five
districts, plus Puerto Rico. These districts -- which correspond to the
Petroleum Administration Districts (PADs) used in World War II -- are
delineated on the map on the following page. Districts I-IV are mainly
states east of the Rocky Mountains, while District V comprises mainly
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COORDINATION DISTRICTS FOR PETROLEUM INDUSTRY
DISTRICTS
I. EAST COAST
2. MID WEST
3. GULF COAST
3. PtCIFIC CCA3T
• HEADCUARTERS
-------
states west of the Rockies (including Alaska and Hawaii). In Districts
I-IV, the only significant distinction in administration of the MOIP
relates to residual fuel oil which is practically exempt from import
controls in District I (East Coast). In District V, quotas are deter-
mined on a different basis than in Districts I-IV. Puerto Rico is also
treated separately.
Commodity-wise, the MOIP classifies petroleum imports in four
categories: (1) crude oil; (2) unfinished oils (products imported for
further processing, such as naphtha); (3) finished products (products
imported for use without further processing, such as No. 2 home heating
oil, jet fuel, gasoline, lubricating oils and asphalt); and (4) residual
fuel oil to be used as fuel. Levels of imports are fixed for each of
these commodities in the various districts, with the authorized import
levels then allocated among domestic claimants by the Interior Department.
The remainder of this chapter reviews the origin of the MOIP;
modifications in MOIP over the years; the present general framework of the
MDIP, including the basis for allocation of the different products and
levels of imports in recent years; and treatment of residual fuel oil
under MOIP.
A. Origin of Mandatory Oil Import Program
The present mandatory oil import program became effective on
March 11, 1959, culminating a series of governmental actions looking
toward the restriction of imports of oil into the United States.
In July 1954, the President established an Advisory Committee
on Energy Supplies and Resources Policy to make a study on energy supplies
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and resources "with the aim of strengthening the national defense, pro-
viding orderly growth, and assuring supplies for our expanding national
economy and for any future emergency."
In February 1955, this committee reported that if crude and
residual oil imports should significantly exceed the respective propor-
tions that these imports bore to the production of domestic crude oil in
1954, "the domestic fuels situation could be so impaired as to endanger
the orderly industrial growth which assures the military and civilian
supplies and reserves that are necessary to the national defense." The
Committee concluded that in the interest of national defense, imports
should be kept in balance, and it proposed that this be done by voluntary,
individual action of importers or those who become importers of crude or
residual oil. The Committee made clear, however, that "appropriate action
should be taken" if imports significantly exceeded the balance which it
recommended.
On June 21, 1955, Section 7 of the Trade Agreements Extension
Act of 1955 became law. This statutory provision required the Director
of the Office of Defense Mobilization to advise the President whenever
the Director had "reason to believe that any article is being imported
into the United States in such quantities as to threaten to impair the
national security." Following the receipt of such advice, the President
was authorized to make an investigation and, if necessary, to adjust the
imports of such article to a level that would obviate the threat.
In August 1955, the Director of ODM called the attention of oil
importing companies both to the Trade Agreements Act of 1955 and to the
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Advisory Committee's recommendations and, in effect, requested that imports
be restricted in accordance with these recommendations. The Advisory
Committee and the Director continued to keep the situation under surveil-
lance and, on several occasions, issued warnings to importing companies
with respect to the quantity of oil programmed for importation.
In December 1956, after hearings, the Director of ODM issued a
statement that evidence presented at the hearing confirmed that imports in
excess of the [Advisory] Committee's recommendations would threaten to
impair the national security and that import programs recently filed with
the Office of Defense Mobilization for the year 1957 would, if carried
out, be contrary to the Committee's recommendations. However, because of
the Suez crisis, the Director temporarily suspended action.
In April 1957, after the resolution of the Suez crisis, the
President was advised by the Director of ODM that he had reason to believe
that crude oil was being imported into the United States in such quantities
as to threaten to impair the national security. The President thereupon
asked the Director to investigate the possibility of limiting crude oil
imports by individual voluntary action, and appointed a Special Cabinet
Committee to Investigate Crude Oil Imports.
In July 1957, the Special Committee advised that a limitation on
imports of crude oil was required in the interest of the national security,
and recommended a plan for voluntary limitation of imports into the area
east of the Rockies (Districts I-IV). For the initial phase of the
program -- the last half of 1957 and the first half of 1958 --the plan
essentially involved a cut back in crude oil imports by established
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importers to a figure 10% below the average of their imports for the years
1954, 1955 and 1956. The objective was to set a level of imports into the
area east of the Rockies equivalent to approximately 12.01 of crude oil
production in that area. The Special Committee did not propose voluntary
restrictions on oil imports into District V at that time, primarily
because the West Coast was a crude deficit area with imports needed to
make up the balance between demand and available domestic supply, but
recommended that the situation be reviewed during the latter part of
1957. The Special Committee also recommended that new importers should
have an opportunity to enter and share in a reasonable manner in the
United States market. The Committee's recommendations were approved by
the President, and the Department of the Interior was chosen to administer
the Voluntary Oil Import Program.
Over the following 12 months, the Special Committee made several
further recommendations regarding the Voluntary Oil Import Program,
including its extension to District V and various adjustments in the
level of imports. In March 1958, to encourage compliance, the Buy
American Act was incorporated in the program by Executive Order 10761.
As a result of this action, companies which failed to comply with the
program were ineligible to obtain government contracts for petroleum
products.
In the latter part of 1958, it became evident that the Voluntary
Oil Import Program was not accomplishing the desired purpose. This failure
was attributed to the following factors: (1) the only penalty for
failing to comply with the program was loss of government contracts;
IV-6
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(2) imports of finished petroleum products, which were not in the program,
rose precipitously, thus throwing the crude program out of balance; (3)
unfinished oils were stabilized at too high a level; and (4] there was no
adequate means for permitting new comers to participate in the program.
On January 22, 1959, the Secretary of State and the Deputy
Secretary of Defense requested the Director of ODM to investigate the
effect upon the national security of imports of crude oil, its derivatives
and products. On February 27, 1959, the Director reported to the President
that, in accordance with this investigation, crude oil and the principal
crude oil derivatives and products were being imported in such quantities
and under such circumstances as to threaten to impair the national
security.
On March 6, 1959, the Special Committee to Investigate Crude Oil
Imports submitted a report to the President recommending imposition of
mandatory controls on imports of crude oil and crude oil products (including
liquefied petroleum gases, gasoline, kerosene, jet fuel, distillate fuel
oil, lubricating oils, residual fuel oil and asphalt). In Districts I-IV,
the Committee recommended that the level of imports of crude oil, unfin-
ished oils and finished products (other than residual fuel oil to be used
as fuel) be limited to 9% of total demand in those districts; that imports
of finished products (exclusive of residual fuel oil) not exceed the 1957
level; and that imports of unfinished oils not exceed 101 of the total
allocation of crude oil and unfinished oils. In District V, the Committee
proposed that the level of imports of crude oil, unfinished oils and fin-
ished products be limited to that amount which, when added to domestic
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production and supply, would approximate total demand in that District.
Essentially similar limitations on imports of finished products and unfin-
ished oils were recommended for District V as for Districts I-IV. The
Committee further suggested that imports of crude oil and finished products
into Puerto Rico should be limited to the level of imports during all or
part of the year 1958. Finally, the Committee recommended that imports of
residual fuel oil be set at their 1957 level in all five Districts, but
also urged that the Secretary of the Interior keep such imports under
review and be authorized to adjust the level of such imports on a monthly
basis if necessary.
B. Establishment of and Changes in Mandatory Oil Import Program
On March 10, 1959, the President issued Proclamation 3279 which,
in substance, ordered into effect the Special Committee's recommendations
for the establishment of mandatory oil import controls, including the
Committee's proposed maximum import levels. The Secretary of Interior
was directed to issue regulations creating a system for allocating
authorized imports of crude oil, unfinished oils and finished products
and for the grant of licenses pursuant to such system. With respect to
crude oil and unfinished oils, the Proclamation specified that allocations
be made to companies with refinery capacity on the basis of refinery
inputs during a particular period (except that initially no company
having inputs during the base period would receive less than 801 of its
last allocation under the Voluntary Oil Import Program), and that
imported crude and unfinished oils be processed in the licensee's refinery
-- except that exchanges could be made for domestic crude or unfinished
IV-8
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oils, again if processed in the licensee's refinery. (Import allocations
or licenses may not be sold or transferred by the authorized importer to
any other person.) As to finished products, the Proclamation provides
for allocations to companies which imported such products during the
respective base periods.
In addition, Proclamation 3279 established an Oil Import Appeals
Board -- to be comprised of one representative each from the Departments
of Interior, Defense and Commerce -- with power, on the ground of hard-
ship, error or other relevant special consideration, to (1) modify any
allocation granted to any company, (2) grant allocations of crude oil and
unfinished oils in special circumstances, and (3) review the revocation
or suspension of any license.
The MOIP has been modified by the President 23 times in the
14 years since its inception. These modifications are listed in the
schedule on the following pages. In addition, the implementing regulations
of the Secretary of the Interior have been revised and amended some 70
times. In general, the modifications have provided for changes in the
level of allowable imports; changes in the treatment of Canadian imports;
the inclusion of "newcomers" and other new groups (such as petrochemical
plants) in the program; the grant of special allocations allegedly to
promote the economic development of Puerto Rico and the Virgin Islands;
the grant of special bonuses to promote the production of low sulfur fuel
oil; and the relaxation or elimination of import restrictions on certain
products (such as residual fuel oil imported into District I, asphalt and
liquefied petroleum gases) ; and other changes. Some parts of the original
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Table IV-1
Sheet 1 of 2
PRESIDENTIAL PROCLAMATIONS CREATING AND MODIFYING MANDATORY OIL IMPORT PROGRAM
Proclamation 3279 (24 FR 1781) dated March 10, 1959 - Provided for, among other things:
(1) In Districts I-IV -- a maximum level of crude oil, unfinished oils and finished products
(except residual fuel oil to be used as fuel) equivalent to approximately 9% of total
demand in those Districts, as estimated by the Bureau of Mines. Within this maximum
level, imports of finished products (excluding residual fuel oil to be used as fuel)
were limited to the level of imports in the year 1957, and imports of unfinished oils
were restricted to 101 of the total permissible imports of crude oil and unfinished oils.
Imports of residual fuel oil to be used as fuel were fixed at the level of residual
imports during 1957.
(2) In District V -- a maximum level of crude oil, unfinished oils and finished products
imports approximating the difference between domestic production and total demand in that
District, as estimated by the Bureau of Mines. Within this maximum level, imports of
finished products were limited to the level of imports in 1957, and imports of unfinished
oils were limited to 10% of the total permissible imports of crude oil and unfinished
oils.
(3) In Puerto Rico --a maximum level of crude oil, unfinished oils and finished products
imports at approximately the level of imports during all or part of 1958, as determined
by the Secretary of the Interior, or such lower or higher levels subsequently determined
to be required to meet changes in local demand in Puerto Rico or demand for exports to
foreign areas.
(4) Issuance of implementing regulations by the Secretary of Interior, including regulations
to allocate imports of crude oil and unfinished oils to companies with refinery capacity
on the basis of refinery inputs and to allocate imports of finished products on the basis
of imports in certain base periods.
(5) Establishment of an Oil Import Appeals Board, to be composed of one representative each
with the rank of Deputy Assistant Secretary or higher from the Departments of Interior,
Defense and Commerce.
Proclamation 3290 (24 FR 3527) dated April 30, 1959 - Exempted oil imported overland from country
where it was produced.
Proclamation 3328 (24 FR 10133) dated December 10, 1959 - Required that exempted imports be taken
into account in setting maximum level of imports into District V.
Proclamation 3386 (25 FR 13945) dated December 24, 1960 - Required that the level of imports of
crude into Districts I-IV be adjusted to take into account the amount that the estimate of the
Bureau of Mines exceeded or understated actual total demand. (No longer in effect.)
Proclamation 3389 (26 FR 507811) dated January 17, 1961 - Permitted the entry of "newcomers" into
the residual fuel oil program, with allocations to be based on their deepwater terminal inputs.
Proclamation 3509 (27 FR 11985) dated November 30, 1962 - Provided that the level of imports of
crude into Districts I-IV be 12.2% of liquid hydrocarbon production during a previous correspond-
ing period in Districts I-IV less estimated exempt overland imports into those districts; for-
malized the use of a graduated scale in allocating all imports; and provided for a gradual
reduction in allocations made on the basis of importing history.
Proclamation 3531 (28 FR 4077) dated April 19, 1963 - Removed requirement that members of the
Oil Import Appeals Board be of Deputy Assistant Secretary rank or higher.
Proclamation 3541 (28 FR 5931) dated June 10, 1963 - Provided that the level of imports of crude
oil into Districts I-IV,be 12.21 of estimated crude oil and natural gas liquids production in
Districts I-IV during the allocation period less estimated exempt overland imports into those
districts.
Proclamation 3693 (32 FR 10547) dated December 10, 1965 - Required licenses for importation of
crude into a Foreign Trade Zone; set up authority for grant of allocations to petrochemical
plants; and provided for development of petrochemical industry in Puerto Rico.
Proclamation 3779 (32 FR 5919) dated April 10, 1967 - Provided for flexible authority to the
Secretary of Interior with respect to asphalt imports.
Proclamation 3794 (32 FR 10547) dated July 17, 1967 - Provided for the Secretary of Interior to
amend regulations so as to encourage the manufacture of low sulfur residual fuel oil; also
amended definition of residual fuel oil to permit importation of crude oil to be burned
directly as fuel.
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Table IV-1
Sheet 2 of 2
PRESIDENTIAL PROCLAMATIONS CREATING AND MODIFYING MANDATORY OIL IMPORT PROGRAM
Proclamation 3820 (32 FR 15701) dated November 9, 1967 - Provided for granting special shipping
rights of finished products from Virgin Islands to U.S. mainland.
Proclamation 3823 (33 FR 1171) dated January 29, 1968 - Provided for making of allocations based
upon exports.
Proclamation 3969 (35 FR 4321) dated March 10, 1970 - Eliminated overland exemption of Canadian
crude for Districts I-IV and replaced same with a volume limitation.
Proclamation 3990 (35 FR 10091) dated June 17, 1970 - Provided for making allocations of No. 2
fuel oil to independent deepwater terminals in District I.
Proclamation 4018 (35 FR 16357) dated October 16, 1970 - Provided that imports of ethane, propane
and butane from Western Hemispheric sources are exempt from control, and that crude oil may be
imported into District I to be topped for use as burner fuel. It also removed viscosity limits
from crude to be burned directly as fuel.
Proclamation 4025 (35 FR 19391) dated December 22, 1970 - Provided for an increase of 100,000
bbls/d of imports for Districts I-IV during 1971. Authorized Mexican imports to enter by
water in such amounts as Secretary of Interior prescribes.
Proclamation 4092 (36 FR 21397) dated November 5, 1971 - Provided for extension indefinitely of
importation of No. 2 oil into District I, and authorized suspension of the requirement that
No. 2 oil be manufactured from crude produced in the Western Hemisphere.
Proclamation 4099 (36 FR 24203) dated December 20, 1971 - Increased overall level of crude
imports into Districts I-IV by 100,000 bbls/d during 1972 over 1971.
Proclamation 4133 (37 FR 3943) dated May 11, 1972 - Set up program for granting special alloca-
tion for petrochemical heavy liquids plant.
Proclamation 4156 (37 FR 19115) dated September 18, 1972 - Increased level of No. 2 oil imports
by 5,000 bbls/d, and also permitted refiners to borrow 104 against their 1973 allocations.
Proclamation 4175 (37 FR 28043) dated December 16, 1972 - Permitted flexibility to allow
Secretary of Interior to increase fuels shipments from Puerto Rico and Virgin Islands to U.S.
mainland.
Proclamation 4178 (38 FR 1719) dated January 18, 1973 - Suspended restrictions on imports of
No. 2 fuel oil into Districts I-IV for the first four months of 1973, and provided for an
increase of 915,000 bbls/d in authorized levels of crude oil, unfinished oils and finished
products (excluding residual fuel oil) into Districts I-IV. Eliminated the requirement for
licenses for importation of crude oil into a Foreign Trade Zone.
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program have been eliminated, such as historical allocations for crude
oil and products. In general, however, the principal overall procedures
and regulations for determining allocations of imported oil have been
retained.
In the past two years or more, several revisions have been made
in the MOIP raising authorized import levels in recognition of potential
shortages of crude oil and petroleum products. The latest Presidential
Proclamation dated January 18, 1973 is especially significant in this
regard. First, based on a finding by the OEP Director that increases
in domestic production in 1973 will not be sufficient to supply demand
for petroleum and petroleum products in that year, the President upped
the level of allowable imports of crude, unfinished oils and finished
products (excluding residual fuel oil) into Districts I-IV by over 50$ --
from 1,785,000 bbls/d in 1972 (after all adjustments) to 2,700,000 bbls/d
in 1973. Second, based on a finding of a threat of temporary shortage of
No. 2 fuel oil, the President removed all restrictions on import of that
commodity into Districts I-IV for the first four months of 1973.
The MOIP was subjected to a searching review a few years ago by a
Cabinet Task Force on Oil Import Control, appointed by the President in
March 1969. In February 1970, the Task Force issued a majority report
recommending that the present import quota system be replaced over a
transition period of three to five years with a tariff system giving
preferences to Western Hemisphere sources and incorporating a "security
adjustment" to protect against undue Eastern Hemisphere imports. This
recommendation was not adopted by the President.
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At this time, the MOIP is now again under intensive review within
the Administration. Major changes, or proposals for change, could be
announced within the next one or two months.
C. Framework of Present Program
The Mandatory Oil Import Program is generally concerned with
three principal functions: (1) regulating the degree of import restriction
through a variety of separate quota levels, (2) allocating permitted
imports among domestic claimants, and (3) managing program administration.
Quota Levels. Essentially, the MOIP entails two quota levels --
one pertaining to crude oil, unfinished oils and finished products, and the
other pertaining to residual fuel oil. Each of these varies geographically,
as described below.
Exemptions. Various products are exempt, or partially so, from
quota restrictions. For example, overland imports of crude, unfinished
oils and finished products from both Canada and Mexico— were exempt from
formal restrictions for most years of the MOIP's existence, although the
levels of imports were limited by intergovernmental agreements. (However,
beginning in 1962, imports from Canada and Mexico were taken into account
in calculating the overall percentage level of imports into Districts I-IV.)
\l Imports from Mexico were exempt by virtue of an arrangement whereby
Mexican oil was shipped by tanker to Brownsville, Texas where it was
loaded onto trucks, hauled across the border into Mexico and immediately
back to Brownsville, reloaded on tankers and shipped to the East Coast.
The second entry qualified for the overland exemption, whereas the
first was regarded as a shipment in bond and hence outside the MOIP.
Imports from Mexico were limited by agreement to 30,000 bbls/d. The
"Brownsville Loop" arrangement was converted in January 1971 into an
essentially country-of-origin quota for Mexico.
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In 1970, this exemption was removed for Canadian imports of crude and
unfinished oils into Districts I-IV, and mandatory controls were imposed
due to increases in Canadian imports far in excess of levels previously
agreed to by the U.S. and Canadian governments. The exemption, however,
continued in District V. Also, imports of finished products from Canada
into Districts I-IV are exempt, provided such products are derived from
Canadian produced crude.
In addition to the overland exemptions, the following petroleum
items are exempt from import controls:
Natural gas liquids from Canadian sources
Ethane, butane and propane from Western Hemisphere sources
Asphalt imported into Districts I-IV
Benzene, toluene and xylenes
Wax and petrolatum
Methane
Allocations. Allocations of quota levels are made differently
for crude and unfinished oils, finished products, and residual fuel oil
to be used as fuel.
In the case of crude and unfinished oils, import licenses --
called "tickets" -- are issued in all areas (except Puerto Rico) to com-
panies which have refinery capacity and had "inputs" to their refineries
during a specified period. In Districts I-IV and in District V, the allo-
cations to each company are based on its refinery inputs and calculated
according to a "sliding scale" whereby decreasing percentages are assigned
to higher increments of refinery runs of a company. This obviously favors
the small refiners. All licensees are required to run (a) the imported
crude oil in their own refineries, or, alternatively, (b) to import the
IV-14
-------
oil and then exchange it for domestic oil which they must process in their
own plants.
The ability to exchange licenses or "tickets" results in
virtually all imported crude oil being processed in coastal refineries,
thereby avoiding the need for transportation of the imported crude to
inland refineries. Thus, the exchange of "tickets" creates a certain
value for inland refiners -- this value being roughly measured by the
difference between foreign crude and domestic crude of approximately the
same quality delivered to the same point. These values, however, are
subject to negotiation where the exchanges involve different qualities
of crude and depending on the demand for foreign crude. Over the years,
"ticket" values have ranged between zero and $1.50/bbl. Late in 1972,
"tickets" were valued at about 50
-------
Residual iinports into District I are effectively decontrolled (although
still subject to licensing and certain other administrative requirements).
Districts I-IV. In 1962, the level of imports of crude oil,
unfinished oils and finished products (including overland imports from
Canada and Mexico) was set at 12.2% of estimated domestic production of
crude oil and natural gas liquids. This percentage figure is still
retained in the applicable regulations but, as indicated by the table
on the following page, has been exceeded in actuality by increasing margins
in the past three years. In 1972, for example, total controlled imports
into Districts I-IV (excluding residual fuel oil) were ultimately fixed
at 1,785,000 bbls/d after all adjustments during the year, representing
over 17% of estimated domestic production. The Canadian portion of this
total was 582,000 bbls/d.
Imports of unfinished oils may not exceed 151 of the total
permissible imports of crude oil and unfinished oils.
With respect to finished products, controlled imports into
Districts I-IV in 1972 totalled 149,000 bbls/d -- with a large part
resulting from special allocations or shipping rights granted to refiners
in Puerto Rico (64,000 bbls/d)-/ and the Virgin Islands (15,000 bbls/d).
In addition, the total includes a 50,000 bbl/d allocation granted to
2/
independent deepwater terminal operators— for the importation of No. 2
V A further 43,000 bbls/d of products is shipped by historical refiners
in Puerto Rico; this amount is not controlled but is fixed by historical
rights.
2/ An independent deepwater terminal operator is defined as one that has
no crude oil allocation and has at least 100,000 barrels of storage
capacity for No. 2 oil and is on deepwater, i.e., 25 feet deep. This
will handle a 16,000 ton dead weight tanker. Deep water ports now
under consideration are 100 feet deep and can handle 500,000 ton dead
weight tankers.
IV-16
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TABLE IV-2
SUMMARY OF OIL IMPORT ALLOCATIONS UNDER MANDATORY OIL
IMPORT PROGRAM IN DISTRICTS I-IV (1970-1972)
(MBD)
Estimated Domestic Production
(Crude Oil and NGL)
12.2% Formula
Additional Allocations Above
12.21
Total "Controlled" Imports
a. Crude and Unfinished Oils
Refiners
Canada
Mexico
Petrochemical Companies
Appeals Board
Other
Total
b. Finished Products
Puerto Rico
Canada
Virgin Islands
No. 2 Oil (District I)
Historical
Defense Department
Other
Total
1970
9,879
1,205
104
1,309
561
384
30
90
35
37
1,137
45
30
15
20
48
--
14
172
1971
10,246
1,250
.*-
200
1,450
639
475
31
94
45
24
1,308
67
--
15
40
--
20
--
142
1972-/
10,420
1,271
279
1,550
657
540
36
94
35
43
1,405
64
--
15
45
--
20
--
144
1972^
10,420
1,271
514
1,785
884
582
24
94
40
12
1,636
64
--
15
50
--
20
--
149
a/ As announced 1/1/72.
E/ As revised 12/15/72.
Source: Interior Department, Oil Import Administration.
IV-17
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fuel oil into District I. This allocation was first granted in August
1970 (at a level of 40,000 bbls/d), on condition that the No. 2 fuel oil
be derived from crude produced in the Western Hemisphere. In December
1972 the President eliminated for a four-month period the requirement of
Western Hemisphere origin. This means the oil may now be imported from
anywhere in the world.
District V. The level of imports of offshore crude oil and
unfinished oils is set at an amount which, together with domestic supply
and production and exempt Canadian overland imports, will approximate total
demand in that district. The licensed level of imports of crude and
unfinished oils into District V in 1972 was 289,000 bbls/d. In addition,
150,000 bbls/d of crude oil were set aside for granting "bonus" alloca-
tions of crude oil to persons in District V who produced low sulfur residual
fuel oil.
Imports of unfinished oils may not exceed 251 of the total per-
missible imports of crude and unfinished oils.
Puerto Rico.— Two classes of import allocations are granted in
Puerto Rico. The first is to historical refiners, i.e., refiners in opera-
tion in 1964, who are allowed imports to meet all local Puerto Rican demand,
demand for export sales to foreign areas, and the volume of shipment made to
the U.S. mainland in 1965. The second class of allocations is to certain
companies (Phillips Petroleum, Sun Oil, Union Carbide, and Commonwealth Oil
§ Refining) which, under special arrangements negotiated with the Secretary
_!/ Since Puerto Rico is inside the customs territory of the U.S., oil can
not be imported into Puerto Rico without an import license.
IV-18
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of the Interior in the mid-1960's, agreed to build petrochemical plants
or refineries which would promote economic development in Puerto Rico,
subject to access to Continental U.S. markets for a portion of plant output.
As a result, the four companies were granted licenses to import crude oil
from Western Hemisphere sources and the right to ship specified volumes
of various products to the U.S. mainland.
With respect to shipping rights to the U.S. mainland, historical
refiners are limited to those products (excluding residual fuel oil) which
were shipped to the U.S. mainland in 1965, i.e., approximately 43,000 bbls/d.
The second class of plants mentioned above received ten-year permits from the
Secretary of the Interior to move 64,000 bbls/d to the U.S. mainland of
finished or unfinished oils (excluding residual fuel oil, which requires no
permit for shipment to the Continental U.S.). On December 18, 1972, the
President authorized the Secretary of the Interior to grant additional
shipping rights for movement of No. 2 fuel oil to Districts I-IV from
Puerto Rico.
Virgin Islands. No license or allocation is required for importa-
tion of crude oil into the Virgin Islands, since it is outside U.S. customs
territory, but a license is required if the oil is moved to the U.S. main-
land.— In 1967, Interior approved a special arrangement granting Hess Oil
Co. (now Amerada-Hess Corp.) permission to ship 15,000 bbls/d of finished
products (other than residual fuel oil) from its Virgin Islands refinery to
Districts I-IV. The allocation -- justified by the Administration, as in
V Unlike the situation in Puerto Rico, however, the Jones Act requirement
that U.S. bottoms be used for shipments to the mainland does not apply
to the Virgin Islands.
IV-19
-------
the case of the special arrangements negotiated in Puerto Rico, primarily
on economic development grounds --is deducted from the total finished
products portion of the overall crude products quota for Districts I-IV.
Recently, on December 18, 1972, the President authorized the Secretary of
Interior to permit the shipment of additional quantities of finished
products to the U.S. mainland above the 15,000 b/d limitation in order
to help alleviate current fuel shortages on the U.S. mainland.
Any amount of residual fuel oil may be ijnported from the Virgin
Islands into District I to persons having a residual fuel oil license.
Administration. As noted previously, the MOIP is presently admin-
istered by the Office of Oil and Gas under regulations issued by the
Department of Interior. Changes in these regulations are normally preceded
by notice and hearing procedures associated with rulemaking proceedings,
but a number of changes have been made without such procedures. OOG is
aided by other offices within the Department of Interior, and from time to
time by other executive departments, in carrying out the MOIP. The enforce-
ment of imports entering the U.S. is through customs control. A great
reliance is placed on the industry itself for the accuracy of claimed
refinery inputs on which allocations are based and for observance of the
limits on product shipments from Puerto Rico -- which are not subject to
customs control because Puerto Rico is within U.S. customs territory.
However, the Office of Oil and Gas now has field compliance offices to
help police the intent of the regulations.
The Oil Import Appeals Board. The OIAB -- presently consisting
of representatives from the Interior, Commerce and Justice Departments --
IV-20
-------
was created by the original Proclamation 3279 and given power to modify or
grant allocations (except original allocations of crude and unfinished
oils) and to review the revocation or suspension of any import license.
In addition, the OIAB has power to make allocations from so-called "set-
aside" amounts granted to it from the total crude and products quota on
grounds of hardship. OIAB allocations have become increasingly important
since 1969.
D. Treatment of Residual Fuel Oil Under MOIP
The subject of residual fuel oil is deserving of special mention
because of its quite different treatment from that of other products under
MOIP, the present dependence of the East Coast on imports of this fuel, and
the consequences of importing a finished product rather than crude oil.
Residual fuel— is a black viscous material primarily composed of
the residuum (or bottoms) of the refining process. It is the product that
remains after lighter products such as gasoline, jet fuel, gas oil and
distillate fuels are refined from crude oil. This residuum is suitable,
within limits, for the firing of boilers in industry, electric utility
plants, ship propulsion, and heating large buildings, etc. Residual fuel
oil is not used for heating individual homes because small furnaces require
a free flowing and clean distillate type of fuel oil.
I/ Residual fuel, as used in this study, is as defined in the Presidential
Proclamation 3279, as amended. Specifically, residual fuel oil consists
of (1) topped crude oil or viscous residuum which has a viscosity of not
less than 45 seconds Saybolt universal at 100° F. and (2) crude oil which
is to be used as fuel without further processing other than by blending
by mechanical means.
IV-21
-------
1. Sources of Residual Fuel Supply
Imports of residual fuel oil have increased over threefold in
the past 14 years -- from about 500,000 b/d in 1958 to about 1,750,000 b/d
in 1972 (nearly all of which is consumed on the East Coast). This increase
is due to three principal factors. First, domestic production of residual
fuel oil has declined as improvements in refining technology have permitted
refiners to lower the proportion of residual output in favor of gasoline
and other more profitable lighter products. Second, the MOIP was modified
in 1966 to virtually decontrol imports of residual fuel oil (for use as
fuel) into District I. The result has been to make the East Coast almost
totally reliant on foreign imports for its residual fuel supply. Third,
demand has risen because of air pollution regulations restricting sulfur
content. The increasing dependence of the U.S. on imported residual fuel
oil is as follows (from the U.S. Bureau of Mines, in millions of barrels
daily):
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
Domestic
Production
1.00
0.95
0.91
0.86
0.81
0.76
0.73
0.74
0.72
0.76
0.76
0.73
0.71
0.75
0.80
Imports
0.50
0.61
0.64
0.66
0.72
0.75
0.81
0.94
1.03
1.09
1.12
1.27
1.53
1.58
1.75
Total Demand
1.46
1.54
1.53
1.50
1.50
1.48
1.52
1.61
1.72
1.79
1.83
1.98
2.20
2.30
2.54
IV-2 2
-------
As shown by Table IV-3 on the following page, virtually all of
the imports are consumed on the East Coast (District I) -- over 99% in
1972. Hast Coast demand for residual fuel oil was approximately 1,700,000
b/d in 1972; of that amount, some 1,600,000 b/d were imported.
The table also depicts the impact of air pollution control
standards on the sulfur content of the imported volumes. In District I,
for example, imports of residual fuel oil containing 0.51 sulfur or less
rose nearly 851 in 1972 compared with 1971, while imports containing over
1.01 sulfur fell nearly 15%.
Reflecting in part the emphasis on low sulfur fuels, the points
of origin of residual fuel imports have shifted in recent years. Another
cause is the current pricing practice in Venezuela. As the table below
indicates, imports of 0 to 1.0% sulfur fuel oil from Italy, the Bahamas,
the Virgin Islands and Canada have increased from zero percent in 1965 to
29.31 in 1971, whereas the contribution of Venezuela and the Netherlands
Antilles (crude is from Venezuela) dropped from 85.7% in 1965 to 55.0% in
1971.
Country 1965 1972
Venezuelan
Netherlands Antilles
Italy
Trinidad
Bahamas
Mexico
Virgin Islands
Colombia
Canada
All Others
53.21
32.5
0
9.2
0
1.2
0
1.0
0
2.9
31.5%
17.6
4.2
9.2
9.0
0.3
15.4
0.5
4.8
7.5
100.0% 100.0%
IV-2 3
-------
TABLE IV-3
U.S. RESIDUAL FUEL OIL SUPPLY BY SULFUR RANGE AND PAD DISTRICT
1971 and 1972
(Thousands of Barrels per Day)
Percent Sulfur Content
0 - .500751 - 1.00Over 1.00 Total
1971 1972 1971 1972 1971 1972 1971 1972
Supply
from U.S.
Refineries
PAD I 19.6 17.7 24.2 29.4 57.9 55.6 101.7 102.7
PAD II-IV 23.7 22.2 129.0 141.8 202.5 218.6 335.2 382.6
PAD V 95.1 137.3 5.2 22.3 195.3 154.3 295.6 313.9
Total 138.4 177.2 158.4 193.5 455.8 428.5 752.5 799.2
Supply from
Imports
PAD I 299.5 553.2 447.8 439.1 707.6 606.0 1,455.0 1,598.3
PAD II-IV -- 1.8 8.6 8.3 2.2 5.5 10.8 15.6
PAD V -- -- -- -- 2.1 2.6 2.1 2.6
Total 299.5 555.0 456.4 447.4 711.9 614.1 1,467.9 1,616.5
Source: U.S. Bureau of Mines.
IV-24
-------
Moreover, U.S. restrictions on the sulfur content of residual
fuel oil are causing refiners in the Caribbean -- which produce the bulk
of the residual fuel oil imported into the United States -- to alter their
operations in order to meet the sulfur requirements. Specifically, these
refiners are now required to be more selective in their choice of crude
oils used to manufacture low sulfur residual (i.e. , with respect to
sulfur content, pour points and metals contained in the crude) and, in
many cases, they must also install elaborate and expensive systems for
desulfurizing gas oil (distillate) for blending with the residual. While
the amount of desulfurized gas oil— to be blended depends on the sulfur
content of the residual and the required sulfur content of the end product,
as much as 501 gas oil may be required in the blend. The overall result is
to reduce the quantities of No. 2 oil which could be made available by
Caribbean refiners for importation into the U.S.
Other than the U.S. itself (where low sulfur crudes are more
abundant than in any other area of the world but are generally not used
for producing residual fuel oil because of economic reasons),— there are
only three large volume sources of crude oil with a naturally low sulfur
content. These sources are North Africa, Nigeria and Indonesia. However,
most naturally low sulfur content crudes are also paraffinics and, as such,
I/ Gas oil generally refers to a refinery intermediate --a semi-refined
~ product that is heavier than gasoline.
21 In the past, it was more economic to install refining facilities to
convert lower value residual components to higher value lighter products,
particularly gasoline, and this is why the configuration of U.S.
refining capacity evolved as it did.
IV-25
-------
produce residual fuel with a pour point of over 100° F. (The pour point is
a test for measure of the temperature at which an oil ceases to flow.) This
means that residual fuel oil produced from such crudes requires special
heating equipment in storage tanks and along the pipeline system. While
large users such as public utilities generally would have little problem
with the high pour fuel because most have the special heating equipment
required, smaller users of this fuel -- such as office buildings, hospitals
and apartments -- would encounter serious difficulties.
Venezuela, currently the largest supplier of residual fuel oil
to the U.S., produces crude oil with a sulfur content of some 2 to 3.5% --
far above the requirements for East Coast residual fuel needs. (The amount
of sulfur in residual fuel oil is always higher than in the original crude
because sulfur compounds tend to be left behind in the bottom in the
distillation process of refining.) Refineries can at least partially desul-
furize Venezuelan residual fuel oil, but the cost is high because of its
high vanadium content. Whereas most low sulfur residual fuel oil is made
by directly desulfurizing a residual intermediate, high vanadium content
oil cannot be directly desulfurized because the metal poisons the catalyst
which is used. Consequently, Venezuelan oils are processed by cutting
very deeply into the residual intermediate in a distillation unit, which
concentrates the metals in the remaining bottoms. Then the distillate
from this unit, which is essentially metals free, can be desulfurized.
The desulfurized distillate is then mixed with the bottoms to make the
finished low sulfur fuel oil. All low sulfur Venezuelan residual is being
produced by this method.
IV-26
-------
A possible substitute for residual fuel oil is crude oil which
can be burned directly in boilers and furnaces. Several public utilities
presently burn whole crude; however, special precautions must be taken in
the storage of crude because of its high volatility and explosiveness
factor. Whereas regular residual fuel oil can be stored in any type con-
tainer because of its high flash point and non-volatility, crude oil in
most all instances should be stored in floating roof tanks with safety
equipment installed on the tanks to prevent static electricity from
igniting free vapors that are present. It should also be pointed out
that, in burning whole crude directly, one effect is to consume a clean
portion of the crude (i.e., naphtha) in an inferior use.
2. MOIP Regulations Affecting Residual Fuel Oil
As originally established in 1959, the MOIP included residual
oil imports, with allocations based primarily on the position of importers
in the base year (1957, or the last half of 1958 in the case of Puerto
Rico). The basic problem with this system was that every licensed
importer was rigidly tied to the share of the total supply he held in
the previous period. Given the rising dependence of all East Coast
cargo buyers on imported supplies, this inflexibility caused serious
problems both for the importers and their customers.
In 1966, following a finding by the Director of OEP that import
controls on residual fuel oil were not necessary to national security,
IV-2 7
-------
residual fuel oil imports into District I to be used as fuel— were
effectively freed from controls. The necessity for licenses was retained,
but the eligibility requirement for such licenses was expanded to include
not only historical importers in 1957 but also all persons who were in the
business of selling residual fuel oil to be used as fuel and who either
maintained a deepwater terminal in District I or had a bona fide through-
put agreement with a District I deepwater terminal. The allocation formula
established by Interior permitted any eligible importer sufficient imports
of residual fuel oil to meet all bona fide sales contracts.
Similar measures have not been taken to decontrol residual fuel
2/
oil imports into Districts II-IV and District V.— However, in recent
years, the President has issued various Proclamations, and the Secretary
of Interior has proposed or promulgated various regulations, designed to
encourage imports of low sulfur residual fuel oil, or crude oil as bonuses
for the production of low sulfur residual fuel oil, in an effort to allevi-
ate air pollution problems.
The first step was a Proclamation in July 1967 authorizing
"bonus" allocations of crude oil to persons "who manufacture in the
United States residual fuel oil to be used as fuel, the maximum sulfur
V The qualification, "to be used as fuel," was intended to assure that
residual fuel oil imports were not used to circumvent crude oil restric-
tions by converting residual fuel feedstocks by cracking into gasoline
or other products.
2/ However, residual fuel oil produced from Canadian crude can be imported
into Districts II-V (as well as District I) without allocation or
license. The same is also true of shipments of residual fuel oil from
Puerto Rico.
IV-2 8
-------
content of which is acceptable to the Secretary [of Interior], in con-
sultation with the Secretary of Health, Education and Welfare."— On
October 4, 1967, the Secretary of Interior implemented this Proclamation
by providing for bonus allocations of crude oil on a barrel-for-barrel
basis to refiners in District V who manufactured low sulfur residual fuel
oil (under 0.51 sulfur content), whether refined from domestic or imported
crude oil, and delivered it to "customers required to burn such fuel in
order to comply with local government regulations." According to the
Secretary of Interior, these bonus quotas were intended to deal with
mounting air pollution problems in Los Angeles County. Allocations under
this bonus program have been growing steadily; from an initial rate of
12,000 bbls/d in 1968, they amounted to 55,000 bbls/d in 1970, are esti-
mated to total 150,000 bbls/d in 1972, and will probably reach 200,000
bbls/d in 1973.
Next, on December 11, 1968, the Secretary of the Interior extended
a program to promote the production of low sulfur residual fuel oil in
Districts I-IV by authorizing additional unfinished oil allocations to
refiners manufacturing low sulfur residual oil. However, unlike District V,
the allocations were restricted to unfinished oils imported from Western
Hemisphere sources and to persons who installed a desulfurization facility.
This amendment to the regulations was indefinitely suspended five months
I/ The same Proclamation changed the definition of residual fuel oil to
include both No. 4 oil (which is lighter than No. 5 and No. 6 fuel oil)
and crude oil burned directly as fuel. In District I, the effect of
these changes was to enable the importation of lower sulfur fuels (for
direct burning) without restriction.
IV-29
-------
later. Before suspension, however, three companies were granted 10-year
allocations in return for agreement to construct desulfurization facilities
to produce low sulfur residual on the East Coast. Those three allocations,
for a total of 241,000 bbls/d, were not suspended. However, by 1972, con-
struction had not started on any of the facilities mainly because of
inability to obtain suitable plant sites and other technical points.
In Districts II-IV, environmental pressures led several electric
utilities and oil companies to apply to the Oil Imports Appeals Board in
the past three years for special allocations of low sulfur residual fuel
oil on "hardship" grounds. In 1970, the OIAB granted such allocations to
Commonwealth Edison Co. and Detroit Edison Co. -- representing the first
major import allocations to utility companies -- and announced the avail-
ability of about 26,000 bbls/d for allocation in Districts II-IV during the
succeeding year. In 1972, the Oil Import Appeals Board was granted a "kitty"
of some 40,000 bbls/d of residual fuel oil for allocation in Districts II-IV
in cases of demonstrated hardship.
A still further measure to provide some flexibility in residual
fuel oil markets was a Proclamation on October 20, 1970 giving the Secretary
of Interior authority to permit the topping of crude oil in District I for
the purpose of producing burner fuel, subject to such conditions as the
Secretary might specify by regulations without adversely affecting the
national security. Subsequently, the Secretary published a proposed rule
to this effect, with the proviso that all products of the topping process
were to be utilized in the importer's own facilities. It was further pro-
posed that importers in District I could obtain the imported oil from any
IV-30
-------
source, while importers in Districts II-IV would be restricted to Canadian
sources only. Adoption of this proposed regulation would have supplemented
existing provisions authorizing the direct burning of crude oil by encourag-
ing, in the interest of safety, the topping of imported crude prior to
burning. However, most of the comments in response opposed the proposal
because of, among other reasons, the lack of a procedure for utilizing
the naphtha topping for production of synthetic gas. The proposal was not
adopted.
E. Alternatives to MOIP
The purpose of MOIP is primarily to support the domestic oil
industry by limiting imports of foreign crude oil and products on a
volumetric basis. This is not the only way to support a domestic industry.
In general terms, there are at least four general approaches to supporting
a domestic industry versus its foreign competition:
1. Volumetric limits on imports, such as MOIP.
2. Tariffs or fees on imports, such as recommended in 1970 by
the U.S. Cabinet Task Force on Oil Import Control.
3. Methods which combine features of both of the above, such
as import auctions proposed by at least one major oil com-
pany in the last few years.
4. Direct subsidy of the domestic industry.
The major advantages (as seen by proponents) and disadvantages
(as seen by opponents) of each are as follows:
IV-31
-------
1. Volumetric Limitations
Advantages
1. Volumetric limitations can totally insulate domestic prices from
downward pressure of lower foreign prices (on a delivered to the
U.S. basis).
2. If administered properly, the minimum portion of the domestic
market available to the domestic industry can be delineated and
predicted. MOIP has not, obviously, had this advantage.
3. Once properly set up, minimal "fine tuning" adjustment or revision
is required. Again, MOIP did not have this advantage because of
its specific structure.
4. Planning by industry and government is probably easiest with this
approach, at least in theory, because each company should know
well in advance exactly what import volume he will get.
5. Cost of imports to the importer (not necessarily the consumer)
is minimized, i.e., nothing is added in duty or fee.
Disadvantages
1. Does not generate revenue in basic form.
2. It is complex in structure, because import volumes have to be
allocated in some fashion to all of the recipients and a balance
between crude and product imports must be determined.
3. There is usually no price competition between domestic and foreign
crude and products.
4. When domestic supply is inadequate, a revision in quota levels is
required.
IV-32
-------
5. The program generates pressure for added low cost imports, which is
a disincentive for developing domestic oil operations.
2. Tariff or Fee Approach
Advantages
1. Allows maximum interplay of market forces, i.e., who buys what from
whom at what price is only minimally restricted. Also, there is
some price competition between domestic and foreign crude and
products.
2. Feueral revenues are generated, which if domestic versus foreign
price differential is large can be very large.
3. In basic form, the structure can be very simple conceptually.
4. The most generally used method of restricting imports is through
tariffs.
Disadvantages
1. Import volumes are quite unpredictable, therefore, portions of the
domestic market available to the domestic producer are unpredictable.
2. Price of domestic crude can be quite volatile, depending on vagaries
of tanker rates and foreign oil prices, reducing the incentive to
develop new domestic reserves. Even careful "fine tuning" may not
avoid this problem.
3. Cost of imports to the importer are increased. The consumer may
or may not know the difference in cost.
3. Combination Approaches
The major combination approach proposed in recent years has been
the import auction, and advantages and disadvantages of this are
IV-33
-------
discussed here. In the import auction system, the desired volumes of
ijiiports are periodically auctioned by the government to the highest
bidders. It is largely a volumetric approach -- total import volume
is limited, and there is also what could be called a variable tariff
or fee according to how high the bidding goes.
Advantages and Disadvantages
This approach has all the advantages of the volumetric, except
that eacii company does not know what imports iie will get until
after each auction. Also, revenues are generated which means cost
of imports are not minimized.
It also has the unique disadvantage of favoring the cheapest
foreign product(s) over all otners.
4. Direct Subsidy
This is much like the tariff or fee approach, except instead of
tacking on a tariff or fee to imports, a roughly equivalent per unit
subsidy is tacked on to domestic products. Obviously, this approach
can be a heavy drain on federal funds, but these are returned to the
public in lower prices. Politically, this is probably the worst
approach because funds required can be so:large.
Which of the above is the best approach has been the topic of
much debate and controversy. Whether any type of import restrictions at
all are desirable is perhaps the most controversial issue, and that
question is beyond the scope of this study.
As to the more specific concern of this study -- availability of
clean fuel -- either the volumetric or the tariff/fee approach can be
IV-34
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structured so as not to restrict clean fuel or raw material imports short
term during periods when domestic refining capacity is not adequate or
cannot be completed in time. Also, either can be structured long term so
as to encourage domestic refining of clean fuels, and to encourage more
domestic raw material for clean fuels. More specifically, a volumetric
approadi can be set up to increase allowed volumes of crude or product
short term as needed, and have firm volume limits longer term to encourage
domestic production and refining. The firm limits can be phased in over
a period of years to provide as smooth a transition as possible. Similarly,
a tariff/fee approach can have minimal or no fees on crude oil and on
products needed short term, and rise over a period of time to predetermined
levels which will encourage domestic production and refining over foreign.
Regardless of the approach, it should be reviewed frequently,
i.e., more than once a year, to see if its low sulfur fuel oil and other
objectives are being met.
IV-35
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CHAPTER V ' REGULATORY MEANS OF INCREASING LOW SULFUR FUEL SUPPLY
A. Supply, Demand and Price Trends for Oil in the United States
Before proceeding with discussion of regulatory means of
increasing low sulfur fuel supply, it is useful to review the overall
oil supply, demand and price situation in the U.S.
Energy demand in the U.S. had doubled in the last 20 years and is
expected to double again in the next 15 years. It has been oil and gas, not
coal or nuclear which has satisfied the growing energy requirements.
Petroleum and natural gas now supply some 75% of the nation's current
energy requirements.
But the domestic supply of oil and gas has been declining in recent
years, relative to demand. Most of the easily found domestic reserves have
already been discovered and the remainder is less accessible and more
expensive to produce, relative to the prevailing price of crude oil. ffore-
over, the reduction of the oil depletion allowance by the Tax Reform Act of
1969 effectively increased taxes and further reduced the economic incentive
for oil exploration.
Historically, the domestic refining industry has not been able to
produce residual fuel oil on a competitive basis with foreign residual fuel
oil because of the high price of domestic crude oil, and, in District I,
the lack of import restrictions as established under the MOIP. In the past,
foreign imported residual fuel oil has been priced below that of domestic
crude. The pricing of residual on the East Coast is comparable with the
lowest cost markets abroad because the virtually unlimited importation
V-l
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of this fuel causes it to reflect world market conditions. Thus, the
East Coast has become increasingly reliant upon imported residual fuel
oil and their current import level now represents about 90% of their
total demand for residual fuel oil. Not only is this area dependent upon
a foreign source of supply but they are also without the necessary refining
facilities to meet their fuel oil needs in the event foreign sources of
supply are disrupted. In fact, refining capacity on the East Coast has
declined in the past 10 years, although some 1,000,000 b/d of new refining
capacity has been constructed in the Caribbean and Canada to supply
residual to the East Coast. Therefore, the refining capacity for this
product has been exported.
Although environmental restrictions have increased the demand for
low sulfur fuels, the domestic oil industry has not constructed desulfuriza-
tion facilities for heavy fractions which would enable them to produce low
sulfur residual fuel oil from high sulfur crudes. In addition, some low
sulfur fuel is being produced by blending high sulfur residual with a
lighter No. 2 (househeating) fuel oil. This means additional supplies of
No. 2 oil are required for that purpose.
A definitive study of the outlook for U.S. oil supply-demand trends
was recently prepared by the National Petroleum Council at the request of the
Federal Government.—
The MFC made four different case studies of the supply-demand
projected to 1985. The case studies ranged from an all-out development of
I/ National Petroleum Council, "U.S. Energy Outlook," December 1972.
V-2
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domestic sources of fuel, to a condition which assumes that recent adverse
trends in the development of energy sources will continue, as follows:
Case I - Estimates outcome from maximum effort to develop domestic
fuel sources. Assumes oil and gas drilling increases at rate of 5.5% per
year and a high projection of discovery per foot drilled, and that synthetic
fuels be developed and produced at the maximum rate physically possible
without any restrictions due to economical problems. The nuclear power
projections are based on the assumption that all new base load generating
plants ordered between now and 1985 will be nuclear. Production of coal
for domestic consumption is increased at a rate of 51 per year.
Case IV - The lowest supply case, assumes that recent trends in
the U.S. oil and gas drilling activity and the success from such efforts
will continue; the siting and licensing problems with nuclear plants will
continue; the incentives to develop new coal mines will not improve and
environmental constraints will continue to retard development of resources.
This case results in a continued deterioration of the nation's energy sup-
ply posture and is generally less optimistic than the appraisal made one
year ago.
Case II - Assumes a less optimistic future than Case I, oil and
gas drilling activities at 3.5% per year increase, but with the same finding
rate per foot drilled. For nuclear assumes problem in manufacturing and
installation lead times will be solved quickly. Coal production increase
at 3.5% per year. Synthetic fuels are developed at a moderate rate.
Case III - Assumes that there will be improvement over Case IV.
Oil and gas drilling grows at average annual rate of 3.51 per year but the
V-3
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trend of oil and gas findings per foot drilled are lowered to those of
Case IV. The development of nuclear power proceeds at about rate in AEC's
most favorable forecast. The results of these four cases are summarized
on the following table.
U.S. OIL SUPPLY-DEMAND BALANCE AS PROJECTED BY
NATIONAL PETROLEUM COUNCIL
(Million Barrels per Day)
Year
1970 Actual
1975
1980
1985
1970 Actual
1975
1980
1985
1970 Actual
1975
1980
1985
1970 Actual
1975
1980
1985
Annual
Demand
14.7
17.5
19.6
20.5
14.7
17.6
20.5
23.1
14.7
18.3
22.3
25.8
14.7
19.3
25.3
29.7
Domestic
Production
11.3
10.2
13.6
15.5
11.3
10.2
12.9
13.9
11.3
9.8
11.6
11.8
11.3
9.6
8.9
10.4
Syn crude
Coal
Case I
0
0
0.1
0.7
Case II
0
0
0
0.1
Case III
0
0
0
0.1
Case IV
0
0
0
0
Syncrude
Oil
0
0
0.2
0.8
0
0
0.1
0.4
0
0
0.1
0.4
0
0
0
0.1
Net
Imports
3.4
7.2
5.8
3.6
3.4
7.4
7.5
8.7
3.4
8.5
10.6
13.5
3.4
9.7
16.4
19.2
Percentage
Imports
23.1
41.1
29.6
17.6
23.1
42.0
36.6
37.7
23.1
46.4
47.5
52.3
23.1
50.3
64.8
64.8
V-4
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As can be seen from these forecasts, Case I would be the most
attractive and Case IV the least attractive alternative from the U.S. point
of view. Perhaps Case II is the most reasonable objective as among the four
alternatives. It will involve a substantial increase in both domestic oil
production and in oil imports. Demand for oil differs in each case because
of different projections for other types of energy such as nuclear power.
Based on the reserve additions, crude oil production is projected
to increase from 1970 level of 9.1 million barrels per day to levels between
9.4 million barrels per day and 13.5 million barrels per day in 1985,
depending upon assumptions made in the Case I to IV. Approximately 201 of
this projected production is forecast to come from the North Slope. Equally
important is that our U.S. offshore region is also projected to provide 20%
of the total domestic by 1985. Secondary and tertiary recovery processes
account for 40% of the 1985 crude oil production. In all cases there was
a period in which domestic oil production declined from 1970 levels at a
rate of 2 to 3% per year for at least five years before beginning to
increase. This is a result of the lead time involved in finding and
developing new production.
Domestic oil and gas resources are of sufficient quantity to
support substantial increases in production according to the NPC. The
oil resources remaining to be discovered total twice the 93 billion barrels
of oil produced in the U.S. through 1970. However, this oil is going to be
more costly to produce because it is located in the less accessible places,
and will also involve secondary and tertiary recovery.
Alaska emerged as a significant source of supply to the markets
in the Lower 48 States with the discovery in the Prudhoe Bay area of the
V-5
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North Slope in 1968. Oil reserves in the Prudhoe Bay area are currently
estimated at 10 billion barrels. Most authorities predict that more
reserves will be discovered in Alaska as soon as the transportation problems
are solved. Delays encountered in obtaining necessary approval for the pro-
posed oil pipeline from the North Slope to Valdez in southern Alaska are
well known and require no further comment here. The effect of this delay
has been to slow down further exploration in the North Slope area.
In addition to the Valdez route, other routes are under considera-
tion for the transportation of the North Slope oil. One alternate route
would be a pipeline through the Mackenzie Delta corridor in the Northwest
Territories of Canada via Alberta and thence to the U.S. market via an
expansion of existing pipeline systems.
Presently, over 200,000 b/d of oil is being produced in the
Cook Inlet area of Alaska. There are two refineries located in Alaska that
use about 50,000 b/d of this oil, hence 150,000 b/d is being moved by tanker
to the refineries on the West Coast of the U.S. Most of this oil goes to
refineries in Southern California because it is of low sulfur and ash con-
tent. Most of this oil is used to take advantage of MOIP program on the
West Coast in which one barrel of offshore import licensed oil is granted
for each barrel of low sulfur (under 0.51) residual fuel oil produced. The
low sulfur Alaskan crude oil facilities comply with this particular feature
of the MOIP program. However, if there is not more exploration and develop-
ment in that area, this supply source is projected to soon decline with a
deleterious effect on the total supply of low sulfur fuel available for
Southern California.
V-6
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In 1971, the U.S. imported approximately 850,000 b/d from Canada,
with most of the volume originating in the Provinces of Alberta and
Saskatchewan. In 1972, the imports from Canada will be well over 900,000
b/d. For 1973 it is expected that some 1,000,000 b/d will be imported.
This oil is moved to the U.S. mainly through three pipeline systems, the
largest being the Interprovincial Pipeline System which moves about 500,000
b/d of Canadian crude into the Northern Tier states as well as Illinois,
Indiana, Ohio and New York. The Interprovincial line also moves crude to
the Canadian refineries in Sarnia and Toronto. The Hudson Bay Pipeline
moves about 100,000 b/d of oil into Montana, Colorado, Wyoming, Kansas,
Missouri and southern Illinois. The other pipeline system is the Trans-
Mountain Pipeline which moves over 200,000 b/d into the State of Washington.
Canada, at the present time, is estimated to have a few hundred
thousand barrels per day of excess production capacity and has relatively
limited proven reserves. The Interprovincial Pipeline System is the only
line that had any spare capacity for moving additional volumes of oil in
1972.
Canadian exploration is primarily proceeding in three areas: the
Mackenzie Delta in the Northwest Territories, the Arctic Islands, and Sable
Island off Nova Scotia. Significant discoveries have been announced, but
at this time without disclosure as to the reserve magnitude. At the present
time there is no way to transport the oil from those frontier areas to the
consumer market. Both the Arctic Islands and Mackenzie Delta oil would have
to be moved by a pipeline that would cost billions of dollars to build, pro-
viding one reason Canadians would like to see the Alaskan North Slope oil
V-7
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moved by a pipeline through Canada, i.e., their oil in northern Canada could
be integrated with that of the North Slope and transferred to market through
one pipeline system. If the discovery on Sable Island is of sufficient
quantity, it could be moved to market by tanker.
After our own domestic oil, authorities agree Canadian oil is,
from the standpoint of national security, the next best source enhanced in
part by the fact that a major portion of Canadian exploration and production
has been done by American capital. The NPC outlook for Canadian oil supply
is set out on the following table.
ESTIMATED CANADIAN PRODUCTION
CAPACITY AND PRODUCTION
(Thousand Barrels per Day)
1970 1975 1980 1985
Producing Capacity
Western Canada 2,275 2,600 2,400 2,250
Frontier Areas 0 0 400 1,200
Tar Sands 45 65 375 1,000
Production
Western Canada 1,316 2,005 2,185 2,200
Frontier Areas 0 0 400 1,200
Tar Sands 33 65 375 1,000
Source: NPC Volume II - U.S. Energy Outlook, November 1971.
While Canadian supplies are most attractive to the U.S., other
foreign sources are projected to account for most of our increased imports
to 1985. As of January 1, 1972, it was estimated by the National Petroleum
Council that in the non-Communist world proven crude oil reserves totalled
463 billion barrels. Assuming favorable political and economic conditions
V-8
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the oil industry is projected to be capable of finding and developing some
450 to 550 billion barrels of additional reserves outside the U.S. in the
next 15 years. Thus, the non-Communist existing reserves coupled with
resource base remaining to be discovered should be sufficient to meet
requirements up to 1985. It is anticipated that supplies will tighten
as the reserve production (R/P) ratio drops from 27 in 1972 to between
14 and 19 in 1985. The R/P ratio indicates the number of years that
these reserves could be produced at that rate.
The projected increase in productive capacity in Latin America
will be only about 1.71 annually up to 1985 whereas the projected increase
in demand for petroleum in Latin America is 4.7% annually to 1980. On
this basis the U.S. will be getting fewer imports from Latin America and
more imports from the Middle East and Africa because Latin America will
be requiring more of their own production.
The Chase Manhattan Bank in a recent study entitled, "Outlook for
Energy in the United States to 1985" forecast that the breakdown of petroleum
imports in 1985 will be as follows:
Latin America 1,500,000 b/d
Canada 2,100,000 b/d
Middle East and Africa 11,600,000 b/d
15,200,000 b/d Total
This report indicated that we will be getting about 200,000 b/d
less imported oil from Latin America in 1985 than we are now getting in 1972.
The Canadian imports are projected to increase about 1,200,000 b/d over 1972
levels. The majority of all additional imports will come from the Middle
East and Africa which is projected to be over 11,000,000 b/d above the present
V-9
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imports from that region. Over the past 20 years political and military
action has disrupted all or part of the oil supply from that area; including,
the civil war in Nigeria, the Seven-Day War in Egypt, the closing of the
Suez, the closing of the TransArabian Pipeline, and the nationalization of
the oil industry in Iran.
The Chase Manhatten projection is not unique. A similar conclusion
was reached by the Office of Oil and Gas, Department of the Interior, as
summarized on Tables X-l and X-2.
A brief discussion of future price trends for oil is pertinent,
because the relative price of U.S. and foreign oil determines the value of
import "tickets," which in turn determines the effectiveness of some of the
options for increasing supply of low sulfur fuel oil. As already noted,
"ticket" values are now about $0.50/bbl, substantially lower than they were
a few years ago. In part, they are lower because foreign oil prices have
risen fairly rapidly, while domestic prices have gone up only a little.
We expect foreign oil prices to continue to rise rapidly over the next
decade, although there is a school of thought (led by Professor M. A.
Adelman of the Massachusetts Institute of Technology) that predicts foreign
prices will drop.
What will happen to domestic oil prices is less easy to project.
If the present slow trend of increase continues, foreign and domestic
prices will converge in just a few years, and, of course, ticket values
will be nil. On the other hand, if imports continue to be restrained under
MOIP, there is no supply and demand reason why domestic oil prices cannot
maintain a substantial spread over foreign, which would mean a substantial
V-10
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WHERE THE OIL IS
WORLD TOTAL 611.40 BILLION BBLS.
AS OF JANUARY 1, 1971
RUSSIA & OTHER
COMMUNIST COUNTRIES 100.OO
CANADA 10.75
A
EUROPE 3.71
UNITED STATES
include*
Alaska 37.01
Without
FAR EAST MAINLAND 2.41
MIDDLE EAST AREA
344.57
SAUDI ARABIA 128.SO
KUWAIT 67.10
IRAN 70.00
IRAQ 32.00
NEUTRAL ZONE 25.70
ABU DHABI 11.80
OTHERS 9.47
CARIBBEAN
.59
VENEZUELA
-, 14.OO
OTHER AFRICA
1.76
OTHER
SOUTH AMERICA 8.40
AUSTRALIA
2.OO
If geography reflected the reserves of oil in the ground, the map of the world
would look like this.
OHic* of Oil and Cot
Deportment of the Interior
March 197)
(D
-------
1985 U.S. DEPENDENCY ON OIL IMPORTS
FROM NORTH AMERICA 8%
FROM NORTH AMERICA 8%
FROM EASTERN
HEMISPHERE
THOUSANDS OF B/D
FROM SOUTH AMERICA 13%
WITH NORTH SLOPE
U.S. PRODUCTION 9,165
ALASKA NORTH SLOPE 2,000
NORTH AMERICAN IMPORTS 2,200
SOUTH AMERICAN IMPORTS 3,500
EASTERN HEMISPHERE IMPORTS 9,585
TOTAL SUPPLY 26,450
FROM
EASTERN
EMISPHERE
THOUSANDS OF B/D
FROM SOUTH AMERICA
WITHOUT NORTH SLOPE
U.S. PRODUCTION 9,165
ALASKA NORTH SLOPE
NORTH AMERICAN IMPORTS 2,200
SOUTH AMERICAN IMPORTS 3,50O
EASTERN HEMISPHERE IMPORTS 11,585
TOTAL SUPPLY
26,450
OHira o( Oil ond On
Department of ttl« Interior
Rev. March 1972
H
6-
f
-------
ticket value. Of course, higher domestic oil prices would have the
advantage of increasing domestic supply of oil. There are other reasons,
though, why the government may not permit a spread to continue. Infla-
tionary pressures on our economy are likely to be with us for a long time.
So, in order to limit inflation, the government may well choose to keep
domestic prices from rising above foreign, and the government could even
go so far as to keep domestic prices below foreign. A further dis-
incentive to maintaining a substantial spread between domestic and
foreign oil is that high domestic prices tend to encourage foreign pro-
ducing countries to raise their prices. The result of all this is that
one should consider the future value of import tickets as being quite
uncertain.
When one looks at the combination of rapidly rising foreign
imports and rising foreign oil prices, the result is no less than frighten-
ing. The amount we will be paying for foreign oil unless we change our
course becomes very large, even in just a few years, and the balance of
payments outflow which results is enormous. (James Akins, U.S. State
Department, in testimony before the Senate Commerce Committee, October 1972,
estimates at least $10 billion per year by 1980 if we do not change our
course.) Also, our dependence on foreign oil becomes so great as to pose
critical national security as well as supply security risks. In our view,
this crisis of dependence on foreign oil is the worst of all the energy
crises we face as a nation -- balance of payments consequences alone will
soon become almost intolerable.
V-13
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What this crisis of dependence on foreign oil means is that later
in this decade, although not necessarily very much later, we will have to
change our course in energy and develop adequate additional domestic
supply to keep foreign dependence within bounds. Since there is a long
lag time in most measures which would achieve adequate domestic supply,
and since we have not yet changed our course, there is likely to be a
period in the late 1970's when we do not have enough domestic energy,
and cannot tolerate importing enough energy (mainly as oil) to meet pro-
jected needs. This is, in our view, what will ultimately limit low
sulfur fuel oil supply (as well as supply of all petroleum products)
later in the 1970's. This is also a major reason why we emphasize
domestic crude oil supply in the discussion which follows.
B. Analysis of Existing Regulations
One of the most important regulatory influences on crude oil
and fuel oil supply in recent years has been MOIP, which, among other
things, has in conjunction with state prorationing held domestic oil and
most product prices well above world levels and has guaranteed a market
for at least part of any oil discovered. Also important has been state
and federal leasing of oil properties, which has led to very large oil
discoveries in Alaska and substantial discoveries in the U.S. Gulf. Of
current importance but relatively little historical influence is the
Economic Stabilization Program. These and other lesser influences are
discussed in the sections below. For clarity, this and subsequent dis-
cussion considers crude oil (which can be burned as fuel or converted to
fuel oil) and fuel oil separately.
V-14
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1. Crude Oil Supply
Whether MOIP, by keeping U.S. prices up and assuring a market
for at least part of domestic discoveries, has led to substantially
greater supply of domestic oil has been widely debated -- for example,
some say that the huge discoveries of oil on the North Slope of Alaska
would not have been made were it not for MOIP. Others say the discov-
eries would have been made anyway even without MOIP because the potential
was so great in that area. Undoubtedly, the program has resulted in
greater supply, but whether it has been worth the substantial cost to
the U.S. public is a question that authorities in the field have not been
able to agree on.
As it was originally structured in Districts I-IV, with imports
essentially a fixed proportion of domestic supply, MOIP would have been
less successful in holding up domestic prices had it not been for state
prorationing. State "market demand prorationing" in Texas and Louisiana
effectively kept surplus domestic crude off the market while MOIP limited
imports. Thus, domestic prices could rise almost without economic restric-
tion. Now, though, prorationing has little effect, because both states
are operating at 1001 of production capability. Even at 100% capability,
domestic production is not maintaining its former proportion of supply.
State and federal leasing has been discussed in some detail
in Chapter VIII. It bears repeating here that additional leasing by
the State of Alaska has been delayed by environmentalists blocking of
the Alaskan pipeline in the courts. It is also important to repeat that
offshore leasing in the Gulf by the U.S. is already proceeding rather
V-15
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rapidly, so there may not be as much room to accelerate as some would
like to think.
Phase III price controls, and whatever similar controls that
are virtually certain to follow, will play an important role in future
crude oil supply. How Phase III will be interpreted for oil is still
unclear. If it is interpreted such that only small price increases
can occur, and this appears to be the more likely interpretation,
incentives to find and develop new or high cost oil will be less than
if substantial increases were allowed. Along with price controls,
price surveillance under MOIP could be important.
State oil conservation regulations have added substantially to
crude supply, although no precise figures are available. Prorationing,
unitization regulation, maximum recovery limits, and various other regula-
tions are involved here. Much progress has been made in this area, so
there is probably only limited opportunity here for improvement in the
future.
Other regulatory influences on crude oil supply have been
relatively small in recent years. There has been substantial research
on supplemental or synthetic sources of crude oil, specifically from
shale and coal. However, no commercial production is expected from either
for some time unless new incentives for such production are created.
2. Fuel Oil Supply
MOIP, obviously, has not resulted in adequate fuel oil supply
right now, especially on the East Coast but also in the Middle West and
V-16
-------
the Gulf Coast as well. This situation, however, is not entirely attribut-
able to MOIP but stems from the complex interaction of a large number of
factors including a rapid and mainly unanticipated increase in demand. How-
ever, the residual oil exemption in District I has accelerated the already
existing trend toward reduced domestic yields of this product and thereby
has reduced the ability of the industry to respond to rapid changes in demand.
In Districts II-IV, the growing number of petitions to import
residual fuel oil is an indication of tightening supply conditions.
Awards by the OIAB are a questionable vehicle for meeting these supply
problems and have not materially increased the supply in the past.—
Substitution of OIAB awards for a defined program represents an undesir-
able administrative mechanism.
From the standpoint of national security, various aspects of
MOIP relating to fuel supply would appear somewhat counter to the basic
objective of minimizing reliance on insecure sources of supply. In particu-
lar, the District I residual fuel oil exemption has resulted in nearly total
dependence on imported residual oil for the East Coast region. On the other
hand, the national security consequences of District V bonuses for low
sulfur residual fuel oil manufacture appears to be minimal. In crude-short
District V, oil would have to be imported in any case to make the needed
I/ Similarly, with regard to No. 2 oil, the special import program for
independent terminal operators (50,000 bbls/d in 1972) in District I
has not had a significant supply effect to date because it represents
such a small portion of the total demand in that area. The removal
of controls on imports of No. 2 fuel oil into Districts I-IV during
the first four months of 1973, however, may provide relief for that
period.
V-17
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products; therefore, though it does increase domestic low sulfur fuel
oil supply, the bonus affects only the relative allocations which are
given to the West Coast refiners.
Another adverse consequence of the District I residual oil
exemption has been to promote -- more than any other program encompassed
in MOIP -- the exportation of U.S. refinery capacity. To a lesser degree,
the special No. 2 fuel oil program and the removal of import restrictions
on LPG from Western Hemisphere sources have also contributed to this
situation. While there is no way of eliminating the need for imports to
meet the petroleum needs of the U.S., the adverse security consequences
of dependence upon imported oil could be reduced by limiting imports to
the extent possible to crude oil, thereby allowing refining operations to
take place in the United States. Generally, crude oil is more readily
available around the world than products in an emergency.
A collateral effect has undoubtedly been the discouragement and
postponement of investment in promising long-run domestic energy sources,
e.g., coal and nuclear power. Residual fuel oil is used by large consumers,
e.g., utilities, industry and large space heaters, who frequently have
sufficient capital resources to enable a choice between competing fuel
sources. Thus, insofar as MOIP programs either exempt residual oil imports
from quota levels or promote the domestic production of residual oil at
competitive prices, these consumers will tend to avoid the investments
necessary to use either coal or nuclear power in favor of residual oil.
This problem is compounded by environmental considerations,
since the economics of low sulfur residual oil use are considerably more
V-18
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favorable at the present time than attempting to adapt to the use of
coal with appropriate facilities to reduce harmful emissions. However,
it should be recognized that, at least until 1975, there is really no
practical alternative to the use of low sulfur residual oil in those
regions where stringent pollution regulations are in effect.
From a balance of payments standpoint, it is obvious that any
program permitting oil imports will engender adverse balance of payments
consequences. However, given the necessity of imports, there is no way
of avoiding adverse balance of payments consequences. But, again, these
adverse consequences can be minimized by limiting imports, insofar as
possible, to crude oil rather than higher cost products.
On the plus side, the various import measures relating to
residual fuel oil (and No. 2 fuel oil) supply have unquestionably had a
beneficial effect on prices to consumers because of the lower cost of the
foreign products. The District I residual fuel oil exemption has kept the
price of this product at a considerably lower level than if imports had
been restricted. The independent terminal operators and fuel distributors
in District I maintain that even their limited access to imports of No. 2
fuel oil has been a beneficial effect on home heating oil prices on the
East Coast, although this benefit has been eroded by substantial price
increases by the principal foreign suppliers of No. 2 fuel oil.
Phase II also apparently played a part in current heating oil
(No. 2) shortages, by freezing heating oil prices at their summer lows.
Many refiners claim this makes it uneconomic to make heating oil, and
have either made gasoline or run less crude instead of maximizing heating
V-19
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oil as they usually do in the winter. Whether this problem will be
alleviated under Phase III remains to be seen -- major refiners have
raised heating oil prices, and the Cost of Living Council is about to
investigate these increases.
Other regulation has had relatively little influence on fuel
oil supplies in recent years.
C. Regulatory Means of Increasing Crude Oil Supply
1. Increasing Domestic Crude Oil Supply
There are relatively few purely regulatory options for increasing
future domestic crude oil supply. The most significant are first, acceler-
ated leasing, and second, letting prices rise under Phase III, both while
continuing to limit imports under MOIP.
Accelerating and regularizing the leasing of offshore lands is one
of the more obvious ways to increase domestic crude oil supply, although, as
already noted, leasing is already preceding at a fairly rapid pace. Only about
1% of federal offshore area has been leased. For comparison, about 20-251 of this
area is estimated to have favorable oil prospects. Moreover, the U.S. Continental
Shelf out to a depth of 200 meters can be drilled with technology now at hand.
Oil and gas lease sales in the 1960's were sporadic, with the
result that promising drilling prospects for the industry did not become
available as fast as they might have with a more regular schedule. The
response of the industry to those sales which were held gives every indica-
tion that additional leasing would have been as favorably received. For
example, in every general lease sale held by the Interior Department
beginning in 1967, total bonus bids to the U.S. Government exceeded $500
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million, with the last in December of 1972 bringing an all time record of
nearly $1.7 billion.
The Gulf of Mexico is the logical focal point of the Department
of Interior's current leasing plan, because potential crude oil (and gas)
reserves could be enormous. Offshore Louisiana is already a prolific
producing area; offshore Texas has shown less promise to date, although
significant potential is believed to exist.
From the standpoint of location, the Atlantic OCS is an obvious
source of providing substantial supply increases of both oil and gas for
the East Coast, already heavily dependent on imports of foreign oil and
likely to become also dependent on imports of foreign gas (LNG) in the
future. While East Coast states will benefit from the development of
potential reserves in the Gulf of Mexico, they must share that potential
with other areas of the country which rely on Gulf Coast sources. By
contrast, all of the Atlantic OCS potential would presumably be avail-
able for local East Coast markets.
Though not as strategically located, the potential of the Gulf
of Alaska could also be very large.
In offshore California, leasing was halted by the major oil
spill occurring in January 1969, and further drilling on some 35 leases
granted prior to that time has been suspended. Interior's authority to
order suspension of operations is now in the courts. Thus, the situation
is uncertain in California at the moment. However, the same basic con-
siderations dictating the leasing of Atlantic OCS lands also favor a
resumption of leasing of the California OCS and extension of this leasing,
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assuming sufficient industry interest and favorable geological data, to
other Pacific Coast offshore areas. It should also be noted that the
Pacific states are effectively not connected by pipeline to Gulf Coast
sources of supply and hence, lacking a means of transportation, cannot
benefit from resources discovered in the Gulf of Mexico.
A corollary issue connected with offshore leasing concerns the
leasing method which will best promote early and rapid exploration and
development of the OCS lands. Interior's present method of awarding
leases is through cash bonus bidding, with a fixed royalty (16-2/3%)
required on any ensuing production. This method has been criticized on
the ground that it siphons off large amounts of capital in bonuses which
might otherwise be expended on exploration and development. Another
criticism is that the bidding process is restricted to larger operators
able to afford the cash bonus plus finance subsequent drilling activities,
thereby discouraging smaller operators with less financial resources.—
This is said to deter the widest possible participation in offshore
development. Althernative methods have been suggested, the two principal
ones being: (1) a deferred bonus-fixed royalty system under which portions
of the bonus would be due at various times in the future; and (2) a royalty
bidding system, with no bonuses.
Both of the suggested alternatives could make available large
sums of capital for exploration and development that otherwise would be
committed to bonus payments. However, Interior takes the position that
If To date, a number of smaller operators have participated in offshore
leasing and exploration in joint ventures with other companies.
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these methods would result in less incentive for full lease development
and recovery of resources. This danger is considered particularly great
in the case of royalty bidding which, Interior fears, would be conducive
to speculative leasing by parties with no intention of exploration and
development and also to premature abandonment of leases. However, even
in the case of the deferred bonus alternative, the fact of less "sunk"
cost could reduce the incentive of the operator to obtain maximum pro-
duction.
In testimony before the Senate Interior Committee on June 19,
1972, then Assistant Secretary of the Interior Harrison Loesch defended
the present cash bonus bid-fixed royalty system as the best of the possi-
ble alternatives and said Interior does not currently plan to change this
system unless directed to do so by Congress.—'
Letting crude oil prices run free under Phase III (or its
successor), while continuing to limit imports under MOIP, would certainly
result in greater supply of conventional crude oil. And, if prices ran
far enough, to say over $5/bbl (in 1973 dollars), supplemental (synthetic)
oil would likely become economic. The amount of new conventional oil that
would be found at higher prices is impossible to quantify, but is probably
very large. The potential amount of supplemental domestic oil, mainly
from shale or coal, is almost unlimited by shale or coal supply. However,
in the case of shale, availability of water (needed to process shale oil)
V Statement of Harrison Loesch, Assistant Secretary for Public Land
Management, U.S. Department of Interior, before Senate Committee on
Interior and Insular Affairs, on leasing and disposal policies for
energy resources on public lands.
V-23
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may limit, and environmental problems may limit both shale and coal
supply. Supplemental oil supplies ultimately will have to play a major
role in our energy picture, and much research and attention has been
given this subject. We will not labor this complex supply alternative
here, however, because the massive subsidies or other special incentives
needed to develop supplemental oil (barring raising crude oil prices) can
only come from legislative action.
Other regulatory means of increasing domestic oil supply include
granting import quota "tickets" under MOIP to those who find new oil and
to those who produce otherwise uneconomic oil. This approach has been
promoted, especially by independent producers, at various times in the
past. Potential would be limited both by availability of tickets, and
by the uncertainty in future ticket values discussed earlier.
2. Increasing Foreign Crude Oil Supply
Longer term, other than Canada and possibly selected other
Western Hemisphere countries, we do not recommend regulatory measures
to increase foreign oil supply. The option of letting prices run up
under Phase III or its successor, and then granting Canada special
preference under MOIP would encourage both conventional and supplemental
oil from that country. Basically, the discussion here parallels that
for the U.S. above, except that supplemental oil would be from tar sands,
supply of which is not limited by water availability and probably not
by the environment.
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Short term, there is probably no alternative to increasing
foreign oil supply by simply increasing quotas under MOIP. These quotas
could be phased out over time to meet longer term objectives.
D. Regulatory Means of Increasing Low Sulfur Fuel Manufacture
1. Increasing Domestic Manufacture of Low Sulfur Fuel
An obvious regulatory option for increasing domestic manufacture
of low sulfur fuel oil (and naphtha) would be to either hold all residual
fuel oil imports at present levels, or to scale down imports over a period
of time under MOIP. Concurrently, domestic fuel oil prices (and naphtha)
would have to be permitted to rise under Phase III (or its successor) to
make domestic manufacture attractive. In this option, crude oil imports
would have to be increased, of course, and additional refining capacity
devoted to production of residual fuel oil.
There are a variety of other options that have been studied
and/or proposed to specifically encourage domestic manufacture of fuel
oil (and naphtha). Most involve using "ticket" values under MOIP in some
way as an incentive to make fuel oil or naphtha domestically. The two
most important are extending the "bonus" approach now in effect in
District V to the rest of the country, and the so-called "drawback"
approach. The first, as already discussed, simply grants import tickets
for manufacture of low sulfur fuel oil on a one barrel for one barrel
ratio. Thus, the ticket value is a direct subsidy for making low sulfur
fuel, regardless of what it is made from.
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The "drawback" approach, on the other hand, is an attempt to
give some of the advantage now accruing to foreign refiners to domestic
refiners as well. In this option, the refiner is granted import tickets
in direct proportion to the amount of unrestricted products (under
MOIP) he makes from foreign oil. Thus, if a refiner makes 20 barrels
of residual fuel oil and 10 barrels of naphtha for synthetic natural
gas feedstock from 100 barrels of foreign crude, he will receive tickets
for 30 barrels more foreign oil. This approach is not as specifically
encouraging to low sulfur fuel manufacture as the bonus plan, but it
does encourage domestic fuel manufacture as well as domestic refining.
Another type of proposal is the so-called ICOP refinery
(Imported Crude Oil Processing), which is special facility to process
imported oil in a simple, separate refinery into residual fuel oil,
synthetic natural gas, or other products not subject to import restric-
tions. There does not appear to be much interest in this approach now,
presumably because building separate refineries of this type is a less
efficient allocation of resources than integrated additions to existing
refineries such as would occur with the "drawback" plan.
Another option is desulfurizing of imported high sulfur unfin-
ished heavy oil, which could be encouraged under MOIP and Phase III.
This has the disadvantage that, in general, balance of payments outflow
from importing an unfinished product, i.e. , a partially refined product,
is greater than importing crude oil, though less than importing a finished
product.
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It would certainly be desirable to encourage domestic refining
by restraining environmentalist and other opposition to refineries and
superports, especially on the Atlantic Coast. However, purely regulatory
measures would not seem to contribute much here -- this is a complex
mixture of political, legislative, regulatory, and judicial problems
largely at the state and local rather than the federal level.
2. Increasing Foreign Manufacture of Low Sulfur Fuel Oil
Longer term, as in the case of foreign crude oil, we do not
recommend measures to encourage foreign manufacture of low sulfur fuel,
although again, Canada and possibly other Western Hemisphere sources
may be exceptions. Foreign manufacture both increases balance of payments
outflow and reduces security of supply. Here, Canada, etc. could get
special preference in MOIP, with fuel oil prices in the U.S. permitted to
run up under Phase III (or its successor) to levels sufficient to encourage
Canadian manufacture and export to the U.S.
Short term there may be no choice but to permit imports of low
sulfur fuels.
E. Legislative Means of Increasing Crude and Fuel Supply
Present regulatory means of increasing low sulfur fuel oil supply
are extremely limited, so new legislation may be needed to increase crude
and fuel oil supply. Possible legislative measures fall into two broad
categories — nav incentives to increase domestic oil production and
refining, and new measures to reduce consumption of oil and its products.
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Broadly, legislative incentives to increase domestic crude oil
production (beyond what can be achieved within the regulatory framework of
oil import policy and price controls) fall within three basic groups --
new tax incentives, direct subsidy of or participation in oil operations,
and R§U support. We think the first and third can be effective and are the
most palatable politically, providing one adds the qualification on the
first that tax incentives apply only to "new" (in contrast to already dis-
covered or "old") oil or to developing of oil supply not otherwise economic,
such as higher cost secondary or tertiary recovery oil. In our opinion, the
outlook for legislation which applies new tax incentives to "old" oil in
addition to "new" oil is rather dim, because this would contribute to
inflation, and in the view of some, unfairly enrich the owners of reserves
already found. Across the board incentives may be more palatable iŁ_ the
incremental profit accruing to holders of "old" oil reserves were required
to be reinvested in exploration.
Tax incentives to increase domestic exploration and production
could take various forms, from increasing the depletion allowance to an
investment tax credit on exploration expenditures. Increasing domestic pro-
duction in response to such incentives would almost directly increase low
sulfur crude oil availability, because the bulk of domestic oil found in
the past has been of low sulfur (sweet) variety).
Direct subsidies or federal participation in exploration, to be
effective, would place heavy drains on the Treasury, hence we do not see
these as really viable options. R§D support, though it may be somewhat
costly, has obvious advantages in such areas as developing supplemental
V-28
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oil supply (from shale or coal), improving offshore and deep well drilling
technology, and improving secondary recovery technology.
Incentives that increase domestic refining could tend to increase
low sulfur fuel oil availability, if incentives are structured to particu-
larly encourage making clean fuel oils rather than just to encourage domestic
refining in general. Types of legislative incentives that can be applied to
encourage domestic refining are fast tax writeoff, investment tax credits,
reduced income tax on domestic refining or direct domestic refining subsidies.
The measures indicated above would not tend to discourage short
term importing of low sulfur fuel oil or raw materials. Thus, they do not
have the problem discussed for import policy where it is difficult to recon-
cile the long term objective of increasing domestic supply with the short
term need for imported supply. In the long term, these measures will increase
domestic supply and enable us to reduce imports. In addition to these
measures, a tariff or fee on imports may be needed to insure that domestic
supply so developed will be used by the consumer.
Legislative measures to reduce consumption of other petroleum prod-
ucts, which would make more oil available for conversion to low sulfur fuel,
cover a wide range of possibilities. We do not think rationing is a reason-
able alternative longer term. On the other hand, such things as promoting
mass transit and requiring better insulation on houses appear desirable and
have other important benefits. Ultimately, substantial selective fuel taxes
to reduce consumption will probably be needed. Such taxes have the political
advantage of generating much needed revenues, but have the major political
disadvantages of being unpopular (barring a much more severe energy crisis)
and of affecting the less affluent disproportionately.
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CHAPTER VI - COST EFFECTIVENESS AND TIME REQUIREMENTS FOR ALTERNATIVE
REGULATORY STRATEGIES TO INCREASE LOW SULFUR FUEL SUPPLIES
A. Increasing Low Sulfur Fuel Oil Supply Short Term
Short term (to about the end of 1975), we think the optimal regu-
latory changes which would tend to increase supply of low sulfur fuel oil
are:
1. Raise domestic low sulfur fuel oil price ceiling permitted under
Phase III to encourage domestic manufacture of low sulfur fuel oil (Phase III
does not control price of imports).
2. Adopt a "bonus" and/or "drawback" plan under MOIP as outlined
earlier to encourage domestic manufacture of low sulfur fuel oil in
Districts I-IV.
3. Remove import restrictions on low sulfur fuel oil in Districts
II-V under MOIP.
4. Offer import ticket bonuses under MOIP for newly discovered
domestic crude oil and for domestic crude oil which would otherwise be
uneconomic to produce.
Of course, the regulatory agencies involved would be the Cost of
Living Council for higher prices, and the Oil Policy Committee for the rest.
The amount of low sulfur fuel oil which would be immediately
forthcoming with these measures is likely to be small -- desulfurization
capacity is limited both in the U.S. and abroad, so what these measures
would do is to encourage optimum use (in terms of fuel oil) of desulfuriza-
tion and existing refining capacity. The amount of domestic crude oil
those measures would bring out immediately would also likely be small,
VI-1
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although some high cost oil might be shut in now that such measures would
make profitable.
The additional domestic low sulfur fuel oil generated by these
measures in a year or two may also, unfortunately, be small, though
imports into Districts II-V might become significant. The reason the
effect of two of these measures on domestic supply is likely to be small
is the great uncertainty in future ticket values -- refining and particu-
larly desulfurization equipment is very costly and would be unlikely to
be added unless incentives can be expected to last for some time. Also,
the time between looking for oil and producing it is long, so ticket
values which are uncertain longer term may not offer much new incentive
to look. Letting price rise is probably less uncertain, but refiners
have been faced with so much uncertainty in so many phases of their
business that they may be reluctant to invest any large sums they can
avoid. Legislation assuring refiners of incentives, whether price or
otherwise, would probably change this view, but that is of course not
a regulatory option.
The cost to the consumer of letting low sulfur fuel oil prices
rise would probably be moderate if the amount of the increase permitted
were not excessive. The cost could be substantial, however, if such an
increase acted to pull up the price of imported fuel oil. The cost of
using tickets as incentives depends on how one views the value of tickets
--if one assumes that ticket values to oil companies get passed on in
savings to consumers, then using tickets for incentives has a significant
cost to the consumer.
VI-2
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The cost of removing import restrictions, of course, may be
increased balance of payments deficits, but short term this may be tolerable.
Another possible cost of increased low sulfur fuel oil supply
could be reduced supply of other products such as gasoline.
B. Increasing Low Sulfur Fuel Oil Supply Longer Term
Longer term (from about 1976 on), we think the optimal regulatory
changes which would tend to increase supply of low sulfur fuel oil include
all the short term measures except removing import restrictions (item 3),
plus the following:
1. Accelerate offshore leasing.
2. Limit or reduce imports of low sulfur fuel oil, but on a specified,
long-term phased in basis.
Accelerating federal offshore oil (and gas) property leasing
will increase crude and potential fuel oil supply, and probably at rela-
tively low cost compared with other domestic options. Also, substantial
federal revenues are generated. The main cost involved is environmental,
although strict regulation should keep this cost low in the Gulf. Environ-
mental cost of leasing offshore Atlantic and in the Gulf of Alaska, where
there has not been the background of experience as in the Gulf, may be
higher, although it would seem that strict regulation and care in choice
of areas to be leased should keep this cost reasonable compared to
benefits. Leasing is relatively slow to increase crude oil supply. It
takes several years to find and develop a new field, and then reserves
so discovered are produced over a long time frame of 10, 20 or more years.
VI-3
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The benefit of limiting or reducing imports of low sulfur oil
longer term is, of course, in balance of payments and security -- when
these factors become critical, more oil can be imported as crude than as
finished product.
Longer term, unfortunately, using import tickets as incentives
to increase low sulfur fuel oil manufacture and to increase crude oil
reserves may not be very successful due to the great uncertainty in the
longer term value of these tickets.
We did not include letting crude oil prices rise substantially
under Phase III or its successor here or in the short term discussion,
because this option does not appear to be politically viable. Letting
crude oil prices rise across the board, compared to specific incentives
for newly discovered oil or oil that would not otherwise be economic, does
not appear consistent with solving the currently critical problem of
inflation. A specific, controlled increase in price of a single product
such as low sulfur fuel oil which is needed to meet pollution control
objectives is not in the same category. Given the likelihood of strong
inflationary pressures in the U.S. for the foreseeable future, it is hard
at this time to see any Administration permitting large increases in
domestic crude oil prices across the board.
Barring a large domestic crude price increase, the quantity of
low sulfur fuel oil generated longer term by all of the regulatory
measures above will likely be limited by availability of domestic crude
oil, and availability of domestic crude oil will not be much affected
by these measures. As discussed earlier, if we do not alter our present
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course on domestic oil, and this is, in our view, mainly a legislative
matter, the availability of low sulfur or any other fuel oil may be very
limited indeed later in this decade.
C. What EPA Can Do
It is apparent from the previous sections that the regulatory
options for increasing low sulfur fuel oil supply are very limited. In
our view, it is mainly up to Congress to provide the incentives and the
stable investment climate to develop the domestic oil base needed to
assure availability of low sulfur fuel oil.
What does this mean for EPA? For EPA, there does not appear
to be much that can be done directly. Nevertheless, we think EPA can
make a significant contribution to increasing low sulfur fuel oil
supply long term by doing the following:
1. Encourage and support legislation now which will eventually
increase domestic oil supply. Optimal legislation from the standpoint
of both developing low sulfur fuel supply and political viability would
seem to be selective new incentives (a) to develop new or otherwise
uneconomic oil and (b) to develop supplemental oil supply from shale
and/or coal. These incentives would not apply to already discovered
oil that is now economic to produce, which would make such incentives
more politically acceptable than across the board incentives. Selective
new incentives are differentiated from across the board incentives which
would increase prices on oil already discovered.
2. Use the influence of EPA as an independent agency to publicize
the environmental tradeoffs involved in running short of low sulfur fuel
VT-5
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oil versus increasing our domestic oil supply. In our view, EPA is in a
better position than any other agency or group to convince the public that
if we don't accept some environmental risk from say offshore drilling, we
may face greater and more certain environmental damage from not having
low sulfur fuel oil.
3. Use the influence of EPA to try to achieve the goals of environ-
mentalist groups with minimal court or other delay of domestic oil pro-
jects. This might take various forms, such as acting as an intermediary,
helping other agencies write environmental impact statements, or encourag-
ing controls stiff enough to avoid environmentalist intervention but not
so stiff as to kill important energy projects.
4. Use the influence of EPA to tell the story of environmental
consequences of domestic energy measures in a balanced and level headed
manner, rather than letting the extremists and alarmists of the environ-
mental movement dominate the scene.
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BIBLIOGRAPHIC DATA
SHEET
1. Report No.
APTD-1461
3. Recipient's Accession No.
I. Title and Subtitle
An Analysis of the Regulatory Aspects of Fuel Oil Supply
5' Report Date
June 1973
6.
7. Author(s)
J. G. Tewksbury, M. W. Rockefeller, T. Suecieker
8. Performing Organization Kept.
No.
9. Performing Organization Name and Address
Foster Associates, Inc.
1101 Seventeeth Street, N.W.
Washington, B.C. 20036
10. Project/Task/Work Unit No.
11. Contract/Grant No.
68-02-0640
12. Sponsoring Organization Name and Address
EPA, Office of Air Quality Planning and Standards
Strategies and Air Standards Division
Research Triangle Park, North Carolina 27711
13. Type of Report & Period
Covered
Final Report
14.
15. Supplementary Notes
16. Abstracts
A study was conducted to review the current regulatory picture affecting the supply and
distribution of natural gas and low sulfur fuel oil, to analyze possible changes in thi
regulatory picture, and to appraise alternate regulatory strategies which could bring
about increased supplies of these clean-burning fuels. The results of the study are
contained in two separate reports, one report for natural gas and the other for fuel
oil. Also, abridged copies of the two comprehensive reports are provided.
17. Key Words and Document Analysis.
Government
Law
17o. Descriptors
17b. Identifiers/Open-Ended Terms
Air pollution
Fuel Oil
17c. COSATI Field/Group
5D
18. Availability Statement
Unlimited
19. Security Class (This
Report)
UNCLASSIFIED
Security Class (This
Page
UNCLASSIFIED
21. No. of Pages
117
22. Price
FORM NTIS-39 IREV. 1-721
USCOMM-DC MR32-P72
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