Offshore Gulf of Mexico Exploration and Production

My name is James D. Abercrombie, General Manager of Offshore Production for Dominion Exploration & Production, Inc.

I am pleased to be here today as a representative of the largest independent natural gas and crude oil exploration and production companies in the United States who make up the Domestic Petroleum Council.

Together these DPC companies, including my own, are strong players in the offshore Gulf of Mexico, with almost 3,700 total OCS lease interests, many as operator. More remarkable, they have more than 1,100 deepwater lease interests in the Gulf of Mexico, including a number of operator designations. They are among the high-tech leaders in finding developing and producing the natural gas and oil resources we need to generate electricity for our computers, heat and cool our homes and businesses and provide the mobility we need to get to our jobs and other activities.

Against that background, let me emphasize that we in the DPC are most concerned about meeting the challenge of supplying the dramatic increase in gas demand that you will continue to hear about. We at Dominion and our counterpart companies are betting our capital everyday on our technical ability to find and produce the supplies that we'll need from a very substantial gas resource base in the offshore Gulf and other areas. But we'll need your help in meeting a number of other challenges, principal among them being access to that resource base.

Let me say a word first about our technical ability. Dominion is among the most active and high-tech explorers in the offshore Gulf of Mexico. Many of the major petroleum service companies have led in the development of innovative geoscience technology that is being applied today to enhance our ability to find and produce oil and gas efficiently. Seismic technology that allows us to "see" geologic structures and potential oil and gas reservoirs below the seabed in the Gulf of Mexico is perhaps the most exciting area of change, especially in view of our need to work in deepwater areas. The conversion from analog to digital technology, combined with the development of "4-D" seismic and "4-C" technology has allowed significantly better resolution and imaging of reservoirs and has resulted in more efficient development plans, utilizing multi-well and multi-lateral completions and more cost effective designs.

Major engineering innovations have also allowed the industry to develop deepwater fields where conventional solutions would not have been economic. A clear example is the design and installation of the world's first production spar, "FPS Neptune", jointly developed by Dominion and Kerr-McGee.

The Neptune Spar is a floating cylindrical structure anchored to the sea floor, in 1,960 feet of water.

The hull is 705 feet long, 72 feet in diameter, weighing 12,000 tons, while the topside is 3,600 tons in weight, supports the production facilities and crew accommodations. A unique trait of the Spar concept concerns effective field development. When reserves from one portion of the field have been depleted, the Spar is moved to another area to produce untapped reserves. This is especially useful when reserves are located over a wide area. The trailblazing concept has led to the use of Spar type designs in a number of previously undeveloped deepwater areas, thus increasing oil and gas supply to the U.S. New drilling and well completion technologies have also expedited new production in the Gulf of Mexico Deepwater.

Again, we're willing to spend our money and devote our human resources to meeting consumer needs.

But we need to go where the resource is.

We applaud and strongly support the efforts of the Bush Administration, as well as the Resources Committee in hearings like this, to step back and examine whether there are areas to which we should have even greater exploration and production access. I'm not talking about national parks, wilderness areas or marine sanctuaries.

But our record in the Gulf of Mexico, and our technology improvements over the past decades should be taken into account as we think about the resources that are currently off limits off all our coasts. It may be time to gather more seismic and other information and to revisit the policy choices we are making in selected areas.

And certainly areas that have already been the subject of careful analysis should be available for appropriate exploration and production activity.

Lease Sale 181 in the Eastern Gulf of Mexico, scheduled for December of this year, provides an outstanding example of what we need to be doing. It alone could make a significant 400 BCF per year contribution to providing natural gas to Florida and the surrounding region to meet increasing electricity generation needs.

The development of supply sources in close proximity to key growth markets like Florida will result in timely responses to the needs of consumers. This is especially important when we consider that projected electricity demand in Florida will include a growth of approximately 25 thousand megawatts. Since almost all of that growth is expected to be fueled by natural gas, Florida gas demand (shown below) is expected to double over the next 15 years.

The chart below illustrates a National Petroleum Council projection of the natural gas supply impact of access restrictions in the eastern Gulf of Mexico. The Reference Case curve (middle line) assumes that Western Norphlet, off the coast of Mobile, Alabama, and MMS Lease sale 181 will be the only areas in the eastern Gulf that will produce gas.

Also shown here is the impact if sale 181 did not happen (bottom line). As noted a moment ago, this is a potential 400 BCF per year loss of valued natural gas resource--or the amount of gas that could meet one-third of Florida's projected electricity demand growth by 2015.

(The top line indicates the NPC study's projection of substantial additional gas supplies to feed the country's growing energy demand if industry is allowed access beyond the Western Norphlet and Sale 181 areas.)

Clearly the Administration should ensure that Sale 181 is held as scheduled.

We are also looking forward to early approval of Floating Production Storage and Offloading vessel (FPSO) technology so that additional deepwater gas and oil fields can be developed more efficiently and cost effectively.

In addition, Congress should consider extension of the deepwater royalty provisions of the Deep Water Royalty Relief Act of 1995 that spurred much of the activity we have seen in waters deeper than 200 meters.

Under the previous Administration, the Minerals Management Service proposed, and the current Administration allowed to go into effect, royalty incentives for deep gas wells on the OCS, and some relief for those seeking gas beneath offshore salt formations. That was positive. But, unfortunately, the MMS also significantly increased the royalty burdens for deepwater leases in the Gulf of Mexico above where they had been for five years under the 1995 law by failing to provide for an automatic suspension of royalties.

In the last federal offshore lease sale in March, the fewest number of blocks offered (214) and the fewest number with bids (52) were in the 200-800 meter water depths. These are the depths for which the MMS eliminated automatic royalty suspension (action with which DPC disagreed.) Most blocks offered were in shallow waters (1305) for which deep gas incentives have been put in place (with which we agree) and ultra-deep waters (2460) where royalty suspension volumes were significantly reduced. There were 338 blocks in shallow waters receiving bids that averaged a total of $670,000 per block. There were only 47 ultra-deep blocks that attracted bids totaling an average of $3.66-million per block. Our strong belief is that all deepwater areas would have seen more robust bidding -- and will in the future if Congress reinstates a more realistic royalty regime as was in place under the DWRRA.

While on the subject of royalties, we strongly support the Administration's efforts to expand and make permanent the taking of its royalties in kind. This "R-I-K" approach, now being extensively pilot tested in the Gulf of Mexico, makes federal leases more attractive to companies like ours, and eases the federal government's administrative and potential litigation burdens. (Currently, 360 million cubic feet of gas and 7,000 barrels of oil are being taken as royalties in kind.)

Finally, we at Dominion and the DPC look forward to continuing to work with you to meet the energy challenges ahead.