National energy policy as modified by Congress has stressed and encouraged development of our Nation's energy resources and the more efficient use of energy to reduce our dependence on insecure oil imports. A central element of this policy has been congressional initiatives to restore funding for fossil, conservation, and renewable gas-related research programs in DOE. Unfortunately, if the Nation is to have a balanced energy program again, it will require congressional initiatives to restore much of the funding that has been slashed. National energy policy must be modified to fund development of our domestic energy sources. Within the GRI recommendation of $121 million for gas-related research, we are recommending $13 million for the fuel-cell program in the fossil energy program. Of that, $4 million would be for phosphoric acid technology development work that GRI would propose to continue to cofund with the Department of Energy. In surface coal gasification, we are recommending $18 million with primary emphasis on gasifying our domestic eastern coal resources and emphasis on the fluidized-bed work that is ongoing in the Department of Energy. In unconventional gas we would recommend a total of $14 million, $7 million for work to continue in the tight gas sands formations in the West, $4 million to continue work in the Devonian shales which underline nine of our Eastern States in the Appalachian regions. In the area of conservation, Mr. Chairman, we recommend $10 million in DOE's Conservation Program for a joint program to be funded with GRI and the gas industry for heat pumps. To match the $10 million we recommend in the DOE budget, the gas industry would fund $13 million in the cofunded program. Finally, Mr. Chairman, in the office of energy research programs in the Department of Energy in their basic energy sciences work we would recommend a redirection of $35 million to establish a viable geosciences initiative. All projections indicate that 40 to 50 percent of our oil and gas that we will use 25 years from now are in fields that are yet to be discovered. Yet, within the Department of Energy, there is less than one percent of the budget devoted to geosciences-type related research that would lead to a better understanding of these oil and gas reservoirs. In summary, during the past 4 years, Congress has recognized the need for viable long-term gas-related research programs in DOE and has appropriated approximately $35 million each year for these programs. The gas industry is seeking a continuation of this trend in fiscal year 1987 at a reduced level. The gas industry also is willing to cofund $161 million of this work for near-term research in these same program areas. Thank you, Mr. Chairman. I would be glad to respond to any questions. [The prepared statement of Mr. Webb follows:] STATEMENT OF DAVID O. WEBB, SENIOR VICE PRESIDENT I appreciate the opportunity to appear before you today to present the Gas Research Institute's (GRI) views and FY 1987 budget recommendations for gas-related research in the Department of Energy's (DOE) fossil, conservation, and renewables programs. GRI recognizes the importance of controlling the federal budget deficit and supports the need to reduce expenditures as Congress intended when it passed the Gramm-Rudman-Hollings bill. Therefore, GRI is recommending a $121 million core program for the gas-related research in the DOE budget. This recommendation is significantly lower than last year's gas industry recommendation and is approximately 11 percent lower than the FY 1986 congressional appropriations of $135 million for these projects. Central to GRI's recommendation is that the gas industry through GRI's research program is planning to commit $161 million to associated near-term gas-related research in 1987, which more than matches the DOE budget recommendation. GRI is an independent, not-for-profit scientific research organization that plans, manages, and develops financing for a cooperative research and development (R&D) program for the mutual benefit of the gas industry and its present and future customers. The R&D program is implemented through contracts with research organizations, engineering and other professional service firms, universities, energy companies, and manufacturers. Funding for the GRI R&D program is provided primarily through regulated sales of natural gas. Even though GRI is not a government contractor and does not accept federal funds, GRI cofunds and coordinates many of its research programs with DOE; therefore, the actions of Congress on the FY 1986 DOE budget deferrals and the FY 1987 DOE budget request have a direct impact on the gas industry's research program. DOE FUNDING POLICY SHIFTS In examining the DOE FY 1987 budget request, it is important to note that it significantly reduces spending for energy R&D and increases spending for DOE defense-related activities. The proposed $12.1 billion DOE budget request assigns $8.2 billion, or two-thirds of the funds, to defense activities. This is an increase of 14 percent over the current budget. At the same time, new budget authority for fossil, conservation, and renewable energy R&D is reduced by 74 percent from $717.5 million in FY 1986 to $185.7 million in FY 1987. To further illustrate this dramatic policy shift, the proposed DOE FY 1987 budget request for the Strategic Defense Initiative (SDI) program is $604 million--three times the new budget authority for the fossil, conservation, and renewable energy programs combined. In fact, the $315 million increase over the FY 1986 SDI program's appropriated funds is greater than the combined new budget authority for the fossil, solar, and conservation R&D programs. This is not sound national policy. If federal energy R&D funding continues this downward spiral, in a few years the nation will once again find itself faced with rapidly rising levels of oil imports because it has not established the necessary technology base to fully develop its domestic energy resources and to use them efficiently. It should be noted that the nation's oil import bill in 1985, although reduced significantly from 1984 levels, was still over $52 billion, and oil imports amounted to 21 percent of consumption. Therefore, terminating ongoing energy R&D programs invites severe problems in meeting future energy demand. RATIONALE FOR FEDERAL ENERGY R&D The urgency and necessity of maintaining a viable federal R&D program in fossil, conservation, and renewable energy becomes self-evident when we examine where the U.S. is projected to get the major portion of its energy supplies during the next 25 years. DOE's FY 1987 budget book indicates that in 1984 the U.S. received 90 percent of its energy from fossil fuels. GRI's projections (See Exhibit 1), which are consistent with DOE's, indicate that in the year 2010 the U.S. will still meet more than 75 percent of its energy needs with oil, gas, and coal. Yet DOE has proposed to assign less than 2 percent of its FY 1987 new budget authority to fossil, conservation, and renewable energy research. To fund even this severely reduced program requires the use of $67 million of fossil and $37 million of conservation R&D funds Congress appropriated just four months ago. The administration's FY 1986 deferrals will result in the termination of many programs Congress specifically approved. National energy policy as modified by Congress has stressed and encouraged development of our nation's abundant domestic energy resources and the more efficient use of energy to reduce dependence on insecure oil imports. A central element of this policy has been congressional initiatives to restore funding for fossil and conservation research programs in DOE. Unfortunately, if the nation is to have a balanced energy program, it will require congressional initiatives again this year. A balanced federal energy policy would establish a reasonable relationship between energy R&D funding and the actual anticipated production and use of U.S. energy resources. The DOE FY 1987 budget request ignores this relationship and does not provide a balanced energy R&D policy. LIQUID FUELS OUTLOOK The long-range impact of an unbalanced energy research policy that essentially ignores domestic resources is made clear when you examine the outlook for liquid fuels. The 1985 GRI Projection of U.S. Energy Supply and Demand indicates increasing total demand for liquid fuels and oil imports. The GRI projection assumes that there will be steady economic growth at average historical rates and no increases in the real dollar-denominated world price of oil and that continued conservation trends will moderate demand growth in all of the energy end-use sectors. Still, it is estimated that U.S primary energy consumption will reach nearly 102 quads in the year 2010, with petroleum contributing 35 percent (36 quads) of the total. By comparison, in 1983 the U.S. consumed 31 quads of petroleum. Petroleum consumption is forecast to increase from 15.2 million barrels per day in 1983 to 16.7 million barrels per day in 2000. In the extended projection, petroleum consumption reaches 17.6 million barrels per day by 2010. While domestic consumption is increasing, the domestic production of crude is expected to decline throughout the projection to 7.8 million barrels per day in 2000--a reduction of nearly a million barrels per day from today's production levels. The GRI projection was prepared before the current drop in world oil prices. When it is compared to several major oil companies' forecasts, it is relatively optimistic concerning U.S. crude oil production. These oil companies expect domestic crude production to decline faster between 1983 and 2000 to around 6.5 million barrels per day in 2000. The net result of an increasing demand for petroleum with a simultaneous decline in domestic crude production is a very large increase in dependence on foreign sources of crude. The GRI projection expects imports to increase to 9.2 million barrels per day in 2010--the greatest demand for imports since the 1977 high of 8.8 million barrels per day. The lower estimates of U.S. crude production made by some of the oil companies would result in even higher levels of imports--over 10 million barrels per day. In fact, the Interstate Oil Compact Commission recently estimated that if the current world oil price of approximately $15 per barrel is maintained for several years, the amount of domestic oil production probably will be at least 300,000 barrels per day less than current projections due to plugging and abandonment of stripper wells. This is dramatized by the fact that the most recent U.S. rotary rig count--the leading indicator of oil and gas drilling activity--reached its lowest level since 1973 with only 1248 rigs in operation. Since at least 40 to 50 percent of the domestic oil and gas production in 2000 must come from yet-undiscovered reservoirs, if the collapse in drilling activity lasts for several years, it will result in even less domestic production and oil imports of more than 10 million barrels per day. By the 1990s, other non-OPEC countries will also face declining production levels. As a result, the U.S. may be faced with the prospect of again relying on OPEC oil as the major source of its crude oil imports. It seems probable that once this happens, OPEC will require significant premiums in real prices to increase production to these levels. This would lead to dramatic escalations in the world price for crude near the turn of the century. National energy policy must be modified by Congress to encourage development of ample supplies of domestic energy resources. A key element of this policy is budget actions to restore funding for critical long-term energy research in DOE. Maintaining adequate program funding is critical if the U.S. is to successfully develop the full potential of its vast domestic energy resources. NEED FOR DOE FUNDING TO CONTINUE NATURAL GAS R&D Natural gas will continue to maintain an important role in a highly competitive U.S. energy mix throughout the remainder of the century. (See Exhibit 2.) If funding for a viable federal/gas industry research program is continued, the technology base necessary to develop domestic supplemental gas supplies and more efficient appliances, equipment, and processes to use gas can be established. To develop this technology base requires a 10- to 15-year lead time. The current drop in world oil prices and the natural gas surplus provide a "window of opportunity." In order to provide a better R&D balance and a stable R&D environment, GRI is recommending $121 million for gas-related research in the fossil, conservation, and renewable energy programs to fund the technology base. During the past four years, Congress has recognized this need for a viable long-term gas research program in DOE and has appropriated approximately $135 million each year for these programs. The gas industry is seeking a continuation of this trend in FY 1987 at a reduced level. In contrast to the DOE proposal to drastically reduce funding for long-term gas-related research, the gas industry's response to federal R&D policy directing industry to fund more of its own near-term R&D has been very impressive. While DOE has proposed about $42 million--only one-third the level of FY 1986 appropriated funds--for FY 1987 gas-related research, GRI is planning to increase its own R&D budget to $161 million in 1987 (up from $138 million in 1986)--nearly four times the DOE budget request. Clearly the gas industry has responded to federal energy R&D policy. However, an effective joint effort requires a long-term gas research program and commitment from DOE. RECOMMENDED DOE FY 1987 GAS-RELATED RESEARCH With the gas industry rapidly increasing its near-term research activities, it is critical for DOE to continue ongoing long-term gas research to have a viable national program. I will discuss important long-term programs in gas research that this Committee previously supported and that require continued federal funding. |