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Senator LONG. And they also require that you use their citizens in those refineries, don't they?
Mr. SCHULTZ. That is right, and they require that you use all of the materials to build those refineries insofar as the country is able to manufacture them in that construction job, too.
Senator KERR. In a lot of places after you get it all set up and done they come over and tell you they are going to expropriate it.
Mr. SCHULTZ. That is correct.
STATEMENT OF PAUL R. SCHULTZ, PRESIDENT, OKLAHOMA INDEPENDENT PETROLEUN
My name is Paul R. Schultz. I am president of the Oklahoma Independent Petroleum Association and a director and member of the import policy committee of the Independent Petroleum Association of America. I appear on behalf of both of these associations. I am also president of the Blackwell Oil & Gas Co., a company which has been engaged for 53 years in exploration for and production of crude oil and natural gas.
My statement will include a discussion of some of the problems of the Oklahoma oil industry, the relationships of Oklahoma's problems to those of the United States oil industry as a whole, and of the effects of ever-increasing foreign imports upon both. I would like to first discuss some of the overall aspects of the oil-import problem and then discuss the situation in my own State of Oklahoma.
In studying the effect of the Trade Agreements Act and the results of its extension, two important factors must be considered. First, and foremost, is national defense and second, the national economy. The two factors are interrelated because a democratic nation cannot successfully prepare for its defense without a healthy domestic economy.
Currently an oversupply of crude oil and products plagues this Nation. In addition, the world, other than the United States, has capacity to produce petroleum far in excess of the amount necessary to supply present world markets outside of the United States. Our immediate problem is a result of the fact that crude oil produced outside of the United States seeks, and for many years has sought, to enter the most favorable petroleum market available, which is of course the American market. This natural characteristic of products to seek the best market is the primary cause for the burgeoning increase in the quantities of oil imported into the United States in recent years.
Surplus producing capacity in the United States was originally developed by domestic producers in response to the requests of the defense agencies who indicated that a large reserve producing capacity would be needed in case of emergency. No subsidy has ever been granted to the producer, and none has ever been sought by him, for the creation of this reserve capacity for security purposes. We are now in the position that maintaining excess reserve capacity in the face of ever-increasing imports is an insupportable burden on domestic producers. At present about one-third of the producing capacity of this country is shut in.
To the difficulties of maintaining excess producing capacity for security purposes in competition with increasing imports, has now been added a redue tion in the rate of growth of the domestic petroleum market, and the present crisis in the oil indsutry has resulted. Domestic crude-oil production reached an alltime peak of 7,717,000 barrels daily in March of last year, at the height of the Suez crisis. It has declined steadily since that time and for the last 3 months, March-May, has averaged about 6,250,000 barrels per day. This is almost 1,500,000 barrels below the March 1957 level and about 100,000 barrels daily less than for the year 1954. Although some improvement is expected during coming months, production for the year 1958 is almost certain to be well below the average production in either 1956 or 1957.
Depressed conditions in the petroleum industry during the past year have had a serious effect on exploration and development work. Experience shows that
new discoveries are directly dependent upon the number of wells drilled, and these declining activities indicate a serious threat to our domestic oil supplies so vital to national security. Excessive imports of crude oil and refined products are a primary factor in this deterioration of the domestic industry.
The decrease in United States petroleum exploration, as measured by the number of active geophysical and core drilling crews, began in 1954 when imports' were recognized as threatening national security by the Congress and the administration's special cabinet committee. During 1954 an average of 713 exploratory crews were active in the United States. The number of crews active has declined steadily each year since that time averaging 666 in 1955, 623 in 1956, 580 in 1957, and 526 during the first quarter of 1958. This is the lowest level for this vital function of the petroleum industry since the first quarter of 1951. The number of exploratory crews active in the first quarter of 1958 is more than 30 percent below the average during the peak year of 1953. Domestic exploration is being discouraged despite the fact that vast potential areas remain untested. The American Association of Petroleum Geologists has stated that more than half of the total land area of the United States is potentially oil producing and yet, to date, we have only proven up 2 percent of the country's surface. In recent years new States have entered the ranks of those producing oil and in many States areas previously thought completely developed are now yielding new discoveries in heretofore untapped depths.
The decline in exploratory crew, activity was followed by a decrease in the number of active drilling rigs and well completions. There are more than 3,100 rotary drilling rigs, in the United States. During 1957 an average of 2,429 rigs were active, a decrease of 7.2 percent from 1956. The decline in the number of active rigs has become more pronounced in 1958, averaging 1,858 during the first 5 months of this year. This represents a decrease of 29 percent from the 1956 average and is about 24 percent below the average number active in 1957. This drastic decline in drilling activity means loss of trained personnel and early abandonment of highly specialized equipment. Such deterioration of the drilling industry means inadequate new wells, inadequate discoveries and inadequate domestic reserves to meet future requirements.
The decrease in active drilling rigs has been accompanied by a decline in new well completions. The number of new oil wells, new gas wells and dry holes drilled in 1957 totaled 53,838, a decrease of 4,322 completions or 7.4 percent as compared with 1956. Wells drilled during the first 5 months of 1958 show a further decrease of about 13 percent below the same period in 1957. A continuation of this trend would mean less than 48,000 wells (oil, gas, and dry) for the year 1958. This would be the lowest drilling rate since 1952. Since 1952 the national oil demand has increased almost 25 percent.
In short, excessive imports of crude oil and refined products are contributing to a severe depression in domestic petroleum exploration and development. Wildcat drilling for new reserves declined 10 percent in 1957 against 1956 and shows a further decrease of about 25 percent in the first 5 months of this year. As a result of these declines in exploration and development activities the domestic industry failed in 1957 to find as much new oil as was produced with the result that total proved reserves declined for the first time since World War II.
There is no place for the pessimist in the business of finding and developing oil and gas. It is necessary to be realistic, however, and face the fact that excessive imports have made it uneconomic to explore and develop the United States oil reserves needed for national security. The July 1957 report of the Special Cabinet Committee To Investigate Crude Oil Imports contained the following warning:
"The sharp increase in imports programed by the importers in their report to ODM indicates such a trend of increase in relation to domestic production as will bring about a further decline in domestic exploratory and development activities. This should not be permitted. The timelag between exploration and production requires that we explore today for tomorrow's usable reserves. Any other course will impair industrial expansion, availability of supplies for consumer use, and preparedness for an emergency.".
In hearings conducted early this year by Captain Carson, administrator of the voluntary import program, applicants for quotas to import foreign oil repeatedly testified that in order to compete with present importers and survive they needed an allocation of cheap foreign oil. In the short span of a few
months 44 additional applications have been received by Administrator Carson. These applicants seek import quotas totaling more than 300,000 barrels daily.
What further proof do we need of the threat to our national security when it is obvious that oil imports in excess of the 1954 ratio are denying markets to domestic oil, and consequently, reducing our domestic exploration, drilling, and producing program, as reflected by the statistics we are submitting.
Long ago those who have studied our oil industry learned that the drilling and the producing arm of our industry cannot be put into mothballs and then in time of emergency called upon to fill an urgent need.
In my own State, the Oklahoma Corporation Commission was forced to reduce allowables drastically during the last year. During March of this year the commission ordered all wells in the State, regardless of size or character, to produce only 89 percent of the amount of oil which they produced during January. Three categories of wells were critically affected: (1) The production of stripper wells, which produce only small amounts of oil each day, were further reduced; (2) wells producing large volumes of salt water with only small volumes of oil were restricted, and in the opinion of many engineers, the ultimate recovery from these wells will be seriously affected; (3) for the first time in the history of Oklahoma's conservation program, the production of secondary recovery projects, such as waterfloods, was prorated. Only one other State regulatory body, the Kansas commission, has ever prorated waterfioods. The Kansas commission's order was soon revised to exclude waterfloods because ample evidence proved that this procedure would result in a permanent loss of State and National reserves. New Mexico and Texas regulatory bodies, on hearing evidence of the detrimental effects that would result, have consistently rejected any action to prorate secondary recovery projects. The Oklahoma Corporation Commission later found it necessary to remove certain waterfloods from this order.
Oklahoma is only one of several States that has made drastic reductions in its daily production. The oil producing States of the Southwest have reduced production in the first half of 1958 as compared to the first half of 1957 about 1 million barrels daily, representing a decrease in total gross income to producers and royalty owners of about $3 million per day.
The impact of this $3 million per day reduction is felt in the everyday economy of each State, but even more important than the impact on the economy is the effect on future reserves. Sixty cents of every dollar taken out of the ground by the oil industry goes back in, to explore for further reserves. Consequently, the industry in just 5 States is reducing its search for more oil by more than $1,800,000 each day. This figure tells only part of the story.
A great segment of the economy of our section of the country is geared to the production of crude oil. In Oklahoma 67 of the 77 counties produce oil. Petroleum represents about 92 percent of our mineral wealth. Over 70,000 people are directly employed in Oklahoma's oil industry and receive over $300 million in salaries and wages each year. The economic, educational, and cultural life of the people of every community in our States is greatly influenced by the oil industry.
The economic life of the people of our State is directly affected by the present crisis. Also vitally affected, is the economy of the State government itself. The State of Oklahoma, through its gross production tax, receives a direct revenue of 5 percent of the value of all oil produced within the State. This revenue is applied to maintain our schools, highways, welfare funds, etc. The welfare and progress of any State or community is geared to its industries, and Oklahoma's oil industry is the major industry in the State.
Unemployment in our industry is increasing every month. Some of our larger service companies have reduced their workweek to 35 hours and in addition have had to reduce their personnel. Increasing unemployment in the oil industry is in good part traceable to and proportionate to increasing foreign imports. This unemployment is not confined to ordinary labor; a good percent of our technical personnel is entering other industries. History is all to clear on this: if an emergency demands all-out effort from the oil industry, our lost technical personnel will have to be retrained or replaced, a heavy burden on any industry.
The following information, based on figures from the Oil and Gas Journal, compares total wells drilled, wildcats drilled, and the number of active rotary rigs in Oklahoma during 1956 and 1957 :
We, as an industry, are going backward, not forward. We are being required to contribute to a higher economy (rising costs of steel and labor), and to compete with a cheaper product (foreign imports).
Evidence and examples could be cited here at great length to show that foreign crude cannot be relied upon in time of emergency. History has proved this fact better than words could ever prove it. In recent months there has been considerable strife in three areas—the Middle East, Venezuela, and Indonesiathree areas that export crude to the United States. Can we, for a moment, think of depending for our supply of a vital war commodity from areas as politically unstable as these?
In an effort to promote a better understanding of the oil industry, an industry whose statistics are frequently misinterpreted, the attached tables, numbered I, II, III, and IV, showing the economies of exploration and production in Oklahoma and in the United States have been prepared. The figures developed in these tables are all based upon information published by the American Petroleum Institute, the Oil and Gas Journal, or the United States Bureau of Mines. The basis of all of the figures used is documented on each of the tables.
Table I sets forth the statistics on oil wells drilled in the United States in 1940, 1950, 1956, and in Oklahoma in 1956, and shows that the average productive well in Oklahoma developed only 46,910 barrels of oil reserves, whereas the average productive well in the United States developed 93,180 barrels. If, however, dry holes are taken into consideration, the productive well developed only 31,780 barrels per "test" in Oklahoma and 58,085 barrels per "test" in the United States.
The cost of developing the reserves indicated above is shown in table II. The average productive Oklahoma well costs $40,500, whereas the average productive well in the United States costs $55,300. After allocating to the productive well its proportionate share of dry holes drilled, the average cost in Oklahoma is $60,000 as compared to $90,000 in the United States.
Table III develops the overall economics of oil exploration and production, based upon the facts developed in tables I and II. This table shows that the total investment required to develop reserves in Oklahoma is $2.01 per barrel, as compared to $1.61 per barrel United States average. Both figures include a leasing and exploration cost, exclusive of dry holes, of 43 cents per barrel, based upon industry experience for 1956. Using as a gross realization, the average 1957 price for crude oil, and using a lifting cost of 50 cents per barrel in Oklahoma and 45 cents per barrel United States average, gives a net realization after operating cost of $2.50 per barrel in Oklahoma and $2.65 per barrel average in the United States. This net realization must cover the investment for finding and developing the profit on this investment and income taxes.
The oil producer in Oklahoma is realizing only 49 cents per barrel return on an investment of $2.01, or a ratio of return to investment of 24 cents per dollar invested or 3.5 percent per year spread over 17 years. For the United States these same figures are $1.04 return on $1.61 invested; or 65 cents per dollar invested or 6 percent per year spread over 25 years. These returns, in addition to being low for a high-risk industry, are spread over long periods of time.
The rate at which money is returned from oil exploration and production has been developed on table IV. Oklahoma is producing its reserves at a rate of 10.74 percent per year. The average United States rate of production is 3.60 percent per year. On this basis, the average new well in Oklahoma produces 13.80 barrels of oil per day gross and in the United States 21.80 barrels per day gross. After royalties and overrides, the average amount of oil received by the operator for each new well is 11.23 barrels per day in Oklahoma and 17.73 barrels per day in the United States.
Based upon a selling price of $3 per barrel and an operating cost of 40 cents per barrel during the early years of production, the average income, before income taxes, for the average well is $10,750 per year in Oklahoma and $16,750 per year in the United States. The cost of drilling the average productive well including its share of dry holes is again $60,000 for Oklahoma and $90,000 for the United States. However, including the cost of leasing and exploration, these costs per productive well are increased to $76,300 in Oklahoma and $122,700 in the United States. Assuming that there is no decline in the production of new wells during the period, payout requires 7.1 years in Oklahoma and 7.3 years in the United States. If the normal decline in production is included, pagout will extend to 12.0 years in Oklahoma and to 10.5 years in the United States.
The average rate of return for a typical oil operator is 3.5 percent per year in Oklahoma and 6.0 percent in the United States, when total expenditures required for drilling and exploration are considered.
Combining the information developed in tables III and IV, the economics of the oil exploration and production business can be summarized as follows:
The typical oil operator cannot expect the return of his investment in less than 10 years. After his investment has been returned, he can expect to realize a profit amounting to from 26 to 65 cents for each dollar invested, and this return will be spread over a period of 15 to 25 years from the time his productive well was drilled, making the average rate of return only 3.5 percent to 7 percent per year. All figures are given before income taxes.
The tables also reflect the historical pattern of the oil industry in the United States over a 15-year period. This pattern shows the decreasing amount of oil found per well, the dramatic increase in the cost of drilling these wells, the ever-increasing finding costs, and the increasing cost of lifting. The net effect of all these factors is of course an ever-decreasing economic attractiveness for the oil producer.
Figures for 1957 are not yet available, but preliminary estimates indicate that the economics will look no better and will probably look worse. Since the first of 1958, we have seen a gradual decrease in the price of crude oil overspreading the country through many price adjustments. Since the increase in crude price of February 1957, we have had over 100 price adjustments, almost all in a downward direction, in the United States.
Our industry stands at a vital crossroad, and the figures I have presented to you bear witness to this fact. Our economy has been crippled and our security is being threatened. Never has the economy of our section of the country depended so completely on a single decision at the national level. Our ability to provide the fuel for national defense in the coming years is no longer a foregone conclusion, if the present situation is allowed to continue. We do not ask that all imports be cut off. We ask only that imports be reduced and that we return to the clear intent of Congress when this legislation was renewed 2 years ago, and that these controls be made mandatory.
The United States domestic petroleum industry is being forced to curtail its operations drastically as imports of foreign oil are allowed to flood its market. Once many of its technical personnel are scattered, many of its wells abandoned. much of its gathering and transporting system allowed to fall into disuse, the domestic industry will be unable to regain its position of strength quickly enough to meet the demands of a national emergency. We urge that Congress provide immediate relief by making it mandatory that imports be held to a redsonable percentage of domestic production.