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The original documents are located in Box 33, folder "Outer Continental Shelf, 1976:
Leasing Legislation (1)" of the Glenn R. Schleede Files at the Gerald R. Ford Presidential
Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
FI. ocs Lungs Lang
MAY 26 1976
MEMORANDUM FOR:
THE PRESIDENT
FROM:
James T. Lynn 151 L
SUBJECT:
OCS Leasing Legislation
Attached is an information memo on offshore oil and gas leasing
legislation signed by several members of your Administration.
Since it was drafted, it has become clear that the Committee
is not going to adopt many of the Administration's amendments.
Therefore, we have decided to stiffen our position by opposing
the granting of a rule and seeking as many votes as we can get
for recommittal.
Attachment
STATEMENT OF THE INTERIOR
United States Department of the Interior
OFFICE OF THE SECRETARY
March
3.
1249
WASHINGTON, D.C. 20240
MEMORANDUM FOR THE PRESIDENT
FROM:
SECRETARY OF THE INTERIOR
SECRETARY OF COMMERCE
ADMINISTRATOR, FEDERAL ENERGY ADMINISTRATION
DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
SUBJECT: Legislation on Offshore Oil and Gas Leasing=-Information
Memorandum
FORD i LIBRARY
Background
Shortly after President Nixon announced accelerated leasing for offshore
oil and gas in January 1974, public concern along the Atlantic coast,
in California and in Alaska brought Congressional action to amend the
Outer Continental Shelf Lands Act, under which the leasing program is
carried out. The Senate passed S. 521, by a vote of 67 to 19, on
July 30, 1975; the House version, H.R. 6218, is about to receive floor
action, perhaps later this month.
Both bills are comprehensive versions of the OCS program. They
extensively modify the leasing arrangements and provide for an oil
spill liability fund as well as aid to States experiencing onshore
impacts. The State aid provisions may become moot if the amendments
to the Coastal Zone Management Act, which are now in conference and
which also contain impact aid provisions, are modified to become acceptable
to you and are signed into law.
Administration Position
The Administration has taken the position that the Senate OCS bill is
unacceptable. It contains provisions that are expensive, wasteful, and
potentially crippling to the leasing program, and it would seriously
delay development of offshore oil and gas resources. The House bill
as reported is much less objectionable; the minority on the Committee
were joined by majority members from Louisiana and Texas in a series of
close votes removing many of the worst provisions of the Senate bill.
REVOLUTION
AMERICAN
BICENTENNIAL
1776-1976
let
2
In our work thus far with the House committee (Ad Hoc Select Committee
on the OCS, chaired by John Murphy of New York) we have maintained
general opposition to the bill, and have twice written letters detailing
Administration objections. In part, the Committee has responded positively
and on the whole we feel that the House bill is now nearing acceptability
if a limited number of additional changes are made, and if adverse floor
amendments can be prevented.
Our general feeling is that the Administration should not accept
significant impairment of the OCS leasing program, which is basically
sound as it stands. On the other hand, there is something to be gained
if a bill could be signed; present State opposition to new leasing off
Alaska, California, and the Atlantic coast would be reduced, and leasing
would undoubtedly be easier to accelerate.
Therefore, if you do not object, we intend to continue to work for an
acceptable bill. The price of Administration acceptance, we are agreed,
should be the changes we list below, plus at least a fair number of
those less crucial but still important changes listed at Tab A.
Avoiding adverse amendments on the floor will be a problem, as will the
outcome of conference with an unacceptable Senate bill. We are by no
means confident that we will be able to recommend signature of the
final product, but the chances are good enough, and the outlook for
sustaining a veto uncertain enough, so that we believe working for an
acceptable bill is the best idea.
GERALD FORD LIBRARY
Required Changes in H.R. 6218
1. Lease cancellation. The bill requires cancellation of hazardous
leases under criteria that are one-sided and has compensation provisions
that are technically deficient. We feel cancellation should occur only
after passage of time has clearly shown it to be necessary, and after full
consideration of the advantages and dangers of continued production.
Cancellation should be invoked only for hazards unanticipated at the
time of lease issuance, and the lessee should be compensated for either the
value of the lease at the time of cancellation, or his net expense on the
lease, whichever is smaller.
2. Limit on bonus bidding. The bill limits use of the present bonus-
bid system for lease sales to 90 percent of future acreage, and requires
approval by both House and Senate to exceed the limit. We do not object
to the 90 percent figure, provided it can be exceeded unless both
Houses, by joint resolution, disapprove.
3
3. Information for States. The bill requires provision to adjacent
States of privileged information developed by companies from geological
and geophysical exploration. We feel that such information should be
provided only if it will not unduly harm the competitive position of
the companies involved.
4. Drainage of State lands. The bill requires joint Federal-State leases
in the first three miles of Federal waters if the area contains oil or
gas pools partly underlying State lands. We do not accept the joint-
lease concept, which implies States' rights beyond the 3-mile limit and
which gives States a potential veto over leasing of such lands. On the
other hand, we are willing to provide arrangements for equitable division
of revenues so that a State will not be financially injured by drainage.
5. Recommendations of Governors or Advisory Boards. The bill requires
acceptance of leasing recommendations of Governors or Advisory Boards,
unless we find them inconsistent with national security or overriding
national interest. We feel that in the case of a nationally-owned
resource not lying within the boundaries of any State, there should
be no presumption of such acceptance, though we seek and encourage
States' recommendations.
6. Environmental studies. The bill shifts Interior's extensive program
of OCS environmental studies to Commerce. We are agreed that the primary
purpose of the studies is to furnish information for Interior's leasing
decisions, and that control should remain in Interior's hands.
7. Changes in safety regulations. The bill provides that no change in
regulations may reduce the degree of safety on the OCS. We object
GERALD R.FORD LIBRARY
to this restriction because it prevents balancing the advantages and
disadvantages of new regulations, and because it could be a source
of delaying litigation.
8. Authority to regulate. The bill strikes from present law the key
sentence which, since 1953, has been the basis of regulations and court
decisions defining Interior's regulatory authority. The sentence is
not inconsistent with other parts of the bill, and we feel it should
be retained.
9. Consistency with State coastal zone programs. The bill requires
that leasing be consistent with State coastal zone programs, but
drops the qualifying phrase which is present in the Coastal Zone
Act itself, "to the maximum extent practicable." We feel the phrase
should be retained, so that the standard of consistency is no higher
for OCS leasing than for other Federal programs.
4
10. Best technology. The bill requires use of "the best available and
safest technology, economically achievable.' We oppose enactment of
this phrase unless report language makes it clear that the costs and
the advantages of new technologies can be balanced against each other,
and the bill is amended to make clear that "economic achievability" is
to be determined by Interior, not the courts.
11. Safety regulation. The bill makes multiple assignments of agency
authority for safety regulations; sometimes as many as three agencies
are directed to do the same thing, to no clear purpose or effect. We
favor retention of the regulatory responsibilities in present law.
12. Marking of obstructions. The bill makes mandatory the Coast Guard's
present discretionary authority to mark obstructions on the OCS for
navigational purposes. We feel that discretion should be retained,
because marking is not always helpful or necessary, and because the
Coast Guard's liability in case of accident might otherwise be
unacceptably expanded.
13. Impact aid. The impact aid provisions are identical to those in
the House Coastal Zone bill now in conference. We object to them as
being inconsistent with the Administration bill on this subject.
FORD i LIBRARY GERALD
14. State authority. The bill forbids development plans to be
inconsistent with "any valid exercise" of State or local authority.
This is language taken from the Senate bill, which requires development
plans to contain information about onshore facilities, but it is
inappropriate in the House bill, which restricts the plans to facilities
in Federal waters.
15. Requirement of due diligence. The bill bars issuance or extension
of a lease if the applicant has not diligently performed his obligations
on other leases. The provision is unnecessary, since due diligence on
each lease is required elsewhere in the bill; it is unworkable, since
it could lead to cancellation of a lease held jointly by several parties
because of the lack of diligence of one of them on another lease.
16. Citizens' suits. The bill broadens the standing of citizens to
sue under the Act well beyond provisions of other recent environmental
laws. This raises the likelihood of nuisance suits.
5
17. Stratigraphic drilling. The bill requires offer of permits to
drill in each frontier area at least one pre-lease-sale test hole, in
a location most likely to contain oil or gas. Present policy is to
keep these tests "off structure" so that no discovery of oil or gas
will result, in order to gather useful geologic information but avoid
pressure for further government exploration before leasing. Present
policy should be retained.
If all of these changes were made, we think the House bill would be
acceptable. We will continue to work with the Committee toward this end.
Thomas Secretary of the &. Interior Heppe
160 for Ellime Richardson
Secretary of Commerce
JolgBarl Administrator, Federal Energy
GERALD FORD LIBRARY
Administration
J Director, Office J. of Management R
and Budget
TAB A
Other Administration Objections to H.R. 6218
1. Retroactivity. The bill applies new development plan requirements
designed primarily for frontier areas to all leases on which production
has not taken place, including hundreds of leases in developed areas
of the Gulf of Mexico. The requirements should be applied to frontier
areas only.
2. Deadline for preparation of 5-year plan. The bill prohibits leasing
after June 30, 1977, unless a required 5-year plan has been prepared
and approved. Eighteen months after passage of the bill should be
allowed.
3. Principles for preparation of 5-year plan. The bill lays down
requirements for preparing the 5-year schedule which are overly
strict and could become sources of delaying litigation. Qualifying
language should be added.
4. Reports of safety violations. The bill requires excessively detailed
reporting of safety violations. Unnecessary expense would be avoided
by redrafting these provisions.
5. Frequency of inspection. Unnecessarily frequent inspections are
called for in the bill. Once-yearly regular inspections of platforms,
plus a program of unannounced visits, would be adequate.
6. Regulations required. The bill requires issuance of regulations
concerning duties of the Secretary himself, such as preparing annual
reports and the 5-year program. Such a requirement would generate
FORD & LIBRARY GERALD
useless paperwork, and should be stricken.
7. Attorney General and FTC review. The bill requires Interior to
provide Justice and FTC with information for their review concerning
antitrust implications lease issuance or extension. The information
requirement is too broad, and could become burdensome and a source
of delay.
8. Regulations for subsurface storage. The bill requires Interior to
issue regulations for all subsurface storage on the OCS, a requirement
that is in conflict with the Energy Policy and Conservation Act, which
assigns responsibility in the case of government facilities to the FEA.
9. Limitations on export. The bill adds requirements for Presidential
findings and Congressional review to the normal procedures of the
Export Administration Act. These are undesirable restrictions on
executive powers.
2
10. Extending the term of a lease. Under certain conditions, the bill
permits extension of the primary term of a lease to ten years from the
normal five. To avoid undesirable pressure for extensions, this provision
should be limited to leases containing such permission in their original
language.
11. Development plan approval if environmental studies are incomplete. The
bill says that an incomplete environmental study shall not "in itself" be
grounds for refusing to approve a development plan. This question should
be left to Interior's discretion, since in some cases the study may be
important enough to be worth waiting for.
12. Compensation for leases cancelled because of safety violations or
inability to comply with law. The bill fails to make clear that
cancellation for these reasons would not entitle the lessee to
compensation.
13. Revision of development plans. The bill restricts too narrowly
the grounds for revision of development plans. If the requested
revision is not contrary to the public interest, the mere convenience
of the lessee should be sufficient.
14. Reimbursement for data costs. The bill provides for reimbursement
of lessees but not permittees for reproduction costs of data acquired
from them by Interior. The provisions should be the same for both.
15. Price per lease-share under "Phillips plan." The bill provides that
all bidders for 1 percent lease shares under the Phillips plan system
would pay the same price, regardless of their bids. This requirement
unnecessarily handicaps an otherwise promising experimental bidding system.
16. Required environmental impact statement at development stage. The
bill requires at least one EIS on development in each frontier area, but
it is ambiguously worded, and could be interpreted to require one on
each geologic structure, which would be unworkably burdensome.
17. Definition of "affected State." The definition now in the bill
makes it possible for a State to be defined as "affected" by an oil spill
from any vessel, not just one carrying OCS oil. This is inconsistent
with the logic of the oil spill liability provisions elsewhere in the bill.
18. Proper term for OCS "structures." In referring to OCS "structures"
such as wells and platforms, the bill fails to use language which is
fully consistent with the 1958 Convention on the Continental Shelf.
GERALD FORD LIBRARY
April 15, 1976
MEMORANDUM FOR:
JIM CANNON
MAX FRIEDERSDORF
FROM:
GLENN R. SCHLEEDE
SUBJECT:
SIGNING CEREMONY
After every conceivable delay, the chances are
good that we will have this legislation (H.R. 10230)
between April 28 and May 1. a schedule proposal
is attached. Note that the list of members and
selected staff from Congressional committees is in
draft and needs to be revised by Congressional
Relations.
I really think this is an event worth highlighting.
RECOMMENDATION
That you sign the attached schedule proposal.
Attachment
GERALD FORD LIBRARY
OFFICE OF MANAGEMENT AND BUDGET
ROUTE SLIP
Take necessary action
TO
Glenn
Schleede
90% Comment
Approval or signature
Prepare reply
Discuss with me
For your information
See remarks below
FROM
Joellyn Murphy
DATE 23 April 1976
REMARKS
I'm told the States are planning a full
scale phone and letter campaign to the
White House on this issue. I thought you
might be the one to get the counter
arguments to whomever at the WH is on the
receiving end.
Your help is important because our nego-
tiations on the Coastal Zone Amendments are
going very well on the Hill, but they will
break down completely if the Hill thinks
the States can bamboozle the White House
on the trumped up issue of "legal" problems
with loans.
What's at stake here is the difference
between $200M in grants plus $800M in
loans (our "bottom line") and $1-4B in
grants!
REFORD & LIBRARY CERALD
OMB FORM 4
REV AUG 70
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
DATE:
April 23, 1976
WASHINGTON, D.C. 20503
REPLY TO
ATTN OF:
Analysis (Murphy)
SUBJECT: Coastal Zone Energy Impact Assistance: State Lobbying
Against the Administration's Loan Approach
Jim Mitchell
The Commerce and Merchant Marine Committees are getting increasingly
heavy pressure from the States on the issue of legal and practical
impediments to our loan and guarantee approach for OCS impact
assistance.
I was informed by Hill staff that key State people intend to
"bombard the White House directly" with their arguments why we
should give them grants rather than loans.
These arguments are:
Some state constitutions prohibit bonding,
FORD & GERALD LIBRARY
Other state laws restrict state bonding to low amounts
and/or limited purposes,
OCS related needs will exceed localities' statutory debt
limits,
Local debt most often requires voter approval,
Changing such statutory constraints is impossible or
improbable in most cases, and
In cases where laws might be changed, they can't be changed
in time to cope with imminent OCS impacts.
Counter arguments are as follows.
Analysis of the 30 coastal states' constitutions shows that
while there are some problems, there are also several (and
frequently used) ways around them. For example, some states
periodically amend their constitutions to authorize debt for
specific purposes. Other states require legislation and/or
referendum to authorize debt.
The issue of State debt is being overemphasized. The public
facilities to be financed are schools, parks, sewers, etc.,
i.e., facilities usually financed by local governments. Our
approach gives the States the say on where, when, and which
projects will be built, but the State does not have to be,
and is unlikely to be, the borrower of record.
These facilities are the kind financed every day by local
governments. If local debt ceilings are a constraint, laws
could be passed to exempt from those debt ceilings these
Federally guaranteed or direct loans (because we forgive them
if there is inability to repay).
If OCS impacts are in fact a real and major problem as states
assert, states and localities should be willing to pass laws
enabling them to accept loans. States pass laws easily enough
when necessary to accept Federal grants; why is it "impossible"
for loans?
OCS related growth should not be exempt from usual local
political review. If a State or a local community votes down
a bond issue, that is its choice. The possibility of voters
rejecting bonds does not justify Federal grants.
Federal grant authority would create a disincentive to borrow
where the community could and should borrow. It would also
reward communities which do not try to help themselves and
penalize communities which do try to help themselves.
The OCS impacts which will necessitate public facilities are
1 1/2 - 2 years away at the very earliest. There is, there-
fore, sufficient time in which to pass or change laws, if
necessary, if they want to. Meanwhile, generous planning
grants will have gone out.
Solving energy impact problems must be a partnership between
Federal and State government. The Federal government is
making about $1B available for public facilities loans because
loans are the most equitable, efficient, and fiscally responsible
approach. States should do a fair share by ensuring that state
law does not prevent localities, State agencies, or the States
themselves, if necessary, from availing themselves of Federal
loans.
CC:
Glen Schleede
FORD i LIBRARY GERALD
Norm Hartness
Frank Hodsoll
Velo
Holl
ERC-EPB Meeting, April 13, 1976
for Not
Background Paper
Status Report, Outer Continental Shelf Leasing Amendments
liber
Breefers
Legislative Background
Senate bill S. 521, Amendments to OCS Lands Act, passed 67-19
on July 30, 1975.
House Ad Hoc Committee on OCS (chaired by Murphy of New York)
now completing markup of H.R. 6218. Floor action expected in
30-60 days.
Administration position: in opposition to both bills. Present
law (OCS Lands Act of 1953) is adequate.
Major Problems in Senate bill S. 521
Requires preparation, publication, and yearly revision of
FORD i LIBRARY GERALD
5-year leasing plan
-- with mandatory environmental impact statement, content of
which is specified in detail
-- must be consistent with approved State coastal zone programs
-- leasing prohibited after June 30, 1977 in areas not included
in the plan
Requires large increase in Federal information gathering and
exploration
-- $100 million per year mapping program
-- Government exploration of areas not included in 5-year plan
($500 million authorized)
Requires stringent safety regulation
-- use of "best available technology"
-- no new regulations may reduce the degree of safety
Interior's OCS environmental studies program (now $40 million
per year) is transferred to NOAA
Secretary of Interior must accept Governors' recommendations on
leasing unless he finds them "not consistent with national
security or overriding national interests."
2
Authorizes use of new bidding systems for sale of leases
-- eight new ones in addition to the two now authorized
-- limits use of present bonus-bid system to 50 percent
of future acreage
-- requires experimental use of new systems
New procedures for review of lessees' development plans
-- mandatory public hearing on each plan
-- plans must include on-shore information (thus Interior
approves plan for facilities outside Federal jurisdiction)
-- plans can be permanently disapproved if "extraordinary
circumstances" prevent safe operation
GERALD FORD LIBRARY
-- oil and gas production must be at "maximum efficient rate"
--- new development plan requirements are retroactive to all
leases on which production has not begun
Summary view of Senate bill S. 521:
would seriously slow OCS leasing, cause large extra administrative
expense and reduce the value of the Nation's offshore oil and gas.
House bill H.R. 6218
House jurisdictional problems led to formation of an Ad Hoc OCS
Committee made up of members from Interior, Merchant Marine, and
Judiciary
House bill now in Committee is far less harmful than the Senate
bill, but some major problems remain
Requires 5-year plan (but EIS is not mandatory)
Baseline environmental studies are shifted to NOAA
Leases may be cancelled or development plans disapproved where
there is serious danger of environmental harm. Lessee would be
compensated by return of all his operating costs and payments
to the Government.
3
First three miles of Federal lands must be leased jointly with
adjacent State, and revenues shared on the basis of whether
State or Federal lands are being drained. Procedure effectively
provides a State veto over leasing these first 3 miles of OCS
Interior is required to offer permits for pre-lease-sale exploratory
drilling in frontier areas (so-called "on-structure stratigraphic
tests").
Present bonus bidding system is limited to 90 percent (Senate
bill, 50 percent) of future acreage
States are given the right to inspect confidential geological
interpretations submitted by lessees to Interior.
Summary view of House bill:
not as bad as the Senate bill, but not acceptable in its present
form.
FORD & LIBRARY GERALD
THE WHITE HOUSE
WASHINGTON
February 6, 1976
MEMORANDUM FOR:
STEVE McCONAHEY
"
FROM:
GLENN R. SCHLEEDE
SUBJECT:
GOVERNOR HAMMOND'S REQUEST TO MEET
WITH THE PRESIDENT
I have obtained Secretary Kleppe's views on this (via
Ron Coleman) and they are as follows:
-- The President should meet with him if the
GERALD FORD LIBRARY
schedule permits.
-- Secretary Kleppe has met with Hammond a couple
of times already on the OCS leasing issue. The
Secretary believes that, while Hammond is asking
for a two-year delay, he is primarily interested
in getting a commitment to some Federal front-end
financial assistance to help with on-shore development
that will result from OCS leasing and development.
-- Assuming this is the case, the President could
tell the Governor that he (the President) is
sympathetic to the Alaska on-shore development
problem and that he will be proposing legislation
in the next few days calling for an Energy Development
Impact Assistance program consisting of loans to
aid impacted areas.
Based on this, a meeting probably is a good idea.
I have asked Interior for a paper with background material
that we can use to prepare a briefing paper for the President,
assuming the meeting goes ahead. Please let me know if you
want material for a briefing paper.
The White House
1
Washington
2
3
WHB026(1253) (1-013215A035)F 02/04/76 1249
4
ICS IPMAFUB AHG
1976 FEB 4 PM I 00
5
6
g08 A WWAQ JUNEAU ALASKA 284 02-04 915A PST
7
PMS THE HONORABLE GERALD FORD PRESIDENT
8
9
THE WHITE HOUSE
10 WASHOC
11
12
DEAR MR PRESIDENT
13
THE STATE OF ALASKA HAS SUPPORTED THE FEDERAL OCS
14.
15
PROGRAM FOR ITS INCEPTION, SEEKING ONLY CONSTUCTIVE
15 CHANGES RESPONSIVE TO WHAT I BELIEVE ARE LEGITIMATE
17
18 STATE INTERESTS. IT HAS BEEN, AND CONTINUES TO BE,
19 MY BELIEF THAT CHANGES MADE NOW IN THE PROGRAM ARE
20
21
THE BEST GUARANTEE OF THE LONG-TERM SUCCESS OF THE
22
OCS PROGRAM IN ALASKA.
23
GERAU FORD LIBRARY
24
25
HAD THE PROGRAM BEEN MORE FLEXIBLE EARLIER, NO DELAY
26
4
5
5
IN THE N.E. GULF OF ALASKA SALE WOULD NOW BE REQUESTED.
7
AS CIRCUMSTANCES NOW EXIST HOWEVER ONLY A DELAY OF ONE
3
9
TO TWO YEARS WILL ALLOW OUR STATE TO AVOID EXTREMELY
10.
UNDESIRABLE SOCIOECO NOMIC AND CULTURAL IMPACTS AND
111
12
THE RISKS OF SUBSTANTIAL ENVIRONMENT CHANGE. THE RECENT
13
RECOMMENDATIONS OF YOUR COUNCIL ON ENVIRONMENTAL
14
15
QUALITY BEAR OUT THE STATE POSITION AND I WANT TO
16 REQUEST IN THE MOST FORCEFUL MANNER POSSIBLE THAT
17
18
YOU ACT TO GRANT A DELAY IN THE N.E. GULF LEASE SALE.
-19 A REDUCTION IN TRACTS SOLD WILL NOT RESOLVE REAL STATE
20
21
DIFFICULTIES IN ANY MEANINGFUL WAY.
22
73
24
I WANT TO EMPHASIZE THAT THE STATE BELIEVES A GOOD
25
ALASKA OCS PROGRAM CAN AND SHOULD BE FORMULATED
25
1
2
3
4
5
5
COOPERATIVELY. WE HAVE OFFERED TO COOPERATE IN THE
7
BEAUFORT SEA AND BELIEVE COOPERATION IS ALSO POSSIBLE
3
9
IN LOWER COOK INLET. THE CO NCER N OF THE STATE CENTERS
10
ON THE NATURE OF THE PRESENT PROGRAM AND THE TIMING
IT
12
OF THE FIRST SALE IN THE N.E. GULF. BEFORE ANY FINAL
13
DECISION IS MADE ON A MATTER WHICH IS SO VITAL BOTH
14
15
TO THE STATE AND NATION I WOULD APPRECIATE AN
16
OPPORTUNITY TO SPEAK WITH YOU EITHER PERSONALLY OR BY
17
18
TELEPHONE. I WILL BE IN WASHINGTON ON MONDAY FEBRUARY 9.
19
MY THANKS TO YOU FOR YOUR CONSIDERATION OF MY CONCERN.
20
21
SINCERELY
22
JAY S. HAMMOND, GOVERNOR STATE OF ALASKA
23
24
FORD is LIBRARY GERALD
25
26
F.6:003
DRAFT
MEMORANDUM FOR: Glenn Schleede
The White House
From:
Executive Assistant to the Secretary
Department of the Interior
Subject:
Governor Hammond's Request to the President
for a Delay in the Alaska Lease Sale
The President should meet with Governor Hammond.
He should not agree to any delay in the proposed
Alaska lease sale.
FORD & LIBRARY GERALD
Based upon several meetings between the Secretary
and Governor Hammond, the Governor's real interest
is some assurance that Alaska will receive economic
front end impact assistance.
Present schedule calls for a decision to have a lease
sale by the Secretary the week of February 16. If
the
the decision is to have a sale, earliest date of
sale would be approximately March 31.
The most optimistic estimate is that only one hole
duilled
could be punched in the fall of 1976. The sale, if
approved, would probably be of limited size and impact;
the major impact to come 3 to 4 years from now which
allows ample time for planning.
- 2 -
o
The President could assure the Governor that the
legislation introduced by the Administration or a
modification of the legislation approved by the
Merchant Marine Committee by a vote of 30 - o, will
emerge from this Congress and that the State of
Alaska would receive appropriate financial aid for
the impact resulting from any Alaska sale this year.
Ron
Ronald G. Coleman
FORD & LIBRARY
OF THE INTERIOR
United States Department of the Interior
OFFICE OF THE SECRETARY
March
3.
1849
WASHINGTON, D.C. 20240
FEB 4 1976
Memorandum
To:
See Distribution
From:
William R. Moffat
Director, Office of Policy Analysis
Subject: Outer Continental Shelf Leasing Experiments
Attached is a paper written by Marshall Rose of my office, "Design
Elements of OCS Leasing Experiments Mandated Under S. 521." I would
appreciate receiving any comments you may have on it.
As you know, S. 521, Amendments to the Outer Continental Shelf Lands
Act, which passed the Senate last July, calls for a series of experiments
with new OCS oil and gas leasing arrangements, and in effect mandates
that half of future frontier leasing be devoted to these experiments by
limiting use of the present customary bonus bidding procedure to no more
than half of frontier acreage. Rose's analysis is intended to throw light
on whether these provisions are wise. His paper will be easy reading only
for persons acquainted with methods of statistical inference and decision
theory, but the general thrust of all of it except the appendix should be
accessible to anyone willing to puzzle it through.
The major presumptions which underly Rose's analysis are these:
-- The net value to the Nation of an OCS oil and gas lease
is often extremely high (tens of millions of dollars or
more). Experiments with sales of leases under untried
lease terms must therefore be treated as potentially
very costly, since the new terms may reduce the value
of the oil and gas by altering the time profile of
production, changing the amounts ultimately recovered,
or affecting costs of lease administration, and may
alter the share of value which is returned to the public
through bonuses, rents, royalties, or profit shares.
FORD & GERALD LIBRARY
REVOLUTION
AMERICAN
BICENTENNIAL
1776-1976
2
-- Therefore, no experiment should be larger than is
necessary to produce a statistically significant
result. Furthermore, some experiments, even of minimum
size, may be too costly to be justified at all.
-- Many of the most important questions about OCS leasing
systems are not answerable by doing experiments, at least
not within a reasonable period of time. The effects of
lease terms on production profiles, ultimate recovery,
early shutdown, and risk aversion, for example, will probably
not be revealed by experiments. Questions which are subject
to experimentation, while interesting and important, may not
justify very high experimental costs. The issue of whether
a particular experiment is worth carrying out at all is
therefore an important one to analyze case by case.
-- Fortunately, experimentation is far from being the only (or
even necessarily the best) method of improving our knowledge
about different leasing systems. Careful theoretical work,
and computer simulation modeling, have so far told us much
more than experiments, and probably will continue to do SO.
In fact, experiments may sometimes be useful primarily for
validating the assumptions used to construct simulation
models, not for the experimental results taken by themselves.
Written against this background, the major conclusions of Rose's analysis
are these:
--- Certain of the alternate leasing systems in S. 521 probably
should not be tested experimentally at all, either because
testable hypotheses cannot be formulated about them, or
because information about some systems can be gained as well
or better by testing others.
-- For a wide variety of assumptions, and for the range of
experience in the October 1974 royalty bidding experiment,
40 to 60 observations should be sufficient to test a given
system. The acreage required depends importantly on whether
more than one system can be tested per lease tract.
-- Decision analysis (based on assumptions deliberately favorable
to experimentation) indicates that between 10 and 25 percent
of the acreage over the next two years is a probable upper
limit on beneficial experimentation.
LIBRARY GERALD FORD
3
In light of Rose's analysis, enactment of the provisions of S. 521 on
experimentation would appear to be a bad mistake with potentially very
high costs.
The presumption in S. 521 appears to be that any experiment is good, and
that lots of experimentation is still better. My personal view is that
while some experiments may be justifiable, an arbitrary mandate as to their
number or size definitely is not. In light of the extreme value of the
resources involved, and the losses that could result from leasing under
inferior systems, before any experiment is carried out there should be
analysis sufficient to warrant the presumption that its benefits will
exceed its costs.
The results so far from theory, from the royalty bidding experiment,
and from various simulation models strongly suggest that the most promising
leasing systems are those using bonus bidding with a specified contingent
payment--either royalty or profit share. Sorting out the advantages of the
various forms of such systems may be helped along by limited experiments
that tell us something about administrative costs and about the types of
bidders attracted to each system. But the choice of systems depends at
least as importantly, and perhaps much more so, on questions experimentation
won't answer. The importance S. 521 places on experiments thus seems
misplaced, and in light of the very real costs of leasing under inferior
systems, it seems extremely unwise.
Bill Moffat
GERALD R. FORD LIBRARA
DESIGN ELEMENTS OF OCS LEASING
EXPERIMENTS MANDATED UNDER S. 521
by
Marshall Rose
Department of the Interior
Office of Policy Analysis
February 1976
GERALD R. FORD LIBRARA
Abstract
This paper considers the composition and size of the OCS experiment
mandated in S. 521. Four of the nine experimental systems listed in
S. 521 have been identified as clearly superior testing candidates.
They are:
- Fixed cash bonus with royalty bid
- Fixed cash bonus with profit share bid
"Yes Fixed profit share with cash bonus bid
- Fixed profit share, cash bonus bid, and one percent
working interest shares.
To efficiently examine a particular hypothesis, 40 - 60 observations
per experimental system are needed. This suggests that for hypotheses
relating to leased tracts only, up to 50 - 80 tracts might have to be
offered under each of the relevant experimental systems in order to
generate 40 - 60 observations on leased tracts.
Thesuitable test size of the OCS experiment appears to be between
10 and 25 percent of tracts offered during the two-year testing period.
Under an accelerated leasing schedule, the appropriate test size is
probably closer to 10 percent, while a 25 percent test is likely to be
more appropriate for low rates of leasing.
FORD R. GERALD LIBRARY
I. Introduction
Senate bill S. 521 (Section 203) directs the Secretary of the Department of
the Interior to experiment with alternative OCS leasing systems over a two-
year period. The results of the experiment "shall be incorporated into an
overall analysis of these [leasing] systems and this analysis shall be
provided to Congress no later than 12 months after the sale date."
The following elements are of primary concern in structuring an experimental
design of OCS leasing systems:
1. Objectives of the tests.
2. Systems to be tested.
3. Sample size of individual systems.
4. Sample size of the entire experiment.
5. Statistical design based on specific hypotheses to be
tested.
6. Supplementary analysis accompanying empirical tests.
The scope of this paper is limited to the first four of these issues.
II. Objectives of the OCS Experiment
Ideally, the experiment should provide information which allows comparison
of the alternative leasing systems under consideration with respect to public
and private benefits and costs. In this regard the following factors are
most important: level of the bids; number of bidders; distribution of bidders
by firm size and frequency of past participation in OCS auction sales; expected
Federal revenues; development and production profiles; and ease of program
administration.
The level of the individual bids indicates the willingness of firms to pay
for the lease as a function of the terms of the auction and the uncertainty
in value associated with specific tracts. The number and distribution of
bidders indicates the degree of auction competition associated with alternative
leasing systems. Federal revenues and development and production profiles
are relevant for determining the expected present value of government receipts
as well as the level and timing of output associated with each of the leasing
systems considered. The importance of program administration is self evident.
d
FORD
GERALD
LIBRARY
2
If the information cited above could be generated in sufficient detail, a
rigorous comparison of alternative leasing systems could then be conducted.
Unfortunately, we can expect that the actual level of information generated
will not be nearly sufficient to allow such a comparison.
One reason is that bidders may disguise their bids (or not bid at all) in order
to bias the results in favor of the leasing system most favorable to themselves.
Owing to differences in bidding strategy, risk aversion, and estimates of
reserves, it may not be possible to distinguish spurious bids from truthful
ones. Even if this were possible, it would be extremely difficult to infer
the production profiles used in generating the bids. This is a particularly
vexing problem when the bid variable is a profit share or royalty rate. In
the former case, the highest bidding firm may be a relatively inefficient
producer, and its bid may reflect a high percentage of a relatively low absolute
level of profits. In the latter case, the winning firm may simply bid a
speculative royalty rate that would discourage or delay production unless
actual reserves are very high. Furthermore, it would take several years to
determine the extent to which a particular leasing system induced such specu-
lative bidding tactics.
As a result, the information generated by a bidding experiment cannot be used
to evaluate alternative systems in a comprehensive and timely manner. Never-
theless, a bidding experiment can be used for more modest purposes, such as
testing the predictive reliability of independently developed leasing models;
examining a limited number of relevant factors among leasing systems, such
as the type and number of bidders, and the ease with which a given system
can be administered; and evaluating in detail designated leasing systems with
regard to bidding strategies as the given element (royalty or profit share
rate) is changed.
III. Leasing Systems to be Tested
S. 521 specifies nine basic experimental systems, and labels them (B) through
(J). The cash bonus bidding system is denoted by (A). These 10 systems are
shown in Figure 1.
Figure 1
OCS Leasing Systems Available Under S. 521
(A) Constant Royalty
(C) Sliding Royalty
(D) Constant Profit Share
Cash Bonus Bid
(F) Constant Royalty and Profit Share
(G) 1% Working Interest Constant Profit Share
(H) 1% Working Interest - Sliding Profit Share
(B) Royalty Bid
Fixed Cash Bonus
(E) Profit Share Bid
(J) Cash Bonus Grant Royalty or Profit Share Bid
GERALD R. FORD LIBRERA
Constant Royalty
(I) Exploratory
Plan
Constant Profit Share
3
For purposes of the OCS experiment, five of these leasing systems are
inferior test vehicles. They are C, H, F, J, and I. Their shortcomings
are described below:
(C) Cash bonus bids with sliding scale royalty, and
(H) Cash bonus bids with sliding scale profit share: Based on
research to date, 1/ it appears that nondevelopment rather than
early abandonment is the more serious economic problem associated
with royalty and profit shares. Thus, we can expect that
modification of constant rates to variable rates will not
significantly affect production or bidding strategies. Accordingly,
the results obtained from testing systems A (cash bonus bids with
constant royalty) and G (cash bonus bids with constant profit
share) can be used in conjunction with our analytical models
to infer the characteristics of systems having sliding scale
rates.
(F) Cash bonus bids with fixed royalty and fixed profit share: With
both the royalty and profit share as fixed elements, it is difficult
to separate the effect of each element on the cash bonus bid and
upon development strategies. The individual effects of each
element may be more accurately evaluated by considering two leasing
strategies: A (cash bonus bid with constant royalty) and D (cash
bonus with constant profit share).
(J) Fixed cash bonus, returned as grants to cover exploration costs,
with royalty or profit share bid: We can expect that the cash
bonus grants will simply increase the bid variable by an equivalent
amount. In this case, leasing system J is largely redundant, since
the relevant information can be obtained from systems B (fixed
cash bonus with royalty bid) and E (fixed cash bonus with profit
share bid).
(I) Exploratory plan: Owing to the ambiguity of the bid variable and the
subjective nature of the bid evaluation, it will be difficult to
formulate testable hypotheses about this type of leasing system.
R.
GERALD
FORD
LIBRARA
1/ "Analysis of Alternative Bidding Systems for OCS Oil and Gas Leases,"
Office of OCS Program Coordination, Department of the Interior, April 29,
1975, draft.
4
Based on the foregoing discussion, we conclude that systems C, H, F, J and I
are inferior and/or redundant leasing systems for empirical testing purposes.
In fact, we could also argue that these systems are dominated by the others
on theoretical grounds as well, but it is not necessary (perhaps not
desirable as well) to do SO at this time.
IV. Sample Size Per Experimental System
Statistical tests of significance involve, among other things, determination
of whether a difference in sample statistics, e.g., mean values, is sufficiently
large to infer that the samples are drawn from different populations, for example,
populations having unequal mean values. As the sample size increases, the test
becomes more sensitive, in the sense that smaller measured differences in the
sample means can be considered statistically significant.
In testing a particular hypotheses at a specified level of confidence, the
magnitude of the difference in statistics that is significant depends upon the
sample size and the estimated standard deviation of the appropriate variable
under consideration. For example, suppose that we want to test whether or not
there is a significant difference in the mean number of bids per tract received
for two leasing systems, namely cash bonus bidding, b, and royalty bidding, r.
Denote the sample mean number of bonus bids by Xb, and the sample mean number
of royalty bids by Xr. The symbol σ represents the estimated standard
deviation of the variable Xr - Xb.
The significance ratio is defined by
T = Xr Xb
(1)
When the samples are independent,
= σr² + σᵇ²,
(2)
and
where Sr2 is the variance of the sample number of royalty bids, and Nr is the size
of the royalty sample. The term σb 2 is defined in a similar way.
To determine if Xr - Xb is significant, we compare the value of T to the number
of standard deviates taken from the Students t distribution for Nr + Nb -2
degrees of freedom. If T exceeds this number of standard deviates at a given
level of confidence, we can infer that the difference in sample mean values is
statistically significant.
LIBRARY GERALD R. FORD
5
If we let t represent the number of standard deviates, then to is the
minimum difference in sample mean values that can be considered significant.
As the sample size increases, both t and σ decline, so that smaller differences
in mean values become significant.
At the same time, larger sample sizes are more expensive. In the absence of
cost-benefit measures, there is no exact method for finding the optimal sample
size. Accordingly, we proceed in the following heuristic fashion.
The standard assumption is made that if Si (i = r, b) is known for any Ni,
then this Si is our best estimate of the sample standard deviation for any Ni2/.
Also, over the range of sample sizes in which we will be interested, t can be
taken as fixed. Thus, as the sample size increases, the improved sensitivity
of the experiment can be measured solely by changes in σ.
Given sample values for the Si and Ni, we can compute the proportional change in
6 as the Ni are varied. In this way we can find a range for Ni within which
the appropriate sample size is likely to reside. We demonstrate this approach
with the following example.
In OCS Sale #36, 297 tracts were offered: 10 under royalty bidding, and 287
under bonus bidding. The following statistics were found for the number of bids
per tract.
Xr
=
5.3,
Sr = 4.80
Xb = 1.1, Sb = 1.56
Computing the significance ratio from equation (1), we find that T = 2.63.
At the 95% level of confidence, t = 1.96 for 295 degrees of freedom. Since T> t,
the difference in mean values is considered significant.
Calculating σ in equation (2), we then find that to= 3.14, which is the
minimum difference in sample mean values that can be detected by this test as
being significant. The effect of alternative test sizes on the level of
significance is shown in Table 1.
Three separate cases are considered therein. In the first case, we let
Nr + Nb = 297. The second case has Nr + Nb = 80. The third case assumes
that Nb = 70. These sample sizes span the range of expected values of future
sale sizes.
2/ See, for example, Snedecor, G., Statistical Methods, Iowa State University
Press, Ames, Iowa, 1956, pp. 60-61.
LIBRATY GERALD FORD
6
Table 1
Effect of Sample Size on the Level
of Significance
Sr = 4.80
Sb = 1.56
Nr
Nb
σ
σ₀
10
287
1.60
1.00
20
297
1.10
0.69
30
267
0.89
0.56
40
257
0.77
0.48
50
247
0.68
0.43
60
237
0.63
0.39
75
222
0.56
0.35
100
197
0.49
0.31
200
97
0.38
0.23
10
70
1.61
1.00
20
60
1.12
0.70
30
50
0.92
0.57
40
40
0.81
0.50
50
30
0.74
0.46
60
20
0.72
0.45
70
10
0.78
0.48
10
70
1.61
1.00
20
70
1.12
0.70
30
70
0.91
0.57
40
70
0.79
0.49
50
70
0.71
0.44
60
70
0.65
0.40
75
70
0.49
0.30
100
70
0.42
0.26
200
70
0.39
0.24
&
FORD
GERALD
LIBRARY
7
For each of these three cases, the proportional effect on to as the sample
size changes is approximated by oo. This term represents the normalized value of
σ, where σ₀ = 1.0 for Nr = 10 in each case. The results are seen to be
quite similar for all three cases. An increase in Nr from 10 to 20 reduces
σ₀ by 30 percent. An increase in Nr from 20 to 30 reduces σ₀ by 20 percent.
An increase in Nr from 30 to 40 reduces σ₀ by approximately 15 percent. When
Nr increases from 40 to 50, σ₀ is reduced by about 10 percent. Additional
increases in Nr result in proportionately smaller reductions in oo.
These results suggest that, for the particular hypothesis being tested, 40 ≤
Nr ≤ 60 is an appropriate test size. However, the results are significantly
more general than one might suspect.
It is easy to show that
σ₀ is unaffected by scalar changes in the Si.
Therefore, σ₀ is the same for a given value of Sr/Sb. In the sample problem,
the values of σ₀ in Table 1 are unchanged as long as Sr/Sb = 3.08.
Experimentation with different values of Sr/Sb shows that, for Nb constant
and lying within the range of 50 - 300, the largest reduction in σ₀ for given
changes in Nr occur at Sr/Sb 211 3.0. Using the reduction in σ₀ with respect to
changes in Nr as a proxy for marginal benefits, it follows that at any level
of Nr, marginal benefits will be lower when Sr/Sb + 3.0. Thus, if the magnitude
of Sr/Sb is substantially different from 3.0, we will find that the appropriate
range of sample sizes for the experimental systems will lie below 40 ≤ Nr 60.
In any forthcoming OCS experiment, it may be desirable to test two bidding
systems on the same set of tracts. In this way differences in tract parameters
could be taken into account or differences in the bidding results could be
analyzed with more precision. When the sample results are paired in this
manner, it is likely that the results will not be independent.
The formula for computing 6 for paired samples is
σ² = σr² + - 2Ror σb,
where R is the correlation between the two samples. Because Nr=Nb in these
cases, it can be shown that
σ₀ = 3.0/ Nr -1.0 .
That is, σ₀ is not dependent upon either the absolute or relative levels of the
Si, nor is it dependent upon R. The numerical relationship between σ₀
and the sample size is presented in Table 2.
3/ The numerator is equal to Nr-1.0 = 3.0 for Nr = 10. As the sample size
increases, σis equal to a constant, which depends upon Sr, Sb, and R, multiplied
by 1.0/ Nr - 1.0.
FORD & GERALD LIBRARY
8
Table 2
GERALD R. FORD LIBRARY
The Effect of Sample Size on the Level
of Significance: Paired Samples
Nr = Nb
10
20
30
40
50
60
75
100
200
σ₀
1.00
0.71
0.58
0.50
0.45
0.41
0.37
0.32
0.22
Comparison between Tablesl and 2 does not reveal any substantial differences
in the effect of sample size on the level of significance for paired and
unpaired samples. However, as a practical matter, it appears desirable to
design an experiment in which Nr is somewhat larger when the samples are paired.
The reason is that, in these cases, we can expect some firms to submit bids
on only one of the two leasing systems for the paired-sample tracts. In this
way they can still win the tract if the system under which they bid on is
chosen for evaluating bids. However, in unpaired samples, the firm obviously
cannot win a tract if it refuses to bid under an experimental system, if this is
the only bidding system utilized on that tract.
In summary, this section has shown that, in order to generate statistically valid
results in an efficient manner, no more than 40-60 observations are needed
per experimental system. Assuming that 75 percent of tracts offered receive
serious bids, we conclude that the maximum number of tracts that should be offered
under any one experimental leasing system is between 50 and 80.
V. Overall Size of the Experiment
This section considers the following question: during the period of the
OCS leasing experiment, what percent of available tracts should be offered under
experimental systems? To answer this question, a decision theoretic model
has been developed. The model is explained in detail in the Appendix.
The primary elements of the model are depicted in Figure 2, where square nodes
represent decision points and circles represent chance events. The decision
problem is to choose between the options of not testing, NT, or testing at
size X, denoted by TX. This decision depends upon the worth of not testing,
Wn, compared to the worth of testing at size X, denoted by Wx. By worth
we mean the net social value of tracts leased according to the relevant
decision rules associated with testing and not testing during the k-year planning
period of future OCS sales.
The model assumes that if we do not test any experimental leasing systems, then the
cash bonus bidding system will be chosen. This choice is denoted by Ab.
If testing is undertaken, then 100X percent of tracts offered during the
h-year test period will be leased under experimental systems. The test will
signal that either cash bonus bidding (B) or one of the experimental systems
(R) is the better leasing system. "Better" means here that the particular
leasing system so described generates a higher aggregate social value for
all tracts offered during the planning period, compared to its counterpart
systems.
Figure 2
Decision Analysis Testing Problem
P(eb); V7
Ab
α
P(er); V2
P(eb/B); V1
Ab; Fx(B, Ab)
α
Wn
P(er/B); V2
P(eb/B); V3
NT
Ar; Fx(B, Ar)
&
TX
S:P(B)
P(er/B); V4
XPI
P(eb/R); V7
Ab; Fx(R, Ab)
R;P(R)
P(er/R); V2
P(eb/R); V3
Ar; Fx(R, Ar)
P(er/R); V4
V1 = V1 (Ab,Ab)
V2 = V2 (Ab,or)
V3 = V3 (Ar,ab)
V4 = V4 (Ar,or)
6
GERALD
R.
FORD LIBRARY
10
Given a particular test signal, B or R at the end of the test period, a choice
is then made to lease tracts using cash bonus bidding or using one of the
experimental systems. The latter choice is denoted by Ar. The choice of
Ab or Ar for test signal B or R depends upon the expectation function Fx.
The calculation of Fx is described in the Appendix.
Suffice it to say here that Fx depends upon (1) the prior probabilities P (ob)
and P(or), representing the chances that bonus or one of the experimental
systems is the true state, i.e., the best method of leasing; (2) the
information matrix P', which indicates the choices that the test will correctly
predict which system is best, for each of the two states, ob and or; (3) the
payoff matrix V, which represents the relative values associated with making
correct and incorrect decisions for a given state; and (4) the probabilities
P(B) and P(R ) which represent the chances of obtaining test signals B or R.
For any set of parameters, Wn and Wx are computed over the potential range
of v'. The range of V' in which Wx > Wn is then determined. Finally, the
probability that V'will fall within the range that results in Wx > Wn is found.
This probability is denoted by P(Wx > Wn) =B.
The numerical results for ß are shown in Tables 3, 4 and 5. The following
parameters are stipulated:
- The discount rate, i, is 10 percent.
- The test period h, is two years.
- The planning period k, is ten years.
- There is an 80 percent chance that the test results will correctly
predict the true state, i.e., P(B/eb) = P(R/or) = 0.8.
Recall that P(ob) is the prior probability that cash bonus bidding is a "better"
leasing system than any of the experimental systems. The symbol Z represents
the ratio of the number of tracts leased during the 2-year test period to the
number of tracts leased during the 10-year planning period. The results shown
in the Tables are independent of the absolute number of tracts leased in
periods h and k.
A 50 percent test size is considered first, in Table 3. For P(ob) > 0.5, it
is unlikely that testing at this level will be more valuable than not testing,
for virtually any feasible value of Z. Only in the presence of ignorance,
defined as P(ob) = 0.5, does it appear marginally worthwhile to prefer a
50 percent test to not testing. Because we have been intentionally optimistic
with regard to the accuracy of testing, it is prudent to reject a 50 percent
test size.
FORD & GERALD LIBRAR, +
11
Consider next a 25 percent test. Table 4 shows that, unless P(θb) < 0.55,
a 25 percent test cannot be justified. (The most likely value of Z is 0.3).
Accordingly, it appears from these findings that the OCS experiment should be
smaller than 25 percent.
Table 5 considers a 12.5 percent test size. In this case we find that testing
is likely to be worth more than not testing if P(ob) ≤ 0.6. A test of this
size does not appear inefficient.
Interpretation of these results with regard to the optimal sample size remains,
to a large extent, a matter of judgment. Based on the decision analysis, it
appears that the optimal sample size is more than 10 percent, but less than
25 percent.
In general, the appropriate percentage test size is inversely related to Z.
This is the case because as the (relative) number of tracts leased during
the test period declines, the number of tracts remaining to be leased
after this period increases. As a result, the value of testing tends to
increase when Z decreases, since the optimal decision rules that derive
from testing can then be applied to a greater number of remaining tracts.
These observations suggest that as Z
0.4, the suitable test size is
closer to 10 percent, while for the case of Z
0.2, the appropriate
test size is approximately 25 percent.
GERALD FORD LIBRARY
12
Table 3
Probability that a 50 Percent Test is More Valuable
Than Not Testing */
ß = P(Wx > Wn)
Z
P(ob) = 0.5
(e) = 0.6
P(ob) = 0.7
P(ob) = 0.8
P(ob) =0.
0.2
0.60
0.40
0.06
- 0 -
- 0 -
0.3
0.52
0.28
- 0 -
- 0 -
- 0 -
0.4
0.45
0.17
- 0 -
- 0 -
- 0 -
Average
0.52
0.28
0.02
- 0 - -
- 0 -
Table 4
Probability that a 25 Percent Test is More Valuable
Than Not Testing
ß = P(Wx> Wn)
Z
P(ob) = 0.5 (0) = 0.6 P(ob) = 0.7 P(ob) = 0.8 P(ob) = 0.
0.2
0.66
0.50
0.22
- 0 -
- 0 --
0.3
0.61
0.42
0.10
- 0 -
- 0 -
0.4
0.56
0.34
- 0 -
- 0 -
- 0 -
Average
0.61
0.42
0.11
- 0 -
- 0 -
Recall that the accuracy of any test size (defined by matrix P'in the
Appendix) is assumed equal to 80 percent in Tables 3, 4 and 5. If we allow
the test accuracy to decline below 80 percent for smaller test sizes, then
in these cases ß will also decline and the results become more favorable
to not testing. This suggests that if testing is, in fact, undertaken, a
modest test size is appropriate.
FORD & LIBRARY GERALD
13
Table 5
Probability that a 12.5 Percent Test is More Valuable
Than Not Testing
ß = P(Wx > Wn)
Z
P (ob) = 0.5
P(0b) = 0.6
P (0b) = 0.7
P (ob) = 0.8 P(ob) = 0.9
0.2
0.70
0.56
: 0.31
- 0 -
- 0 -
0.3
0.67
0.52
0.24
- 0 -
- 0 -
0.4
0.64
0.46
0.17
- 0 -
- 0 -
Average
0.67
0.51
0.24
- 0 -
- 0 -
FORDO & LIBRARY GERALD
14
Appendix: Decision Theoretic Model
The decision analysis model considers two states of nature. The first,
denoted by ob, represents the state wherein cash bonus bidding, with
royalty or profit share fixed at any predetermined level, is the "better"
leasing system. "Better" is used here to suggest that tracts leased
under cash bonus bidding generate a higher net social value than tracts
leased under any one of the experimental systems. Similarly, or denotes
the state wherein one of the experimental systems generates a higher net
social value than the cash bonus bidding system. The prior probabilities
P(ob) and P(or) represent the likelihood that either ob or or is the true
state. Accordingly, P(or) = 1 - - P(0b).
The symbol B represents experimental test results predicting that ob is
the true state, while the symbol R denotes test results suggesting that
or is the true state. The information matrix given by P below
State
ob
or
B
P(B/0b)
P(R/0b)
Test Result
= P'
R
P.(B/or)
P(R/or)
denotes the likelihood of obtaining the designated test signals conditional upon
specified states of nature. For example, P(B/0b) is the probability
that testing will (correctly) predict that ob is the true state, given
that it is, in fact the true state.
The decision to choose cash bonus bidding is denoted by Ab. The decision
to choose one of the experimental systems is denoted by Ar. The payoff
matrix can be represented by V'below.
State
ob
or
Ab
V1(Ab,ob)
V2(Ab,or)
Action
= V'
Ar
V3(Ar,ob)
V4(Ar,or)
For example, V1 = V1 (Ab,ob) denotes the payoff that derives when the cash
bonus bidding system is used on a tract, given that cash bonus bidding is,
in fact, a better leasing system than any one of the experimental leasing
systems.
FORD is LIBRARY GERALD
15
Suppose that the ratio of tracts leased to tracts offered is the same
for any of the leasing systems under consideration. Then V'can be
interpreted as representing the net social value per leased tract
associated with a designated action, given a specified state.
The ratio of the number of tracts leased (offered) under experimental
systems to the total number of tracts leased (offered) during the test
period is denoted by X. The symbol Z represents the ratio of the number
of all tracts leased during the test period to the total number of tracts
leased during the planning period. It follows that XZ is the ratio of the
number of tracts leased under experimental systems during the test period to
the total number of all tracts leased during the planning period. If M
tracts will be leased during the planning period, then MXZ is the number
of tracts in the OCS experiment.
At this point it is possible to develop expressions for the worth associated
with not testing, given by Wn, and the worth associated with a test of a
specified size X, given by Wx. Consider first the expression for Wn.
The following terms are defined:
h = number of years in the testing period.
k = number of years in the planning period.
i = discount rate.
Without testing, the cash bonus bidding system is assumed to be employed
throughout the planning period. The expected worth of a tract leased
with this system at time t = 0 is given by
The discount factors are defined by
D¹ = h-1 0 (1 + i) -t
D² = E k (1 + i) -t
GERALD R. FORD LIBITARY
16
Suppose that tracts are leased uniformly during both period h and during
period k - h. There will then be MZ/h tracts leased per year for h years,
and M(1 - Z)/(k - h) tracts leased per year for k - - h years. Therefore,
we can write
Wn = E { h k h }
MZ D¹ M(1 - Z) D²
+ -
(4)
Now consider Wx. The marginal and posterior probabilities are computed
from Bayes' Theorem:
P(B) = P(B/eb) P(ob) + P(B/or) P(or)
P(R) = 1 - P (B)
P(ob/B) = P(B/0b) P(0b)/P (B)
P(or/B) = 1 - - P (0b/B)
P(0b/R) = P(R/0b) P(0b)/P (R)
P(or/R) = 1 - P (0b/R)
Denote the expectation associated with decisions given test signals by
Fx. Let
MZ(1 - X) D¹ M(1 - Z) D²
H1 =
h
+ k - h
MZX D¹
H2 = h
MZX D¹
M(1 - Z) D²
H3 =
h
+ k - h
MZ (1 - X) D¹
H4 =
h
The expectation functions, Fx, can now be expressed by
Fx(B, Ab) = P(0b/B) { V1 (H1) + V3(H2) }
+ P(or/B) { V3(H1) + V4(H2) }
Fx(B,Ar) = P(eb/B) { V3(H3) + V1 (H4) }
+ P(or/B) { V4(H3) + V2(H4) }
GERALO R. FORD LIBRARY
17
Fx(R,Ab) = P(0b/R) { V1 (H1) + V3(H2) }
+ P(or/R) { V2(H1) + V3(H2) }
Fx(R,Ar) = P(0b/R) { V3(H3) + V1 (H4) }
+ P(or/R) { V4(H3) + V2(H4) }
From these expressions we can write
Wx = P(B) { max [Fx(B,Ab), Fx(B,Ar). }
+ P(R) { max [Fx(R,Ab), Fx(R,Ar)] }
(5)
Ordinarily, it would be sufficient to compute Wn and the Wx, and then to choose
the test size at which the worth is at a maximum. Howeyer, we do not know
the magnitude of the elements in the payoff matrix V'. 4/
The approach taken is to choose, on the basis of observed and inferred
behavior, a V'which ranges over the likely values of the (normalized)
payoffs. For example, because it is clear that making a correct decision
for a given state of nature is better than making an incorrect decision,
it follows that
V1 > V2,
(6)
V4 > V3.
(7)
FORD & GERALD LIBRARY
Further, the cash bonus bidding system has been used for many years,
rather than any one of the experimental systems. Assuming that, with
our current state of knowledge, the same decision, Ab, would continue to
be made in the future, it follows that we can infer the relationship
given by
P(eb) V1 + P(or)V2 >P(ob) V3 + (or) V4
(8)
Although we believe that P(ob) >0.5, we also believe that, based on our
current level of knowledge, the cash bonus bidding system would continue
to be used even if P(ob) were as low as 0.5.2 Stated equivalently, we
find that when P(ob) = 0.5, expression (8) becomes
V4 - V2 < V1 - V3
(9)
4/ We do not have much information about P'either. Nevertheless, the numerical
results are seen to favor modest test sizes at a level of P'which is
intentionally favorable to testing in general.
5/ To the extent that P(ob) < 0.5, and Ab would be chosen, the numerical results
generated become more favorable to smaller test sizes. Of course, if we thought
that Ab would be chosen only if P(ob) > 0.5, the argument tends to favor larger
test sizes.
18
A payoff matrix that satisfies (6), (7), and (9) is represented by
V' = ['.° 0
0
V4
(10)
where 0 <V4 < 1.0.6/ This range of V4, as well as inequality (9), appear
reasonable when it is recalled that there are up to nine experimental systems
to consider. Even if or is the true state, and decision Ar is made, we
still may not choose the "best" one of the experimental systems. That is,
as the number of experimental systems increases, the posterior probabilities
associated with any one of the experimental systems, P(0r/R), decline,
so that the expected payoffs from choosing Ar also decline. Thus, if V4
(in normalized form) is considered an expected value over all experimental
systems, the relationship given by (9) appears justified.
At first glance it might seem that the choice of the unit matrix for V'
above is somewhat arbitrary. Some reflection, however, indicates that this
is not the case. Any V'which satisfies the constraints in (6), (7) and (9)
is equivalent for our purposes to the unit matrix given in (10). Any
one of these alternative matrixes can be converted into (10) by adding
(subtracting) a constant to any column, and/or by multiplying (dividing)
the entire matrix by a scalar. Such operations do not affect the ranking
of column elements or the ratio of column differences, so that all constraints
are preserved.
In addition, our objective is to find the level of V4 at which Wx = Wn.
This break-even level, expressed as a fraction of the feasible range of V4,
is unaffected by changes in V'of the sort just described.
To prove this, we first set Wx = Wn, using equations (4) and (5). The
solution is of the form
V4 V1 - - V3 V2 = 4
(11)
where 4 is a constant that depends upon the problem parameters. Let the
solution of (11) be given by V4 = V4. Define the relative break-even level
of V4 by
max V4 - V4
(12)
B =
max V4 - min V4
FORD & GERALD LIBRARY
6/ The author is indebted to Bart McGuire of the Interior Department for
suggesting this simplified form for V'. Professor McGuire also provided
a computer program for generating the numerical results presented in
Tables 3, 4 and 5.
19
Let V'be given by (10). It can be demonstrated that for any
modification in this V'by a scalar and/or by adding constants to columns,
the solution of (12) is always
B = -1/4,
and the proof is completed.
Assuming that V4 in uniformly distributed over its feasible range, it
follows that ß can be interpreted as the probability that Wx exceeds Wn,
i.e.,
ß = P(Wx > Wn).
On the basis of the magnitude of this measure for different test sizes
and problem inputs, we can infer the appropriate size of the OCS leasing
experiment. Numerical results are presented in Tables 3, 4 and 5.
FORD & GERALD LIBRARY
Distribution List
Mr. Carl Perian
Mr. Norman Hartness
Suite 2187 Rayburn HOB
Office of Management & Budget
Washington, D.C. 20515
Room 8202 New EOB
Washington, D.C. 20503
Mr. Tom Kitsos
Rm. 720
Dr. William Fisher
HOB Annex 1
Acting Assistant Secretary--E&M
Washington, D.C. 20515
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Rm. 719
Acting Director
HOB Annex 1
Office of Minerals Policy Develop-
Washington, D.C. 20515
ment
Room 4351 Interior Building
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Rm. 720
Mr. Frank Kelly
HOB Annex 1
Staff Assistant
Washington, D.C. 20515
A/S--LWR
Room 6627 Interior Building
Mr. Michael Harvey
Deputy Chief Counsel
Mr. Dennis Sachs
Senate Interior Commite
Deputy Assistant Secretary-- LWR
3206 Dirksen SOB
Room 6616 Interior Building
Washington, D.C. 20510
Mr. Frank Edwards
Mr. Harrison Loesch
Assistant Director--Minerals
Minority Counsel
Management, BLM
Senate Interior Committee
Rm. 5640 Interior Building
Room 3202 Dirksen SOB
Washington, D.C. 20510
Mr. Red Patton
(same as Edwards)
Mr. David Stang
Senate Interior Committee
Mr. Curt Berklund
Room 3202 Dirksen Building
Director, BLM
Washington, D.C. 20510
Room 5660 Interior Bldg.
Mr. Martin Belsky
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House Judiciary Committee
Director, GS
Room 2137 Rayburn HOB
Rm. 7A412 National Center
Washington, D.C. 20515
Reston, Virginia (MS 101)
Dr. Darius W. Gaskins
Mr. Dale Bajema
Graduate School of Public Policy
USGS, Rm. 7A401
University of California - Berkeley
National Center (MS 105)
Berkeley, California 94720
Mr. Rich Bernknopf
Mr. Thomas J. Teisberg
(same as Bajema)
R.
FORD
(same as Gaskins)
GERALD
LIBRARY
Dr. Robert J. Kalter
Mr. William J. Van Ness
Professor of Agricultural Economics
Chief Counsel
Cornell University
Senate Interior Committee
445 Warren Hall
Room 3204 Dirksen Bldg.
Ithaca, New York 14850
Washington, D.C. 20510
Mr. Wallace Tyner
Mr. Glenn Schleede
(same as Kalter)
Domestic Council
Old Executive Office Building
Mr. Robert Lawton
Washington, D.C. 20500
Rm. 323
1129 - 20th Street, N.W.
Mr. Royston C. Hughes
The White House
Professor Robert Smiley
Room 175 Executive Office Building
Graduate School of Business
Washington, D.C. 20500
& Public Administration
Cornell University
Mr. William W. Lyons
Ithaca, New York 14850
Deputy Assistant Secretary
Room 6116 Interior Building
Professor Robert Lind
(same as Smiley)
Ms. Pamela Baldwin
Senate Commerce Committee
Mr. James Curlin
Immigration Building
Congressional Research Service
119 D Street, N.E., Rm. A-405
Ocean & Coastal Division
Washington, D.C. 20510
Library of Congress
Washington, D.C. 20540
Mr. John Hussey
Senate Commerce Committee
Mr. Ed Strohbehn
Rm. 435 Russell Building
NRDC
Washington, D.C. 20510
1710 N Street, N.W.
Washington, D.C. 20036
Mr. Douglas Costle
Congressional Budget Office
Mr. Steven D. Jellinek
Capitol Hill Annex
Staff Director
Washington, D.C. 20510
Council on Environmental Quality
722 Jackson Place, N.W.
Mr. Nick Timenes
Washington, D.C. 20006
Congressional Budget Office
Capitol Hill Annex
Mr. Charles Eddy
Washington, D.C. 20510
Council on Environmental Quality
Mr. Larry Oppenheimer
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Congressional Budget Office
Federal Energy Administration
Capitol Hill Annex
New Post Office Building
Washington, D.C. 20510
12th & Pennsylvania Avenue, N.W.
Washington, D.C. 20461
Mr. Robert Niblock
Program Manager, Ocean Assessment Program
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Office of Technology Assessment
Federal Energy Administration
119 D. Street, N.E.
Room 4109 New Post Office Building
Washington, D.C. 20510
Washington, D.C. 20461
GERALD FORD LIBRARY
Mr. Thomas Cotton
Ocean Assessment Program
Office of Technology Assessment
119 D Street, N.E.
Washington, D.C. 20510
Ms. Barbara Heller
Dr. Robert Wilson
Graduate School of Business
Stanford University
Stanford, California 94305
GERALD R. FORD LIBRARY
OCS.
EXECUTIVE OFFICE OF THE PRESIDENT
leasing
COUNCIL ON ENVIRONMENTAL QUALITY
722 JACKSON PLACE. N. W.
WASHINGTON, D. C. 20006
January 23, 1976
Dear Mr. Secretary:
On December 18 Environmental Protection Agency
Administrator Russell Train referred to the Council
on Environmental Quality his determination, in
accordance with Section 309 of the Clean Air Act,
that the Proposed Oil and Gas Lease Sale for the
GERALD FORD LIBRARY
Northern Gulf of Alaska (#39) is environmentally
unsatisfactory as proposed and scheduled. Since
then the Council, in conjunction with representatives
of your Department, EPA, the Federal Energy Adminis-
tration, the Office of Management and Budget, and the
National Oceanic and Atmospheric Administration, has
conducted an intensive review of the objections raised
by Administrator Train with particular emphasis on the
state of understanding of the environment of the Gulf
of Alaska Outer Continental Shelf, on the proposed
U.S. Geological Survey operating orders, and on the
probable onshore impacts that would be triggered by a
lease sale. I would like to thank you and your staff
for the Department's excellent cooperation in this
review.
As you know, in April 1974, CEQ submitted a report to
the President, "OCS Oil and Gas - An Environmental
Assessment," which concluded that the area proposed in
this sale presented the highest development risks of any
OCS frontier area from the standpoint of environmental
quality. That report discussed in detail the unique
storm, oceanographic, seismic, biological, and onshore
conditions in the Gulf of Alaska. The report also made
numerous recommendations for improving the Department's
OCS planning and management processes. CEQ's 1974
-2-
conclusions and recommendations served, in large part,
as the basis for EPA's December 18 referral.
The Council recognizes that over the past year and a
half the Department has taken many constructive steps
in response to CEQ's recommendations, and on its own
initiative, to improve the substance and process of
OCS decisionmaking. These include initiating substantial
baseline environmental studies in frontier areas, estab-
lishing a joint Federal-State OCS Advisory Board,
expanding the tract nomination process to include the
concerns of states and the public, increasing public
disclosure of geological and geophysical data, and providing
for state and public review of the development plans of
OCS lessees. We commend the Department for these actions.
During the period of our review of EPA's Section 309
referral the Council has also been impressed with the
Department's clear commitment to incorporating the best
and most recent environmental information available into
the preparations for your decision on this lease sale.
The Department appears to us to be approaching this matter
even-handedly and a number of environmentally protective
options are being considered in the decision-making process.
In the course of our review over the past month, the
Council has focused on two broad questions and four key
environmental issues. The first question involves delay
of the sale. We have examined the issues to determine
whether, given the unique problems and conditions in the
Gulf of Alaska, a delay of this entire sale is justified on
the merits. Second, we have examined alternatives to a
blanket delay to determine the dimensions and conditions
of an environmentally acceptable sale. We have approached
both of these questions within the context of the following
four environmental issues:
-3-
- first, the adequacy of data on geological
hazards for the purpose of selecting tracts
that can be developed safely;
- second, the adequacy of biological and
oceanographic data for the purpose of
selecting tracts that avoid or minimize
the vulnerability of critical species and
habitat to damage from oil spills and drilling
operations;
- third, the capacity of the State of Alaska
and local communities adjacent to the proposed
sale area to cope with the impact of the
industrial activity that will be triggered by
a lease sale; and
FORD & LIBRARY GERALD
- fourth, the adequacy of OCS operating orders
for protecting the Gulf of Alaska from environ-
mental damage.
Each of these issues was examined as to whether a blanket
delay would improve significantly your ability to make
environmentally protective tract selections and the
Alaskans' ability to deal with the onshore impacts of
development (see Attachment A).
We have concluded that the benefits of delaying the sale,
and the extent of such a delay, depend upon and vary with
the nature of each issue:
- on the basis of publicly available information,
it appears that the quality of knowledge on
geologic hazards would be improved significantly
by additional analysis of existing data and by
further seismic and stratigraphic field work
during the summer of 1976. (In addition to
publicly available data, USGS uses substantial
proprietary data.)
-4-
- the environmental baseline studies are in
their very early stages and significantly
improved biological and oceanographic infor-
mation cannot be expected realistically
before two more years of field study
- from one to two years is needed for the
State of Alaska and potentially affected
local communities to take the legislative,
annexation, zoning, planning, programmatic,
and fiscal steps necessary to deal with
expected onshore impacts.
- finally, adequate operating orders can be
developed, in conjunction with EPA and CEQ,
within two to three months.
We believe that it would be most desirable, from an
environmental point of view, to delay the sale for a
sufficient period of time to permit substantial realization
of the above set of benefits. We recommend that you give
careful consideration to that option.
The Council recognizes, of course, that the final decision
is yours and that you must decide whether the environmental
benefits gained by such delay outweigh the costs of post-
poning potential oil and gas production and revenues.
If, on balance, you conclude that a blanket delay of the
sale is not in the national interest, the Council strongly
urges that the sale be limited to those tracts that,
relative to other tracts in the original proposal, appear
to represent the lowest possible degree of risk of environ-
mental damage. For that reason, we endorse Administrator
Train's recommendation of January 19, 1975 (copy attached)
that the sale should be restricted to Icy Bay Tracts
75-79, 117-125, 160-169, and 204-206. These tracts make
up a contiguous block in the northeasternmost zone of
the original sale proposal. Fortuitously, they cover an
-5-
area which appears to be highly promising in oil and
gas potential and relatively low in vulnerability to
environmental damage. We believe that both factors
should be given great weight in your consideration of
areas to offer for sale.
In addition, we have the following specific recommen-
dations:
- the sale date should be set for as late as
possible to give USGS maximum time to evaluate
existing data on geological conditions SO that
unsafe tracts can be eliminated from the
offering prior to the sale date
FORD i LIBRARY GERALD
- OCS operating orders 2, 7, and 8 should be
issued in final form before the sale date
(see Attachment B for detailed recommendations)
- environmental information gathering and
analysis should continue in all areas
and future sales in those Northeast Gulf
of Alaska areas not leased should be deferred
for at least two years, or until we have a
substantially improved understanding of the
environment of such areas
- the Department should take special steps,
similar to those taken with respect to con-
struction of the Trans-Alaska Pipeline, to
assure that State and other Federal agency
interests are taken into account in managing
the Alaskan OCS program and to establish and
coordinate Federal/State scientific and
technical review of proposed regulations,
exploration and development plans, and other
appropriate.operational matters (see Attachment
C for our detailed recommendations on this
matter).
-6-
- the Department, working through the
Federal/State Alaskan Regional OCS
Advisory Committee, should conduct an
early review of the entire proposed
Alaskan OCS lease schedule and develop
recommendations concerning modification
in the sequence and timing of future
Alaskan OCS sales. (See also Attachment
C). .
Finally, we are concerned with the effective operation of
the National Environmental Policy Act as it relates to
this lease sale and future OCS lease sales. As noted
earlier in this letter, CEQ has been impressed with the
Department's commitment to using all available environ-
mental information in its decisionmaking process and to
considering a wide range of environmentally protective
options and we urge you to continue this practice.
However, a number of the options and some supporting
material developed late in this process are not included
in the final environmental impact statement. We believe
that environmental impact statements for future OCS sales
can be improved as an aid to decisionmaking and as documents
for the information of other Federal agencies and the
public if they are planned and timed to: 1) reflect,
as fully as possible, the latest available biological,
geological and oceanographic information, 2) discuss
the OCS operating orders in more detail, 3) analyze the
cumulative onshore effects of OCS development in the Gulf
of Alaska and the adjacent region, and 4) present all
reasonable alternatives and options to the sale as originally
proposed.
-7-
Once again, the Council wants you to know how much we
appreciate your cooperation throughout the course of
this review. As in the past, we stand ready to work
with you in implementing our recommendations and on
other environmental aspects of the OCS leasing program.
Sincerely,
John John Acting Busterud Bustend Chairman
Honorable Thomas S. Kleppe
Secretary of the Interior
Washington, D.C. 20240
FORD & LIBRARY GERALD
Attachments
Attachment A
Summary of CEQ Review of Major Issues Raised
by Section 309. Referral,
Northern Gulf of Alaska (NEGOA) Lease Sale
I. Environmental/Oceanographic Data Base
The principal vehicle for improved understanding of frontier
OCS regions, the BLM-NOAA Outer Continental Shelf Environmental
Assessment Program (OCSEAP), was initiated in 1974. It has
had only one full field research season (1975). The data
acquired are thus quite limited. Furthermore, analysis of
the first season's data is incomplete. BLM in addition has
researched the available historical literature. Review of
the environmental impact statement indicates this historical
information base is only marginally useful.
It appears that the environmental/oceanographic data base
for tract selection and operations regulation can be sub-
stantially improved by at least two more years of work under
the OCSEAP. The following are the most critical research
needs for these purposes:
- Physical Oceanography: Better understanding
of circulation patterns in the general leasing
GERALD FORD VIBRARY
area, near shore processes, and weather patterns
will lend to better capability for predicting
oil slick trajectories. Circulation models
can be developed and existing models can be
refined. Additional time required: 2 years
- Fish (Adult) : Present NEGOA information is
historical, and perhaps out of date. Recent
data are needed to predict the effect of
operations on resident and migratory populations.
Spawning and nursery ground information are
especially important. The information from
the 1975 comprehensive survey is not yet
available. Additional time required: 1-2
years
- Fish (Ichthyoplankton - eggs, larvae, and young)
This information is perhaps most important
-2-
because of the vulnerability of this critical
life stage to perturbation. No data are
presently available. Additional time required:
2+ years.
- Plankton (other than Ichthyoplankton) Infor-
mation of plankton populations and effects of
oil on them is very limited at the present
time.
Other areas of research are, of course, important, and will
lead to significantly improved risk assessment in connection
with tract selection and operational decisions.
II. Geology
Leasing decisions must take into account bottom conditions
(slumping and unstable sediments), surface and subsurfacing
faulting, and other seismic conditions to assure that a tract
can be safely operated before it is leased.
Preliminary maps from OCSEAP studies showing faults, epicenters
sediment thickness and distribution, and areas of slumping
and potential sea floor instability were reviewed. However,
it is unclear that this information is precise enough for
tract by tract leasing decisions. Additional information on
geologic structures and faulting surfaces is held on a
proprietary basis by Geological Survey.
Without the opportunity to review the proprietary data the
following additional research appears necessary.
- More precise location of shallow fault traces
and age of last displacement.
- Further identification of unstable bottom
sediments and evaluation of the age of
historical slumps and slides.
- Correlation of earthquake epicenter data
with fault location data; further evaluation
of probability location and energy of future
major earthquakes.
-3-
- Improved understanding of Gulf of Alaska
seismicity.
Additional time required: 1-2 years
III. OCS Orders
The proposed Gulf of Alaska OCS orders have been reviewed
by EPA and CEQ and a number of recommendations made.
Geological Survey has made substantial improvements in
the OCS orders. Attachment B contains CEQ's detailed
recommendations for the orders, including issuing certain
orders in final form prior to the sale.
Additional time required: 2-3 months
GERALD FORD VIBRARY
IV. Onshore Impacts
A careful review of potential onshore impacts was conducted
in connection with a delegation from the State of Alaska.
A number of onshore activities in connection with the NEGOA
lease sale have already begun. The sale itself is likely to
trigger a number of major, irreversible actions. Alaska has
taken steps to assist impacted communities in their planning
efforts, but these activities are still in their early stages.
It is clear that prior to leasing, a certain level of
sophistication is necessary on the part of government units
to assure that onshore development is not destructive to the
environment and quality of life. The communities that will
be impacted by the NEGOA sale, and by most future sales, do
not have the level of sophistication common to most communi-
ties in developed areas.
Time is necessary before leasing to allow the following
actions:
- Provision of planning assistance to local
governments.
- Preparation of comprehensive local plans to
assure facilities are situated and developed
in the best manner and location.
-4-
- Enactment of zoning codes based on the compre-
hensive plans.
- Development and implementation of statewide
procedures for energy facility siting in the
coastal zone.
Additional time required: I-2 years
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Attachment B
Council on Environmental Quality
Comments and Recommendations on Proposed OCS Orders
for the Gulf of Alaska
General Comments
FORD & GERALD LIBRARY
These comments are addressed to the proposed OCS Orders
issued under cover of January 12, 1976. They are intended
to supplement those of the Environmental Protection Agency.
1. OCS Orders should be promulgated very early in development
of an OCS area. Order numbers 2, "Drilling Procedures;" 7,
"Pollution and Waste Disposal"; and 8, "Platforms and
Structures," should become effective prior to the lease sale.
The need for implementation of number 2, is clear because
exploratory drilling will begin as soon after a lease sale
as the lease-holder can secure equipment. Number 7 is required
because since initiation of drilling introduces the first
possibility of an oil spill incident, pollution control and
spill contingency regulations need to be promulgated.
As to number 8, platform design may be started soon after
leasing and before oil discovery, and design criteria for
storms and earthquakes should be available to put potential
lessees on notice. We recognize that sufficient site
specific information will not be available prior to leasing
for precise structural standards. The proposed third party
review process and our recommendations for review of develop-
ment plans (see Attachment C) should compensate for this lack
of specificity.
2. There are two significant problems with order number 9.
Transportation and storage facilities are designed in parallel
with platforms and the same timing should apply as for order
number 8. However, we recognize it may be impossible to
have this order out prior to the sale. Present efforts
to coordinate the involvement of other agencies should be
expedited, particularly the memorandum of understanding
with the Office of Pipeline Safety.
Also the proposed orders appear to cover all activities
which will occur in oil and gas development with the exception
of oil and natural gas transportation and storage. A version
of OCS Order #9 which covers offshore storage and tanker
transportation as well as pipelines is needed.
-2-
3. The Orders should be as specific as possible in
establishing standards for construction and operation
of facilities. They should be updated frequently as
further research provides better understanding of oper-
ating conditions in the Gulf of Alaska.
OCS Order #2
p. 2-2 Because of the oceanographic and meteorological con-
ditions in the Gulf of Alaska, only semi-submersible drilling
rigs should be utilized in water depths greater than 200 ft.
Jack-up rigs should be permitted in water depths less than
200 ft. only if they are capable of withstanding the severe
seismic conditions (earthquakes and tsunamis) which often
occur in the Gulf of Alaska in addition to often expected
oceanographic and metecrological conditions. Consequently,
for item 1, the following wording is recommended: "Drilling
Platforms and Vessels. All drilling platforms and drilling
vessels should be capable of withstanding the oceanographic,
meteorological and seismic-induced (earthquakes and tsunamis)
conditions of the Gulf of Alaska. Jack-up rigs may be
utilized in water depths of 200 ft. or less provided that
data are available to indicate that ocean floor stability
is sufficient to support the rig and that the rig can
satisfy the seismic conditions specified in Section L.A(4)
of OCS Order #8 for fixed platforms.
1
p. 2-2 Well Casing. No mention is made in this section of
earthquake design for casing strings. A worst case would be
horizontal faulting tending to shear the casing, and this
should be considered in casing design.
For item 2, the following wording is recommended for the
last phrase in the first sentence: "...and the Application
for Permit to Drill shall include the casing design safety
factors for collapse, tension, burst and shear failure due
to earthquakes."
-3-
p. 2-11, items 4.C and D. The wording should be changed
to call for blind/shear rams rather than blind rams as
is presently specified.
p. 2-15, item 5.B. (1) and (2). No sensitivity is indicated
for mud monitors. Since mud loss or gain is the first indi-
cation of well control problems, a sensitivity for these
indicators of I bbl for visual warning and 5 bbl for audio
warning should be specified.
p. 2-18, item 6.C. Well control training does not have any
uniform qualification procedure. A licensing or accreditation
system should be established by Geological Survey for well
control schools, and only graduates of licensed schools
should be used in exploratory drilling in the Gulf of Alaska.
OCS Order #8
General - All references to an effective date of this order
should be deleted. Specifically, the references are: p. 8-2,
second paragraph; p. 8-9, item 4.B; p.8-12, item 4.D; p. 8-15,
item 4.D. (1) (f) (ii) ; p. 8-20, item 4.D. (1) (f) (iv) ; p. 8-25,
item 4.D(2) (c) ; p. 8-34, item 4.D. (4). We perceive no reason
for grace times in an area where no operations are presently
underway.
p. 8-3, item 1.A. (I). Because of the limited meteorological
data available for the Gulf of Alaska, the severe storm
probability should be 0.5 percent per year, and severe storm
characteristics should be verified by USGS or NOAA. As
presently worded, no standard is indicated for severe storm
probability estimates. Also in this item a new paragraph
should be added at the end: "Periodically, and following
severe storms or seismic events, platforms shall be inspected
for structural failures. Any failures found shall be promptly
repaired and a statement of the failure and repair measures
taken shall be submitted as an addendum to the application
for installation (item 2)."
FORD DIBRARY
-4-
p. 8-3, item 1.A. (4). No mention is made of design con-
siderations based on the combined effects of earthquakes
and tsunamis. Since the most likely occurrence of tsunamis
is following an earthquake, these considerations should be
a part of seismic loading criteria.
p. 8-4, item 1.A (4) (g). It is not clear how one accelerometer
on the platform will help in ascertaining whether some
portion of the platform is particularly sensitive to seismic
indicated motion. The following wording is recommended:
"An array of strong motion accelerometers shall be installed
on each platform to correlate the observed system response
with measured motions should an earthquake occur. Data from
these correlations and a comparison to predicted system
response shall be submitted as an addendum to the application
for installation (item 2). If during recorded earthquake
motions any portion of the system proves particularly sensi-
tive to ground motions, necessary remedial measures shall be
taken."
p. 8-7, item 2.E(1) should become item 2.A (8) to facilitate
design review by third parties or the public.
p. 8-8, item 3. The discussion of the structure of the third
party certification process should be expanded. It is
particularly important that the certifying organization be
independent and free from industry pressure. In addition to
this third party review, an arrangement is recommended in
Attachment C which will facilitate outside review.
p. 8-20, item 4.D(1) (g) (i). The following wording is
recommended: "Curbs, gutters, and drains which are adequate
to collect contaminants under all weather conditions likely
to occur, shall be installed in all deck areas [remainder
of wording same as earlier].
p. 8-20, item 4.D(1) (h) (i). The following wording is
recommended: "A fire-fighting system adequate to provide
needed protection under all weather conditions likely to
occur in areas where production handling equipment or other
concentrations of flammable sources are located shall be
installed. The fire-fighting system shall be rigid pipe
with fire hose stations and may include a fixed spray system.
-5-
Chemicals may be used if determined to provide adequate
fire protection control" [remainder of wording same as
earlier].
p. 8-25, item 4.D. (2) (c). The following wording is recommended:
"Simultaneous Operations. Other Activities, such as drilling,
workover, wireline and major construction operations, should
be avoided when wells are producing. Prior to conducting
activities concurrently with production operations which
could increase the possibility of occurrence of undesirable
events, such as harm to personnel or to the environment,
or damage to equipment, an Operator's Contingency Plan shall
be filed for approval by the appropriate District Supervisor.
Activities requiring such a Plan are drilling, workover,
wireline, and major construction operations. No more than
one such activity in addition to production may occur at the
same time [remainder of wording as earlier].
p. 8-35, item 4.D. (4) between items (c) and (d) a new item
should be added: "Methods for testing personnel who have
taken training to ascertain that they are qualified."
OCS Order #7
General - As part of the regional contingency plan, all
shoreline shall be identified as to its sensitivity to oil
spills, and appropriate response action designated for each
area. This will result in less likelihood of inappropriate
response if an oil slick approaches a sensitive area, and
in the event of a massive spill some priority will have
been designated for response action.
p. 7-6 w item 3.A. Specification should be made of what is
meant by "Available to each operator,' II since time is SO
important in spill response. Booms should be available
within one hour in good weather. This item should also
specify the sea state capability and length of containment
booms which are available.
GERALD FORD LIBRARY
-6-
P. 7-8, item 3.B (4) (a). Frequency and quality of training
for response operating team personnel should be specified.
OCS Order #9
General - The necessity for this order was discussed under
overall comments above. Referring to OCS Order #9 for the
Gulf of Mexico, the following specific recommendations are
made.
1. The best available flow monitoring equipment (such as
used for the Alaska pipeline) should be specified for any
offshore pipelines.
2. All valves, fittings, and other appendages to a pipeline
should be considered as part of the pipeline and covered by
this order.
3. Corridors should be considered for pipelines in order to
limit environmental impact of landfalls or impact on fishing.
4. Pipeline completion reports should specify the accuracy
to which the actual pipeline location is determined. The
location should be to within ± 10 ft. with respect to a
nearby shore location.
OCS Order #5
General - Because of the possibility of subsurface casing
failures due to seismic events, two safety valves should be
specified for this area, a surface controlled valve more than
100 ft. below the surface, and a velocity actuated valve
just above each producing zone.
P. 5-4, item 3. The following wording is recommended:
"Temporary Removal. Each wireline -- or pumpdown --
retrievable subsurface safety device may be removed for a
routine operation which does not require approval of a Sundry
Notice and Report on Wells (Form 9-331) for a period not to
exceed fifteen (15) days provided notice is given with an
indication of the reason for removal. The well should
be clearly identified [remainder of wording same as earlier].
Attachment C
Alaskan OCS
Federal-State Relationships
Background
- 9 OCS sales scheduled for the Alaskan OCS
over the next three years; more are likely
in the future; massive potential oil industry
impact on State; State is undeveloped in
character, lacks existing infrastructure,
has a fragile and highly vulnerable coastal
environment; potential impact on other Federal
interests (parks, forests, wildlife refuges) .
- The State, as well as the Federal Government,
has a legitimate interest in protecting the
natural resources in the proposed sale areas
and minimizing onshore impacts.
- Three institutional mechanisms now exist with
specific focus on Federal and State interests
in the Alaskan OCS: The Alaskan OCS Regional
Advisory Committee, a subunit of the National
OCS Advisory Board; the BLM's Alaskan OCS
Office; and the USGS' Alaska Area Supervisor.
Proposed Actions
-
The Department should establish a special
Alaskan OCS Coordinator in the Office of the
Secretary.
FORD & LIBRARY GERALD
This would give high level visibility
and support to the Alaskan OCS program
comparable to that given to construction
of the Trans-Alaskan Pipeline.
The Coordinator would be responsible for
assuring that the Department's mechanisms
for Federal/State cooperation are operating
effectively.
-2-
- The Department's Alaskan OCS Coordinator, in
conjunction with the Alaskan OCS Regional
Advisory Committee (including representatives
of CEQ, EPA, FEA, and other appropriate
Federal agencies) should conduct a reexamin-
ation of the present leasing schedule for
Alaskan OCS.
It would report to the Secretary, within
three months, any recommendations for
modifying the sequence and timing of
remaining announced sales and potential
future sales
The objective would be to improve the
Department's ability to take advantage
of existing and emerging environmental
data and to minimize the cumulative social
and economic impacts on the state and on
other Federal interests.
-
The Department should establish, along the model
of the Alaska Pipeline Office, an Alaska-based
interdisciplinary technical/scientific review
group (or groups as appropriate) composed of
experts representing the State and other
Federal agencies.
This group (or groups) would advise the key
BLM and USGS officials in Alaska
It would be responsible for reviewing
exploration and development plans,
training programs, and for on-site
surveillance and monitoring of con-
struction and operations on a frequent
schedule
It would also be responsible for reviewing
the results of environmental baseline and
monitoring studies and for recommending
changes to agency procedures or operations
indicated by such results
UNITED
STATES
AGENCY
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
PROTECTION
WASHINGTON, D.C. 20460
JAN 19 1976
OFFICE OF THE
ADMINISTRATOR
Dear Russ:
The purpose of this letter is to offer the
Environmental Protection Agency's position on the options
being considered by the Secretary of the Interior with
respect to oil and gas leasing on the Outer Continental
Shelf in the Northern Gulf of Alaska (NEGOA, sale #39)
This position follows up my letters of December 18, 1975,
to you and Secretary Kleppe stating my determination
under Section 309 of the Clean Air Act that the proposed
sale, as described in the Bureau of Land Management's
final environmental statement, would be unsatisfactory
from the standpoint of environmental quality.
In my December 18 letters, I requested that the
Secretary of the Interior delay the proposed sale until
adequate Operating Orders had been formulated for the
Gulf of Alaska, and until completion of environmental
baseline and other special studies presently being
conducted in the Gulf. Such a delay would, I felt, also
be exceedingly valuable to the State of Alaska in order
that the State and affected local communities could
complete their coastal studies and planning and establish
their coastal zone management program.
Since the 18th, we have had several productive
meetings, under your Council's leadership, with the
Department of the Interior and representatives of the
GERALD FORD LIBRARY
State of Alaska and the National Oceanic and Atmospheric
Administration. As a result of these meetings, EPA is
in a position to be more specific in its observations
and recommendations. These are outlined below in the
two major areas of concern - Operating Orders and
Environmental Studies.
2
General
The Bureau's final environmental statement states
that OCS oil development in NEGOA is likely to result
in severe damage to the sensitive coastal ecosystems.
CEQ's report OCS Oil and Gas -- An Environmental Assessment
describes serious reservations concerning development
of the OCS in NEGOA. The report points out that there
exists a very strong probability that any oil spills
occurring in the lease area will impact highly productive
fish nursery and spawning areas, as well as indigenous
and migratory bird populations. The CEQ report correctly
states that the probability of severe spills is greater
in NEGOA than other proposed OCS areas because of the
greater demand on OCS technology due to the severity
of storms in the region, earthquake potential and, in
general, the formidable problems of working in a
sub-arctic environment.
Studies currently being performed by NOAA under
contract to BLM generally support the statement that
the NEGOA is an area of unique highly productive
biological resources that may suffer considerable damage
if OCS development is allowed to occur without
exceptional measures to protect the environment. Such
measures must include technology requirements to insure
safe operations (both in the drilling and production
phases) in the face of severe seismic and storm conditions,
and plans and controls to mitigate the adverse effects
of onshore developments (for example, provision
of adequate public facilities and locational controls
to prevent wetlands or other environmental destruction).
Operating Orders
EPA has repeatedly expressed its concerns over the
Operating Orders for the Gulf of Alaska dating back to
our March 1975 comments on the proposed Operating Orders
which appeared in the Federal Register in January 1975.
(These proposed orders were in essence operating orders
for the Gulf of Mexico.) Since that time EPA has offered
recommendations for development of orders for the unique
environmentally hazardous conditions in the Gulf of
Alaska. These recommendations follow closely the
recommendations for improving the system of Operating
Orders as published in CEQ's report.
3
It is our firm position that final Operating
Orders acceptable to EPA should be published before any
leasing takes place in the Gulf of Alaska. The State
of Alaska, which has had considerable experience in
administering the development of the Cook Inlet oil
and gas fields, should be asked to participate in the
development of final Orders. With an accelerated effort
including EPA and State of Alaska participation, such
orders could realistically be produced within two months.
EPA's most recent detailed comments on what we would
consider to be adequate Operating Orders were contained
in staff memoranda of January 8 and 15, 1976, which
are enclosed for your reference. In summary: (1) EPA
has no objection to the Department's drafts of Orders
No. I, 3, 4, 6, 11 and 12 (as proposed on January 6,
1975, or in the redrafted orders which were sent to us
on January 12, 1976) ; (2) EPA believes that Orders
No. 2, 5, 7, 8 and 9 require further modification in
accordance with our comments of January 8 and 15, 1976.
Additionally, we note that sufficient site-specific
information does not currently exist to write the detailed
performance requirements for Order No. 8 which ideally
should be written. Therefore, it is EPA's position
that specific design criteria should be developed (as
outlined in our January 8, 1976, comments) and that
GERALD FORD LIBRARY
reviews including the use of these criteria should be
conducted prior to the development phase. We note in
the final environmental statement that the Department
states that it will prepare environmental assessments and
if necessary, environmental impact statements, on the
development plans. We concur with the Department's
commitment and request that the assessments and statements
be made available for EPA review.
Environmental Studies
In our recent meetings (as well as in the Department's
analysis of the hazards contained in its final environ-
mental statement), a very strong case has been made for
a 2-3 year delay in oil and gas leasing. I would like
to outline a number of benefits such a delay would
afford.
Sufficient time would be provided to complete an
environmental impact statement on all proposed Alaska
OCS development. This statement would provide an
4
intercomparison of the energy resource/environmental
impact trade-offs among the various Alaska OCS regions.
It would insure that initial Alaska OCS development
would represent the best balance between energy resource
recovery and ecological considerations.
The State of Alaska would be given sufficient time
to develop a comprehensive coastal zone management
program (CZMP) that would integrate mineral resource
extraction and its associated onshore developmental
impacts, with other competing or multiple use activities
such as fishing, transportation, recreation, aesthetics,
etc. The CZMP in conjunction with the environmental
statement on Alaskan OCS development would give a
reasoned approach that would help responsible agencies
minimize ecological impact. This approach would be firmly
based on studies performed over an ecologically meaningful
time period rather than on the preliminary data now
available and would provide an informed basis for decision
making and evaluation which does not presently exist.
NCAA's environmental baseline assessment program
dealing with NEGOA would be more complete. These study
results would provide an adequate description of
environmental (physical, chemical, biological) conditions
needed for assessing the ecosystem impact of OCS
development. Our present knowledge is far too limited
to make definitive statements regarding qualitative and
quantitative ecological disturbances that may result
from oil extraction operation. Further effort in the NOAA
study is needed to make adequate judgments concerning
tract deletions or special lease stipulations to protect
the environment.
If in the national interest it becomes imperative
to proceed with the sale this year, it is our view
that such an action could only be made environmentally
satisfactory if the following steps are taken:
°Limited Sale
The sale should be restricted to the lease area
in the Northeastern zone of the Icy Bay tracts Nos.
75-79, - 117-125, 160-169, and 204-206.
Such a limited sale would involve minimal offshore
environmental disturbance while allowing an estimated
30% of the total crude oil resource to be developed.
5
By restricting the sale to one contiguous area many
technological or operational advantages are gained
which provide a greater level of ecological safety
than would be assured if scattered sections are
offered for lease.
Some of the advantages are the consolidation of
oil storage areas, minimizing the number of offshore
tanker loading facilities, minimizing the miles of oil
well connecting pipeline required, restricting onshore
facilities to one relatively convenient location,
minimizing the number of platforms required and minimizing
both the number, routes, and distance to be traversed
by tankers, work boats and drilling platforms. Con-
tainment and consolidation criteria are essential
features to insure minimum impact and to develop experience
in working in this area.
The Northeast Zone represents a large area with
good prospects for sizable oil finds if oil and gas
deposits exist in the Gulf. Research and coastal
management activities should be much more developed
before other regions of the NEGOA OCS are considered
for additional lease sales.
°Operating Orders As recommended above, Operating
Orders should be promulgated in final form prior to the
lease sale concurrent with a commitment by Interior to
allow an EPA review of environmental assessments or
statements prepared in conjunction with the review of
development plans.
°Exploration Plans
FORD i LIBRARY GERALD
It is evident that the onshore environmental (as
well as social and economic) effects of both exploratory
and production activities are likely to be highly
disruptive and could be disastrous unless carefully
controlled within a properly planned framework. It is
also evident that such plans and controls are not in
place at present. The need for such improvements
presents a strong argument in favor of a delay, but
again if a sale must be held this year, a limitation
in the geographic dispersion of tracts offered would
assist the Alaska CZM and local planners by enhancing
their capabilities to predict the location and extent
of impacts on a particular area.
6
More importantly, the Secretary of the Interior
should make maximum efforts to assist the State of Alaska
in planning for and controlling onshore development.
In particular, this would appear to be important to
the Alaskan Native Village of Yakutat. It has been
suggested that the Secretary should utilize his trust
authorities and responsibilities to assist this community.
The Department should further facilitate Alaska
State-local planning by including lease stipulations
(or developing other appropriate regulatory means)
requiring submission of detailed exploration plans. Such
plans should be available for review by Federal, State
and local agencies prior to Interior approval, and
should cover phasing of exploratory operations, onshore
facilities, offshore support needs and transportation
needs.
EPA is available to discuss the position outlined
above at any time. I am most grateful for the thorough
review you and your staff have conducted and for the
serious consideration you have given to our views.
Together we have, I believe, shown how the Section 309
referral process can work to illuminate the environmental
problems and alternatives in issues of unusual national
and environmental significance, and I am most hopeful
that this process will lead to a course of action that
is best for all concerned.
Sincerel yours,
Russell Then E. Train
GERALO R.FORD VIBRARY
Administrator
Honorable Russell W. Peterson
Chairman
Council on Environmental Quality
722 Jackson Place, N.W.
Washington, D.C. 20006
L UNITED STATES. AGENCY
PROTECTION
WASHINGTON, D.C. 20460
UNITED STATES ENVIRONMENTAL FLOS PROTECTION AGENCY
JAN 19 1976
yes
OFFICE OF THE
ADMINISTRATOR
Dear Russ:
FORD i LIBRARY GERALD
The purpose of this letter is to offer the
Environmental Protection Agency's position on the options
being considered by the Secretary of the Interior with
respect to oil and gas leasing on the Outer Continental
Shelf in the Northern Gulf of Alaska (NEGOA, sale #39)
This position follows up my letters of December 18, 1975,
to you and Secretary Kleppe stating my determination
under Section 309 of the Clean Air Act that the proposed
sale, as described in the Bureau of Land Management's
final environmental statement, would be unsatisfactory
from the standpoint of environmental quality.
In my December 18 letters, I requested that the
Secretary of the Interior delay the proposed sale until
adequate Operating Orders had been formulated for the
Gulf of Alaska, and until completion of environmental
baseline and other special studies presently being
conducted in the Gulf. Such a delay would, I felt, also
be exceedingly valuable to the State of Alaska in order
that the State and affected local communities could
complete their coastal studies and planning and establish
their coastal zone management program.
Since the 18th, we have had several productive
meetings, under your Council's leadership, with the
Department of the Interior and representatives of the
State of Alaska and the National Oceanic and Atmospheric
Administration. As a result of these meetings, EPA is
in a position to be more specific in its observations
and recommendations. These are outlined below in the
two major areas of concern - Operating Orders and
Environmental Studies.
2
General
The Bureau's final environmental statement states
that OCS oil development in NEGOA is likely to result
in severe damage to the sensitive coastal ecosystems.
CEQ's report OCS Oil and Gas --- An Environmental Assessment
describes serious reservations concerning development
of the OCS in NEGOA. The report points out that there
exists a very strong probability that any oil spills
occurring in the lease area will impact highly productive
fish nursery and spawning areas, as well as indigenous
and migratory bird populations. The CEQ report correctly
states that the probability of severe spills is greater
in NEGOA than other proposed OCS areas because of the
greater demand on OCS technology due to the severity
of storms in the region, earthquake potential and, in
general, the formidable problems of working in a
sub-arctic environment.
FORD i LIBRAR, GERALD
Studies currently being performed by NOAA under
contract to BLM generally support the statement that
the NEGOA is an area of unique highly productive
biological resources that may suffer considerable damage
if OCS development is allowed to occur without
exceptional measures to protect the environment. Such
measures must include technology requirements to insure
safe operations (both in the drilling and production
phases) in the face of severe seismic and storm conditions,
and plans and controls to mitigate the adverse effects
of onshore developments (for example, provision
of adequate public facilities and locational controls
to prevent wetlands or other environmental destruction).
Operating Orders
EPA has repeatedly expressed its concerns over the
Operating Orders for the Gulf of Alaska dating back to
our March 1975 comments on the proposed Operating Orders
which appeared in the Federal Register in January 1975.
(These proposed orders were in essence operating orders
for the Gulf of Mexico.) Since that time EPA has offered
recommendations for development of orders for the unique
environmentally hazardous conditions in the Gulf of
Alaska. These recommendations follow closely the
recommendations for improving the system of Operating
Orders as published in CEQ's report.
3
It is our firm position that final Operating
Orders acceptable to EPA should be published before any
leasing takes place in the Gulf of Alaska. The State
of Alaska, which has had considerable experience in
administering the development of the Cook Inlet oil
and gas fields, should be asked to participate in the
development of final Orders. With an accelerated effort
including EPA and State of Alaska participation, such
orders could realistically be produced within two months.
EPA's most recent detailed comments on what we would
consider to be adequate Operating Orders were contained
in staff memoranda of January 8 and 15, 1976, which
are enclosed for your reference. In summary: (1) EPA
has no objection to the Department's drafts of Orders
No. 1, 3, 4, 6, 11 and 12 (as proposed on January 6,
1975, or in the redrafted orders which were sent to us
on January 12, 1976) (2) EPA believes that Orders
No. 2, 5, 7, 8 and 9 require further modification in
accordance with our comments of January 8 and 15, 1976.
Additionally, we note that sufficient site-specific
information does not currently exist to write the detailed
performance requirements for Order No. 8 which ideally
should be written. Therefore, it is EPA's position
that specific design criteria should be developed (as
outlined in our January 8, 1976, comments) and that
reviews including the use of these criteria should be
QERALD FORD LIBRARY
conducted prior to the development phase. We note in
the final environmental statement that the Department
states that it will prepare environmental assessments and
if necessary, environmental impact statements, on the
development plans. We concur with the Department's
commitment and request that the assessments and statements
be made available for EPA review.
Environmental Studies
In our recent meetings (as well as in the Department's
analysis of the hazards contained in its final environ-
mental statement), a very strong case has been made for
a 2-3 year delay in oil and gas leasing. I would like
to outline a number of benefits such a delay would
afford.
Sufficient time would be provided to complete an
environmental impact statement on all proposed Alaska
OCS development. This statement would provide an
4
intercomparison of the energy resource/environmental
impact trade-offs among the various Alaska OCS regions.
It would insure that initial Alaska OCS development
would represent the best balance between energy resource
recovery and ecological considerations.
The State of Alaska would be given sufficient time
to develop a comprehensive coastal zone management
program (CZMP) that would integrate mineral resource
extraction and its associated onshore developmental
impacts, with other competing or multiple use activities
such as fishing, transportation, recreation, aesthetics,
etc. The CZMP in conjunction with the environmental
statement on Alaskan OCS development would give a
reasoned approach that would help responsible agencies
minimize ecological impact. This approach would be firmly
based on studies performed over an ecologically meaningful
time period rather than on the preliminary data now
available and would provide an informed basis for decision
making and evaluation which does not presently exist.
NOAA's environmental baseline assessment program
dealing with NEGOA would be more complete. These study
results would provide an adequate description of
environmental (physical, chemical, biological) conditions
needed for assessing the ecosystem impact of OCS
development. Our present knowledge is far too limited
to make definitive statements regarding qualitative and
quantitative ecological disturbances that may result
from oil extraction operation. Further effort in the NOAA
study is needed to make adequate judgments concerning
tract deletions or special lease stipulations to protect
the environment.
If in the national interest it becomes imperative
to proceed with the sale this year, it is our view
FORD i LIBRARY GERALD
that such an action could only be made environmentally
satisfactory if the following steps are taken:
°Limited Sale
The sale should be restricted to the lease area
in the Northeastern zone of the Icy Bay tracts Nos.
75-79, 117-125, 160-169, and 204-206.
Such a limited sale would involve minimal offshore
environmental disturbance while allowing an estimated
30% of the total crude oil resource to be developed.
5
By restricting the sale to one contiguous area many
technological or operational advantages are gained
which provide a greater level of ecological safety
than would be assured if scattered sections are
offered for lease.
Some of the advantages are the consolidation of
oil storage areas, minimizing the number of offshore
tanker loading facilities, minimizing the miles of oil
well connecting pipeline required, restricting onshore
facilities to one relatively convenient location,
minimizing the number of platforms required and minimizing
both the number, routes, and distance to be traversed
by tankers, work boats and drilling platforms. Con-
tainment and consolidation criteria are essential
features to insure minimum impact and to develop experience
in working in this area.
The Northeast Zone represents a large area with
good prospects for sizable oil finds if oil and gas
deposits exist in the Gulf. Research and coastal
management activities should be much more developed
GERALD FORD LIBRARY
before other regions of the NEGOA OCS are considered
for additional lease sales.
°Operating Orders As recommended above, Operating
Orders should be promulgated in final form prior to the
lease sale concurrent with a commitment by Interior to
allow an EPA review of environmental assessments or
statements prepared in conjunction with the review of
development plans.
°Exploration Plans
It is evident that the onshore environmental (as
well as social and economic) effects of both exploratory
and production activities are likely to be highly
disruptive and could be disastrous unless carefully
controlled within a properly planned framework. It is
also evident that such plans and controls are not in
place at present. The need for such improvements
presents a strong argument in favor of a delay, but
again if a sale must be held this year, a limitation
in the geographic dispersion of tracts offered would
assist the Alaska CZM and local planners by enhancing
their capabilities to predict the location and extent
of impacts on a particular area.
6
More importantly, the Secretary of the Interior
should make maximum efforts to assist the State of Alaska
in planning for and controlling onshore development.
In particular, this would appear to be important to
the Alaskan Native Village of Yakutat. It has been
suggested that the Secretary should utilize his trust
authorities and responsibilities to assist this community.
The Department should further facilitate Alaska
State-local planning by including lease stipulations
(or developing other appropriate regulatory means)
requiring submission of detailed exploration plans. Such
plans should be available for review by Federal, State
and local agencies prior to Interior approval, and
should cover phasing of exploratory operations, onshore
facilities, offshore support needs and transportation
needs.
EPA is available to discuss the position outlined
above at any time. I am most grateful for the thorough
review you and your staff have conducted and for the
serious consideration you have given to our views.
Together we have, I believe, shown how the Section 309
referral process can work to illuminate the environmental
problems and alternatives in issues of unusual national
and environmental significance, and I am most hopeful
that this process will lead to a course of action that
is best for all concerned.
Sincerel Thn yours,
FORD i LIBRARY GERALD
Russell E. Train
Administrator
Honorable Russell W. Peterson
Chairman
Council on Environmental Quality
722 Jackson Place, N.W.
Washington, D.C. 20006
JCS leasing
Principal Objections to H.R. 6218
1. Lease cancellation. The bill requires cancellation of hazardous
leases under criteria that are one-sided and has compensation provisions
that are technically deficient. We feel cancellation should occur only
after passage of time has clearly shown it to be necessary, and after full
consideration of the advantages and dangers of continued production.
Cancellation should be invoked only for hazards unanticipated at the
time of lease issuance, and the lessee should be compensated for either the
value of the lease at the time of cancellation, or his net expense on the
lease, whichever is smaller.
2. Limit on bonus bidding. The bill limits use of the present bonus-
bid system for lease sales to 90 percent of future acreage, and requires
approval by both House and Senate to exceed the limit. We do not object
to the 90 percent figure, provided it can be exceeded unless both
Houses, by joint resolution, disapprove.
3. Information for States. The requires provision to adjacent
States of privileged information veloped by companies from geological
and geophysical exploration. We feel that such information should be
provided only if it will not unduly harm the competitive position of
the companies involved.
4. Drainage of State lands. The bill requires joint Federal-State leases
in the first three miles of Federal waters if the area contains oil or
gas pools partly underlying State lands. We do not accept the joint-
lease concept, which implies States' rights beyond the 3-mile limit and
which gives States a potential veto over leasing of such lands. On the
other hand, we are willing to provide arrangements for equitable division
of revenues so that a State will not be financially injured by drainage.
5. Recommendations of Governors or Advisory Boards. The bill requires
acceptance of leasing recommendations of Governors or Advisory Boards,
unless we find them inconsistent with national security or overriding
national interest. We feel that in the case of a nationally-owned
resource not lying within the boundaries of any State, there should
be no presumption of such acceptance, though we seek and encourage
GERALD FORD LIBRARY
States' recommendations.
6. Environmental studies. The bill shifts Interior's extensive program
of OCS environmental studies to Commerce. We are agreed that the primary
purpose of the studies is to furnish information for Interior's leasing
decisions, and that control should remain in Interior's hands.
7. Changes in safety regulations. The bill provides that no change in
regulations may reduce the degree of safety on the OCS. We object
to this restriction because it prevents balancing the advantages and
disadvantages of new regulations, and because it could be a source
of delaying litigation.
8. Authority to regulate. The bill strikes from present law the key
sentence which, since 1953, has been the basis of regulations and court
decisions defining Interior's regulatory authority. The sentence is
not inconsistent with other parts of the bill, and we feel it should
be retained.
9. Consistency with State coastal zone programs. The bill requires
that leasing be consistent with State coastal zone programs, but
drops the qualifying phrase which is present in the Coastal Zone
Act itself, "to the maximum extent practicable." We feel the phrase
should be retained, SO that the standard of consistency is no higher
for OCS leasing than for other Federal programs.
10. Best technology. The bill requires use of "the best available and
safest technology, economically achievable.' We oppose enactment of
this phrase unless report language makes it clear that the costs and
the advantages of new technologies can be balanced against each other,
and the bill is amended to make clear that "economic achievability" is
to be determined by Interior, not the courts.
11. Safety regulation. The bill makes multiple assignments of agency
authority for safety regulations; sometimes as many as three agencies
are directed to do the same thing, to no clear purpose or effect. We
favor retention of the regulatory responsibilities in present law.
12. Marking of obstructions. The bill makes mandatory the Coast Guard's
present discretionary authority to mark obstructions on the OCS for
navigational purposes. We feel that discretion should be retained,
because marking is not always helpful or necessary, and because the
Coast Guard's liability in case of accident might otherwise be
unacceptably expanded.
FORD & LIBRARY GERALD
13. Impact aid. The impact aid provisions are identical to those in
the House Coastal Zone bill now in conference. We object to th. m as
being inconsistent with the Administration bill on this subject.
14. State authority. The bill forbids development plans to be
inconsistent with "any valid exercise" of State or local authority.
This is language taken from the Senate bill, which requires development
plans to contain information about onshore facilities, but it is
inappropriate in the House bill, which restricts the plans to facilities
in Federal waters.
15. Requirement of due diligence. The bill bars issuance or extension
of a lease if the applicant has not diligently performed his obligations
on other leases. The provision is unnecessary, since due diligence on
each lease is required elsewhere in the bill; it is unworkable, since
it could lead to cancellation of a lease held jointly by several parties
because of the lack of diligence of one of them on another lease.
16. Citizens' suits. The bill broadens the standing of citizens to
sue under the Act well beyond provisions of other recent environmental
laws. This raises the likelihood of nuisance suits.
17. Stratigraphic drilling. The bill requires offer of permits to
drill in each frontier area at least one pre-lease-sale test hole, in
a location most likely to contain oil or gas. Present policy is to
keep these tests "off structure" so that no discovery of oil or gas
will result, in order to gather useful geologic information but avoid
pressure for further government exploration before leasing. Present
policy should be retained.
NOTE:
Other objections to H.R.6218 are listed in the attachment.
FORD & LIBRARY
ATTACHMENT
Other Objections to H. R. 6218
1. Retroactivity. The bill applies new development plan requirements
designed primarily for frontier areas to all leases on which production
has not taken place, including hundreds of leases in developed areas
of the Gulf of Mexico. The requirements should be applied to frontier
areas only.
2. Deadline for preparation of 5-year plan. The bill prohibits leasing
after June 30, 1977, unless a required 5-year plan has been prepared
and approved. Eighteen months after passage of the bill should be
allowed.
3. Principles for preparation of 5-year plan. The bill lays down
requirements for preparing the 5-year schedule which are overly
strict and could become sources of delaying litigation. Qualifying
language should be added.
4. Reports of safety violations. The bill requires excessively detailed
reporting of safety violations. Unnecessary expense would be avoided
by redrafting these provisions.
5. Frequency of inspection. Unnecessarily frequent inspections are
called for in the bill. Once-yearly regular inspections of platforms,
plus a program of unannounced visits, would be adequate.
6. Regulations required. The bill requires issuance of regulations
concerning duties of the Secretary himself, such as preparing annual
reports and the 5-year program. Such a requirement would generate
useless peperwork, and should be stricken.
FORD & LIBRARY GERALD
7. Attorney General and FTC review. The bill requires Interior to
provide Justice and FTC with information for their review concerning
antitrust implications lease issuance or extension. The information
requirement is too broad, and could become burdensome and a source
of delay.
8. Regulations for subsurface storage. The bill requires Interior to
issue regulations for all subsurface storage on the OCS, a requirement
that is in conflict with the Energy Policy and Conservation Act, which
assigns responsibility in the case of government facilities to the FEA.
9. Limitations on export. The bill adds requirements for Presidential
findings and Congressional review to the normal procedures of the
Export Administration Act. These are undesirable restrictions on
executive powers.
10. Extending the term of a lease. Under certain conditions, the bill
permits extension of the primary term of a lease to ten years from the
normal five. To avoid undesirable pressure for extensions, this provision
should be limited to leases containing such permission in their original
language.
11. Development plan approval if environmental studies are incomplete. The
bill says that an incomplete environmental study shall not "in itself" be
grounds for refusing to approve a development plan. This question should
be left to Interior's discretion, since in some cases the study may be
important enough to be worth waiting for.
12. Compensation for leases cancelled because of safety violations or
inability to comply with law. The bill fails to make clear that
cancellation for these reasons would not entitle the lessee to
compensation.
13. Revision of development plans. The bill restricts too narrowly
the grounds for revision of development plans. If the requested
revision is not contrary to the public interest, the mere convenience
of the lessee should be sufficient.
14. Reimbursement for data costs. The bill provides for reimbursement
of lessees but not permittees for reproduction costs of data acquired
from them by Interior. The provisions should be the same for both.
15. Price per lease-share under "Phillips plan." The bill provides that
all bidders for 1 percent lease shares under the Phillips plan system
would pay the same price, regardless of their bids. This requirement
unnecessarily handicaps an otherwise promising experimental bidding system.
16. Required environmental impact statement at development stage. The
bill requires at least one EIS on development in each frontier area, but
it is ambiguously worded, and could be interpreted to require one on
each geologic structure, which would be unworkably burdensome.
17. Definition of "affected State. " The definition now in the bill
makes it possible for a State to be defined as "affected" by an oil spill
from any vessel, not just one carrying OCS oil. This is inconsistent
with the logic of the oil spill liability provisions elsewhere in the bill.
18. Proper term for OCS "structures." In referring to OCS "structures"
such as wells and platforms, the bill fails to use language which is
fully consistent with the 1958 Convention on the Continental Shelf.
FORD & LIBRARY GERALD