<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:55644.wais]
THE IRAQI OIL FOR FOOD PROGRAM AND ITS IMPACT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND POWER
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
MARCH 26, 1999
__________
Serial No. 106-27
__________
Printed for the use of the Committee on Commerce
<snowflake>
U.S. GOVERNMENT PRINTING OFFICE
55-644CC WASHINGTON : 1999
------------------------------------------------------------------------------
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
BILL LUTHER, Minnesota
LOIS CAPPS, California
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Power
JOE BARTON, Texas, Chairman
MICHAEL BILIRAKIS, Florida RALPH M. HALL, Texas
CLIFF STEARNS, Florida KAREN McCARTHY, Missouri
Vice Chairman THOMAS C. SAWYER, Ohio
STEVE LARGENT, Oklahoma EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma BART GORDON, Tennessee
JAMES E. ROGAN, California BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING, RON KLINK, Pennsylvania
Mississippi JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Bole, David L., Corporate Research and Development, Randall
and Dewey, Inc............................................. 85
Brown, F.W.``Pete'', Co-owner, Cimarron Production Company... 80
Hakes, Hon. Jay, Administrator, Energy Information
Administration, Department of Energy....................... 21
Sieminski, Adam E., Principal and Senior Oil Analyst, BT Alex
Brown...................................................... 66
Smith, Hon. Carl Michael, Secretary of Energy, State of
Oklahoma................................................... 26
Taylor, Tom, Regional Vice President, Texas Independent
Producers and Royalty Owners Association................... 73
Watkins, Hon. Wes, a Representative in Congress from the
State of Oklahoma.......................................... 7
Williams, Hon. Michael L., Commissioner, Texas Railroad
Commission................................................. 39
Wood, Hon. William B., Principal Deputy Assistant Secretary,
Office of International Organizations, Department of State. 34
Material submitted for the record by:
Larkin, Barbara, Assistant Secretary, Legislative Affairs,
letter dated April 16, 1999, on behalf of Wood, Hon.
William B., Principal Deputy Assistant Secretary, Office of
International Organizations, Department of State, enclosing
material for the record.................................... 97
(iii)
THE IRAQI OIL FOR FOOD PROGRAM AND ITS IMPACT
----------
FRIDAY, MARCH 26, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Energy and Power,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2322, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Largent, Burr,
Shimkus, Bryant, and Hall.
Staff present: Catherine Van Way, majority counsel; and
Rick Kessler, minority professional staff member.
Mr. Barton. The Subcommittee on Energy and Power of the
Commerce Committee hearing on the Iraqi Oil-For-Food Program
will come to order.
I would like to welcome everyone. I believe that this is an
issue which impacts our national energy security and which
everyone, not just individuals from the oil-producing States,
should pay attention to.
After Iraq's invasion of Kuwait in 1990, the United Nations
imposed sanctions which prohibited all trade with Iraq.
However, in April 1995, in recognition of the humanitarian
needs of the people of Iraq, Security Council Resolution 986
was passed, which authorized the sale of oil from Iraq to be
used to purchase goods authorized by the United Nations
Security Council.
Under this program, Iraq is currently allowed to sell up to
$5.2 billion worth of oil every 6 months. The money generated
from the sale is deposited in the bank of the choosing of the
government of Iraq and is supposed to be used to provide
humanitarian goods to the Iraqi people under United Nations
supervision.
Under this program, Iraqi oil sales have risen over the
past year from 1.47 million barrels per day to 2.1 million
barrels per day. The revenue received for those sales has been
approximately $3 billion every 6 months.
The United States recently proposed that the Security
Council consider lifting the ceiling on oil sales permitted
under the Oil-For-Food Program. It is worth noting that the
Oil-For-Food Program is not the only way Iraq currently sells
its oil. Some oil is exported to Jordan under a long-standing
program; some oil we are told is smuggled into Turkey and sold
on the black market. In addition, other oil is exported through
Iran and from seaports in the south, again for what we believe
to be black market sales.
Since the Oil-For-Food Program was begun, $2.75 billion
worth of food, over $500 million worth of medicine, and $400
million worth of supplies for things such as water, sanitation,
electricity and education projects have been delivered to the
people of Iraq. The program has been criticized for its
slowness. In February of this year, the U.N. Secretary General
reported that there are $275 million worth of medicine sitting
in Iraqi warehouses that have been undistributed.
All that being said, the question arises, is this a
worthwhile program? Two-thirds of the world's proven reserves
of oil reside in the Middle East. In fact, Saudi Arabia and
Iraq are first and second in proven reserves of oil and Iraq,
which is largely unexplored, might ultimately have more oil
than Saudi Arabia. For the past several months, oil prices have
languished at historic lows. The precipitous and sustained drop
in oil prices have been attributed in part to the Asian
economic crisis, which caused a drop in anticipated demand,
while oil production has continued to grow. Many also attribute
growing Iraqi oil exports as a factor for today's low oil
prices. Some argue that Iraqi oil is not impacting prices, but
I find it interesting that oil prices rose slightly this week
because of an announcement by OPEC that its member countries
would be cutting production by 2.1 million barrels a day. It
may be a coincidence, but Iraq is exporting 2.1 million barrels
a day.
Low oil prices pose the greatest threat to domestic
producers of oil and gas, because in the United States, our
small independent oil and gas producers have the highest cost
of production. We are beginning to see the impact as U.S. oil
production has begun to decline in the wake of these sustained
and abnormally low prices. The U.S. is now dependent on imports
to meet more than 50 percent of our daily petroleum needs. That
number is likely to grow dramatically as more marginal wells
are shut in and domestic exploration activities are slowed in
the wake of these continued low oil prices.
I believe that we should not ignore the humanitarian needs
of the people of Iraq, but I also believe that we should not
ignore the needs of our own people here in the United States,
and these low oil prices, which I believe are caused in part by
the Iraqi oil production, are having an impact on our energy
security.
I will be most interested to hear from our administration
witnesses today to see if they can explain this apparent policy
disconnect.
Finally, I want to note that I hope today's hearing will be
the first of a number of hearings that this subcommittee will
be having on the domestic oil and gas industry. I am deeply
concerned that the current situation in the Oil Patch in the
United States in the long term does cause a national security
risk to our country. If we cannot maintain existing production
and to some extent encourage new exploration for domestic
resources, we will be in a situation where we are more and more
dependent on foreign oil.
I want to welcome everyone, especially our witnesses, to
this hearing. I am sure they are going to find it very
informative.
With that, I would like to recognize the ranking member
from Rockwall, Texas, Mr. Ralph Hall, for an opening statement.
Mr. Hall. Mr. Chairman, I thank you, and members of the
committee, I thank you for having this hearing, but not much to
have it on Friday. I would have rather had it on Tuesday or
Wednesday or Thursday.
Mr. Barton. I understand.
Mr. Hall. I see folks on the committee that would be
strapped to an airplane right now.
Mr. Barton. You and me, that's right.
Mr. Hall. My folks over here, Democrats are poorer than
Republicans, they all caught the bus out last night.
Seriously, Joe, thank you for the good hard work you do and
the very successful work you do as chairman of this committee.
You do a great job and I am very proud to work with you as our
chairman. Few live in the Oil Patch, as I do. It is, I guess,
stunningly apparent to you that when you talk to anyone in or
even near the oil business, that these days are about the
toughest and the most frightening in the history of the people
that are in the oil business. Regrettably, this is not an idle
boast, considering the market calamities of the 1980's and the
1950's, because we have some pretty bad times to compare it
with.
We are here today to examine one of the most often cited
reasons for today's low oil prices, and the Iraqi Oil-For-Food
Program, as the chairman has pointed out, is considered one of
the big problems of it. I am a big believer in the unfettered
operation of markets, and I also believe in being compassionate
to people, particularly those who are unfortunate enough in
life to have to live under a regressive regime of a Saddam
Hussein. At the same time, it is important for us to think
about this country and for us to examine how the world oil
market is doing and whether or not it is working, and then to
get our own assessment of how well it is working. If it is not
working properly we need to make some changes in it, and we can
only change that over which we have some control. So we have
very good panelists today and I am sure we will know a lot more
about it after we hear them.
I, for one, am suspicious of this program. It seems to be
borne out of an appropriate humane consideration, but it may be
disruptive of the worldwide crude oil market and could spawn a
lot of abuse.
We have good witnesses here today who can help us better
understand the impact of the Oil-For-Food Program. I want to
extend a special welcome to my old friend, Congressman Wes
Watkins, whose district lies just across the Red River from
mine. I don't know of anybody that works harder, day and night,
than Wes Watkins. You know, Wes was a Democrat at one time and
we worked together then. He, when he switched over to the
Republican Party, they asked me about it. We have a mutual
television station that comes into Oklahoma and Texas and they
asked me about Wes. And they said well, what do you think about
him switching over to the Republican Party? I said, well, I
would be for him, and he could win even with the laundry
ticket. And they tell me that he used that for a commercial.
But I got a few ugly letters from Democrats. But I got my
friend back up here, and I am glad to work with Wes.
I also want to welcome a fine group of Texans. The newest
member of the Texas Railroad Commission, Mike Williams, whom I
had the pleasure of having lunch with yesterday. He is on the
Railroad Commission, and I think that is one of the most
dignified and prestigious offices that we have in the State of
Texas, and the most important. Tom Taylor, who represents
TIPRO, and Dave Bole of Randall and Dewey. We have good,
outstanding--Joe, you invited some good Texans up here, and I
am proud of you.
Mr. Barton. There is no such thing as a bad Texan, though.
Mr. Hall. Well, I don't know.
I thank the chairman. I thank you for having them here, and
I hope this hearing is only one of however many it takes to
determine what remedies exist to deal with the current price
situation. It is a situation that is helping to destroy the
domestic onshore petroleum industry, even as we sit here today.
And while we have seen some upward pressure on prices lately,
we need not to be lulled by any underlying factors which remain
unchanged that we can change.
I guess that is the testimony we are going to hear today.
Seriously, thank you for having this hearing. It is a very
important hearing, and it can yield an awful lot to folks that
are hurting. Thank you.
Mr. Barton. Thank you, Congressman Hall. I might point out
we wanted to do this hearing yesterday, but we had a full
committee markup of the satellite bill, and Chairman Bliley
thought that we ought to do the markup.
Mr. Hall. Well, I haven't had anything to fuss at you about
this year yet, and this gave me a first shot.
Mr. Barton. Okay. But you and myself and Mr. Largent are
normally on the first plane out of town after the first vote,
so we are all in the same boat on that.
The chairman recognizes the distinguished gentleman from
Illinois, Mr. Shimkus, for an opening statement.
Mr. Shimkus. I would like to ask permission to submit my
statement for the record and just say that it seems like we are
in a Catch-22 where consumers all love the low oil prices, but
what it does is shut down marginal wells. I have the two
largest fields in Illinois in my district. Most of the
operating wells are in my colleague David Phelps' district, and
we all know what this does is it closes down those wells, the
low prices, thus making us more dependent on foreign oil. And
national security and energy security is one of my main focuses
on this subcommittee.
So I appreciate this, and I am also looking forward to
talking with the folks from the administration, with the, Iraqi
intransitives on the inspections and stuff. I think it is time
that we reopen this debate on this program, and I look forward
to this hearing.
I yield back my time.
Mr. Barton. Good. We thank you, Mr. Shimkus. Without
objection, his statement will be inserted in the record in its
entirety.
We welcome Mr. Largent from Oklahoma to give an opening
statement. Congressman Largent has put a lot of emphasis in the
last year or so on this issue and is one of our congressional
experts on it.
Mr. Largent for an opening statement.
Mr. Largent. Thank you, Mr. Chairman. I, too, will submit
my entire statement and just make some brief opening remarks.
First, I want to thank you for having this hearing. I wish we
could draw even more attention to this issue, because as you
know, it is very serious. I also want to recognize two
Oklahomans that are also on our panels today. Mike Smith, who
is our Oklahoma State Department of Energy Secretary, and Pete
Brown, an independent producer from Oklahoma City. Thanks for
coming.
There is a number of questions that I hope that we can get
some answers to, and I would like to verbalize those right now.
One is, why is the Iraqi oil export quota measured on a revenue
basis, currently $5.2 billion worth of oil over 6 months,
rather than measured on a quantity basis? The second question I
would like to ask is what assurances do we have that the money
is being spent in the manner intended; in other words, for
food, and are we relying on Iraqi government entities to verify
this. I am glad to see that there is somebody from the State
Department that hopefully will answer that question for us
today.
Why are the funds allowed to be spent by the Iraqis for oil
production equipment? Has this policy been revisited since we
began responding to the Iraqi military aggression by bombing
their missile defenses on almost a daily basis? And what about
the 5 percent of the Oil-For-Food funds that are going to fund
the U.N. investigations and costs. Currently, as we know, there
are no inspectors there. Also, I think it would pose an
interesting question to try to figure out why one of the
military targets, when we are exchanging oil for food, why one
of the military targets in the latest round of bombing was an
oil refinery in Iraq. That seems a small irony to me. Can the
U.S. truly determine what the oil production export capacity of
Iraq is, given their ability to sell oil on various black
markets? And how can the U.S. propose that the U.N. Security
Council could consider lifting the ceiling on oil sales
permitted under the Oil-For-Food Program while conceding that
increased U.S. dependence on foreign oil imports is a threat to
our national security?
Mr. Chairman, one thing that I think that is imperative for
this Congress and this administration to come to terms with, we
had a vote last week on the import of steel, and I think many
of the arguments that were made during that debate were about
the importance of the steel industry for national security
reasons. If we don't have the ability, the capacity to make
steel in this country anymore, we can't build tanks and
airplanes and ships to protect this country, and the same is
equally true of our ability to produce energy domestically.
I know that back in the 1980's there was a push to develop
a national energy policy, and included in that was to say that
we should cap imports at 50 percent, this was back in the
1980's, because anything beyond that would pose a very critical
national security risk. And now, as you know, we have well
exceeded 50 percent, it has even gone up as high as 58 percent
in recent years, and I think this is a very important question
that Congress, the American people, the President, and the
Pentagon need to address, is that at what point, what is the
threshold that we are going to say enough is enough. How much
oil can we import without severely and critically undermining
our national security interest?
Mr. Chairman, I appreciate you having this hearing, and
hopefully, this is the first in many steps toward resolving a
number of these questions. I yield back.
[The prepared statement of Hon. Steve Largent follows:]
Prepared Statement of Hon. Steve Largent, a Representative in Congress
from the State of Oklahoma
I want to thank the Chairman for holding this hearing on the impact
of foreign oil imports on our domestic oil industry, specifically the
Iraqi Oil for Food Program.
At the outset, I want to acknowledge the Chairman's efforts to
include two Oklahomans on the panels of experts testifying today. I
doubt that there is anybody more qualified to speak on the current
state of our domestic oil industry and the impact of increased U.S.
dependence on foreign oil than Secretary Mike Smith of the Oklahoma
Department of Energy and Pete Brown, an independent oil and gas
producer from Oklahoma City. I would encourage the committee to pay
close attention to their testimony because I believe it will shed some
light on the seriousness of the state of our domestic oil industry.
It is my hope that the hearing today on the Iraqi Oil for Food
Program will address some concerns I have about the goals and merits of
the program. These concerns include:
1) Why is the Iraqi oil export quota measured on a revenue basis
(currently $5.2 billion worth of oil over 6 months) rather than
measured on a quantity basis?
2) What assurances do we have that the money is being spent in the
manner intended? Are we relying on Iraqi government entities to
verify this?
3) Why are funds allowed to be spent by the Iraqis for oil production
equipment?
4) Has this policy been revisited since we began responding to Iraqi
military aggression by bombing their missile defenses on almost
a daily basis? What about the 5% of the Oil for Food funds that
are going to fund the U.N. investigations and costs?
5) Can the U.S. truly determine what the oil production and export
capacity of Iraq is given their ability to sell oil on various
black markets and transport it by other than pipeline means?
6) How can the U.S. propose that the U.N. Security Council consider
lifting the ceiling on oil sales permitted under the oil for
food program, while conceding that increased U.S. dependence on
foreign oil imports is a threat to our national security?
Our domestic petroleum industry is currently facing a severe
crisis: one that if not addressed expeditiously could prove disastrous
economically, yet more importantly, threatens our national security.
Since October of 1997, it is estimated that our domestic oil and gas
industry has lost 57,000 jobs--5 times the number of jobs lost in the
American steel industry! And each barrel of domestic oil lost will be
replaced by imported oil.
In December of 1994, the Secretary of Commerce issued the results
of an investigation conducted under the Trade Expansion Act which
studied the impact of crude oil imports on the national security of the
United States. The investigation determined that oil imports threaten
to impair our national security.
In February of 1995, President Clinton concurred with the Commerce
Department's finding that ``the nation's growing reliance on imports of
crude oil and refined petroleum products threaten the nation's security
because they increase U.S. vulnerability to oil supply interruptions.''
At that time (1995), imports comprised about 50 percent of the United
States consumption. In 1998, gross imports had risen to 53 percent!
Unfortunately, little has been done over the past four years to
heed this ominous warning. Now, the domestic petroleum industry faces a
more complicated and potentially devastating set of problems than it
did four years ago. According to recent figures released by the
Independent Petroleum Association of America (IPAA), preliminary
employment data for the exploration and production sector of the oil
and natural gas industry, as of December 1998, stood at 309,300,
compared to 339,800 in the same month last year. Since the early
1980's, roughly half a million jobs relating to the oil and natural gas
industry have been lost. And rather than attempting to decrease our
reliance on foreign imports--the U.S. has become more dependent on
imported oil.
The hardest hit by this latest crisis has been the independent
producer. The Energy Information Agency recently released a report that
indicated that about 60 percent of oil production in the lower 48
states comes from independents, a percentage that increased by ten
percent over the past ten years. This reflects an irreversible trend.
Major oil companies are leaving the onshore lower 48 states. They have
concluded that these wells do not produce the volumes they need to meet
the return on capital that they seek. Majors now operate in the United
States primarily offshore and Alaska, but more and more they are
seeking their new production overseas. At current prices, most--if not
all--of the onshore lower 48 production is at risk of loss.
If we lose our independent producers, our reliance on foreign oil
will likely increase from about 55 percent to over 70 percent. If we
continue on this course, we will systematically degrade our ability to
produce a sufficient amount of oil to maintain a secure energy source
vital to our national security policy.
Simply put, we can't fight a war, even a defensive war, if we are
counting on Saddam Hussein to ship us oil to fuel our tanks, aircraft
and ships. And notwithstanding the fact that domestic oil producers are
suffering now because of low oil prices, once they are gone we cannot
revive their wells or industrial expertise or hope the market will
rebound. It will not. The national security impact of losing our
ability to produce oil domestically is no different than losing our
industrial base to build nuclear submarines. If more than half of our
nuclear submarines were imported from foreign countries, I think we
could agree that the United States would be in grave danger.
I look forward to the testimony of our expert panelists today. Our
domestic oil industry, and the current impact of Iraqi imports, must
begin to appear on the nation's radar screen so all Americans can
understand the threat that exists. I am committed to making this case
so that we can move quickly to look for viable solutions to a very real
problem.
Mr. Barton. I thank the Congressman from Oklahoma for that
statement.
We would now like to hear from our first panelist, the
Honorable Wes Watkins from the great State of Oklahoma,
representing very well with a distinguished career the Third
Congressional District.
So, Mr. Watkins, if you will come forward. We will put your
statement in the record in its entirety, and being from
Oklahoma, which we think is a great State, we will recognize
you for such time as you may consume.
STATEMENT OF HON. WES WATKINS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF OKLAHOMA
Mr. Watkins. Thank you, Mr. Chairman. I appreciate the
distinguished members being here. Even though short in number,
I know we are high in quality, and I can also tell the States
that are hurting out there and the districts that are hurting
concerning not only this policy that we are talking about
today, but the entire failed policy of this administration and
the U.N. Security Council dealing with the Oil-For-Food Program
and all. I want to acknowledge that I know each of you well and
I know some of the things that you are working on, and I
appreciate the commitments you have made.
My colleague from Oklahoma, Congressman Largent, Steve, you
asked some very logical questions. It reminds me of a guy who
says, you know, common sense is not common anymore, you know,
and there is not much of it around, and this is something that
I think the Oil-For-Food Program is not a--Ralph, my good
friend across the river, it is not one of those things that our
people in our area find that has much common sense, and I would
like to talk about that a little bit.
I call it a failed policy because the sanctions, you might
as well not have them. My members of the committee, I will say
to friends that I work closely with, Saddam Hussein has won.
Saddam Hussein has won. We are bombing Iraq. At the same time,
we have opened up for him, for his people, a lot that we are
not willing to do for ourselves. Today it is at $5.2, it is
actually at about $10.5 billion/year worth of oil that can be
sold, and it is a question why net barrels. That is more oil
than Iraq exported before the Gulf War in 1991. It is not just
being utilized on food or hospitals and medicine, it is being
used to help rebuild their infrastructure. Our CRS reports have
pointed that out. So when you look at the system we have there
and the policies that we have, and I wonder why we are not
willing to do it as a State Department, as a country, as the
U.N. Security Council, why don't we insist that they abide by
what is legal in what they sell.
You know, I have never understood that. We close our eyes
just to illegal things that go on. And there is around 300,000
barrels a day that is being sold illegally over the black
market to Jordan and to Iran, Syria, and Turkey. And you know,
also part of the fallacy of this lack of common sense that I
look at and wonder about, on the emergency programs that just
passed yesterday, it had $100 million in there for Jordan, but
Jordan is also buying about $100 million of illegal oil from
Iraq. It is hard for me to explain why the policy of this
administration is to allow that to happen that way, destroying
our oil patches, destroying our means of making a living. I
hear in their voices the pain of people I have never heard
before, the fact that they are losing everything. I know in my
area the oil patches are a war zone. They are yanking up pipe,
they are closing down oil wells, and there is going to be a lot
more of that, and I cannot stand idly by, and I know you cannot
either. I know every one of you right here are the same way I
am. We have to try to do something. I don't understand the
administration and our country willing to go along with that.
In the last 14 months, we have allowed Iraq to go from
700,000 barrels a day up to 2.3 million barrels a day. Mr.
Chairman, as you rightly said, the irony is that the OPEC is
dropping production, and I was going to be at OPEC Tuesday.
They have dropped, have a policy of 2.1 million drop per day in
the oil, and Iraq has gone up about 2.1. Now, I may not be a
rocket scientist, but let me tell you, it doesn't take much
more than common sense to recognize the fact that literally,
OPEC has staggered the market and it has gone up a little bit
when they dropped to 2.1 or even the discussion that that is
what is happening. We know that it hasn't gotten there yet, but
it has cut production, and it has increased the price. Does it
stand to reason that the 2.1 million that Iraq has increased
affects the market the same way? Am I thinking, Ralph, wrong? I
mean is that logic there? Is that is wrong, if 2.1 over here on
OPEC affects it like we have seen it, is the 2.1 in there, or
are we just seeing something a lot differently? I think we need
to look at that. We have allowed it. It is common sense to me.
If our policy, if our policy in the United States in
dealing with Iraq is to allow a dissatisfied group of people in
Iraq, the Iraqis, to overthrow Saddam Hussein, we have gone
about it the wrong way. Because our reports show that they are
basically importing anything and everything they want to, and
why worry about it? In fact, as I tell them, we have a mental
institution in Oklahoma, and the old boy told me one time, he
said I have proof that I am sane, that I have got good sense. I
submit to you Iraq has got it better than OPEC, OPEC should be
mad, we should be mad. They are having to come down; Iraq is
out of the box. Even though they belong, they don't have to
abide by that reduction.
In fact, I am going to follow up on the statement that as I
prepared for this, under the new program they have a standard
or a statement I saw there, I want to check it out, they have a
higher price they are going to be able to get. I hope that is a
wrong statement I am reading, because I think that also is
something we need to be concerned about.
Let me share with you and close on two things, and I think
we have to reevaluate this. It is again something that deeply
disturbs me. Thomas Pickering, the Under Secretary, said this
is in the newspaper of March 18, told the Senators, that is the
Senators across on the other side, as we all know, ``The
humanitarian needs of the Iraqi people must be addressed. The
Oil-For-Food Program,'' he said, ``has had a tremendous
positive impact on the conditions of the average Iraqi.'' I
don't disagree with that.
With regard to the program's effectiveness on crude prices
and domestic energy industry, Pickering agreed with Richardson,
our Secretary of Energy, that Iraqi's exports are just one
factor. Well, yeah, it is just one factor. It is 2.1 million
barrels a day. They said the policy toward Iraq has never been
linked to the world oil market. I don't care. ``Allowing oil
price consideration to drive our sanctions decisions or seeking
to use sanctions to target oil prices would undermine our
ability to provide for the humanitarian needs of the Iraqi
people.''
I don't think I am looking in the face of any person here
that is not against trying to help with some humanitarian aid.
But I want to know how much is for their military buildup, how
much money are they using there? How much money are they
getting from illegal sources?
The infrastructure, I have infrastructure needs, I think
many of you know, in my district, and I have a need to try to
rebuild that area.
Then I read over here, in closing my statement, a statement
that--you know, it is kind of like our welfare program, a
failed program. It is kind of like a giveaway program. What it
states here, supporters of increased oil sales, on the other
hand, say that the tactic would reduce suffering among Iraqis
and make it more difficult for the Iraqi government to maintain
anti-government, or anti-American and British sentiment because
of being in favor because we give them stuff.
You know, members of the committee, there is one man who
stands between us and the Iraqi people and his name is Saddam
Hussein. Do you think we are going to have favor of being able
to do all of these things, or Saddam Hussein? We are dealing
with failed policy that is coming from our administration and
the U.N. Security Council and we have to correct it. It is not
taking any consideration in for the American people.
I thank you so much for letting me come by to just share
with you a little bit, because we need the common sense of this
committee at work in trying to shape, Mr. Chairman, some of the
policy. I too plan to be strapped on that airplane heading
toward Oklahoma, but I delayed it until about 1 o'clock because
of wanting to come here and be with you. I just thank you so
much.
[The prepared statement of Hon. Wes Watkins follows:]
Prepared Statement of Hon. Wes Watkins, a Representative in Congress
from the State of Oklahoma
Chairman Barton, Ranking Member Hall, I would like to thank you for
calling this hearing and allowing me the opportunity to testify before
the Subcommittee on Energy and Power. Those of us from oil producing
states need to do a better job of educating the American public about
the importance of our domestic oil industry. I believe this hearing is
a step in the right direction, but we need to do more. I would like to
encourage our colleagues in the Congress and the Administration to
reduce Iraqi oil sales to pre-Persian Gulf War levels--not increase
them.
As we all know, we are facing a crisis in our domestic oil and gas
industry. World oil prices have dropped from above $20 a barrel in 1997
to less than $9 a barrel this year. When adjusted for inflation, these
are the lowest prices seen since the Great Depression. This crisis is
having a devastating effect on our domestic industry. Since October of
1997, our domestic oil and gas industry has lost 57,000 jobs. That is
more than five times the number of jobs lost in the American steel
industry.
This subcommittee knows that the backbone of our domestic oil and
gas industry is the small, marginal well. Marginal wells are defined as
those wells which produce less than 15 barrels a day. At these low
prices, it is impossible to keep many of our small, marginal wells
open. These marginal wells account for 1.3 million barrels of daily
production--equivalent to the amount of oil the Unites States imports
from Saudi Arabia. Marginal wells also contribute 80,000 jobs and
generate close to $14 billion each year in economic activity. However
at these low prices, it is becoming impossible to keep many of our
marginal wells open. When we lose these marginal wells, the backbone of
our domestic oil industry, we become more dependent on foreign oil. We
must not lose sight of the fact that the economic health and national
security of our country are tied to the strength and stability of the
domestic petroleum industry.
There is a general consensus that the current crisis in the
domestic oil patch has been caused by a combination of several factors.
Certainly the Asian financial crisis, warmer than expected winters, and
increased oil production by certain countries have played an important
part in driving down prices. However we should not minimize, as some
have done, the impact that the resumption of Iraqi oil sales under the
oil-for-food program has played in driving down prices.
We are here today because the Clinton Administration is currently
considering asking the United Nations to remove the U.N. imposed
ceiling on Iraqi oil sales. I am strongly opposed to this proposal
because, I believe it would severely damage our already devastated
domestic oil and gas industry and would not accomplish the objective of
alleviating the suffering of the Iraqi people. Iraq should not be
allowed to sell greater quantities of oil then they were prior to the
Persian Gulf War, as they are doing now. The extended period of below
cost prices is causing more and more of our small, independent
producers to plug their marginal wells. Allowing Iraq to sell
additional quantities of oil on the world market will only drive down
these already depressed prices and force our marginal producers to plug
their wells. Once these wells are plugged, we have basically lost this
valuable resource for secondary recovery.
It is important that Members understand the flaws inherent in the
oil-for-food program's structure and how that effects the amount of oil
Iraq can sell on the world market. Iraq's quota is based on a dollar
amount rather than on quantitative limits. Currently, the oil-for-food
program allows Iraq to sell $5.2 billion worth of oil every six months.
As the price of oil fell through late 1997 and 1998, Iraq was allowed,
under this flawed structure, to drastically increase its production.
Under this expanded oil-for-food program, Iraq has increased its daily
oil production from around 700,000 barrels to 2,300,000 barrels during
the last 14 months. This excess Iraqi production has exacerbated the
current glut on the market and caused the price of oil to slide even
lower. In fact, the 2.3 million barrels a day more than offsets the
recent decision by the Organization of Petroleum Exporting Countries
(OPEC) to reduce oil production by 2.1 million barrels a day in an
effort to prop up prices.
The Administration will likely argue today that Iraq is already
producing at capacity and therefore increasing the amount of oil Iraq
is allowed to sell will not have an effect on world prices. This
argument is flawed in several aspects. First, if Iraq is already
producing at capacity, then there is no need to raise the dollar
ceiling on Iraqi oil sales because Iraq cannot sell any more oil than
it is currently selling. Second, while Iraq is currently producing at
capacity, the UN allows Iraq to use $600 million annually from the oil-
for-food program (which is supposed to be for humanitarian supplies) to
improve its oil production capability. This will allow Iraq to improve
its production facilities and to further flood the world market with
cheap oil.
I am also opposed to this proposal because I do not believe that
expanding the oil-for-food program would help alleviate the suffering
of the Iraqi people. Iraq has failed to meet the conditions of the 1991
cease-fire agreement and the 1996 oil-for-food program. I am concerned
that the oil-for-food program itself is flawed and that many Iraqis
will never see the benefit of the oil sales. The State Department has
acknowledged that Iraq has not distributed much of the humanitarian
supplies they have already acquired through the oil-for-food program.
According to U.S. officials cited in the press, ``Iraq has kept large
supplies of food and medicine in storehouses, refusing to distribute
them to the needy'' (Associated Press Wire, 1/4/99). State Department
Spokesman Jamie Rubin was quoted in the January 14, 1999 State
Department Briefing as saying:
``The facts are that (the Iraqis) are failing to order and
distribute food and medicine as quickly as they could. The
facts are that they are failing to order and distribute food
and medicine that would alleviate the problem, and that Iraq
plans to order less food and medicine for the Iraqi people than
in previous times. So those are the facts.''
Why would the Administration even consider a policy which would
further damage our domestic oil industry and, according to their own
spokesman, do little to alleviate the suffering of the Iraqi people?
I also have concerns about the manner in which humanitarian
supplies are distributed. If the Iraqi people are starving, as Saddam
Hussein claims, why is the oil-for-food money being spent on oil field
and telecommunications equipment. Are these not the same
telecommunications facilities we have bombed because they are an
important part of Saddam Hussein's command and control complex? I am
also concerned that Iraq is allowed to use $600 million annually in its
oil-for-food receipts for oil production equipment. If Iraq can allow
food and medicine to sit in warehouses, than why should we allow the
Iraqis to expand their oil production and further flood the world
market with cheap oil? The oil-for-food program also allows Iraq to
spend $250 million to rehabilitate the agricultural sector. While I
have nothing against the Iraqi people growing their own agricultural
commodities, does anyone honestly believe that Saddam Hussein will use
those crops to feed the Iraqi people at the expense of his treasured
military?
The Administration will likely say that Iraq's increased production
is necessary to lessen anti-American and anti-British sentiments among
the Iraqi people. However, does anyone believe that Saddam Hussein and
his regime will allow the United States to claim credit for these
humanitarian supplies? I believe it is more realistic to expect that he
will continue to let food and medicine sit in warehouses while the
Iraqi people starve. Instead, we are rewarding Saddam Hussein for his
lawlessness. We are rewarding him for shooting at our planes. We are
rewarding him for illegally smuggling oil through Turkey, Jordan, and
Iran and we are punishing hard working American families in the
domestic oil patch.
Mr. Chairman, a tremendous disconnect between a policy where we
bomb Iraq on almost a daily basis yet remain the largest consumer of
Iraqi oil. That is why I, along with our colleague from Texas Mr.
Thornberry, have introduced H. Con. Res. 39. This resolution urges the
Administration to oppose the unmerited expansion of the oil-for-food
program.
Mr. Barton. Does that conclude your oral statement?
Mr. Watkins. I have a lot more to say, but I better
conclude.
Mr. Barton. I thought you were a little bit moderate today,
Congressman. I have heard you be in the Republican Conference
what we would call excited. We appreciate your moderate tone.
We are a real high-tech committee, so this is our timer. It
is a little egg timer. The Chair is going to recognize himself
for 5 minutes. I don't think I will take the 5 minutes.
I want to make sure I understand you, though, Congressman
Watkins. You are not opposed to food supplies and medicines
going to the people of Iraq, isn't that correct?
Mr. Watkins. I do not. I do not like the attitude about
saying they are not going to buy American food with it. It is a
slap in our face again. We are hurting the farmers, as well as
the oil patches. It is a double whammy.
Mr. Barton. Your problem is the producers in your district
and in the State of Oklahoma, some of the small, marginal
producers that are going out of business, and it doesn't appear
that anybody in the U.S. Government cares about that?
Mr. Watkins. That is correct. I feel strongly about it. I
have a tax credit bill coming through my committee, and I hope
the leadership and the administration will back that in order
to help us have some kind--as we all say, greater national
security.
Mr. Barton. So if we could come up with a program that
maintains the current level of humanitarian supplies to Iraq,
but cutoff the oil exports, or if not totally cut it off,
substantially reduced it, you would support such a program?
Mr. Watkins. Yes, I would. I think we need to definitely do
that. The food, I don't think it should be more than the
essential food and medicine. If our policy is for a
dissatisfied society over there that would overthrow Saddam
Hussein, we have the wrong policy. He is laughing, he is
laughing at us.
Mr. Barton. I would assume that there are corn growers and
wheat growers and cattle producers in Oklahoma that would be
willing to provide that food for a reasonable price to the
people of Iraq.
Mr. Watkins. I am quite sure we would be happy to do that.
Mr. Barton. I am going to yield back the balance of my time
and recognize the gentleman from Texas, Mr. Hall, for 5
minutes.
Mr. Hall. Thank you, Mr. Chairman. I will try to be brief,
too, because I know we have other witnesses that we are very
anxious to hear from, and perhaps soon the gentleman from the
Department of State will be able to give us a little more input
as to some of the whys of what has taken place.
As I said in my opening statement, I am troubled and
suspicious of this program. I am not unlike anyone else in that
I care about little children and old people, but you know,
MacArthur made a great statement one time. He said ``The object
of war is victory,'' and I think the President right now today
while we are here dispatching men and women of our armed forces
to inflict pain and hopefully disgrace on the Yugoslav
leadership over there, Milosevic, in an effort to cause the
people to drive him out, the easier you make it on people, the
more you help the people that need the leadership of even a
dictator, the longer he is going to be there. The program
doesn't make that much sense to me. But, who cannot feed little
hungry kids? And of course, you know, Hiroshima and Nagasaki
would have been a lot better off if they had given them a
couple of weeks notice to move all the young people and old
people offshore and just put the folks that were fighting the
war there under the bomb, but that is not the way it works, not
the way it can work, not the way it works over there today.
I asked George Bush one time why they didn't destroy Iraq's
ability to produce war, and he said well, it wasn't totally his
decision, it was a U.N. decision. Besides, they were afraid of
Iran. Didn't want to weaken Iraq and then have Iran. And I said
well, while we are over there, why can't we take care of them
too while we are there. Of course, that is not the way we do
it. I think we missed out when Iran and Iraq were fighting each
other, why we didn't just arm the hell out of both of them.
How can we impress on people that are voters and are
interested citizens the importance of people outside the
producing areas that they ought to care about domestic oil
producers? If everyone could hear you speak today, that would
get through to them. But how do we get that message over to
them?
Mr. Watkins. Are you really asking me that question?
Mr. Hall. Yes, yes.
Mr. Watkins. If I knew the answer to that, we would solve
all of our problems. Because right here, the members who are
not here are the ones that need to be listening and hearing
your feelings and the chairman's and other members from the Oil
Patch. We do bring in national security.
But I went to Venezuela. I went down and met with the new
President the week before, a couple of weeks before, who is
probably one of the most dynamic men I ever met in my life. I
mean he can look you right in the eye. And I talked to him
about the oversupply of production, and he is sincere in
wanting to lower it in helping the price, and I think he has
followed up on that. There is a lot of hope there. There is 80
percent poverty in Venezuela.
I want to get to this point, right to what you are talking
about. There is a lot of hope in Venezuela, but they don't know
anything about the new President. All they know is that 6 years
ago he tried to overthrow their government and he ended up in
jail for 2 years. Less than 2 years ago, we would not even give
him a visa to come to this country.
Now, he has his hand on the spigot of the greatest supply
of crude oil to the United States. He chased out the president
for PdVSA, but yet we have now relied more on Venezuela and
Mexico and Canada and of course Saudi Arabia. The Saudi
Arabians will produce as much oil as we consume or we produce
out of our marginal wells, 1.3 million barrels a day.
So if people understand, we have become more dependent than
ever before in the history of our country. And I thought about
that when we celebrate Independence Day. I said, we are not
independent anymore.
Mr. Hall. You were here when we tried to get an import fee
put on, and we have not been able to muster the votes, and the
reason given by those that voted against it was the hardship of
the people in the Northeast for their heating oil and things
like that, and you know, they had a good, sensible argument
there. The effort was made at one time by Charlie Cooke back
here that worked for me and worked with the committee back at
that time to try to produce a paper that would be a good
position for one of the Presidential aspirants to use on
supporting an oil import fee, and I think Charlie had to write
about 300 pages, and that is not good for a one-line quip for a
Presidential runner. Finally, we decided that there ought to be
an import fee on all oil-related goods. You can imagine how
long that takes to put together and explain, and finally the
Presidential aspirant was told just to forget it. He didn't put
part of that in his program. Yes, it was Al Gore. He wasn't
running too fast then. I don't know how he is going to do now,
but he hasn't asked us to put that together for him again, and
I doubt that he will.
I thank you. You know, once again I will leave you with
this. This is not a question that you can answer. People
outside the Oil Patch want cheap gasoline. People in the Oil
Patch want to make some money producing the basic ingredient.
Mr. Watkins. Just trying to make a living this time.
Mr. Hall. I thank you, Wes. Appreciate it.
Mr. Barton. I recognize the gentleman from Illinois for 5
minutes.
Mr. Shimkus. Thank you, Mr. Chairman, and Wes, welcome. As
you know, I am a cosponsor of your bill and I appreciate all
the good work you do.
One question that hasn't been asked, and we have been
talking about it in Illinois, the problem with the base
closings and the people who say there is a savings, we never
take in the environmental cost of cleanup. When we have
marginal wells that are going bankrupt, the State has to assume
the cost of cleanup, not only in closing down the well, but
also the cleanup of the surrounding area, and that is also a
taxpayer issue in Illinois that with these historically low
prices, because of the oversupply, that we will have to address
as citizens of the State of Illinois. Is that a similar effect
on the taxpayers in your district and the State of Oklahoma?
Mr. Watkins. I am delighted with the vision and commitment
and dedication of our independent oil producers in Oklahoma. We
established the first checkoff program per barrel, which helps
a great deal with environmental and also educational matters.
Even in Oklahoma we try to educate the people about the value
and the importance, et cetera, of the oil industry. But also,
it helps a great deal in matching some money, but also helping
in the environmental cleanups. And it has been very good,
because the industry itself is helping clean up old wells that
they have no connection with.
So I know exactly what you are saying. It is costly to plug
a well. It is very expensive, the environmental requirements to
do that today. As well as if you ever tried to open one of them
back up, it becomes--a marginal well, it is not conducive.
I would just say, I do have--I am cosponsoring with Charlie
Stenholm, or we offered it together and are working on it right
now, is the Environmental Equalization Act, trying to do
exactly what Ralph was talking about. It is a fee. I don't know
how we want to work it, but we may want to try to say all the
money coming in from this goes to offset the heating oil cost
or we do something like that, but it helps us get maybe the
offset of $3 to $4 where we are paying for the environmental
requirements put upon us in this country, but the other
countries do not have to do that. They just shift oil to us.
And there should be some equalization to that. We should look
back also, I might say, at some research in the 1950's and
1960's, where we had a tariff against Venezuela, we had one
against Mexico and also Canada. We don't talk about tariffs
nowadays basically, but I think as late as the 1960's, in the
research, Mr. Chairman, I think we had some tariffs on.
Mr. Shimkus. My last question is I am really concerned with
our foreign policy with respect to Iraq and Saddam Hussein. The
fact that we bombed them and now we have no inspectors in the
area, so they can continue to develop their weapons of mass
destruction, nuclear, biological and chemical, and I fully
believe that they are doing that.
Mr. Watkins. It is crazy.
Mr. Shimkus. How do we know that the revenue generated from
the Oil-For-Food Program is not going into those developmental
programs?
Mr. Watkins. I think, I believe and feel, the research I
have done indicates some of it is. Let me say the money has
been agreed to by the U.N. Security Council to go into an Iraqi
bank of their choice. I just think about that just a little
bit. Also, if we look at it and see the breakdown, they can
have chemicals and everything like this they can buy for
agriculture, fertilizers. The biggest bombing ever in this
country in domestic is Oklahoma City and it is from fertilizer,
and moneys from this program is going to do exactly that. You
have every right to be concerned, and I hope you will just get
as mad as I am about this thing, because it is the wrong
policy. It is a failed policy for our people and for our
country.
Mr. Shimkus. Thank you. Mr. Chairman, I yield back my time.
Mr. Barton. The gentleman from Oklahoma, Mr. Largent, is
recognized for 5 minutes.
Mr. Largent. Wes, I want you to give us a little domestic
production 101 course here this morning for our friends that
may not be aware of some of these facts.
Tell us what a stripper well is. That is not a Demi Moore
movie, but what is a stripper well?
Mr. Watkins. In Oklahoma we call it 10 barrels or less. A
marginal well is considered 15 barrels or less.
Mr. Largent. And what percent of our domestic oil
production comes from stripper wells, approximately?
Mr. Watkins. About 25 percent of the overall production.
Eighty-five percent of the wells in Oklahoma are stripper
wells.
Mr. Largent. Okay. And what percent of our domestic
production actually comes from our small oil independent
producers?
Mr. Watkins. Small oil independent--oh, from independent
wells? About 20 percent. Wouldn't that be about right? Sixty
percent of our--did I get the question correctly?
Mr. Largent. I think it is closer to 60, 60 to 70 percent
of the oil that is produced in this country is done so by our
small independents.
Mr. Watkins. Yes, well over 50 percent.
Mr. Largent. Let me ask you a couple of questions here. A
lot of times when we hear oil prices, we hear that Nynex
Mercantile figure, but how does that differ from what the
producers are making at the wellhead? In other words, if we
hear $16 a barrel or $17 barrel, what are they actually making,
the producers, what are they actually getting at the wellhead.
Mr. Watkins. Well, the various ones, like Oklahoma or Texas
Intermediate and all, most of the time is a couple dollars less
than what we are hearing out of New York. And also the futures
have a play on some of that today now, some of the prices.
Mr. Largent. And what would you say approximately is the
cost of production for a small independent with stripper wells
or marginal wells?
Mr. Watkins. Of course that would vary, but I would say
$13, $14 would be an amount that just, if you call it break
even. Some would not break even at that amount.
Mr. Largent. What are they getting----
Mr. Watkins. We are up to close to 15, give or take? Twelve
at the wellhead.
Mr. Largent. So a dollar or 2 less than it costs them to
produce the oil?
Mr. Watkins. That's right. So it is kind of like an artery
that has been cut. It is flowing and you can't stop it unless
you plug it.
Mr. Largent. Well, this is 101. So what we have established
here is that it costs them more to produce it than they are
making. And what is the result now that you are seeing in your
district in terms of personnel and equipment? What is taking
place in the oil and gas industry, especially the small
producers today?
Mr. Watkins. They are yanking up pipe, they are plugging up
wells, they are stopping the production, and some on the verge
I think of suicide.
Mr. Largent. And once you close a stripper well or marginal
well, what happens to it?
Mr. Watkins. 90 percent of them are not worthy of opening
back up.
Mr. Largent. You have lost them.
Mr. Barton. Will the gentleman yield on that?
Mr. Largent. Yes.
Mr. Barton. It may be different in Oklahoma than in Texas,
but you can suspend production with permission of--in our State
it is the Railroad Commission. I am not sure what it is called,
it may be the corporation----
Mr. Watkins. Corporation commission.
Mr. Barton. For what, up to 90 days without having to plug
it, but after a certain amount of time, if you are not going to
resume production, you do have to go ahead and plug the well.
Mr. Watkins. I would ask Mike or Pete, they would probably
know exactly that on the corporation commission. Do they give
you forgiveness time and not plug it?
Mr. Smith. Two years, Mr. Chairman. Two-year moratorium
now, unless it is a health or environmental situation.
Mr. Watkins. By the way, the way your colleague Ralph Hall
described the railroad commissioner, I think I want to leave
this job, because that sounds like a very honorable job and a
very nice job. Excuse me, Steve.
Mr. Barton. Well, you have already tried to quit Congress
once and we didn't let you.
I yield back to Mr. Largent.
Mr. Largent. Wes, just a couple of other questions. There
has been--we are seeing the same thing obviously in the First
Congressional District where people are leaving the industry. I
think the number is close to 50,000 since November have left
the industry. I think the number is about a half a million in
the last 10 years have left the industry. Those people don't
come back. The equipment is rusting, the drilling equipment
lays dormant. It is irretrievable at that point. You shut up
the stripper wells at some point in time and they are
irretrievable.
I guess I would just like to throw out one other question,
if I could have an additional minute.
There has been a lot of remedies suggested, some of them
that you have proposed. Some people are suggesting an oil
import fee. There has been suggestions of regulatory relief.
There is a loan program I just learned of yesterday that the
Senate is talking about putting into effect; capping imports
and tax relief. You have a tax relief bill. What do we need to
do, Wes?
Mr. Watkins. My feeling is this. Maybe it is just the way
I--I have always taken a full court press. You understand that
term. I mean take everything we can and move it as quickly as
we can and move forward. Do I expect everything I am trying to
do to get done? No. I hope a few of those things are sending a
message to the Arabs and others, and what we are doing today I
hope sends a message, and what you do after this can send a
message one way or the other. But yes, we need some immediate
relief, and I think the income-averaging that Bill Thomas and I
are on, trying to go back and pick up some good years they have
had where they have paid in some taxes, they could carry that
forward. The tax credit bill that I have is one of the quickest
things we can do. All of those things, if we can do it, would
help secure the industry here in America so we can have a--in
agriculture we say we need to have a domestic food basket. I
agree that we have to have. I think we have to have a domestic
energy basket for national security. We are walking into a trap
if we don't. I think common sense tells us that.
So Steve, all of the above is what I would say. Let us try
everything we can, knowing full well we have to try to come out
with one or two of those things if we possibly can.
The other thing, and this committee could address that. You
remember we got a trade adjustment, the displaced workers, I
would encourage you to revisit that and make sure that we can
get our oil field workers in that, so they can get that kind of
training. Because Steve, as you indicated, we are displacing
those workers too and they are not going to come back. They are
going to go into some computer work, technology, other things
out there, and we are losing that infrastructure, and you
cannot gear it back up overnight. Even if we had to, we
couldn't get it to.
Mr. Largent. Thank you, Mr. Chairman. I yield back.
Mr. Barton. Thank you, Congressman.
I recognize the gentleman from North Carolina, Mr. Burr,
for 5 minutes.
Mr. Burr. Wes, I wasn't going to ask a question and I may
not ask one, but I may make a statement. You are right, we
probably ought to include them in that displaced worker list.
What alarms me is how long that list could be if we actually
looked at displaced workers that we have had policy that has
displaced them, whether it is inadequacies in trade
negotiations or decisions as it related to foreign policy, and
I guess what you are here saying is our foreign policy
decisions do affect the livelihood of the American people.
Mr. Watkins. Exactly right.
Mr. Burr. It doesn't seem to play a part necessarily in the
formation of that policy or those negotiations, and I think
maybe we ought to raise that question a little louder. I thank
you for your willingness.
Mr. Watkins. If I can respond to that, I have a sinking
feeling, because I think a lot of our State Department people
and some of our international people literally are more
concerned about getting and having a favorable feeling from
where they may be stationed, Ambassadors and others, than our
concern about the people on the farms and in the oil patches of
this country or other industries. I have detected that. Maybe I
am a little harder nosed than what I should be, but I mostly
think I have a warm heart.
Mr. Burr. I hope the workers in the oil fields don't find
the same end results as the textile workers in the mills across
the South.
I thank the chairman, and I yield back.
Mr. Watkins. By the way, I married a Presbyterian
minister's daughter.
Mr. Barton. We are not going to ask you a second round of
questions, but I think Congressman Hall has one final question
and then we will excuse you.
Mr. Hall. Wes, just for the record, are you in favor of
continuing the Iraqi Oil-For-Food Program?
Mr. Watkins. Limited to the necessities of food and
medicine.
Mr. Hall. And being able to check on them.
Mr. Watkins. And being able to check on them. You bet. You
bet.
Mr. Hall. Somebody said trust, but verify?
Mr. Watkins. If we go what was above the 700,000 barrel
area, then we are just handing them over everything they need
and more.
Mr. Hall. I thank you.
Mr. Barton. Well, Congressman Watkins, we really
appreciate, on behalf of this subcommittee, the leadership that
you have shown in this area. Almost single-handedly you have
raised the visibility of this, and as I said in my opening
statement, this is not the only hearing we are going to do on
the domestic oil and gas industry. It is unfortunate that this
is on a Friday and that we don't have any television coverage
for it, at least we don't have now, but I can assure you, and
you can assure the people of the Third Congressional District
of Oklahoma that if there is something that can be done to
change this program and this subcommittee can do it, we will do
it, and we will continue to work with you. I just hope that the
people of your district appreciate the efforts that you are
making on their behalf.
Mr. Watkins. I thank you, Mr. Chairman, members of the
committee, my neighbors in Oklahoma and Texas. I appreciate it.
Mr. Hall. See you out at National.
Mr. Barton. Save a seat on the plane for Congressman Hall.
We want to recognize our second panel now. We have Mr. Bill
Wood, who is the Principal Deputy Assistant Secretary of the
Office of International Organizations, the United States
Department of State; we have the Honorable Jay Hakes, who is
the Administrator of the Energy Information Agency within the
United States Department of Energy; we have the Honorable Carl
Michael Smith, the Secretary of Energy from the great State of
Oklahoma; and we have, not to be outdone, the Honorable Michael
Williams, who is the Commissioner of the Texas Railroad
Commission.
Gentlemen, we want to welcome you. Your statements are in
the record in their entirety. I am going to recognize you to
speak in a second, but before I do that, I want to direct some
comments to our representative from the State Department.
We don't call State Department witnesses too frequently to
this subcommittee. We have fairly frequent testifiers from our
friends at the Department of Energy. It is not normal that we
would ask a representative of the State Department. But we have
a rule that we like testimony 2 days in advance so our members
can actually study it. I won't swear to you that every member
uses that time to study, but some do. We got the State
Department's testimony I believe this morning, and you were the
first people we asked.
Now, if you were me, what kind of--what would your attitude
be if you were me and you are the, in some ways, the most
important government, Federal Government witness we are going
to hear from because you all are in charge of this program and
we get your testimony some time this morning.
Mr. Wood. Mr. Barton, I can only apologize for the lateness
of the arrival of the testimony. We don't testify before the
subcommittee very often. We are very, very pleased at this
opportunity to do so and we thank you very much for inviting us
here. If the opportunity arises again in the future, we assure
you we will do better.
Mr. Barton. Well, we had the ability to look at some
testimony. I don't know if you are the individual that gave it,
but a representative gave similar testimony on a similar issue
over in the Senate several weeks ago. I guess it is possible
that whoever prepares it is on vacation. I guess it is possible
you all don't think very much of the House of Representatives.
I guess it is possible that you all don't think it is a very
important issue. But I am going to send a letter to the
Secretary of State and I may send a letter to the
Appropriations Subcommittee chairman asking that we dock your
part of the State Department $100,000, maybe take it out of the
Iraqi Oil-For-Food Program, just to send a signal.
We have problems with our friends at DOE, not EIA. EIA has
been pretty good, but there are others in the Department of
Energy that are almost as bad, but I don't think we have ever
had an administration witness, and I was chairman of the
Oversight and Investigation Subcommittee for 4 years, that had
the effrontery to send in the testimony the day they were
testifying. I just don't appreciate it. I really don't.
Mr. Burr. Mr. Chairman, I ask that the witness be excused
and not have the ability to testify.
Mr. Barton. Well, unfortunately, we have to have their
testimony. They have us between a rock and a hard place.
Mr. Burr. We have his testimony, Mr. Chairman, but we don't
need to hear from him verbally.
Mr. Barton. I think if I send a letter to the Secretary of
State and we dock them $100,000, I think that will get their
attention.
I mean we are going to be doing a series of hearings on the
oil and gas industry and some of it is domestic, but a lot is
international, so we are going to be calling other State
Department witnesses, and I really want you to go back, I don't
know if this was in your chain of control or not, Mr. Wood, but
I want you to let folks know, we don't expect the State
Department to turn cartwheels when they are asked to testify,
but we do expect reasonable courtesy and we would like to get
it in what the notice requires, which is 2 days ahead of time.
But we at least want to get it a day ahead of time so that we
can copy it and send it around to the staffs and let everybody
review it.
Mr. Burr. Mr. Chairman, could I at least ask the witness to
tell the committee why we received the testimony so late, why
he couldn't fulfill the rules of the committee.
Mr. Barton. Well, sure. I mean I tried to ask him that. Why
did it take the day of the hearing to get it?
Mr. Wood. Mr. Chairman, I don't want to try to offer an
excuse. All I can say is we were wrong not to get it to you on
time. It won't happen again. We apologize. We do consider it
both a lack of courtesy and a lack of professionalism. We are
very grateful for your suggestion that in the future it has to
be, at a minimum, 1 day in advance. We will get it here 2 days
in advance.
Mr. Barton. Again, I am new on this subcommittee, but I
have been chairman of the oversight, and Mr. Burr has been one
of my distinguished members on the oversight, and we have had
this problem with the FDA and we have had it with the EPA. We
finally got their attention. We didn't let them testify one
time. You know, we just said go home and sit in the corner for
the day. We don't want to start out that way. But we do want to
let you know that we need to get the testimony on time.
Mr. Wood. You got our attention, sir.
Mr. Barton. All right.
We are going to start with Mr. Hakes. Your testimony is in
the record in its entirety. We are just going to go right down
the line, Mr. Hakes, Mr. Smith, Mr. Wood and Mr. Williams and
then we will let our committee members ask questions.
Mr. Hall. Can I ask Mr. Hakes a question before we start?
Mr. Barton. Yes, sir.
Mr. Hall. Aren't you glad you submitted yours this morning?
Mr. Hakes. I am going to try to get it in 3 days early next
time.
Mr. Barton. Well, my good friend from Texas, it does help
the minority staff, too, to help prepare the questions and to
read it. I actually read it. I may be the only member, but I
read the testimony ahead of time as the chairman so I can know
a little bit about where you all are coming from. So I was very
upset.
Mr. Hall. I withdraw my question.
Mr. Barton. Okay. We will give each of you 7 minutes, and
if you need a little more time, so be it. So, Mr. Hakes, you
are recognized for 7 minutes.
STATEMENTS OF HON. JAY HAKES, ADMINISTRATOR, ENERGY INFORMATION
ADMINISTRATION, DEPARTMENT OF ENERGY; HON. CARL MICHAEL SMITH,
SECRETARY OF ENERGY, STATE OF OKLAHOMA; HON. WILLIAM B. WOOD,
PRINCIPAL DEPUTY ASSISTANT SECRETARY, OFFICE OF INTERNATIONAL
ORGANIZATIONS, DEPARTMENT OF STATE; AND HON. MICHAEL L.
WILLIAMS, COMMISSIONER, TEXAS RAILROAD COMMISSION
Mr. Hakes. Thank you, Mr. Chairman and members of the
committee. As you know, the Energy Information Administration
is an independent analytical and statistical agency within the
Department of Energy. I would like to talk a little bit today
about the role that Iraq plays in world oil markets.
We have identified four factors that influenced world oil
markets since the end of 1996 and the interaction between these
factors make it difficult to assess the impact of each
individually, but I would like to discuss them and sort of put
them in some context.
One factor that has clearly influenced the world oil market
has been the increase in Iraqi oil production and the
consequent exports that have occurred since the beginning of
the United Nations Oil-For-Food Program. Iraq's oil production
is currently 2.5 million barrels per day, which is about 2
million barrels per day higher than it was prior to the Oil-
For-Food Program, although it is still lower than it was prior
to their invasion of Kuwait in 1990. You can basically follow
the movement of price there with that blue line, and you can
see where the program started, it sort of zigzagged up to the
2.5 million level.
Even with the current oil exports of about 2 million
barrels per day, Iraq is still below the ceiling of $5.3
billion per 6 months imposed under the current phase of the
Oil-For-Food Program. In order for Iraq to approach the ceiling
during the next year or 2, the price of West Texas Intermediate
crude would have to average about $18 to $19 per barrel day.
Mr. Barton. $18 per barrel?
Mr. Hakes. Yes, excuse me. $18 to $19 per barrel, which are
prices that we are not currently forecasting, incidentally.
Another factor that is important in terms of its impact on
the world oil market is the dramatic slowdown in oil demand
growth in Asia as a result of the economic crisis. I think
after the Persian Gulf War most oil producers around the world
realized that eventually at some point Iraq would come back,
and that this would pose a problem for the market. And a number
of them, including Saudi Arabia and others, made the comment
that they thought that the increased demand in Asia would
probably help soak up the Iraq increased production when that
happened. But you can see that almost at the same time that
Iraq is coming back onto the world market, there is an economic
collapse in Asia, and the demand sort of stops.
Demand in Asia was growing roughly 850 thousand barrels a
day each year, and that is adding a lot of demand into the
world market. Then you can see for 1998, demand growth was
virtually negligible. So at the very time when there was a hope
that Asian demand would soak up the Iraqi extra production,
that demand was not there.
EIA is estimating that Asian oil demand will grow by only
1.5 million barrels per day during the entire period from 1997
to 2000, instead of the 3.4 million barrels per day that would
have been expected before this economic crisis occurred.
Added on top of this have been three warm winters in a row,
which has reduced the demand for heating oil, and this has
further thrown the world market out of balance and created
excess supply.
Another factor that contributed to it is as Iraq was coming
back on the market in 1997, other areas of the world instead of
cutting back on their production actually were increasing
production. There was quite a bullish market internationally in
oil, and OPEC, which some thought might cut back because they
had increased after the Persian Gulf War to cover the absence
of Iraq, they actually had an increase in 1997, and it was not
until 1998 that they began to cut.
Let me just speak briefly, Mr. Chairman, about the outlook
for Iraqi oil production in the world oil market. We feel that
Iraq is currently producing at pretty much its full capacity
since its oil revenues are significantly less than allowed and
they would be producing more today if they could. Our current
forecast assumes that Iraqi crude oil production capacity
increases only by 100,000 to 200,000 barrels per day between
now and the year 2000. Currently, the United Nations is
allowing Iraq to import about $300 million worth of parts that
are used to improve their oil infrastructure. How fast Iraq
receives these parts and how well these parts are used will
determine how quickly Iraqi oil production might increase. Some
analysts believe that the capacity would be somewhat higher in
the year 2000 than the EIA is estimating, but most of them
expect the increases to be fairly modest.
Now, the newest issue on the block of course is the recent
announcement by OPEC that they are setting targets for reducing
production. OPEC itself has pledged 1.7 million barrels per day
of cuts and some nations outside of OPEC have joined into the
agreement and pledged another 0.4 million barrels per day cuts.
The cartel in the past has had a difficult time fully enforcing
these cuts. However, Saudi Arabia has already put them into
effect for April orders, so at least a part of this seems to be
quite real. We have been predicting up until the OPEC action
that the price of oil would probably, for West Texas
Intermediate, get to slightly below $15 a barrel at the end of
this year. I am sure we will raise that estimate when we come
out with our next update, which is scheduled for April 8. At
that time we will do a fairly detailed analysis of the
estimated impact of the OPEC actions. But that is where it
stands for now, and I of course will be glad to answer any
questions the members of the committee may have.
[The prepared statement of Hon. Jay Hakes follows:]
Prepared Statement of Hon. Jay Hakes, Administrator, Energy Information
Administration, Department of Energy
Short-Term World Oil Market Outlook
Mr. Chairman and members of the Committee, I wish to thank you for
the opportunity to testify today on our short-term world oil outlook,
paying particular attention to Iraq's role in the international oil
market. As Administrator for the Energy Information Administration
(EIA), which is an independent analytical and statistical agency within
the Department of Energy, I have been asked to provide an overview of
the world oil market--how we got here and where we think we are headed.
As part of this discussion, I will highlight Iraq's oil production
history thus far in the 1990s and provide our assessment of the short-
term outlook for Iraqi crude oil production.
EIA has identified four factors that have influenced the world oil
market since the end of 1996. The interaction between these factors
makes it difficult to assess the impact of each individually.
Nevertheless, I will discuss each factor separately and try to put the
oil market impact of each in context.
One factor influencing the world oil market has been the increase
in Iraqi oil production (and exports) that have occurred since the
beginning of the United Nations' ``oil-for-food'' program. Iraq's oil
production is currently 2.5 million barrels per day, which is about 2
million barrels per day higher than it was prior to the ``oil-for-
food'' program, although it is still lower than it was just prior to
their invasion of Kuwait in 1990 (figure 1). But even with current oil
exports of about 2 million barrels per day, Iraq is still well below
the ceiling of $5.256 billion imposed under the current phase of the
``oil-for-food'' program. In order for Iraq to approach the ceiling
during the next year or two, the price of West Texas Intermediate crude
oil would have to average about $19 per barrel during a 180-day phase
of the United Nations' ``oil-for-food'' program. I would like to point
out, however, that EIA is not forecasting prices at this level in the
short-term.
Another factor that is equally important in terms of its impact on
the world oil market is the dramatic slowdown in oil demand growth in
Asia as a result of the economic crisis, which began in the summer of
1997. Between 1991 and 1996, Asian oil demand was increasing on average
by about 850,000 barrels per day each year (figure 2). If Asian oil
demand had continued to grow at this pace, EIA would have expected oil
demand to be about 2 million barrels per day more in 2000 than in our
current forecast, which would have helped soak up the increased
production from Iraq. Instead, EIA is estimating that Asian oil demand
will grow by only 1.5 million barrels per day during the 1997-2000
period, instead of the 3.4 million barrels per day that would have been
expected before the Asia crisis occurred.
Weather has also been a major factor influencing the world oil
market in recent years. Oil demand typically peaks in the winter, along
with the demand for heating oil. Weather patterns in the northeast
United States and Western Europe are particularly important to the
world oil market since these are the regions where oil is used
significantly as a fuel for heating. The winters of 1996-97 and 1997-98
were particularly warm compared to ``normal'' temperatures, and now it
is apparent that this winter will be the third significantly warmer
than normal winter in a row. As a result, global oil inventories are
much higher than they would have been had temperatures been more
``normal'' during the past three heating seasons.
The last major factor that EIA has identified as a major influence
in the world oil market was oil production increases from many
countries outside of Iraq, particularly in 1997. Global oil supply
increased by about 2.3 million barrels per day in 1997, much more than
the 1.7 million barrels per day of global oil demand growth that year.
This followed a period of 32 months in which the price of West Texas
Intermediate crude oil averaged above $17 per barrel each month. While
oil production from Iraq increased more than any other single country
in 1997 (about 600,000 barrels per day) as a result of the ``oil-for-
food'' program which began in December 1996, other OPEC and non-OPEC
countries also increased oil production significantly in 1997 (world
production increased by 2.3 million barrels per day, making Iraq's
increase about 25 percent of the total). Within OPEC, Saudi Arabia oil
production increased by 370,000 barrels per day, Venezuela increased by
227,000 barrels per day, Qatar increased by 139,000 barrels per day,
and Nigeria increased by 129,000 barrels per day. Outside of OPEC, most
of the growth was in the Americas (North, Central, and South America,
but excluding Venezuela, an OPEC member), which increased by over
500,000 barrels per day. Since demand growth did not keep pace with the
supply growth in 1997, much of this oil found its way into inventories.
Turning to the future, let's look at where EIA thinks the oil
market is headed in the short-term (through 2000). In 1998, OPEC and
some non-OPEC countries agreed to cut oil production in order to help
increase oil prices. In part because of these agreements and the
beginning of an expected gradual recovery in Asia, EIA's most recent
forecast had prices increasing by about $3.50 per barrel by December
1999 from the historical low point in December 1998, and by an
additional $1-$1.50 by the end of 2000. Now that OPEC and some non-OPEC
countries have agreed to cut production by about 2 million barrels a
day (figure 3), we would expect prices to increase even more. EIA's
next Short-Term Energy Outlook, which is updated monthly, is scheduled
for release on April 8, 1999. At that time, EIA will incorporate a
detailed analysis of the new OPEC cuts into our price forecast. I can
say now, however, that our forecast for oil prices will be higher. This
forecast will be based on the assumption that demand growth will
outstrip supply growth in both 1999 and 2000, even if producers only
partially implement the planned cuts.
Let me spend a little time discussing our outlook for Iraqi oil
production. As I stated before, Iraq's crude oil production has
increased by about 2 million barrels per day since late 1996. However,
we feel that they are currently producing at full capacity since their
oil revenues are significantly less than allowed and would produce more
if they could, and that their oil production capacity is not expected
to increase substantially through 2000. Our current forecast assumes
that Iraqi crude oil production capacity increases by only 100,000-
200,000 barrels per day between now and 2000 (figure 1). Currently, the
United Nations is allowing Iraq to import $300 million worth of parts
that are to be used to improve their oil infrastructure. How fast Iraq
receives these parts and how well these parts are used will help
determine how quickly Iraqi oil production capacity might increase.
There are some analysts that expect Iraqi oil production capacity to be
somewhat higher by the end of 2000 than EIA is estimating. However,
most analysts expect Iraq's oil production increases this year and next
to be far less than what they were in 1997 and 1998.
This concludes my testimony before the Committee. I would be glad
to answer questions at the appropriate time.
[GRAPHIC] [TIFF OMITTED] T5644.001
[GRAPHIC] [TIFF OMITTED] T5644.002
Mr. Barton. Just before we recognize Mr. Smith, Iraq is
part of OPEC, is it not?
Mr. Hakes. Yes.
Mr. Barton. Mr. Smith, we will recognize you for 7 minutes.
Mr. Largent, do you want to formally introduce Mr. Smith.
Mr. Largent. Yes, I did in my opening statement. This is
our Secretary of Energy from the great State of Oklahoma. We
are glad to have him here.
Mr. Barton. You are recognized for 7 minutes.
STATEMENT OF CARL MICHAEL SMITH
Mr. Smith. Thank you, Mr. Chairman, and members of the
subcommittee. As Congressman Largent mentioned, I serve as
Secretary of Energy for the State of Oklahoma, and this year I
am vice chairman of the Interstate Oil and Gas Compact
Commission. I have been a member of Oklahoma's oil and gas
community my entire adult life, either as a producer, as an
attorney for operators, and currently in my public service. I
have experienced firsthand the Arab embargo of 1973, the
oilfield pipe and equipment shortage of the mid-1970's, the
ill-conceived Natural Gas Policy Act of 1978, the misguided
Fuel Use Act of 1978, the plunderous windfall profits tax of
1980, the Middle East turmoil of the late 1970's and early
1980's, the collapse of our domestic oil and gas industry in
the mid-1980's, precipitating, as Congressman Largent mentioned
earlier, a loss of about a half a million jobs, the advent of
computer technology into the industry, the Gulf War, and now,
Operation Desert Fox. In short, I have seen a lot of success, a
lot of failure, and an abundance of public policy, most of
which has, unfortunately, been poorly conceived and missed the
mark.
Since entering public life in 1990, I have been assisting
in the conception and implementation of energy policy. Most of
this work has involved assisting the IOGCC Governors in
drafting and implementing A Dependent Nation: How Federal Oil
and Gas Policy is Eroding America's Economic Independents.
Recently, I have assisted my Governor, Frank Keating, as he has
led the other oil and gas producing State Governors in
addressing an unprecedented oil price trough which is
approaching its 18th month.
Today's hearing focuses on the Iraqi Oil-For-Food Program
and its impacts. Mr. Chairman, the American people, and the
people of my State, are very confused. Occasionally a
constituent asks for my explanation of our Iraqi policy, and a
rational answer is impossible. I overhear comments in elevators
and discussions in coffee shops throughout my home state. No
one can understand why, according to press reports, 3 days of
Operation Desert Fox cost the American taxpayers almost $1
billion, yet the rogue of the world, Saddam Hussein, is
seemingly stronger than ever. Our proposed response is not to
isolate him or cutoff his funding for weapons of mass
destruction, rather to allow his continuing military threat to
be enhanced through unlimited oil production, or so it seems.
No one can argue that the Iraqi people have suffered a mighty
hardship under his reign of terror, or that they deserve
humanitarian aid. What is hard to explain to my constituents,
who are losing their jobs due to less than break-even oil
prices, is why our government would put our military at risk,
spend balances of tax dollars, and then allow Saddam to flood
the world oil market. Even more puzzling was America's
acquiescence in the United Nations formula allowing Iraqi oil
sales to be limited by a dollar amount rather than by volumes
of oil. The Oklahoma Geological Survey, which is in my cabinet
policy area, has reported that the almost singular contributor
to the 1997 and 1998 world oil glut has been Iraq. As the
attached data attached to my testimony which, by the way, Mr.
Hakes, was from your agency, demonstrates that most of the
world oil production, both OPEC and non-OPEC, has been
relatively stable. The exception to that has been Iraq. Even
more shocking is Iraq's rise to No. 4 source of U.S. imports
last year, and in 1 month, Mr. Chairman, they were actually No.
3, almost nosing out Kuwait. They have sort of been neck and
neck for the three and four spot.
Certain facts are not in dispute. America is importing
nearly 60 percent of its daily crude oil needs. Current
wellhead prices are far below the break-even point for most
domestic producers. The world is awash in over-produced oil.
Allowing Iraq to produce unlimited oil impairs America's
economic and military security, and the lifting of limitations
helps finance Saddam's almost certain future mischief.
Long before the current crisis, President Clinton approved
1994 findings by the U.S. Department of Commerce that oil
imports, which were then at a much lower level, threatened U.S.
security. Can you imagine our response if this morning we
awakened to 60 percent of our air, water or food controlled by
foreign sources? Oil is the lifeblood of our Nation and we
cannot permit Iraq to further the disintegration of our
domestic oil industry.
Mr. Chairman and subcommittee members, I cannot count the
number of times I have wanted to shout from the rooftops,
America, wake up. We need America's oil to protect our shores
and our way of life. I am proud to say, my constituents have
always been first in line on both counts, and on their behalf I
thank you for this opportunity to testify.
[The prepared statement of Carl Michael Smith follows:]
Prepared Statement of Carl Michael Smith, Secretary of Energy, State of
Oklahoma
Mr. Chairman and members of the subcommittee, I serve as Secretary
of Energy for the State of Oklahoma and as Vice-Chairman of the
Interstate Oil and Gas Compact Commission (IOGCC).
I have been a member of Oklahoma's oil and gas community my entire
adult life. I experienced first hand the Arab embargo of 1973, the
oilfield pipe and equipment shortage of the mid-1970s, the ill-
conceived Natural Gas Policy Act of 1978, the misguided Fuel Use Act of
1978, the plunderous windfall profits tax of 1980, the Middle East
turmoil of the late 70s and early 80s, the collapse of our domestic oil
and gas industry in the middle 1980s (precipitating a loss of
approximately 500,000 jobs), the advent of computer technology into the
industry, the Gulf War, and now, Operation Desert Fox. In short, I've
seen a lot of success, failure, and lots of public policy,
unfortunately, most of which has been ill conceived. Since entering
public life in 1995, I have been assisting in the conception and
implementation of energy policy. Most of this work has involved
assisting the IOGCC governors in drafting and implementing A Dependant
Nation: How Federal Oil and Gas Policy is Eroding America's
Independence. Recently, I have assisted my Governor, Frank Keating, as
he has led the other oil and gas producing state governors in
addressing an unprecedented oil price trough which is approaching its
18th month.
Today's hearing focuses on the Iraqi Oil for Food Program and its
impacts. Mr. Chairman, the American people are confused. Occasionally,
a constituent asks for my explanation, and a rational answer is
impossible. I overhear comments in elevators and discussions in coffee
shops throughout my home state. No one can understand why, according to
NBC News on December 23, 1998, three days of Operation Desert Fox cost
the American taxpayer almost $1 billion, yet the rogue of the world,
Saddam Hussein, is seemingly stronger than ever. Our response is not to
isolate him or cut off his funding for weapons of mass destruction,
rather allow his continuing military threat to be enhanced through
unlimited oil production. No one can argue that the Iraqi people have
suffered a mighty hardship under his reign of terror or that they
deserve humanitarian aid. What is hard to explain to my constituents,
who are losing their jobs due to an oil market producing a dollar price
per barrel less than break-even cost, why our government would put our
military at risk, spend billions in tax dollars, and then willingly
allow Saddam to flood the world oil market. Even more puzzling was
America's acquiescence in the United Nations formula allowing Iraqi oil
sales, under current sanctions, to be limited by a dollar amount rather
than volumes of oil. The Oklahoma Geological Survey, which is in my
cabinet policy area, has reported that the almost singular contributor
to the 1997 and 1998 world oil glut has been Iraq. As the attached data
demonstrates, most world oil producers (both OPEC and non-OPEC) have
been relatively stable--the exception being Iraq. Even more shocking
is, during 1998, Iraq rose to the number 4 source of U.S. imports,
almost nosing out Kuwait for the number 3 spot.
Certain facts are not in dispute:
<bullet> America is importing nearly 60% of its daily crude oil needs
<bullet> Current wellhead prices are far below the break-even point for
most domestic producers
<bullet> The world is awash in overproduced oil
<bullet> Allowing Iraq to produce unlimited oil impairs America's
economic and military security, and a lifting of monetary
limitations helps finance Saddam's almost certain future
mischief
Long before the current crisis, President Clinton approved 1994
findings by the U.S. Department of Commerce that oil imports (then at a
much lower level) threatened U.S. security.
Mr. Chairman and subcommittee members, I cannot count the number of
times I have wanted to shout from the rooftops, ``America, wake up--we
need America's oil to protect our shores and our way of life.'' I am
proud to say, my constituents have always been first in line on both
counts, and on their behalf, I thank you for this opportunity to
testify.
[GRAPHIC] [TIFF OMITTED] T5644.003
[GRAPHIC] [TIFF OMITTED] T5644.004
[GRAPHIC] [TIFF OMITTED] T5644.005
[GRAPHIC] [TIFF OMITTED] T5644.006
[GRAPHIC] [TIFF OMITTED] T5644.007
Mr. Barton. Thank you, Mr. Smith. We would now like to hear
from Mr. Wood. We do have your testimony, so you are recognized
for 7 minutes to elaborate on it.
Mr. Wood. Thank you very much, Mr. Chairman. Let me again
repeat how pleased I am to be here to discuss----
Mr. Barton. You need to speak into the microphone so that
we can hear you.
STATEMENT OF WILLIAM B. WOOD
Mr. Wood. Okay. I am pleased to be here today and I want to
reiterate that fact. Thank you for inviting me.
The U.S. policy is to contain Saddam Hussein until he can
be removed from power.
In the meantime, U.S. sanctions on Iraq and the Oil-For-
Food Program are critical to the containment of Iraq. We must
maintain broad international support for these programs in
order to keep Saddam Hussein contained. Sanctions on Iraq were
put in place by the international community following the
brutal invasion by Iraq of its peaceful neighbor, Kuwait. The
sanctions deprived Saddam of the revenue he would otherwise use
to reconstitute his weapons of mass destruction.
It is essential that we address the humanitarian needs of
the Iraqi people. Doing so is right in itself, but also crucial
to maintaining Security Council, regional and other support for
the international sanctions regime while we continue our
efforts to change the Iraqi regime. It is also consistent with
our message to the Iraqi people that the United States is not
against the people of Iraq, only the regime that is responsible
for their plight. By meeting Iraq's general humanitarian needs,
Oil-For-Food allows us to maintain a tough sanctions regime
against Iraq.
In 1991, the Bush Administration first proposed an Oil-For-
Food Program to meet the humanitarian needs of the Iraqi
people. Iraq rejected the program. In 1995, the Security
Council, with full U.S. leadership and support, adopted a
revised Oil-For-Food Program, which Iraq finally accepted at
the end of 1996. The first food shipments under this program
arrived in Iraq in March 1997. In February 1998, based on the
Secretary General's recommendations that additional funds were
needed to meet the needs of the Iraqi people, the legitimate
humanitarian needs of the Iraqi people, the Security Council
expanded the Oil-For-Food Program. That program has most
recently renewed last November.
I might add that that is the reason why the Oil-For-Food
Program is accounted for in dollars, because it is based on
estimates of what it would cost to take care of the
humanitarian needs of Iraq. It is not an effort to promote
Iraqi exports, it is an effort to raise money for the specific
humanitarian needs of Iraq.
The current Oil-For-Food Program permits Iraq to sell up to
$5.2 billion worth of oil every 6 months, two-thirds of which
goes toward the purchase of food, medicine and other
humanitarian goods such as water and sanitation infrastructure
supplies. The remaining one-third goes to pay claims arising
from Iraq's occupation of Kuwait, and to pay U.N.
administrative and UNSCOM disarmament costs. All revenues of
Iraq's oil sales are deposited in a U.N. escrow account to
which Baghdad has no access. Although it is true that Iraq's
agreement as to which bank was selected was necessary, Iraq did
not get to choose the bank and, indeed, its first choices were
refused under the memorandum of understanding between Iraq and
the United Nations. We are assured that the bank in which the
escrow account exists is functioning in a transparent and
effective manner and funds cannot be released from that account
without U.N. agreement.
All contracts are reviewed by the U.N. sanctions committee,
of which the U.S. is a member. Because the committee operates
by consensus, we can hold or block any contract that is
inappropriate or ill-advised. U.N. monitors on Iraq's borders
and inside Iraq oversee importation and distribution within
Iraq, and in northern Iraq, the three northern governments,
distribution is actually carried out by the U.N. itself.
Oil-For-Food, the largest humanitarian program in the
U.N.'s history, requires that Saddam spend his own money on the
thing he cares least about: his own people.
Oil-For-Food is not a step toward lifting sanctions, nor
does it reward Saddam Hussein. In fact, it makes sanctions, his
worst enemy, sustainable. Without an Oil-For-Food Program,
history has shown that Saddam Hussein would starve his own
people to buy weapons and build palaces and to force the
international community to lift sanctions. Although we could
use our veto at the U.N. to prevent the lifting of sanctions,
the pressure of a sympathetic international community, absent
Oil-For-Food, could well lead to a de facto breakdown of the
implementation of the sanctions regime. So it is not simply a
distribution problem, it is also an implementation problem.
Sanctions have slowed considerably Iraq's ability to expand
oil exports. We estimate that sanctions have prevented Iraq
from exporting more than $120 billion of oil from 1991 to 1996.
In the last two phases of the Oil-For-Food Program, the
Security Council earmarked limited funds for the importation of
spare parts and equipment to improve Iraq's crumbling oil
infrastructure so that funds can be made available for
legitimate, necessary humanitarian needs. Those spare parts
have just begun to arrive in Iraq, and it will be many more
months before there will be an appreciable growth in the Iraqi
ability to export oil as a result of them.
We are also discussing in Security Council capitals and in
the Security Council itself how to keep Oil-For-Food viable and
effective. We have proposed that the Security Council consider
raising the ceiling on oil sales consistent with Iraq's
legitimate humanitarian needs. In the short run, Iraq would be
unable to expand oil exports. Over time, allowing increased
Iraqi oil exports would address concerns regarding the
shortfall in revenues needed for humanitarian purchases. Saddam
would not benefit from these increased oil export revenues. The
revenues would be put into the escrow account and released only
for the purchase of humanitarian goods.
Raising the ceiling on revenue available for the purchase
of humanitarian goods would also serve to counter growing calls
from Arab states and Security Council members to lift sanctions
outright. By removing the root cause of calls for lifting
sanctions, we free our allies in the Arab world and elsewhere
to support our broader Iraqi policy goals. We also draw
Security Council support away from more radical French and
Russian proposals to lift sanctions altogether.
We also understand your concerns about the current oil
market. However, Iraq is only one among several factors which
has adversely impacted oil prices. Our sanction--our Iraq
sanctions policy, frankly, has never been linked to the price
of oil on world markets. This was true in the early 1990's,
when Iraqi oil was completely cutoff the world market, putting
upward pressure on oil prices, and it remains the case today.
Allowing oil price considerations to drive our sanctions
decisions or seeking to use sanctions to target oil prices
would undermine our ability to maintain an international
consensus aimed at containing Saddam Hussein, as well as
provide for the humanitarian needs of the Iraqi people.
Were international support for an effective U.N. sanctions
regime to erode, Saddam Hussein would be a much greater threat
to the world community. He would quickly regain the free use of
$10 billion to $15 billion per year to put into his weapons of
mass destruction programs. But we have promoted raising the
ceiling under monitoring. Moreover, the prospect of Iraq
without U.N. sanctions would also have a negative effect on oil
prices.
Over the long term, the only way to ensure that Saddam no
longer threatens either his people or his neighbors is to work
for a new government of Iraq, one that will maintain the
territorial integrity and unity of Iraq, respect the rights of
Iraq's people and neighbors and fulfill Iraq's international
obligations. We are committed to helping the Iraqis achieve
this regime change or transition.
Mr. Chairman, I realize I am over my time, but let me only
make one sort of summary comment. The Oil-For-Food Program has
been characterized repeatedly as a humanitarian program. It is
certainly a humanitarian program. We are a humane Nation. We
are not making war on the population of Iraq. That is Saddam's
strategy. But it is not the policy of the administration to
benefit the populations of other countries at cost to our own
population. That is not our goal, and that is not what we
believe we are achieving here.
Mr. Barton. That may not be the goal, but that is certainly
the result. And I am not going to get in a debate right now. We
still need to hear from Mr. Williams, but I guarantee you when
we get to the question and answer period, we are going to have
a dialog.
Mr. Wood. We do believe, however, that this is a national
security requirement. That is my last comment.
[The prepared statement of William B. Wood follows:]
Prepared Statement of Hon. William B. Wood, Deputy Assistant Secretary
of State
Mr. Chairman: I am pleased to be here today to discuss US policy
toward Iraq and the role the Oil-for-Food program plays within it.
The Administration's policy is to contain Saddam Hussein until he
can be removed from power. We will contain Iraq by maintaining
sanctions on Iraq, enforcing the no-fly zones in the North and South,
and by maintaining a robust military presence in the region and a
readiness to use force if Iraq reconstitutes its prohibited weapons
programs, threatens its neighbors, or moves against the Kurds in the
north.
In addition to these elements of containment, we are also working
at the United Nations to build consensus in the Security Council in
support of an effective disarmament and monitoring presence in Iraq.
Over the long-term, however, the only way to ensure that Saddam no
longer threatens either his people or his neighbors is to work for a
new government in Iraq--one that will maintain the territorial
integrity and unity of Iraq, respect the rights of Iraq's people and
Iraq's neighbors, and fulfill Iraq's international obligations. We are
committed to helping Iraqis achieve this regime change or transition.
There are many tools we can use to help them, including both the $8
million in Economic Support Funds Congress has appropriated for this
purpose, and the Iraq Liberation Act. In the final analysis, change has
to come from the Iraqi people themselves. We cannot impose ideas or
initiatives on them.
In the meantime, UN sanctions on Iraq and the Oil-for-Food program
are critical to the containment of the Iraqi regime. We must maintain
broad international support for these programs in order to keep Saddam
contained.
Sanctions on Iraq were put in place by the international community
following the brutal invasion by Iraq of its peaceful neighbor Kuwait.
The sanctions deprive Saddam of the revenue he would otherwise use to
reconstitute weapons of mass destruction.
It is also essential that we address the humanitarian needs of the
Iraqi people. Doing so is right in itself, and crucial to maintaining
Security Council and regional support for sanctions while we continue
our efforts for regime change. It is also consistent with our message
to the Iraqi people that the United States is not against the people of
Iraq--only the regime that is responsible for their plight. By meeting
Iraq's genuine humanitarian needs, oil-for-food allows us to maintain a
tough sanctions regime against Iraq.
The current oil-for-food program permits Iraq to sell up to $5.2
billion worth of oil every six months, two-thirds of which goes towards
the purchase of food, medicine and other humanitarian goods such as
water and sanitation infrastructure supplies. The remaining one-third
goes to pay claims arising from Iraq's occupation of Kuwait, and to pay
UN administrative and UNSCOM disarmament costs. All revenues from
Iraq's oil sales are deposited in a UN escrow account to which Baghdad
has no access. All contracts are reviewed by the UN Sanctions
Committee, of which the U.S. is a member. Because the Committee
operates by consensus, we can hold or block any contract that is
inappropriate or ill-advised. UN monitors on Iraq's borders and inside
Iraq oversee their import and distribution. In northern Iraq, the
distribution is carried out directly by UN personnel.
Sanctions have never prohibited the import of food or medicine to
Iraq. However, the regime in Baghdad has been unwilling to take full
advantage of this exemption, and, therefore, in 1991, the Bush
Administration first proposed an oil-for-food program to meet the
humanitarian needs of the Iraqi people. Iraq rejected the program. In
1995, the Security Council, with full US leadership and support,
adopted a revised oil-for-food program, which Iraq finally accepted at
the end of 1996. The first food shipments under this program arrived in
Iraq in March 1997. In February 1998, based on the Secretary General's
recommendations that additional funds were needed to meet the needs of
the Iraqi people, the Security Council adopted an expanded oil-for-food
program. That program was renewed again in November.
Oil-for-food is not a step towards lifting sanctions, nor does it
reward Saddam. In fact, it makes sanctions--his worst enemy--
sustainable. Without an oil-for-food program, history has shown that
Saddam Hussein would starve his own people to force the international
community to lift sanctions. Although we could use our veto at the UN
to prevent the lifting of sanctions, the pressure of a sympathetic
international community--absent oil-for-food--could well lead to the de
facto breakdown of the sanctions regime.
The oil-for-food program has had a tremendous positive impact on
conditions for the average Iraqi. Since the beginning of the program,
$2.75 billion worth of food, over $500 million of medicine and $400
million worth of supplies for such things as water, sanitation,
electricity and education projects, has been delivered to Iraq. The
average daily food ration has increased from 1275 calories per day in
1996 to 2100 calories per day now. However, problems remain. Although
malnutrition rates have declined, they are still too high. Significant
work on the sanitation and water, electrical, education, agriculture
and other sectors is still required.
Sanctions have slowed considerably Iraq's ability to expand oil
exports. We estimate that sanctions have prevented Iraq from exporting
more than $120 billion worth of oil from 1991 to 1996. We have in the
last two phases of the program permitted funds to be earmarked for the
importation of carefully screened spare parts and equipment to improve
Iraq's crumbling oil infrastructure to fund needed humanitarian
purchases. Those spire parts have just begun to arrive and it will be
many months before there will be significant growth in Iraqi ability to
export oil.
We are also discussing in Security Council capitals how to keep
Oil-for-Food viable and effective. We have proposed that the Security
Council consider raising the ceiling on oil sales consistent with
Iraq's legitimate humanitarian needs. In the short run, Iraq would be
unable to expand oil exports. Over time, allowing increased Iraqi oil
exports would address concerns regarding the shortfall in revenues
needed for humanitarian purchases. Saddam would not benefit from these
increased oil export revenues. The revenues would be put in an escrow
account and released only for the purchase of humanitarian goods.
Raising the ceiling on revenue available for the purchase of
humanitarian goods also would serve to counter growing calls from Arab
states and Security Council members to lift sanctions outright. By
removing the root cause of calls for lifting sanctions, we free our
allies in the Arab world and elsewhere to support our broader Iraq
policy objectives. We also draw Security Council support away from more
radical French and Russian proposals to lift sanctions altogether.
We also understand your concerns about the current oil market
situation. However, Iraq is only one among several factors which has
adversely impacted oil prices over the last year. Our Iraq sanctions
policy, moreover, has never been linked to the price of oil on world
markets. This was true in the early 1990s when Iraqi oil was completely
off the world market, putting upward pressure on oil prices, and it
remains the case today. Allowing oil price considerations to drive our
sanctions decisions, or seeking to use sanctions to target oil prices,
would undermine our ability to maintain an international consensus
aimed at containing Saddam Hussein as well as to provide for the
humanitarian needs of the Iraqi people.
The US will continue to work to improve the oil-for-food program,
and to ensure that it serves its intended purpose. In February, the UN
Secretary General reported that there are $275 million worth of
medicine sitting in Iraqi warehouses undistributed. This is
unacceptable, and we will work to change it. We will continue to
scrutinize every contract for goods under the oil-for-food program and
can veto any contract that we judge to be inappropriate or ill-advised.
Given the absence of UNSCOM and IAEA, which have a role in monitoring
dual-use goods, we have tightened our standards for contract approval.
In January, the Security Council formed three panels to examine
disarmament, humanitarian and Kuwait-related issues. We expect that the
humanitarian panel's report, due in mid-April, will suggest additional
changes that may enhance the program's effectiveness.
Were international support for effective UN sanctions regimes to
erode, Saddam Hussein would be a much greater threat to the world
community. He would quickly regain the free use of ten to fifteen
billion dollars per year to put into his WMD programs. Moreover, the
prospect of Iraq without UN sanctions would also have a much greater
negative impact on oil prices.
We remain concerned about the illegal traffic of oil and petroleum
products out of Iraq--to Turkey, Jordan, Syria and the Persian Gulf.
Each of these avenues presents unique problems, and we are addressing
each of them differently. We continue to work with Turkey to find a way
to bring illicit trade over the Turkish border within the framework of
the oil-for-food program. We believe a similar approach should also be
taken regarding Syria. With respect to the smuggling of Iraqi gasoil
through Iranian territorial waters, we have had considerable success
over the past year in combining efforts to bring third-country pressure
to bear on Tehran to end the trade with more direct military actions.
This has included bombing of the section of the Basra refinery devoted
to this trade during Desert Fox, and the conduct of ``surge
operations'' by the multi-national Maritime Interception Force or
``MIF,'' in areas of the northern Gulf known to be used by the Iraqis
and others as routes for smuggled cargoes. As for Jordan, although the
UN has taken note of Jordan's trade of bartered humanitarian goods in
exchange for Iraqi oil at concessionary prices, we continue to work to
reduce Jordan's dependence on Iraqi oil.
Although the oil-for-food program is not perfect, it is essential
to our policy of containing Saddam until there is a new government in
Baghdad. Without it, sanctions would be much more difficult to sustain.
Saddam Hussein would once again have control over tens of billions of
dollars a year to spend on weapons of mass destruction.
Over the long-term, however, the only way to ensure that Saddam no
longer threatens either his people or his neighbors is to work for a
new government in Iraq--one that will maintain the territorial
integrity and unity of Iraq, respect the rights of Iraq's people and
Iraq's neighbors, and fulfill Iraq's international obligations. We are
committed to helping Iraqis achieve this regime change or transition.
Thank you, and I welcome any questions you may have.
Mr. Barton. Thank you. Mr. Williams, your statement is in
the record in its entirety and we will recognize you for up to
7 minutes to elaborate on it. We welcome you as one of the
members of the Railroad Commission from Texas. I believe you
are the newest member. You have a distinguished background. I
won't put that all in the record, but you are a former
administration official in the Bush Administration, you have a
distinguished record in the private sector and public sector in
Texas. We are very glad that you could testify today.
STATEMENT OF MICHAEL L. WILLIAMS
Mr. Williams. Chairman Barton, thank you, and members of
the committee, thank you for the opportunity to be with you.
Before I go any further, Congressman Hall, thank you for the
kind words earlier this morning.
I appreciate this opportunity to testify on behalf of the
Texas Railroad Commission on the impact of the United Nations
sponsored Oil-For-Food Program and the impact that it has on
the vital interests of Texans, as well as the Nation.
Admittedly, the goal of the Iraqi Oil-For-Food Program is
quite laudable. However, I must admit that as presently
structured, that program is adverse to the interests of Texans
and Americans. No Texan would take issue, and quite frankly no
American would take issue with a responsible attempt to provide
food and medicine and other necessities for the Iraqi people.
Arguably, however, we do have some serious doubts that the
program is actually meeting the humanitarian needs of the Iraqi
people, and nonetheless quite frankly it is more troublesome
that Iraq is being permitted to sell oil and make money out of
the pockets of Texas producers and, I might add, Oklahoma
producers and other domestic producers, their workers and their
families at the same time that Iraqi ground troops are firing
at American fighter pilots who are protecting the no-fly zone.
Moreover, by allowing Iraq to sell $10.4 billion of oil during
a 12-month period, irrespective of linking it to the impact
that Iraqi production is having on worldwide crude oil supplies
and price, provides no incentive for the Iraqis to be proper
stewards of their crude oil reserves, nor is there any
incentive whatsoever for the Iraqis to concern themselves with
the harmful impact that their behavior might be having on
producers worldwide, particularly those producers here in the
U.S.
Quite the contrary, the Oil-For-Food Program places a
premium on how much money Iraq is allowed to generate, rather
than how many barrels of crude oil it is being allowed to sell.
So the program encourages them to provide and dump as much
crude oil as possible on the market during the 6-month period
to reach that $5 plus billion mark with no regard to the price
per barrel.
The Oil-For-Food Program doesn't just permit Iraq to act in
a way that is adverse to American interests, but to some extent
it encourages them to do so and that puts domestic production
at great risk. We have already heard today about the cost and
what happens to domestic production when prices are running at
somewhere below $15 a barrel. What is happening in Texas is
that we are now at an all-time low for oil rig count. We have
191 oil rigs presently in service compared to 377 at this time
last year. Between February 1998 and 1999, some 9,500 wells in
Texas were plugged.
In the same time period, some 2,200 wells were shut in. So
wells in Texas and across the country have been placed at great
risk because of the impact of Iraqi production on the world
market depressing prices.
And what is the impact in terms of what is happening to
real people? In Texas we have had since December 1997 the loss
of some 11,000 jobs. Unemployment claims in Texas has risen
some 304 percent compared to this time last year. And I might
add that I grew up in the oil patch in Midland--and most people
typically think of folks in the oil business as being, as we
frequently say, a bunch of J.R. Ewings with cowboy boots and
exotic gold cuff links. The oil patch is comprised of a wide
variety of folks; and of those 11,000 folks who have lost jobs,
many of the people who have lost jobs in the oil fields are
Hispanic, and many of the people in the accounting departments
and the personnel departments and the H.R. departments and
otherwise are African-American. This is an industry that
represents the bulk and the diversity of Texas, and it is being
hurt.
What is happening to our schoolchildren? In Texas, about
two-thirds of the 1,000 school districts in the State of Texas
receive some funding from oil and gas revenues, particularly
from ad valorem and tax revenues. Ninety-five of those school
districts receive half of their funding from that source, and
we are estimating in Texas that we lose anywhere from $150
million to $160 million because of the depressed prices.
This is also affecting those royalty interests owners in
Texas, many of those who are living on fixed incomes who look
for that royalty check each and every month in order to make
payments. But obviously with depressed prices, they are not in
a position to do so.
And so what might be done? While I am the newest member of
the Texas Railroad Commission and have not been around a long
time, I will take the liberty to make some suggestions. And the
first might be that Congress and the administration might press
the United Nations to conduct a thorough investigation to
determine whether the Iraqis, indeed, are using the designated
amount of oil-for-food funds to provide food and medicines and
other necessities for the Iraqi people.
The second thing, frankly, you might look to restructure
the oil-for-food production formula. Currently the cap allows
for $5.26 billion of Iraqi oil production every 6 months
without regard to the number of barrels it would take to reach
that target. And I have heard that this program has never
linked the production to the barrels; and, quite frankly, I
think that would be helpful to do so, so that we would not
encourage overproduction and a depression on prices.
And the third would be that we look at and revisit the
notion of allowing the Iraqis to use the oil-for-food funds in
a way to rebuild Iraq's oil infrastructure. I just want you to
think about the irony of producers in Texas and Oklahoma and
elsewhere who have to look for refinancing and have to find
money and capital in order to go out and work rigs; and we are
providing an opportunity for the Iraqis who are now assisting
in providing the oversupply to the industry. We are providing
dollars for them to buildup and retrofit their infrastructure.
Mr. Chairman and members of the committee, I thank you
again for the opportunity of being with you this morning; and I
stand to answer any questions that you might have.
[The prepared statement of Michael L. Williams follows:]
Prepared Statement of Michael L. Williams, Commissioner, Texas Railroad
Commission
Mr. Chairman, and members of the committee, I appreciate this
opportunity to testify on the impact of the United Nations sponsored
oil-for-food program on our vital national energy interests. For time
purposes, I have summarized my testimony and have submitted additional
written testimony for the record.
Founded in 1891, the Texas Railroad Commission's chief
responsibility is to protect and conserve one of Texas and America's
most precious natural resources: oil. As America's number one producer
of oil, Texas' proper resource management of oil has yielded profound
contributions for both our state and the nation:
<bullet> The discovery of crude oil at Spindletop in Beaumont, Texas in
1901 changed the face of the American transportation industry
and gave way to thousands of oil and related service companies
that have employed untold millions of Americans.
<bullet> Plentiful supplies of Texas crude oil made possible our modern
automobile industry. World War II may well have taken a
different course.
<bullet> Allied Forces would not have sailed to victory on a sea of oil
if it were not for Texas' extra production capacity and
Hitler's lack of oil during World War II.
<bullet> And today, petrochemicals derived from oil and natural gas
have enabled us to create everything from Teflon to
televisions.
Crude oil exploration and production have been central to the
modern industrial age. As we approach the 21st Century, we must
continue to protect and conserve this precious natural resource that
has proven a powerful economic, military, political, and strategic
tool. And with the proper stewardship of the 120 billion barrels of
crude oil still locked underground in Texas, our nation's energy future
could be just as bright.
the iraqi oil-for-food program as presently structured threatens
american interests
The Iraqi oil-for-food program is another matter. The goal of the
program is quite laudable. No Texan would take issue with a responsible
attempt to provide food and medicine for the Iraqi people. Arguably,
there are some serious doubts that the program is actually meeting the
humanitarian needs of the Iraqi people.
U.N. Secretary General Kofi Annan, someone who knows the ins-and-
outs of the program, admitted in February, ``Only half of the $540
million worth of drugs and medical supplies delivered to Iraq since the
program was launched in 1995 have reached hospitals and clinics.''
The Iraqi oil-for-food program, as presently structured, is adverse
to American interests. It is more than troublesome that Iraq is being
permitted to sell oil and take money out of the pockets of Texas
producers, workers and families at the same time that Iraqi ground
troops are firing at American fighter pilots who are protecting the
``no-fly zone.''
Moreover, by allowing Iraq to sell $5.26 billion of oil during a
six month period (irrespective of the impact that Iraqi production has
on worldwide crude oil supplies or price), there is no incentive for
Iraq to properly steward its crude oil reserves. Nor is there an
incentive for Iraqis to concern themselves with the harmful impact
their behavior might have on producers worldwide.
Quite the contrary, the oil-for-food program places a premium on
how much money Iraq is allowed to generate rather than how many barrels
of crude oil it is allowed to sell. In so doing, the program encourages
Iraq to sell as much crude oil as possible during the six-month
interval to reach the more than $5 billion mark, with no regard to
price per barrel. Oil for food doesn't just permit Iraq to act in a way
that is adverse to American interests, it encourages it to do so.
While there is no certain number, there appears to be developing a
consensus in the industry, that the amount of excess oil on the world
market is roughly between one and two million barrels a day. That said,
on average, Iraqi oil production accounts for more than 2.3 million
barrels a day. Furthermore, evidence indicates that Saddam may be
illegally exporting an additional 100,000 barrels a day. Even the U.S.
Department of Energy admitted in late 1998, ``[The] increase in Iraqi
oil exports has been playing a significant role in the world oil glut
which is responsible for the sharp decline in world oil prices.''
We may be dropping bombs on Iraq without visible retaliation;
however, Saddam Hussein is engaged in a clandestine campaign of full-
scale economic terrorism. His conduct is keeping world oil prices low
by pouring even more oil onto an already saturated market under the
guise of the oil-for-food program.
the oversupply of crude oil hurts domestic production
In his letter to Congress earlier this month, President Clinton
stated that ``The United States has expressed its support for [once
again] lifting the cap on Iraqi oil exports under the oil-for-food
program.'' In fact, the Clinton Administration advocates eliminating
the cap. In light of Secretary Annan's recent report, however, that dog
simply won't hunt.
More oil on the already flooded world market would adversely affect
oil prices across the globe. It's Supply and Demand 101: the more
product on the market, the cheaper it is. In the United States where
production costs are relatively high and production is relatively low,
drastic price declines have sent the rig count and production
spiraling. Since last year, U.S. production has fallen by 4.7%. In
Texas, production has fallen by 7.4%. The rig count, the historical
barometer of industry vitality, is down 78% since a year ago. Texas'
rig count has plunged 97% during the same period.
less domestic production means less for texans
The Iraqi people are not the only ones who stand to lose something
under Oil for Food. Texans like the Ryder family from our state's
Permian Basin have seen their lives fall apart during the past year. In
their early fifties, Ronnie Ryder and his wife, Inatte, used to think
retirement might not be so far off. After working in the oil business
for 30 years, Ronnie is now looking for ``any job he can get.'' Inatte
is back in school and working nights at an elderly care facility.
Unfortunately, the Ryder's story doesn't stop there.
Until the price crisis hit, Ronnie's son was working in a
roustabout gang for Phillips Petroleum. Today, with their first child
on the way, Rusty and Priscilla Ryder don't get to spend much time
together as Rusty has been forced to take a job driving trucks cross-
country. I wish the Ryder's story was the exception, but I'm afraid
that in the oil patch, it's become the rule.
The overwhelming majority of producing wells in Texas are marginal
wells--or wells that produce 10 barrels or less per day. Those wells
are placed in jeopardy by low and unstable prices. With profits falling
and the amount of oil on the market increasing, thousands of Texans who
operate marginal wells have been forced to shut in wells--an
irreversible process. When those wells get shut in workers get shut
out.
Economic studies have shown that for each dollar invested in the
oil and gas industry at the wellhead, there is a positive economic
effect of $2.91 on the Texas economy. Without marginal well production,
millions of dollars and thousands of Texas jobs will be severely
impacted. State unemployment will increase, sales tax revenues will
drop, and property tax revenues used to fund schools will plummet.
As the number of producing marginal wells decline because they are
no longer economically viable to produce, royalty and interest owners
are directly impacted by a loss in revenue. Royalty income has
sustained countless families, small farms and ranches and rural towns
for decades. In turn, royalty dollars circulate many times through a
local economy by way of the grocer, the doctor, the pharmacist, small
shops, retail stores, and service providers. In many rural communities
people are dependent on royalty payments for their daily existence.
Shutting in or reducing marginal well production could mean financial
devastation to some.
The importance of marginal well production and its rippling effect
on the state economy is reinforced in a recent article published by the
Texas Workforce Commission. According to their December 1998
publication of the Texas Labor Market Review, mining (oil & gas
extraction) continued its trend of declining employment and loss of
jobs. The article states that persistently low crude oil prices are
placing tremendous pressure on mining employment counts and are
affecting other industries that support drilling and explorations
activities in Texas. Employment in all three of the major industries
within the goods producing sector (mining, construction, and
manufacturing) declined in December, for a total loss of 2,400 jobs. As
of January 1999 release, mining was suffering the seventh straight
month of declining employment. Employment estimates in the mining
sector alone decreased from 169,300 in January 1998 to 160,600 for
January 1999--a 75% decrease of some 8,700 jobs. Additional workforce
impact information can be found on the Texas Workforce Commission web
site at www.twc.state.tx.us.
Low oil prices are also taking a toll on Texas' greatest resource:
our children. It is estimated that Texas' statewide Fiscal Year 2000
school district losses will be between $150-$160 million. The impact is
already been being felt by many cities and counties across our state as
jobs are lost, related services are cut, and state and local revenues
plunge. I think David Goodman, superintendent of Andrews Independent
School District in West Texas summed it up best when he asked, ``Do you
know of any businesses that could stand to lose one-third of its
operating budget and still open its doors the next year?''
The Texas Comptroller's Office recently surveyed appraisal
districts and contract firms that appraise oil and gas reserves for
property tax purposes. Although the appraisals are not complete, the
appraisers' consensus is that oil properties will decline in value from
January 1, 1998 to January 1, 1999 by about 40% and gas properties will
decline about 15%. In school districts where oil and gas reserves
comprise more than $250 million, these value losses were translated
into property tax levy losses and are available on the Comptroller's
web site at www.window.state.tx.us/taxinfo/proptax/levyloss.html.
According to the American Petroleum Institute, at least 51,000
Americans have lost their jobs since December of 1997 because of low
oil prices--nearly 9,000 of them are in Texas. Compared to a year ago,
oil-related unemployment claims are up 304%. Contrary to the impression
left by popular culture, those are not men and women who wear exotic
cowboy boots and wear gold watches. Rather, they are Americans like you
and me, like the Ryders with real car payments, real mortgages, and
real families to feed.
what to do
Like the families of America's steelworkers or farmers, oil
families are suffering in ways that they have not felt before. And,
like we have to the steel and farming industries, we should reach out
and correct policies like Oil for Food that make bad times even worse.
For the sake of American families and schoolchildren, the oil-for-food
program should be revisited and restructured. To that end, I would urge
you to consider the following.
<bullet> First, Congress and the Administration might press the United
Nations to conduct a thorough investigation to determine
whether Iraq is using the designated amount of oil-for-food
funds to provide food and medicines for the Iraqi people.
According to U.S. National Security Adviser Sandy Burger,
``Saddam is so indifferent to the suffering of his people that
he still refuses to make full use of this allowance.''
<bullet> Secondly, while the humanitarian needs of the Iraqi people
might necessitate additional revenues, we should seek to insure
that any attempt to eliminate the crude oil production cap
takes into account and does not exacerbate the negative impact
that additional Iraqi production might have on domestic
producers.
<bullet> Third, the United States should call on the United Nations to
revise the resolution so that oil-for-food funds are not used
to rebuild Iraq's oil infrastructure. Common sense says that it
is not in the United States' best interest to rebuild a
competitor's economic and industrial arsenal.
<bullet> Fourth, we should urge the United Nations to restructure the
oil-for-food production formula. Currently, the cap allows for
$5.26 billion dollars of Iraqi oil production every six months
without regard to the number of barrels it would take to reach
that target. Nor does it take into account the impact Iraqi
production has on world oil prices. During every six-month
period the U.N. should designate the number of barrels of oil
Iraq would be allowed to produce to reach a designated revenue
target. We must urge that the target be placed at a level that
neither fosters price instability nor that is harmful to the
preservation of domestic production.
<bullet> Fifth, members of Congress from producing and non-producing
states should band together--as they have recently for other
vital U.S. industries--to boycott the sale of Iraqi oil within
the United States, thereby mitigating the insult to our men and
women in uniform stationed in the Persian Gulf and working in
the oil patch.
It's a disgrace that hard-working Texans have been forced to bear
the brunt of a skewed foreign policy that does more harm than good.
Congress and the Clinton Administration should revisit and revise the
United State's support of the oil-for-food program as it stands--if not
for our oil producers, for the sake of the coming addition to the Ryder
family.
______
Railroad Commission of Texas
Austin, Texas
March 22, 1999
The Honorable Joe Barton
2264 Rayburn House Office Building
Washington, D.C. 20515
Dear Mr. Barton, there's a clear and urgent need to evaluate our
nation's domestic energy policy. Texas Railroad Commissioner Michael
Williams will testify before the House Subcommittee on Energy and Power
on Friday, March 26th. He'll offer his insight into our nation's
domestic energy policy and the U.N.-sponsored ``Oil for Food'' program
with Iraq. I want you to know that as Chairman of the Railroad
Commission of Texas, I'm in complete support of Commissioner Williams'
testimony.
When the energy industry in Texas suffers, we all feel its effects
through decreased state revenues and fewer dollars for our state's
public schools. The Texas Comptroller of Public Accounts estimates that
with every dollar drop in the price of oil, approximately 10,000 Texas
jobs are lost. Lower prices and an increasing dependence on foreign oil
means many of those jobs are going abroad. These losses are
particularly staggering when you consider that the U.S. already imports
more than 50% of the oil we use, placing our nation more and more at
the mercy of foreign--and often unfriendly--governments.
In Texas, Governor George W. Bush recently signed emergency
legislation that gives certain oil and gas producers temporary
exemptions from severance taxes when prices fall below set levels. It's
not a silver bullet, but it's a step in the right direction and shows
that Texas is committed to helping one of our state's most important
industries. Now it's time for Washington to step up to the plate for
domestic producers.
The Independent Petroleum Association of America will hold Crude
Awakening rallies in Washington, D.C., Austin, Texas and across the
nation this week where members will sign the ``Oil Price Crisis Relief
Resolution.'' The IPAA and its members make it very clear: the federal
government needs to respond to this downturn in prices. The resolution
states that Washington should support the filling of the Strategic
Petroleum Reserve (SPR), get behind a reduction of taxes on marginal
wells, work to encourage domestic production, investigate improper
trade practices in the U.S. market by foreign suppliers, and offer much
needed regulatory reform for the industry.
Your actions in the coming weeks will show just how committed
Washington is to a strong domestic energy policy. It's more than simple
economics. It's an issue of critical importance for our national
security. With best wishes, I am,
Sincerely,
Tony Garza
Chairman
Mr. Barton. We thank you, Mr. Williams. The Chair is going
to recognize himself for 5 minutes. We are going to be very
flexible. We have got four members here. We are going to use
the 5-minute rule, but we are going to give additional time and
probably do additional questions; and if people want to
interrupt, that is fine.
If the staff would put the first chart there, the EIA, the
Iraq crude oil production chart. Let's put that back up on the
easel.
I want to start off--this is off of the CNN news line that
we get on the Internet: March 4, the headline is ``British jets
attack Iraqis in the southern no-fly zone.'' March 6, ``U.S.
launches new attacks in Iraq no-fly zone.'' March 14, ``U.S.
jets strike at Iraqi northern no-fly zone.'' March 15, ``U.S.
war planes attack Iraq's northern no-fly zone.'' March 16,
``Iraq breaks sanctions by flying pilgrims to Saudi Arabia.''
March 17, ``Sanctions-busting Iraqi pilgrims snub no-fly zone
rules again.''
This chart shows that right before the Kuwaiti invasion by
Iraq, they were producing about 3.5 million barrels. Once the
invasion occurred and President Bush declared that would not
stand, their production fell to about 500,000 barrels per day.
And then when the oil-for-food program began in January or late
November 1996, it started ratcheting back up; and it is
currently up to 2.6 million barrels a day.
Mr. Wood, does the State Department dispute any of those
figures?
Mr. Wood. I don't believe we do.
Mr. Barton. Okay. If it is true that Mr. Hakes' statement
that they--I mean, at least before the invasion they were
producing for a short spike period up to 3.5 million. But I
believe, Mr. Hakes, you said you don't believe they could get
much higher than what they are doing right now?
Mr. Hakes. They would need a lot more spare parts and
capital development to repair the equipment to get back up to
that level.
Mr. Barton. So for all intents and purposes, is it fair to
say that we are allowing Iraq to produce as much oil as they
are capable of producing? Is that a fair statement?
Mr. Wood. It is certainly true at the moment, yes, sir.
Mr. Barton. I can only characterize the current policy,
after listening very intently and scanning the testimony, that
our Iraqi policy is designed to maximize Iraqi production at
the expense of the marginal producer in the United States,
which is a small independent oil and gas producer. And I don't,
quite frankly, think that makes a lot of sense. Do you disagree
that if it is not the intent, that is the effect of this
policy, Mr. Wood?
Mr. Wood. The intent of the policy, sir, is to maximize
international support for the continued isolation and
containment of Iraq.
Mr. Barton. And it seems to be working really well.
``Sanctions-busting Iraqi pilgrims snub no-fly zone rules
again.'' Now, that is not some political headline. That is the
CNN news line March 17, 1999. Could you explain to me how these
sanctions are working when Iraq can produce as much oil as they
are capable of, regardless of the price; they can fly pilgrims
to wherever they want to in the world; they have thrown our
inspectors out. So please explain to me and the American people
how effective these sanctions are. I think the sanctions are
driving constituents in the oil producing States with marginal
producers out of business. I think that is what the sanctions
are doing.
Mr. Wood. Mr. Chairman, there is no question that Iraq is,
as it always has, resisting sanctions implementation. At the
same time, first, the sanctions are being very effective in
controlling Iraqi exports and the revenues that come from those
exports.
Mr. Barton. But the only export they have, Mr. Wood, is
oil. Maybe some olives, I don't know.
Mr. Wood. I understand and we are controlling with a high
degree of confidence where the revenues from those exports go.
Mr. Barton. I see.
Mr. Wood. We are also--we are preventing, through this
regime, the use of those revenues for the purposes that Saddam
Hussein would most like to use them for.
Mr. Barton. Let me ask this question, because my first 5
minutes is about out. Where did this determination that they
needed $5.2 billion every 6 months come from? Who made that
determination?
Mr. Wood. That was the result of an extensive United
Nations study that was completed in February 1998, I think.
Mr. Barton. And did the Iraqi government have any input
into that study?
Mr. Wood. The Iraqi government refused to cooperate with
that study in large part. It was conducted, for the most part,
by organizations like the World Food Program and others.
Mr. Barton. Okay. Now, do we have any confidence that the
food that is being purchased is actually getting to the Iraqi
people?
Mr. Wood. We do have, obviously, some problems. The papers
reported very recently that the Iraqis were--that the
government was not distributing medicines, for instance, that
were supposed to be distributed. But at the same time, we know
that Iraq has imported an average of 3.8 billion metric tons of
food a year, which is more than 50 percent higher than the
annual average for the 6 years prior to the program's
implementation.
We know that the malnutrition rate in the government-
controlled south has stabilized over the past year at about 15
percent for infants and 25 percent for children between 1 and 4
years of age; and that is an improvement over the previous
years. We know that UNICEF reports that malnutrition in the
north for the Kurds has dropped--for children under 5 has
dropped to 25 percent last year from 30 percent in 1997 and 37
percent in 1994.
So we have got some clear indications that the goal of the
oil-for-food program, which is to take care of the Iraqi
population in spite of Saddam Hussein's intentions, is being
achieved.
Mr. Barton. Now, is it true--one of my briefing papers said
that Saddam Hussein has refused to let any of this money be
spent on food that is purchased or manufactured in the United
States. Is that true?
Mr. Wood. That is only true very recently, sir.
Mr. Barton. But it is true right now?
Mr. Wood. Right, it is true. We have under the oil-for-food
program roughly $240 million of U.S. products have been
purchased, of which----
Mr. Barton. I want you all to listen to this. This program
has been in effect since what, November 1996?
Mr. Wood. Right.
Mr. Barton. And we allow up to $5 billion every 6 months,
so that is potentially $10 billion a year. So that is
potentially maybe $12, $13 billion since we are just into 1999;
but I am told that it has not been that much. We have spent how
many billions of dollars? Do you know the exact number? I am
going to guess it is $8 or $9 billion, but I don't know that.
Mr. Wood. Well, it is important to remember again that the
proceeds for the oil-for-food, a large part of it, a third of
it goes to the compensation commission to compensate Kuwaitis
for their losses--Kuwaitis, Americans, and others for their
losses during the Gulf War. So not all of that program goes for
the purchase of food.
Mr. Barton. Give me your best number for how much of the
billions of dollars that they have collected has been spent on
food that actually went into Iraq.
Mr. Wood. Our best understanding is that $902 million have
been approved for food.
Mr. Barton. Only $902 million?
Mr. Wood. Let me keep going. $172 million for health.
Mr. Barton. Let's just focus on food right now. A little
less than a billion dollars on food? Is that your best number?
Mr. Wood. That is right.
Mr. Barton. Less than a billion, and of that billion, $240
million was purchased from the United States sources?
Mr. Wood. That is right.
Mr. Barton. Okay. Well, I think I could equate that to how
many jobs have been lost and how many millions of barrels of
production have been lost in the United States. But that would
be hitting a little bit below the belt. But I think you get my
drift.
Mr. Hall is recognized for 5 minutes.
Mr. Hall. Thank you, Mr. Chairman. Mr. Williams, I will
start with you. You have--one of your cures for the dilemma is
that we get the U.N. to do some searching and see what is
happening with the food when it gets there, who it goes to. I
know you are highly educated, and I also know that you have got
an awful lot of street sense, street smarts. Doesn't your
street sense tell you that if they couldn't find the dang
nuclear plants, that they are going to have a hard time
catching those guys stealing that food?
Mr. Williams. It probably does and it should. The import of
that suggestion goes to the fact that we need to have--someone
needs to do the investigation and make the----
Mr. Hall. You pointed out by your answer now the dilemma
that we are in. And my thrust probably is going to be to see
what we can do to kill the policy. I don't think it is a good
policy. I don't think it is a sensible policy. We used the
Space Station for foreign policy and wound up putting money
galore into Russia; and still apparently we are not saving the
Space Station. Here we are using food-for-oil as another--
really a kind of a--I don't know why we would try to have a
good foreign policy with Iraq, but apparently somehow we are
trying to keep our foot in the door.
It seems to me--I am not saying cut all the trees and kill
all the whales and everything is bad and we ought to disconnect
everybody in the world. But I don't see any sense in dealing
with Iraq. I don't like to starve children, but war is war; and
we are in a state of war with those people. We are bombing them
probably today or tonight or tomorrow or whenever we are going
to.
Mr. Wood, what do you mean by saying you are controlling
where the revenue goes? That thought occurred to me--I heard
you say that a moment ago. Where does the revenue go? I will
come back to you, Mr. Williams.
Mr. Wood. As I indicated, the revenue goes into an escrow
account that is only released for authorized purposes.
Mr. Hall. Now, this is food for oil.
Mr. Barton. But it is really not food for oil. That is what
is so frustrating about this. They have collected somewhere
between $5 and $6 billion and they have spent a little less
than a billion on food. So it is called food for oil, but it is
really not food for oil.
Mr. Wood. Let me correct what I said earlier because I was
giving you the most recent statistics. Since the beginning of
the program, a total of $2.75 billion has been used to purchase
food. Over $500 million has been used to purchase medicine and
$400 million for supplies in areas of water, sanitation,
electricity, and education projects.
Mr. Barton. So that gets us up to about $3 billion, but a
little over $2.5 billion for food?
Mr. Wood. And, again, don't forget the oil-for-food program
has only been at the $5.2 billion level for a year or so.
Mr. Barton. Right. I am going to give Mr. Hall additional
time; and I don't want to dominate this, but that infuriates
me. This study that was done apparently was done with a great
degree of effort to find out what the true needs were, but you
have doubled the program; and the population of Iraq has not
doubled in the last year. I mean, I can draw no conclusion to
that, sir, but that that is just a pure political judgment on
behalf of the bureaucrats in the United Nations to appease
Saddam Hussein. I may be wrong, and the studies may show it
different; but if the first study was an accurate study, the
Iraqi population is not that fertile that they are expanding
the population so greatly that they need to double the amount
of flood and supplies that they need. But, Mr. Hall?
Mr. Hall. Go ahead and get your answer from him.
Mr. Wood. Mr. Chairman, I think that the easiest example I
can give you is that OPEC has just cut back its sale of oil.
Mr. Barton. Yes, they did. And Iraq did not and Iraq is a
member of OPEC.
Mr. Wood. This is following in December Baghdad's call for
the overthrow of the regime of Saudi Arabia and the leadership
in some of the other Persian Gulf OPEC members.
Mr. Barton. Which have the full faith and credit of the
United States of America to guarantee that this will not happen
by military means.
Mr. Wood. I understand. But the OPEC nations themselves
believed it was better for them to cut back their oil sales
than to seek a reduction in the oil-for-food program. And the
reason for that, we believe, is a combination of humanitarian
concern for people of Iraq and the recognition that taking care
of the humanitarian needs of the people of Iraq is an absolute
prerequisite to maintaining the integrity of sanctions
implementation and to returning, as we hope will occur soon,
the weapons-of-mass-destruction inspectors and the other
elements of the policy for containing Iraq.
Mr. Barton. Well, hopes are one thing, sir, but reality is
another. And I don't believe anybody on this subcommittee
opposes providing in some way food and medicine for the people
of Iraq. That is not the message we are sending. But it really
does not appear, so far as this hearing is going along, that
that is what is happening. And with all due respect, I don't
think appeasement works; and I don't think it works with Saddam
Hussein, and I would disagree with the collective wisdom of the
OPEC nations to think it is okay to appease Saddam Hussein and
let him produce as much oil as he wants.
Mr. Hall, I have used almost your entire 5 minutes, so I
will give you another 5 minutes. We will give you an additional
2 or 3 minutes.
Mr. Hall. You are the Chairman. It makes a difference.
Mr. Barton. I am just a little riled up about this.
Mr. Hall. To reclaim my 7 minutes--and you have covered
some of the ground I wanted to cover, and of course we have
talked about the economic advantages that the Iraqi government
and Saddam Hussein has taken. I think, Mr. Hakes, you can tell
us another advantage that he has taken. Our research and
development expert from Randall and Dewey, Dave Bole, is going
to be testifying in a little bit; but we have read his
testimony and he has indicated that not only do the Iraqis have
this advantage, the two advantages that the Chairman drew out
there, they have also made Iraq the swing oil producer, have
they not, in that whole part of the country?
Mr. Hakes. Not as I understand that term.
Mr. Hall. Well, let me tell you how I understand the term.
It may be wrong. They sell the last barrel into the market. And
doesn't that define the market price?
Mr. Hakes. Well, everybody that sells into the market is in
a sense selling the last barrel.
Mr. Hall. The last seller getting the most price for it.
Mr. Hakes. The swing producer, as I have normally seen it
used, is referred to Saudi Arabia who has the ability to raise
and lower production because they have more excess capacity
than they use.
Mr. Hall. They have a bigger hole in their well than
anybody else.
Mr. Hakes. Right. For instance, a year ago before they made
these cuts, they still had the capacity to almost immediately
increase production by 2 billion barrels; and they also have
been more willing to cut back. So they sort of have been the
only swing producer that is able to raise and lower. The Iraqis
don't have any ability right now to go above the 2.5.
Mr. Barton. But they do have the ability to go below 2.5.
Mr. Hakes. As does any producer.
Mr. Barton. I mean, there is no structural impediment to
the Iraqis reducing their oil production if they wanted to.
Mr. Hakes. Right. Particularly the state-owned companies
have that option if they are willing to.
Mr. Barton. And all the oil in Iraq is state owned.
Mr. Hakes. Right. I think the four or five largest
companies in the world right now are state-owned companies
including Iraq.
Mr. Hall. Mr. Hakes, to where we are on the same line, his
testimony will be--it says, ``Let me explain what allows Iraq
to become the swing producer.'' I guess that is why we ran
across that. ``Currently many industry analysts estimate that
worldwide oil productive capacity that is, production that
could quickly be added to the world market exceeds demand by
only about 4 percent.'' And says, ``This increase has allowed
Iraq to become the world's swing producer, the producer that
sells the last barrels into the market and thereby defines the
market for the entire market.'' Is that not your understanding
of what a swing producer is?
Mr. Hakes. No.
Mr. Hall. Okay. I am sorry that I hadn't set that out for
you.
Mr. Hakes. I have heard that discussed, but I am not sure
that is the way it works.
Mr. Hall. That is a good thing to allude to. Call it
whatever type producer you want to; he in the position of
selling the last and defining the market.
Mr. Hakes. The market is set by all producers and all
buyers.
Mr. Hall. In diamonds or whatever.
Mr. Barton. Mr. Hall, could you ask one more question and
then let us go to Mr. Shimkus. We will come back and give you
additional time after the other three.
Mr. Hall. I would like to just ask a quick yes-or-no from
Mr. Wood. Are we the only Nation supporting the oil-for-food
program?
Mr. Wood. By no means, sir.
Mr. Hall. A number of other nations? With Iraq?
Mr. Wood. Absolutely, sir. Both in the Security Council and
around the world.
Mr. Hall. You have answered. What would be the impact on
our foreign policy and our relations with our allies if the
U.S. were to successfully push for an end to the oil-for-food
program?
Mr. Wood. We believe that the sanctions, all of the
programs aimed at containment of Iraq, would be seriously
eroded. While we retain the ability within the Security Council
to veto any legal change in these programs, we believe that
their observance by other nations would erode quickly. We would
face growing international pressure to lift sanctions. We would
have less support for a hard line on maintaining inspections of
Iraq's weapons-of-mass-destruction programs. We believe that
this would seriously weaken our ability to take a tough line
with Iraq while we are pursuing the other track--the two other
tracks, which are the enforcement of the no-fly zones and our
efforts to replace the regime of Saddam Hussein.
Mr. Hall. Last question. Are you all talking to the oil
producers about the impact it has on them?
Mr. Wood. Absolutely, sir. And I might add----
Mr. Hall. Are you listening to them?
Mr. Wood. We are, sir. Oman was one of the original
sponsors in the United Nations of the first oil-for-food
program proposal back in the early 1990's.
Mr. Barton. Could I just--Mr. Hakes and Mr. Wood, before we
go to Mr. Shimkus, are either one of you aware of any other
Nation in the world that is permanently shutting in production
that will never come back as a result of this program? You say
that the other nations support the program. I am not aware of
any other nation in the world that has the marginal-well
situation like we have in the United States that is being
permanently lost because of this. Are there other nations?
Mr. Hakes. I am not as familiar with--Canada might possibly
have some, but I would agree with the drift of your question
that the United States is in a rather unique position on this
issue.
Mr. Barton. I am told we have lost about 600,000 barrels a
day just within the last year. It is never going to come back.
Mr. Hakes. The December-to-December figures going to
December 1998, we had lost about 500,000 barrels a day; and it
is higher than that now, I am sure; and there is also a leg
effect because it discourages new investments, and sometimes
that doesn't show up in production losses that you otherwise
would have had.
Mr. Barton. So with the exception of Canada, when the
deputy under special assistant secretary talks about the rest
of the world supporting this program, it is really the domestic
small oil and gas producer in the United States that is
supporting it by losing their job and losing their resources.
There is no other----
Mr. Hakes. The point, I think, is very valid that the small
producers have a very limited ability to come back once they
are shut down. In other words, when the price goes down like
this and then the price goes back up, that won't necessarily
bring those--a higher price won't necessarily bring all of
those producers back.
Mr. Barton. I want to correct the record. It is the
principal assistant deputy secretary. I am not trying to be
facetious about that, sir.
Mr. Shimkus.
Mr. Shimkus. Mr. Chairman, I yield my time to my colleague
from Oklahoma so he can catch his plane.
Mr. Largent. Thank you, Mr. Chairman. Mr. Wood, I am
reading in your testimony that we got at 9:30 this morning. The
second paragraph says that the administration's policy is to
contain Saddam Hussein until he can be removed from power. It
sounds to me that it is the administration's policy to sustain
Saddam Hussein until he can be removed from power, and I want
to make a statement and get you to respond to it.
As I have studied history throughout the world, the most
motivating thing--if you want to foment change in a country,
hunger is the most motivating factor to foment political change
that we are trying to see in Iraq. And yet we are moving in the
opposite direction. Would you like to comment on that? I mean,
I am striking at the very fundamental policy decision that is
being made.
And I want to say, too, just parenthetically here, that I
understand that if we can see this change take place and we get
a new regime in there and Iraq comes back on with their oil
production and begins increasing their oil production, that we
are in the same boat. So what I am really talking about is a
foreign policy decision that currently is affecting independent
producers; but if we are successful in our foreign policy, we
still have the same problem that we have to deal with, and I
understand that. So don't think that I am saying--or anybody up
here is saying that the problem that we are having in Oklahoma
is all because of our foreign policy. But this foreign policy
is important, and I am just thinking that we are doing the
exact opposite of what we need to be doing if our policy goal
is to remove Saddam Hussein from power.
Mr. Wood. We certainly agree with you that this is a very
important foreign policy, and, indeed, in fact there is no
issue on which the Secretary of State and our people in New
York and others spend more time.
It is not our assessment that withholding humanitarian
assistance under the oil-for-food program would be a better way
to drive out Saddam Hussein. And I might add that it is not his
assessment either. He has not cooperated with this program. In
spite of the program, he has tried to keep food from his
population. He has tried to keep medicine from his population.
That is why we received these press reports a month ago. He
finds it more useful to blame the world for the poverty and the
malnutrition and the unhappiness of his own people than to
allow them to be adequately nourished.
He has consistently failed to cooperate with the oil-for-
food program. He sees it as a threat. He does not see it as a
bolster for his regime, and in this assessment, frankly, we
agree with him.
Mr. Barton. If he really felt that, he wouldn't have to
sell any oil. If that were literally a true statement, he would
refuse to let his state-owned oil company sell any oil. So it
can't be true.
Mr. Wood. During the life of the program, Saddam Hussein
has interrupted the flow of oil on several occasions for
periods of more than a month at a time. And, again, it is
because his assessment is that--we believe that his assessment
is that the world will take responsibility for his population
even if he won't. And that may extend, as it has in some cases,
to proposals to lift sanctions.
Mr. Largent. So in this world, we literally cannot force
Saddam Hussein to do anything, including allow us to inspect
weapons sites. We cannot force him to not fly in the no-fly
zone. But what we can do, what we have been effective in doing
is forcing food on him. Is that what you are telling us? That
is the one thing that we have been effective in doing is
forcing food on him when he didn't want it?
Mr. Wood. I would have to say that I don't think that he is
happy with what is happening in the no-fly zones.
Mr. Largent. Who distributes the food under this program?
Mr. Wood. The Iraqi regime distributes it in the south
under U.N. monitoring, and the U.N. itself distributes it in
the north.
Mr. Largent. And where in the pecking order does the
Republican Guard fall in? Who gets fed first?
Mr. Wood. Again, I think that they are--they tend to be
less malnourished than anybody else to begin with.
Mr. Largent. I think so. We are making them fat.
Mr. Wood. I am not saying that it is the U.N. that is
feeding them. I am not saying that it is this program that is
feeding them. They have always been cared for better than the
population at large.
Mr. Largent. Thank you, Mr. Chairman.
Mr. Barton. We have been everywhere liberal in the use of
time. I have consumed probably three times my 5 minutes, so if
you have some additional questions.
Mr. Largent. It just seems to me that the administration's
policy or our foreign policy in this issue right now is that we
want to overthrow this evil empire, but we don't want to make
anybody mad doing it. I don't understand that. That just really
baffles me. We are going to kill them with kindness.
Mr. Hall. Will the gentleman yield?
Mr. Largent. Yes, sir.
Mr. Hall. Does it ever occur to you that we won't ask
ourselves the question of whatever happened to consorting with
the enemy? You know, they used to shoot you for that. I think
it is a sorry policy, and I think this is a sorry program. And
I think you are bringing it out very well. So give him 7 more
minutes.
Mr. Largent. I will yield back, Mr. Chairman.
Mr. Barton. Mr. Shimkus, do you want to reclaim original
order or do you want me to go to Mr. Burr?
Mr. Shimkus. I would rather go original order, unless Mr.
Burr has a pressing----
Mr. Barton. Mr. Burr's plane is not until 4:15.
Mr. Shimkus. I imagine mine is too, or close to it.
Mr. Wood, I am sorry that I missed the initial fireworks,
so welcome. And we are learning a lot, and I appreciate you
being here, along with the other panelists. But it seems like
you are getting the brunt of the fire right now.
I am trying to follow up on a statement that you said that
our allies want this program and they are willing to curtail
their own production while allowing Saddam Hussein to produce
more, both on the food-to-oil program and through the black
market, thus undercutting their prices on the world market. Our
allies support this policy?
Mr. Wood. What I am saying is that we have not received
approaches from OPEC nations, and in particular the Gulf OPEC
nations, seeking to curtail the oil-for-food program. Just the
opposite. They have indicated strong support for the oil-for-
food program.
Mr. Barton. Would the gentleman yield on that?
Mr. Shimkus. I will.
Mr. Barton. Surely you have got people in the State
Department that understand if we drive the American marginal
producer out of production, it helps every producer in the
Middle East over time. And Iraq is part of OPEC. So they are
crying with crocodile tears when they support this because
every marginal well in Texas, Oklahoma, Louisiana, Illinois,
West Virginia, California, Colorado, on and on and on that goes
out of production is never coming back. And their wells in the
Middle East are there just waiting to resume production. Surely
you all understand that. Do you?
Mr. Wood. Yes, I mean--I am certainly not an expert in our
domestic oil industry, but it is obvious from the testimony
here today, and from your own comments, sir, that marginal
wells once shut down stay shut down.
Mr. Shimkus. Maybe that message ought to get back to the
State Department.
Mr. Wood. It will.
Mr. Shimkus. Following up on a question I asked to my
colleague, Wes, from Oklahoma--and you have kind of
elaborated--but you said an escrow--how do we know that the
revenue from the oil-for-food program is going for food only?
Mr. Watkins said that it is going to an Iraqi bank account. You
mentioned an escrow. What bank or banks is this money flowing
to, and who controls the account?
Mr. Wood. I am not sure what--I am told that, I think, it
is Banque Nationale of Paris, one of the world's largest and
most reputable. Let me just say, though, that within the oil-
for-food program there are a series of checks and maybe it
would be useful if I went through those.
A U.N. contractor monitors outflow of Iraqi oil through
pipelines. This does not mean that there is not a smuggling
problem. I will get to that in a second because we are trying
to address that.
Then roughly 50 employees of another contractor, a Swiss
company, are stationed at the four points of entry for products
that are allowed. And they are responsible for verifying the
arrival of humanitarian goods. Within Iraq itself, the U.N.
Office of the Iraq Program has roughly 150 inspectors whose job
it is to ensure that the goods sent into Iraq under our oil for
food reach their proper destinations. There are 50 sector
observers and 50 geographic observers and 20 of sort of a
multidisciplinary unit.
That is how distribution within a particular southern part
is tracked. Every contract is approved--every contract is
approved by the sanctions committee, of which we are a member.
We review every contract. We approve every contract.
In addition, UNSCOM, the weapons-inspection agency, when it
is functioning--and I admit it is not functioning now--but when
it is functioning, they also receive reports of all imports
into Iraq and do their own analysis as to whether or not there
is any diversion away from the intended----
Mr. Shimkus. But that is not being done now, so there could
be diversions?
Mr. Wood. And as a result, we on the sanctions committee
are being more scrupulous in the contracts that we are allowing
to go through. So there is an offset there. Maybe--that is the
general framework.
Mr. Shimkus. Okay. So you would take--so you would not
accept Congressman Watkins' premise that there is no control of
the money and that the money is going totally for the needs of
the food and the medicine?
Mr. Wood. Sir, I would never say totally. I would say with
a high degree of confidence, we are absolutely sure that the
vast, vast majority of this revenue is going for what it is----
Mr. Shimkus. Does State Department believe that money is
fungible?
Mr. Wood. Yes, sir.
Mr. Shimkus. In other words, that if this money is being
used to feed the populous and the medicine needs, then that is
saving revenue for the Iraqi government to fully feed the Guard
and also the people in high places and authority?
Mr. Wood. That is true. However, Iraq is under the most
sweeping sanctions regime in the history of the world. And it
is not clear where they will develop new hard currency in order
to buy imports, in order to do that.
Now, we have talked about the smuggling program; and this
continues to be a problem. There has been smuggling of gas oil
products through the Gulf; and we estimate that that has been
reduced from roughly 55,000 barrels a day a year ago to
approximately 5,000 barrels per day now. And we have done this
through a combination of third-party pressure on Iran, which is
where the smuggling was destined; the bombing of the Basrah oil
refinery which was responsible for producing this oil; and
through the activities of the maritime interception force and
other activities there. So there is a dramatic decrease in that
smuggling.
Trade through Turkey we also believe has decreased
significantly by about 50 percent. We estimate that the current
trade is roughly 20,000 barrels per day compared to 45,000
barrels a day a year ago. We are continuing to work hard with
Turkey on reducing this.
So much for the good news. The bad news is that there seems
to be a growing illicit trade through Syria, and we are looking
into that; but I assure you that we take the smuggling problem
seriously. We take--it is of particular concern because it is
the way of raising hard currency for use by the Iraqi regime,
which is not under our control. It is the principal way that
they can raise hard currency that is not under our control. And
what they can buy with hard currency are things that we don't
want them to buy.
Mr. Shimkus. I would love to follow this line of
questioning more, but I want to go to my last one. And this is
a little bit more touchy and generic.
How can we as a Nation continue to follow the line of the
U.N. position that gives us the authority to patrol the no-fly
zone, to do the oil-for-food program, when we are now engaged
in activities in Kosovo without any negotiation of the United
Nations, no U.N. Security Council. Do you not think that we are
now in a position of not legitimizing our presence in that
region under the U.N. when we have totally disregarded U.N.
negotiations in our current activities?
Mr. Wood. I think I would make a couple of quick points.
First, our policy is to pursue U.S. objectives. And to the
degree that the U.N. assists us to do that, it is a valuable
tool in the----
Mr. Shimkus. It is a U.N. no-fly zone. It is not a U.S. no-
fly zone.
Mr. Wood. The no-fly zone is carried out within the
framework of U.N. resolutions. They are not explicitly
authorized by U.N. resolutions.
Mr. Shimkus. Is it a U.N. no-fly zone or a U.S. no-fly
zone?
Mr. Wood. Again, the no-fly zones were put in place
following the Gulf War after Saddam Hussein began to attack his
own people----
Mr. Shimkus. Who authorized it?
Mr. Wood. It is not authorized explicitly in any U.N.
resolution, but it is within the framework of U.N. resolutions
that calls upon nations to assist--to help prevent Iraq from
brutalizing its own population. But there is nothing--but the
pilots of the no-fly zones don't wear blue helmets. They don't
fly U.N. planes. There is no U.N. chain of commands whatsoever.
That is a green-hatted operation.
Mr. Barton. What is a green hat?
Mr. Wood. It is under the national chain of command.
Mr. Shimkus. So go ahead and continue with the answer,
then.
Mr. Wood. Again, we utilize the United Nations, as every
nation does----
Mr. Shimkus. No, we don't. We haven't in our recent
activities in Kosovo. We pick and choose when we need to use
the U.N. and when we do not.
Mr. Wood. We certainly believe that our actions in Kosovo
are entirely in keeping with international law. There is, in
fact, a vote taking place just about now, I hope, in the
Security Council on a resolution to be introduced by Russia
criticizing the NATO action. And we believe that it will fail
both for lack of votes and because it will have no fewer than
three vetoes on it. So we will have to see.
Mr. Barton. We will have to reclaim somewhat regular order
so that we can let Mr. Burr get a question in. Mr. Burr is
recognized for 5 minutes.
Mr. Burr. Thank you, Mr. Chairman. Mr. Wood, just keep that
mike next to you. I want to ask you about your testimony. Did
you really mean it when you said you are pleased to be here
today?
Mr. Wood. Absolutely, sir.
Mr. Burr. Did you write this testimony?
Mr. Wood. No, sir.
Mr. Burr. When were you told that you were testifying in
front of this committee?
Mr. Wood. Wednesday, sir.
Mr. Burr. Who told you?
Mr. Wood. I was asked if I was available to do it.
Mr. Burr. Who asked you?
Mr. Wood. Our normal legislative----
Mr. Burr. Name?
Mr. Wood. I don't think I have a name.
Mr. Burr. You don't know who asked you?
Mr. Wood. I can't recall, sir.
Mr. Burr. Who would have approved it?
Mr. Wood. My boss approved it.
Mr. Burr. Your boss is who?
Mr. Wood. Assistant Secretary Welch.
Mr. Burr. Did he write your testimony?
Mr. Wood. No.
Mr. Burr. Who wrote your testimony?
Mr. Wood. It was written in our office.
Mr. Burr. Who did that?
Mr. Wood. Some of the people behind me, but----
Mr. Burr. When did you read it?
Mr. Wood [continuing]. I take full responsibility for it.
Mr. Burr. When did you read your testimony for the first
time?
Mr. Wood. Wednesday evening.
Mr. Burr. Did you have the ability to change your
testimony?
Mr. Wood. Yes, sir.
Mr. Burr. Did your boss sign off on your testimony?
Mr. Wood. He reviewed it. He didn't sign off on it.
Mr. Barton. Who is your direct supervisor?
Mr. Wood. Assistant Secretary Welch.
Mr. Burr. Is he the final sign-off on it, or did it have to
go somewhere else?
Mr. Wood. It had to be cleared fairly widely.
Mr. Burr. To what degree, as far as the hierarchy at State?
Mr. Wood. Well, because it reflected--because the principal
task in writing it was to update the testimony that I think has
been mentioned here earlier that Under Secretary Pickering gave
in the Senate, there was a wide, wide clearance.
Mr. Barton. Would the gentleman yield?
Mr. Burr. Let me make one statement, and I would be happy
to yield. Would you disagree with the statement that your
testimony was to support what the State Department's policy is?
Mr. Wood. Yes, sir, that is exactly what my testimony is
for.
Mr. Barton. I just want to follow up on this same line. We
had some concern, Mr. Wood--and we are not personally offended
that you are here. I think you are doing a good job in a
difficult situation, so I want to let you know that. But we had
a concern that we were not getting the appropriate level of
testifier that should have been here.
That was expressed to me early in the week, and did I want
to call the Secretary of State and demand that there be a
higher-level official than yourself; and I said no, that the
main thing was to get the meat of the issue before the
subcommittee. Of course, then when we didn't get testimony
until this morning, that kind of inflamed opinion about that.
How many people in the State Department have direct impact
on this policy that Mr. Burr and I and every other member of
the subcommittee is concerned about? Could you elaborate the
chain of command of the people who are directly involved in
this policy?
Mr. Wood. By ``this policy,'' you mean our policy toward
Iraq?
Mr. Barton. No, the great oil-for-food policy that you are
trying with some difficulty to defend.
Mr. Wood. Starting with the Secretary of State. There are
officials at the Under Secretary level--well, at the----
Mr. Barton. I am with Mr. Burr on this one. We want names
of people. We want names and titles: Secretary Madeleine
Albright, the Secretary of State----
Mr. Wood. Deputy Secretary of State Strobe Talbott, Under
Secretary for Political Affairs Thomas Pickering, Under
Secretary for Economic Affairs Stuart Eizenstat, Assistant
Secretary for Near East/Middle East Affairs, Martin Indyk,
Assistant Secretary for International Organization Affairs,
David Welch.
Mr. Barton. That is six so far.
Mr. Wood. There are also people in our intelligence----
Mr. Barton. Give us the name of the person or at least the
title. I know the State Department is a massive bureaucracy, so
I may even get beyond your mental ability here.
Mr. Wood. Getting beyond my mental ability is not a high
threshold.
Mr. Barton. No, I think so you are an intelligent man.
Mr. Wood. But perhaps I can cut this--can help by saying
that it is routine State Department practice--and I can't speak
for other departments of the government--that officials at the
Deputy Assistant Secretary level, my level, are often the
testifiers on a variety of subjects. It is not our policy,
however, to fail to provide testimony on a timely basis.
Mr. Barton. Who is your direct report? I forgot.
Mr. Wood. David Welch, assistant secretary.
Mr. Barton. But you are the principal deputy assistant.
Mr. Wood. That is right.
Mr. Barton. Which would indicate that there is a deputy
probably below you.
Mr. Wood. That is right.
Mr. Barton. Is it safe to say that you are the lowest level
State Department official that they could comfortably get away
with sending before this subcommittee?
Mr. Wood. No, sir.
Mr. Barton. No, sir? There is somebody lower than you?
Mr. Wood. I hope so, sir.
Mr. Barton. Okay. If we want to pursue this, though--and I
think we will. I have heard nothing yet to indicate that this
is a policy that the Congress should support with any
enthusiasm. So if we want to continue this, we should ask up to
probably the Under Secretary and just have a State Department
panel so that we get every player in the State Department that
has put this policy together before this subcommittee.
Mr. Wood. Well, I----
Mr. Barton. And probably the U.N. Ambassador.
Mr. Wood. We very much hope that everybody from the State
Department would speak with one voice on the policy. And I
believe that I can adequately represent that voice.
Mr. Barton. Oh, I think you are making the best of a bad
deal before this subcommittee.
Mr. Wood. And at the same time, my initial statement that
we were genuinely grateful for this opportunity to testify
before the subcommittee, a subcommittee that you yourself
pointed out we don't testify before very often----
Mr. Barton. But you will.
Mr. Wood. And we look forward to it, sir.
Mr. Barton. There is a new beginning. We will recognize Mr.
Burr for another 5 minutes because I took 3 minutes and didn't
even let you get started.
Mr. Burr. Mr. Wood, how long will it take for Saddam to be
removed?
Mr. Wood. Difficult to say, sir. Sooner the better.
Mr. Burr. Who will remove him?
Mr. Wood. We are working--we, including our new Special
Coordinator for Transition in Iraq, Mr. Frank Ricciardone, is
working with regional groups, with dissident groups.
Mr. Burr. Outside Iraq? Inside Iraq? Who will actually
bring him down?
Mr. Wood. Don't know.
Mr. Burr. We don't know?
Mr. Wood. Don't know yet.
Mr. Burr. Will we?
Mr. Wood. Yes, although not necessarily much before it
actually happens. I just don't--this isn't the kind of thing
that lends itself to speculation or to, really, public
analysis. But it is certainly the case that there are dissident
groups outside of Iraq. There are groups inside of Iraq that
have been oppressed by Saddam Hussein. This includes the Kurds
in the north, the Shiites in the south, it includes numbers of
groups. And we believe that every day and every way Saddam
Hussein is alienating his own population. This is one of the
reasons that we do not wish to provide him the additional lever
of claiming that he is protecting his population.
Mr. Burr. So the State Department has determined that
hunger does not mobilize his people to be upset with him? Is
that what you are saying?
Mr. Wood. Yes, and he has made that statement.
Mr. Burr. If he gives them the food, they will be angrier
at him?
Mr. Wood. He has concluded that with his control of the
media and other things, it is easier for him to blame the
outside world if his----
Mr. Burr. I am trying to determine what mobilizes his
people, because I think your whole policy is based on an
overthrow from within. And I guess I would ask you where have
we used this policy before and it worked?
Mr. Wood. I think that there are numbers of cases where we
have supported dissident groups, both inside and outside of
countries, and it has produced an overthrow. I wouldn't like to
go into specifics in this forum.
Mr. Barton. I think that it is working really well in Cuba.
I think Fidel Castro came into being in 1959.
Mr. Hall. Haiti.
Mr. Barton. Haiti. We have a number of sterling examples of
this policy.
Mr. Burr. Clearly, if we adopt the same definition for the
term ``removal'' being death by old age, then we have quite a
few years that we would live with this policy.
Let me just make one comment and then I will quit, Mr.
Chairman. Thomas Pickering testified in front of the Senate
Foreign Relations Committee on March 17, a little over a week
ago, I guess. I don't think there was anything real difficult
in preparation for you to testify. I think, in fact, there was
intent at the State Department to make sure that we were as ill
prepared for your testimony as we possibly could be.
I will push next time a State Department official is here
to refuse that they testify. When we find out that we can get
the same information from other sources, maybe we will take
that opportunity to grow a larger surplus by our reductions at
the State Department in personnel.
I am confident that this is not the last time somebody from
the State Department will be in front of this committee and
many other committees to try to defend this program, the
policies that we have got, and ultimately put all the policies
of this State Department under scrutiny.
Mr. Chairman, I thank you and the ranking member for your
willingness to hold it; and I feel confident that next time, if
we don't do it on the last day before a break, that we will
have a full subcommittee of members here to pursue this policy
further. And I yield back.
Mr. Barton. The Chair is going to recognize himself for 5
minutes.
Mr. Williams, can you give me right now a verbal
approximation, and then within a week or so in writing, the
number of wells in Texas that have been shut in since the oil-
for-food program began in late 1996?
Mr. Williams. I will do that, Mr. Chairman. But since
February 1998 through about February 1999, we have shut in
about 2,200 wells in Texas; and I will provide that additional
information.
Mr. Barton. 2,200?
Mr. Williams. Right. And we have plugged about 9,500.
Mr. Barton. Plugged about 9,500. Mr. Smith, can you again
give me an approximation now and within a week or so the
numbers for that same question in Oklahoma.
Mr. Smith. Happy, to Mr. Chairman. Thank you. We have about
70,000 wells in Oklahoma that produce oil and some gas. As
Congressman Watkins mentioned, most of those are marginal. We
are plugging wells right and left. I don't know the number. I
can get it for you. Maybe Mr. Brown, who is a producer here
with me, will know. I am going to guess--and then I will
substantiate my number later--that we have plugged since this
oil-for-food program started probably about 10 to 15,000 wells.
Mr. Barton. 10 to 15,000 wells in Oklahoma?
Mr. Smith. Yes, sir.
Mr. Barton. So many more in Oklahoma than in Texas?
Mr. Smith. I think so. Again, that is off the top of my
head. I will verify that.
Mr. Barton. There are different terms for stopping
production. But the term ``plug'' means it is literally
cemented in and you cannot resume production from that well.
Mr. Smith. That is correct.
Mr. Barton. So it is gone.
Mr. Smith. That is correct.
Mr. Barton. Mr. Hakes, I asked those two gentlemen because
they represent States. You represent the United States. Could
you give us your best approximation for domestically--the
number of wells that have been plugged and again, as soon as we
can get the exact number, get it to us for the record since
this oil-for-food program began.
[The following was received for the record:]
The EIA estimates that as many as 33,000 oil and gas wells
were plugged in 1998 in the United States. This estimate is
based on two pieces of information and certain assumptions. The
Interstate Off and Gas Compact Commission (IOGCC), in a recent
report entitled ``A Battle for Survival?: The Real Story Behind
Low Oil Prices'' (Updated Report--April 1999), reported the
results of a survey of States that showed that (excluding
Texas) at least 48,000 oil and gas wells were abandoned or
idled in 1998. It is unlikely that as many as 50 percent of
these wells were plugged. Plugging costs can be high and
operators generally try to avoid incurring them as long as
possible. On the other hand, it is noted that both Pennsylvania
and Colorado did report higher plugging percentages. Assuming,
for the purpose of determining a rough upper estimate, that 50
percent of the abandoned or idled wells were plugged, the total
wells plugged outside of Texas would be 24,000. For Texas, a
precise number (8,951) of plugged wells was made available by
the Texas Railroad Commission. Combining the two estimates
yields the 33,000 wells for the total United States. While it
was not possible to determine the exact distribution of total
plugged wells between off wells and gas wells, it is clear that
the large majority of these were oil wells.
Mr. Hakes. If you are using the term ``plug'' in the
literal sense, that would be data we would get from the States,
but we would be glad to assist in the preparation of that
number for you.
Mr. Barton. Well, give me an estimate. And I am not going
to hold you to a great degree of accuracy. I am just trying to
get a feel for how many wells we have lost forever since this
program began. And we have got 10 to 15,000 in Oklahoma and
around 2,000 in Texas. So can you give us--fill in the blank
for the rest of the country?
Mr. Hakes. Well, I think those are the two largest States
for those kinds of wells, so you could extrapolate from that
data and say all the other States maybe it is twice that or
something.
Mr. Barton. So kind of a back-of-the-envelope, you would
say 20 to 30,000 wells?
Mr. Hakes. I am extrapolating from their data. I would have
to go back and check.
Mr. Barton. You can get us--to the extent such data is
available, you can compile that and get it within the next 2
weeks?
Mr. Hakes. Yes, we will certainly do that.
Mr. Barton. Mr. Smith?
Mr. Smith. Mr. Chairman, just a correction. I misread Mr.
Hakes' chart. I read it as January 1996 for the oil-for-food
program start date rather than 1997. I think I was probably
high, but I will get those for you.
Mr. Barton. Okay. We are going to make a good faith effort
to either terminate this program or substantially change it.
And in order to do that, we need to have factual data that we
can show our friends at the State Department these losses have
occurred. And while there are other factors, we are not going
to deny that the Asian situation and the Caspian Sea and all of
that, there is a fairly substantial good correlation between
this program starting and the problems in the other area.
Mr. Wood, do you know how many barrels a day the Iraq
Nation needs just for internal consumption? And Mr. Hakes may
know that number.
Mr. Hakes. The number we use is about 550,000 barrels a
day.
Mr. Barton. 550?
Mr. Hakes. So the exports are roughly 2 million.
Mr. Barton. I want to be sure. If they are producing 2.5
million barrels or 2.6 million barrels a day, that is for
export; and then on top of that they are using half a million.
Mr. Hakes. I believe that is the production number.
Mr. Barton. That is the total production number and not the
export number?
Mr. Hakes. Yes, the exports are about 2 million, I believe.
Mr. Barton. Okay. So is it the Department of Energy's
energy information estimate that they are basically at maximum
production right now?
Mr. Hakes. Yes, because of their difficulty getting spare
parts and capital investment. You know, I think if they had
full access to parts and capital investment, they could quickly
get back to prewar levels; and I think just in terms of the
physical potential there, if you had full investment there,
they could probably get up to, maybe, 5, 6 million barrels. But
right now they have limited access to capital and parts.
Mr. Barton. But given the infrastructure in place, we can
assume that they are at maximum production and they are using
half a million barrels a day for internal consumption and then
they are exporting as much as they can?
Mr. Hakes. Right. Just to be a little bit more precise, we
are estimating that they may go up 50,000 to 100,000 barrels a
day over the next year or so, so that there would be some
addition. And I would say that there are a couple of respected
firms who think they might be able to increase a little bit
more than that. But somewhere in that range.
Mr. Barton. Now, Mr. Wood, as this program was put together
at the State Department, and I guess the White House and in the
United Nations, my understanding is that Iraq has financial
assets that have been frozen in western banks since the
invasion; is that correct or not correct?
Mr. Wood. That is correct, sir.
Mr. Barton. Do you know the amount of those assets in terms
of dollars?
Mr. Wood. I don't think I do.
Mr. Barton. Can you get that for us?
Mr. Wood. We can look for it for the number, sir.
Mr. Barton. Can you do more than look for it? Can you find
it?
Mr. Wood. We will get you a number, sir. My best
understanding is that there are--that there are substantial
claims by Americans and by others against those frozen assets
just for your----
[The following was received for the record:]
Question. Into which bank are the revenues from sales of
Iraqi oil under the Oil-for-Food program are deposited?
Answer. Revenues from sales of Iraqi oil under the Oil-for-
Food program are deposited into an account at the New York
branch of the Banque Nationale de Paris. Iraq does not have
access to the bank account, nor can Iraq change banks.
Question. What is the value of Iraqi frozen assets in the
United States? Please provide background on this matter as it
relates to the Oil-for-Food program.
Answer. Blocked Iraqi assets in the United States total
between $1.2 and 1.3 billion. The asserted value of prewar
claims against Iraq by U.S. citizens, corporations, and the
U.S. government totals approximately $5 billion.
In 1992, the U.N. Security Council adopted resolution 778
which required states to transfer to the U.N. limited blocked
assets representing the proceeds from the sale of Iraqi oil
paid after sanctions were imposed on Iraq on August 6, 1990 to
fund UNSCOM and the UN Compensation Commission. The USG
transferred to the U.N. a total of $211 million. Few other
countries made such transfers.
The U.S. opposes making further transfers of blocked Iraqi
assets to the U.N. because of the potential damage to the
interests of U.S. claimants against Iraq.
Mr. Barton. I understand. But here is my point. Instead of
letting the Iraqis export oil, if we have assets that are in
western banks, why couldn't we use those assets to buy the food
and to send it to the Iraqis and put a liability against future
oil production when we have a new government in Iraq so that
you still have a contingent claim by the current claimants, but
you don't decimate our domestic oil and gas industry in the
short-term?
Use the money in the bank, buy them the food and the
medical equipment, send it over there, put a voucher in there,
put a marker in place. Then when we get a new government, then
future oil revenues can go back into those funds, into those
accounts that we borrowed against or drawn against. I mean does
that seem to be a possible rational policy?
Mr. Wood. I believe that such an idea has been considered.
I think that the lawyers tell us----
Mr. Barton. Well, God help me if I have suggested something
that the lawyers might have a problem with.
Mr. Wood. I think that the lawyers have some concerns about
substituting current claims against current assets for current
claims against future assets. But I will certainly ask the
questions, sir.
Mr. Barton. Lawyers have concerns about the sun rising in
the east every morning. It may not come up tomorrow, so.
The gentleman from Texas is recognized for 5 minutes.
Mr. Hall. I am entitled to the same amount of time to talk
about the engineers. Joe is an engineer, the engineer of the
year in Texas the year before last, I think.
You know, as I have been listening--and I thank you for
your testimony--and questions that have been asked, and I don't
want to ask any of you to comment on what I am about to say,
but it seems like we are aiding the enemy. I don't think there
is any question that we are aiding the enemy. It seems, while I
don't subscribe to anybody lying to a grand jury or anybody
else, the Senate committee, it seemed like this dwarfs Oliver
North's being charged with aiding the Contras when they were
our friends. And here we are aiding a country that is
absolutely our enemy, and we are feeding its children and we
are doctoring them.
And while that maybe makes a lot of us feel good, we are
putting off the time that those same people are going to rise
up and put him out. That is the goal. That is why we are
bombing Yugoslavia today, to encourage the people to rise up
and fight their own war. Just to get the scenario in Baghdad,
it is a sunny afternoon; and Saddam looks up and sees a truck
driving up and tells all of his buddies there, Let's tie our
camels over in front of the Long Branch. We have this truck
coming in. I hate this stuff but we are going to unload it. You
have told us, Mr. Wood, that he doesn't like the program. That
is the kind of scenario that could take place. And then get
back to this country and the oil hits here. All of us--all the
testimony I have heard is that this program is hurting our
domestic Nation's oil industry. But it hits over here, and they
say, Well, we don't like it. We don't like this program. I know
this committee doesn't like the program. But let us unload it
and put it in the pipeline.
Two of you got bad deals there. I always thought somebody
had the best of a contract. You know, marriage isn't anything
but a contract; and I didn't marry until I thought I had the
best of the contract. Here it looks like they both got the
worst of the contract.
Why are we putting up with this? Why are we continuing with
this? In February 1998 the U.N. secretary general criticized
this oil-for-food program basically for delays and
inefficiency. And it seems if this is hurting our Nation's oil
industry, at the same time being criticized by the General
Secretary of the U.N.; and Saddam says he doesn't want it, what
would it take to kill a program like this? Not to fund it? Let
me ask a more pointed question: How much money is in our budget
to support this program?
Mr. Wood. Mr. Hall, this program does not directly cost the
United States a nickel because it is using Iraq's money
exclusively.
Mr. Hall. The money that is in their banks over here?
Mr. Barton. Are we are paying the unemployment claims for
all the displaced workers out of this program?
Mr. Hall. I will take all the help I can get. Thank you,
Joe.
Mr. Wood. I understand the point, but the fact is this uses
the proceeds from Iraqi oil sales to fund humanitarian supplies
for Iraq to ensure that those revenues are not used for weapons
of mass destruction or other nefarious means; to fund, in fact,
inspections against weapons of mass destruction, which I admit
are temporarily suspended and we are working hard to get them
back into place. And roughly a third of it goes to the U.N.
compensation commission to pay the just claims of poor
Kuwaitis, poor Saudis, poor Americans, for losses that they
suffered during the Gulf War.
Saddam Hussein doesn't like this because he is only getting
a share of the total value of his oil revenues, because he is
not controlling the share that he gets; and the share that he
is not controlling is going to fund inspections of his weapons-
of-mass-destruction program; and it is going to feed his
population so that he cannot blame their unhappiness on the
outside world.
This in our view is--this program is absolutely fundamental
to maintaining the solidarity of the international community
behind a continued tough line on Iraq. And as you know, we have
been facing some problems in that regard. We think that oil for
food is absolutely fundamental to maintaining that tough line.
When he was interviewed by David Frost, George Bush said
that his most important accomplishment was not winning the Gulf
War; it was forming the coalition that won the Gulf War. We are
trying to maintain that kind of coalition. We are trying to
maintain that kind of international consensus, in spite of the
fact that a potentially very rich, potentially very powerful
country is doing everything it can to get out of the box. And
we are trying to keep them in the box.
Mr. Hall. Well, I must admit we don't have all the
information that you have at your disposal, and that is the
purpose of these hearings. And I want to reread the record
myself.
At best, it seems to me that we are helping to keep Saddam
in charge over there by feeding his children and doctoring his
people. And if you have another part of your body that hasn't
been beat on, if you will turn toward me, I will ask you some
more questions. But without that, I have had all the time I
need, Mr. Chairman.
Mr. Barton. I just have a few wrap-up questions for this
panel.
And I don't know if this would be Mr. Wood or Mr. Hakes,
but we understand that there are currently $380 million in
spare-parts contracts that have been signed with the Iraqi
government for additional infrastructure improvement, but only
$11 million worth of that equipment has arrived in the country.
If and when that equipment arrives, how much additional export
or production capacity does that give the Iraqi oil industry?
Mr. Wood. I could begin to answer that question. I am not
sure what the incremental effect on Iraqi exports will be. But
the delay--I mean, we are now in the second 6 months in which
up to $300 million in each phase has been made available for
the Iraqi infrastructure improvements. The delay is the result
of close scrutiny by the sanctions committee of the proposed
contracts, making sure that they go to the right things and
they don't go to the wrong things.
For instance, we continue to keep on hold contracts that
the Iraqis want to use to improve the Basrah refinery, which is
the one that we bombed which was heavily implicated in illegal
smuggling. And I am not sure what, frankly, this rash of
improvements in the Iraqi infrastructure, what the marginal
impact----
Mr. Barton. Do you know, Mr. Hakes?
Mr. Hakes. Well, I think our analysts in arriving at their
projection have assumed a sort of moderate speed in the arrival
of these parts. And, I believe, in my written testimony we say
that there is some uncertainty that the parts will arrive very
quickly and fully. We might raise our estimates a little bit if
they increase more--are delivered more slowly we might lower a
little bit. But we have sort of assumed that they would arrive
at a moderate pace.
Mr. Barton. Okay. Well, you are going to get a letter next
week--the Secretary of State is going to get a letter. We are
going to ask that no contracts be signed. You are also going to
be asked to give all information that is not classified as to
the contents of those contracts. And I am going to sign that
letter as subcommittee chairman, and I am going to ask Mr. Hall
and every other member of the subcommittee to sign it. Whether
I can get them all to sign it, I don't know. I see absolutely
no sense in continuing to give the Iraqis the ability to
increase their production, even if it is marginal, while our
industry is being decimated in the United States.
The other thing we are going to ask you, Mr. Wood, is we
want a complete itemization of all revenues that have been
collected under this program. We want a complete record of all
disbursements that have been made under this program. We want
an estimate of the expected revenues for the fiscal year that
we are currently in and the fiscal year that will begin in
October and an expected disbursement from those same funds. And
we are going to want that in the next 2 weeks. And we have got
to get you the official request in writing for what I just
itemized. I understand you can't act on anything until we make
it official. But we are going to take a very, very serious look
at this program. And I am going to do everything I can--and I
mean everything--to either stop it or at least change it so
that we provide for the legitimate humanitarian needs of the
Iraqi people, but we do it in a way that is different than is
currently being done. And there are some things that can be
done differently through our food-for-peace program, using the
existing Iraqi assets that are in western banks. There are all
kinds of ways to help the humanitarian needs of the Iraqi
people that don't involve, basically, letting Iraq produce as
much oil as it can and export as much as it can. I mean, that,
to me is a flawed policy; and it is a failed policy, and it is
not in the national security interest of the United States of
America.
Does this panel wish any final comments before we go to the
third panel? Anybody? Well, gentlemen, we want to thank you for
your attendance. There will be additional questions for the
record in addition to the ones that I have itemized; but we do
appreciate it, and this is an important hearing of this
subcommittee; and your input has been very valuable, so you are
excused.
Mr. Hall. And you might tell them that their long tenure at
the table will shorten the tenure of the next panel. You have
done some good for somebody.
Mr. Barton. We would like to call forward our third and
final panel, but not the least important. Mr. Adam Sieminski, a
principal and senior oil analyst from Baltimore, Maryland; we
have Mr. Tom Taylor, who is the regional Vice President for the
Texas Independent Producers and Royalty Owners Association; we
have Mr. F.W. Pete Brown, co-owner of the Cimarron Production
Company in Oklahoma; and Mr. David Bole, who is in corporate
research and development, Randall and Dewey, Incorporated, in
Houston, Texas; and I believe we have Mr. Scott Anderson, who
is the executive director of TIPRO who wishes to appear at the
table with the TIPRO witness.
Mr. Anderson. I will just sit right behind him.
Mr. Barton. Gentlemen, your statements are in the record.
We want to thank you for getting your testimony in on time. It
is good to know the private sector pays more attention than
some of our public officials. We are going to start with Mr.
Sieminski. How close am I?
Mr. Sieminski. That was very good, Mr. Barton. Thank you
very much.
Mr. Barton. We will give each of you 5 minutes and then we
will have questions. Starting with you, sir.
STATEMENTS OF ADAM E. SIEMINSKI, PRINCIPAL AND SENIOR OIL
ANALYST, BT ALEX BROWN; TOM TAYLOR, REGIONAL VICE PRESIDENT,
TEXAS INDEPENDENT PRODUCERS AND ROYALTY OWNERS ASSOCIATION;
F.W. ``PETE'' BROWN, CO-OWNER, CIMARRON PRODUCTION COMPANY;
DAVID L. BOLE, CORPORATE RESEARCH AND DEVELOPMENT, RANDALL AND
DEWEY, INC.
Mr. Sieminski. Thank you, Mr. Barton. I appreciate the
opportunity to come in and provide a statement on some of the
factual aspects associated with the Iraqi exports.
Let me first try to answer a question that you just asked,
sir. What does $300 million worth of spare parts and equipment
do for production? Let me just take a quick crack at that.
U.N. personnel experts who were sent to Iraq said that
production would fall somewhere between 4 to 8 percent a year
if they did not get $300 million in spare parts. So if we just
said 5 percent or 6 percent, that would be somewhere between
125,000 barrels a day, up to 150,000 barrels a day that,
presumably, would be able to stay on line with those funds
coming in.
And so that would--if we are now up to $600 million, I
think we could be talking about this possibility of 250,000
barrels a day of oil that would be available to the Iraqis to
export.
Let me, in light of, I think, that 7-minute rule, let me
make seven quick points. Again, putting the Iraqi oil exports
into perspective, they were the greatest source of OPEC's
difficulty in meeting their own compliance rule. Second point,
exports have gone up quite a bit. We went from about 1.5
million barrels a day in 1998, and that number should hit 2.1
to 2.2 in 1999. That is a little bit less than the growth that
occurred between 1997 and 1998.
The third point I had in my written statement said that
Iraq's exports were the second largest influence in 1998 in
driving oil prices lower. Listening to Mr. Hakes, I might want
to revise that. He said that, I believe, that the incremental
loss of demand in Asia was about a million barrels a day. And
Iraq's exports went up just a little under 900,000. Mr. Hakes
said that in his chart, he had the incremental amount in Asia
was about 850,000. If we took his number, then Iraq was No. 1
in terms of its impact on the market in 1998.
Fourth point. Production capacity in Iraq looks like it is
stuck. Looks like it is stuck at 2.7 million barrels a day.
That means that imports would presumably be capped at somewhere
near 2.1. But the Iraqis have managed to somehow keep
production growing faster than the U.N. technical experts
thought they could. And it was only about a year ago that the
U.N. said that exports would be limited to about 1.6 or 1.7
million barrels a day, and they have gotten well over that
level. So I don't know how that is being accomplished, and that
might be a question that you might want to ask somebody.
Fifth point----
Mr. Barton. Our staff actually had that in the prepared
questions. So it will be asked for the record.
Mr. Sieminski. The fifth point is that while taking the
ceiling off of the $5.265 billion ceiling actually could become
more than just a technical kind of thing very soon. Oil prices
have already gone up quite a bit since the beginning of the
year. Iraq sold oil last week for $12 a barrel. All they need
is another $2 on top of that $12 number that they got last
year, and they will hit their cap. And they will not do this
during this fifth phase, but if you projected that $2 increment
into the next phase which starts May 25, they would actually
collect, if they exported 2.1 million barrels a day, $5.3
billion. And if they can export more than 2.1, that cap could
actually come into effect at a price $2 above current WTI.
Sixth point is kind of, I think, an interesting one and
this is--you are going to have to ask somebody else because I
don't know the answer to this question, but I would love to
know the answer to it. The last two times that Iraq has gone to
war--in late 1979 just before their invasion of Iran and then
in 1990, in the first half of 1990, just before the invasion of
Kuwait--there was a sharp rise in production in Iraq. And we
have seen just recently another sharp rise in production.
And I heard the comment made earlier that oil or funds are
fungible. Even if the sources--with more revenue coming into
Iraq from these exports, that would give Saddam the ability to
use his own internal funds for possible mischief, and I am kind
of wondering what this big increase that we have seen in
production exports just in the past month or so really means.
Final point is one that I really wish that Deputy Secretary
Wood would have made and that is that if Iraq is allowed to
rebuild its facilities--and this would be a lot easier done if
the overall sanctions were moved or if the oil-for-food program
was changed in some way, as there have been recommendations on
the Security Council to allow companies to go in and invest to
help Iraq rebuild its--and repair its equipment and facilities,
I would think that Iraq would be quite capable of getting up to
3.5 million barrels a day of production pretty quickly, and all
of that increment would be available for export.
So I would conclude, Mr. Chairman, with sort of a kind of a
recommendation, which is that one of the key focuses of this
committee and the questions that I think you should pursue with
the State Department is how do we keep direct foreign
investment by other countries into the Iraqi oil industry
limited during the period that sanctions are on and Iraq is
still misbehaving. And I thank you for your time.
[The prepared statement of Adam E. Sieminski follows:]
Prepared Statement of Adam E. Sieminski, Principal and Senior Oil
Analyst, BT Alex. Brown Incorporated
iraq's oil exports and world oil markets
Iraqi exports were a major reason for the drop in oil prices in 1998
The rise in Iraqi production from an average of 1.15 mmb/d in 1997
and 2.11 mmb/d in 1998, to about 2.5 mmb/d currently has been the
greatest source of OPEC's difficulty in meeting quota compliance under
agreements reached in March and June of 1998. Iraq's oil exports, which
rose along with production, were a major contributor to the oil price
weakness of 1998 and early 1999. Two key factors played a role in this
situation. First, the UN's Oil for Food Program sets a monetary (not
oil volume) target for humanitarian relief. If oil prices decline for
any reason, the amount of oil Iraq is allowed to sell under the program
can rise. Low oil prices allowed Iraq to sell more barrels under the
`old' $2 billion per six months plan. Second, in early 1998 the UN
raised the oil-for-food revenue ceiling to $5.265 billion every 180
days.
Iraqi oil exports increased from 0.59 mmb/d in 1997 to 1.47 mmb/d in
1998
During the recent period of low oil prices, the level of exports
from Iraq was limited only by Iraq's wellhead production and pipeline/
terminal capacities. A UN rule requiring at least 50% of exports to
transit via the 1.0 mmb/d capacity Ceyhan (Turkey) route is being
ignored, since all export amounts over that level are now exiting
mainly via the Gulf port of Mina al-Bakr. Exports are currently
averaging about 2.1 mmb/d and have exceeded 2.5 mmb/d for short periods
of time since January 1999.
How the rise in Iraqi exports influenced the oil markets in 1998
There is little doubt that the rise in exports from Iraq, a 0.87
mmb/d increment between 1998 and 1999, had a significant impact on the
oil markets. Of course there were other factors, but in our opinion,
Iraq's exports were the second largest influence pushing oil prices
lower in 1998.
<bullet> The crisis in Asia reduced oil demand by 1.0 mmb/d against
expectations
<bullet> Warm weather dropped demand by 0.5 mmb/d compared to `normal'
<bullet> Russian exports rose contra-seasonally by 0.2 mmb/d in 4Q 1998
<bullet> China curtailed oil imports (by about 0.3 mmb/d) in 2H 1998
<bullet> OPEC's efforts to trim production in 1998 were neither timely
nor sufficient
<bullet> OECD inventories rose some 200-300 mb above industry norms
Production history
Iraq's oil production climbed from about 1.5 mmb/d in 1972 to an
annual peak of 3.5 mmb/d in 1979. In the last quarter of 1979, Iraq
managed to produce 3.7 mmb/d. The Iran-Iraq war, which started in
September 1980, lead to a significant decline in export capacity and
wellhead production. From a low of 1.0 mmb/d production in 1981-83,
Iraq's output climbed back to 3.5 mmb/d just before the invasion of
Kuwait in August 1990. In 1991-92 Iraq produced about 0.4 mmb/d (which
is probably a good estimate of actual internal consumption). More
recently, Iraq's internal use has appeared to be about 0.65 mmb/d, but
this includes UN-approved exports of 0.1 mmb/d of products to Jordan,
and probably reflects some level of smuggling.
The main physical constraint on exports is now wellhead capacity
Production capacity in Iraq appears to be limited to about 2.7 mmb/
d. The UN has been slow to approve imports of the equipment, expertise
and capital required to boost Iraq much beyond this level.
Nevertheless, Iraqi engineers have surprised the UN inspectors with
their ability to keep output climbing. In March 1998 UN technical
experts estimated that Iraq's wellhead production capability was
unlikely to exceed 2.2 mmb/d (mid-1998) or 2.4 mmb/d (start 1999). In
fact, Iraq has managed to exceed these estimates by about 0.2 mmb/d.
Status of oil spare parts and equipment authorizations and repairs
In view of Iraq's inability to take full advantage of the $5.3
billion oil-for-food allowance, in June 1998 the UN authorized Iraq to
purchase up to $300 million in spare parts and equipment to repair its
oil facilities. Later in 1998, an additional $300 million in purchase
authority was granted. To date, UN's Office for the Iraq Programme has
approved 395 contracts worth $237 million. Another $28 million in
contracts is on hold. UN Security Council members (including the US)
have argued that some of the requested equipment is either
inappropriate or has military use potential. Several members of the
Security Council are arguing for more active involvement of outside
companies in the needed repairs and expansion of Iraq's oil
infrastructure.
Near term production difficulties
The Iraqi oil Ministry, UN technical experts and outside
consultants all seem to agree that Iraq is experiencing production
difficulties. According to a UN report, production in the north has
been lost because of water encroachment problems. In the south,
production water problems are coupled with pressure maintenance
difficulties resulting from lack of water injection facilities. Some
experts believe that without a significant increase in investment,
Iraq's basic production capacity could fall by 4-8% per year. Many
believe that the recent rise in production is related to very
aggressive petroleum engineering practices--pushing output beyond
normal levels in order to maximize near-term production and exports.
There have been some reports that domestic use has been officially
constrained as part of this policy.
With higher oil prices, a new volumetric constraint could come into
force
During January and February, Iraq's oil sold for about $9 per
barrel, a $2 discount to Brent, and a $3+ discount to WTI. With Brent
prices now at $14 and WTI at $15, Iraq's exports are likely selling at
close to $12 per barrel. This raises an interesting policy question if
oil prices continue to rise. At a $14/bbl Iraqi sales price, Iraq would
hit the UN's $5.3b ceiling at an export level of 2.1 mmb/d.
This potential limit to oil exports is more of an issue for the
UN's Phase 6 program, which starts May 25, and not for the current
Phase 5, because low prices in December-February make it highly
unlikely that the $5.3b cumulative revenue ceiling would be achieved
during the current Phase. The Clinton administration has proposed
removing the ceiling on oil exports, but still opposes allowing direct
foreign investment in the Iraqi oil industry--which may be necessary to
significantly boost Iraq's production. Studies are underway now at the
UN (with reports due in mid-April) which are intended to review the
status of the oil-for-food program.
Could there be an Iraqi-instigated interruption?
Although the US and Iraq are still at odds over weapons
inspections, and Iraq has experienced some erosion of its support in
the UN Security Council, there have been several new proposals advanced
to alter the sanctions policy. Despite the US proposal to remove the
ceiling, the Iraqi regime does not appear to favor expansion or
indefinite continuation of the oil-for-food program. This suggests that
some interruption in the program could occur when the current Phase 5
expires May 24. Such an interruption does have precedent--in July 1997
and December 1997 the Iraqi regime temporarily halted exports. However,
in those two situations, Iraq's exports were constrained by the earlier
monetary limit (and thus Iraq was able to `make up' its lost production
by physically increasing the level of exports. At this time that option
does not appear to be available to Iraq.
What about longer-term production and export capability?
With investment in both production and pipeline/terminal
facilities, Iraq could probably continue to increase its output and
exports. Repairs to the Kirkuk-Ceyhan pipeline could boost its capacity
from the current 1.0-1.1 mmb/d level to its 1.5 mmb/d pre-Gulf war
level. Iraq has had discussions with Syria about re-opening the 0.65
mmb/d capacity Banias line that was closed in 1982 during the Iran-Iraq
war. The IPSA pipeline through Saudi Arabia to the Red Sea could be
opened if currently unfriendly relations between the two governments
were to improve.
Upstream production could rise significantly with access to outside
capital and expertise
Iraqi official have claimed that 3.0-3.5 mmb/d of production
capacity could be reached fairly quickly once sanctions are removed.
Iraq's NIOC believes that this can be accomplished by a development
effort that includes: re-working and upgrading existing upstream
facilities; attracting foreign investment for new fields; and
establishing an E&P effort in Iraq's Western desert region. In 1997,
former Iraqi oil minister al-Chalabi estimated that Iraq would require
a least $5 billion of foreign capital during the first two or three
years after sanctions to lift production capacity to 3.5 mmb/d. There
does not seem to be any shortage of potential investors as seen in the
material prepared by the Energy Intelligence Group (attached as an
exhibit), although the incremental 2.8 mmb/d of production is estimated
by EIG to cost about $18 billion.
What is the most likely near-term impact on the oil markets?
Downside risk to oil prices: The UN allows more upstream
investment, perhaps due to a change of regime in Iraq, or a further
softening in the US stance. Upside potential: Iraq carries out its
recurring threat to cease cooperation with oil-for-food when it expires
in May, or some form of conflict (with the US or internal) physically
interferes with exports. Most likely outcome: an extension of the
status quo with no monetary ceiling. This implies no interruption in
exports, a likely gradual rise in the overall level of production and
exports, but no large-scale near-term expansion of production.
[GRAPHIC] [TIFF OMITTED] T5644.008
[GRAPHIC] [TIFF OMITTED] T5644.009
[GRAPHIC] [TIFF OMITTED] T5644.010
[GRAPHIC] [TIFF OMITTED] T5644.011
Mr. Barton. Mr. Taylor, we will put your statement in the
record and delighted to hear from you. My understanding is that
you actually are an independent producer. Is that correct?
Mr. Taylor. I am trying to be.
Mr. Barton. Trying to be. That is the right answer. Welcome
to the committee.
STATEMENT OF TOM TAYLOR
Mr. Taylor. I want to thank you for allowing me to be here
to testify, Mr. Chairman.
Yes, I am trying to be an oil producer in West Texas. I
also am the regional vice president for the Texas Independent
Producers and Royalty Owners Association, TIPRO, which I am
representing here today, consists of approximately 1,600
members with petroleum interests in the State of Texas making
us the largest statewide group in our industry.
We are not here to advocate making life even more
unbearable for the Iraqi people. It would be unreasonable, as
well as unrealistic, for Americans whose jobs depend on the
American oil industry to expect our economic problems to be
solved through a ``beggar thy neighbor'' policy. We are having
a humanitarian crisis out in West Texas right now. We are
plugging wells. These wells are not shut in; they are plugging
wells. Because we don't have--we have 2 years in order to not
plug wells. But in all due respect there might have been an
attorney or two here in the room. Landowners who don't get
royalty checks to provide for their food are concerned. They
call their attorneys. They ask them why. The attorneys say
those wells are not producing. We have 90 days in most
situations to produce those wells. In the event we don't
produce those wells, our leases are expired. Then we have 2
years to plug those wells.
By virtue of that, those wells become worthless; and the
school systems, as Commissioner Williams pointed out, are
losing a tremendous amount of money. Up to 40 percent of our
revenues to run our school systems in West Texas are being lost
because of this.
Our knowledge is limited about the Iraqi situation, but we
know that anyone who thinks the world oil market is a free
market is kidding themselves. War, threat of war, political
instability, sanctions, government fiats--these are not exactly
what one thinks of when one thinks of a willing buyer and
willing seller with each other in a properly functioning
marketplace. We know that Mr. Wood and the U.S. policymakers
like to tell themselves that our Iraq policy is neutral in
terms of effect on oil prices, but they are kidding themselves
once again. The sanctions policy, in particular the oil-for-
food program, represents significant government intervention
into the world oil market and, as presently structured, has a
depressing effect on prices.
Finally, we know that low oil prices are bad for any
program that depends on revenues for oil, whether the program
is a small drilling venture in West Texas, a major development
such as that down in the Caspian Sea, or the oil-for-food
program in Iraq. If policymakers want to increase the amount of
oil revenues available to each of the suffering people in Iraq,
the policy focus should be shifted from increasing production
to increasing price in order to reach whatever revenue target
they may be seeking.
I will elaborate briefly. As has been discussed here,
certainly world events other than the Iraq situation have an
impact on this. As we discussed, the Asian energy demand,
increasing oil production from OPEC, and recent warm winters
have all contributed to the current crisis. But increased Iraq
production must also be recognized as a material influence on
the price. As you have stated, in our records 1.3 million
barrels of exports is a direct reflection of this. You have
Saudi Arabia that is decreasing by 2 million barrels; and,
therefore, they are basically subsidizing the production from
Iraq. And as we discussed, there has been a 20 percent rise
just off of this speculation.
Now, before a reporter would take that and inflate that,
oil prices are back up. They have increased 20 percent from an
all-time low, which still causes an uneconomic situation as a
producer. The surplus capacity dictates that producers reduce
supply, yet our government is encouraging the United Nations to
allow Iraq, a distressed seller if there ever was one, to
increase supply.
Basically, we are going to be the next 2 million barrels is
what we are afraid of as independent producers. We have lost
almost 250,000 barrels in Texas alone. I think we have lost, as
we stated earlier, 600,000 barrels in the United States as
independent producers, and we don't have the luxury of turning
those wells back on like they do over there.
The effect of low oil prices in the U.S. has been
staggering, as we discussed. The charts prepared by the
Independent Petroleum Association is included as an appendices
to my testimony, and this will illustrate all too well. It
shows the workover rigs, not the drilling rigs, but the
workover rigs, which is a key indicator of the industry's
efforts to maintain production, has declined almost 50 percent.
So we are not even able to be able to work over these wells,
because their economics, it doesn't justify the expenditure.
Appendix 2 shows that oil and gas extraction employment has
fallen by over 50,000 jobs. In Texas I might also add
unemployment claims in my industry quadrupled in 1998 and in
1999 it is even worse. Low oil prices are troublesome for the
Oil-For-Food Program, and Appendix 3 outlines the difference in
price and pro-
duction scenarios facing this program. At current prices, Iraq
will raise over $3 billion during phase 5. So far, it is far
short of the $5 billion target. The table also shows that at
current price average, Iraq will need to export 3 million
barrels at the current price to raise $5 billion. The
Department of Energy Secretary Bill Richardson testified last
week that Iraq appears unable to increase production to this
level. So it appears Iraq will not raise $5 billion--the $5.2
billion target price for the foreseeable future. Put simply,
the Oil-For-Food Program simply does not work in a world of $10
oil.
I will conclude with two suggestions for policymakers, and
it should be noted that it is important that these suggestions
be pursued in concert. First, we suggest that the U.S. press
the United Nations to restructure the Oil-For-Food Program so
that it no longer gives Iraq an incentive to depress world oil
prices. We submit that production increases measured in
hundreds of thousands of barrels per day would cause prices to
fall further, and the Oil-For-Food Program would still come up
short. Put simply, humanitarian needs in Iraq will not be met
in a world of $10 oil.
We believe that the way to restructure the Oil-For-Food
Program so that it no longer serves to depress oil prices is
for the United Nations to establish an oil quota for Iraq. The
quota would be equal to the number of barrels per day that can
be reasonably expected to yield the revenues that are believed
necessary. The production quota could be adjusted every 80 days
as revenue targets and oil price forecasts change. A potential
quota table is attached as Appendix 4. As you can see, a slight
increase in the dollar amount makes a significant difference.
This proposal may have some flaws and I present it only as
a potential option. However, by maintaining Iraq's production
at a level that bears some relation to market demand, we can
eliminate the downward pressure Iraq's increased production has
on price.
In summary, if the United Nations wants to increase the
amount of oil revenue available to ease the suffering of the
Iraq population, the policy focus should be shifted from
increasing production to increasing price. What we are saying
is give price a chance.
Our second suggestion is to couple the restructuring of the
Oil-For-Food Program with meaningful efforts to stabilize the
price of oil at levels that reflect its hidden environmental
and military cost. The United States can help achieve this
through variable import fees such as fees on tankers that move
oil in environmentally sensitive coastal waters, fees
designated to recoup some of our Nation's enormous military
cost devoted to protecting Middle East oil supplies and/or fees
that offset the advantage that imported oil currently enjoys
over domestic production due to minimal environmental
regulations of foreign production practices.
I close in saying that I would be honored to assist Mr.
Woods in explaining to the State Department the effect this has
on the small independent producer. I would like to take this
opportunity to thank you again, and we would be more than happy
to answer any questions.
[The prepared statement of Tom Taylor follows:]
Prepared Statement of Tom Taylor, Regional Vice President, Texas
Independent Producer and Royalty Owners Association
Mr. Chairman and Members, my name is Tom Taylor from Abilene,
Texas. I am an oil producer and serve as a Regional Vice President for
the Texas Independent Producers and Royalty Owners Association (TIPRO).
TIPRO, which I am representing here today, consists of 1600 members
with petroleum interests in the State of Texas, making us the largest
statewide group in our industry.
We come to you today with a sense of humility. My association has
no magic solution to the difficulties in Iraq, and I am not a foreign
policy expert. It is tempting to say that the experts don't have the
answers either, but we are not here to make a wholesale indictment of
Iraq policy.
Neither are we here to advocate making life even more unbearable
for the Iraqi people. It would be unreasonable, as well as unrealistic,
for Americans whose jobs depend on the domestic oil and gas industry to
expect our economic problems to be solved through a ``beggar thy
neighbor'' policy. In other words, and we want to be quite clear about
this, Texas oil producers are not here to ask for elimination of the
oil-for-food program or even to suggest that Iraqi oil production
levels should return to those that prevailed a year or two ago.
While our knowledge about Iraq is limited, we do know a few things:
<bullet> We know that anyone who thinks the world oil market is a free
market is kidding themselves. War and threat of war, political
instability and intrigue, sanctions and governmental fiats--
these are not exactly what one thinks of when one thinks of
willing buyers and willing sellers dealing with each other in a
properly functioning marketplace.
<bullet> We know that U.S. policymakers like to tell themselves that
our Iraq policy is neutral in terms of effects on oil prices,
but they are kidding themselves once again. The sanctions
policy, in particular the oil-for-food program, represents
significant government intervention in the world oil market
and, as presently structured, has a depressing effect on
prices.
<bullet> Finally, we know that low oil prices are bad for any program
that depends on oil revenues, whether the program is a small
drilling venture in West Texas, a major development such as
that found in the Caspian Sea, or the oil-for-food program in
Iraq. If policymakers want to increase the amount of oil
revenue available to ease the suffering of the Iraqi people,
the policy focus should be shifted from increasing production
to increasing price in order to reach whatever the revenue
target may be.
I want to elaborate on the two latter points, that is, how the
present design of the oil-for-food program depresses prices and how
higher oil prices would further both the Iraq program and domestic
energy production.
(1) The oil-for-food program, as presently structured, depresses world
oil prices.
Certainly, world events other than what is taking place in Iraq
have had an impact on oil prices. Reduced Asian energy demand,
increased OPEC production and recent warm winters have all contributed
to the current price crisis. But, increased Iraqi production must also
be recognized as a material influence on prices. Iraq has added at
least 1.3 million barrels per day to the market since 1997--1.3 million
barrels of new supply compared to a global surplus of approximately one
to two million barrels per day.
What kind of impact has this had? A big impact. To put the impact
of 1.3 million barrels in perspective, note that oil prices in recent
weeks have risen over 20 percent merely upon OPEC's declaration that it
will reduce production by a total of about 2 million barrels. Surplus
capacity dictates that producers reduce supply. Yet our government is
encouraging the United Nations to allow Iraq, a distressed seller if
ever there was one, to increase supply.
The sanctions policy, if it is enforced as intended, gives Saddam
only one way to raise meaningful revenue--taking whatever is available
to him under the oil-for-food program. Since the program is structured
only in terms of revenue limits, with no limits on the amount of Iraqi
production, Saddam's incentive is to produce whatever it takes to
generate permitted revenue. And if the limits on the revenues were
simply removed, his incentive would be to produce even more, without
regard to the glut in the marketplace that motivates producers who are
under less duress to curtail production.
(2) Low oil prices are bad for both U.S. producers and the oil-for-food
program.
The effect of low oil prices in the U.S. has been staggering. Two
charts prepared by the Independent Petroleum Association of America
(IPAA), included as appendices to my testimony, illustrate this all too
well. Appendix One shows that the workover rig count, a key indicator
of the industry's efforts to maintain production, has declined
dramatically; from 1,459 in December 1997 to 766 in January 1999.
Appendix Two shows that oil and gas extraction employment has also
fallen from 339,000 employees in December 1997 to 288,000 in February
1999. In Texas, I might add, unemployment claims from my industry
quadrupled in 1998 and 1999 is even worse.
Low oil prices are also troublesome for the oil-for-food program.
Appendix Three outlines different price and production scenarios facing
the program. According to the United Nations, since the beginning of
Phase V (which runs from November 26, 1998 to May 24, 1999) Iraq has so
far exported an average of 1.9 million barrels per day at $9.31 a
barrel. At this price, Iraq will raise $3.18 billion during Phase V--
far short of the $5.26 billion target. The table also shows that at the
current average price, Iraq will need to export 3.1 million barrels of
oil per day to raise $5.2 billion. Department of Energy Secretary Bill
Richardson testified last week that Iraq appears unable to increase
production to this level, so it appears Iraq will not raise the $5.26
billion target for the foreseeable future. The oil-for-food program
simply does not work in a world of $10 oil.
recomnendations and conclusion
I will conclude with two suggestions for policymakers, and it
should be noted that it is important that these suggestions be pursued
in concert.
(1) Restructure the Oil-for-Food Program so it does not depress world
oil prices.
First, we suggest that the U.S. press the United Nations to
restructure the oil-for-food program so that it no longer gives Iraq an
incentive to depress world oil prices. TIPRO is concerned that to
simply lift the ceiling on oil sales, as the Administration has
recently proposed to the United Nations Security Council, would depress
oil prices further. In a world of $10 oil, Iraq would need to produce
almost 3 million barrels per day--which is almost half a million
barrels per day more than it produces currently--to generate $5.26
billion every 180 days, as the current ceiling allows. Given that a
world oil surplus of perhaps 2 million barrels a day (half of which can
be attributed to increased production by Iraq) yields oil prices that
are only slightly above historic lows, what will happen if Iraq
increases production by a half million barrels per day in the next
year?
We submit that production increases measured in hundreds of
thousands of barrels per day would cause prices to fall further, and
the oil-for-food program would still come up short. Put simply,
humanitarian needs in Iraq will not be met in a world of $10 oil.
We believe that the way to restructure the oil-for-food program so
that it no longer serves to depress oil prices is for the United
Nations to establish an oil quota for Iraq. The quota would be equal to
the number of barrels per day that can be reasonably expected to yield
the revenues that are believed necessary.
The production quota could be adjusted every 180 days as revenue
targets and oil price forecasts change. A potential quota table is
attached as Appendix Four. For example, if the forecast is that Iraq
will receive an average of $12 per barrel during the next United
Nations reporting period, and $5.25 billion is the target revenue for
the period, the quota would only need to be 2.43 million barrels per
day. If the United Nations determines that more revenue is needed, $6
billion for example, the quota for the period would be 2.78 million
barrels per day. If the price of Iraqi crude should rise to $16 per
barrel, a 2.43 million barrels per day quota would provide $7 billion
of revenue in 180 days, should the United Nations want to provide that
much revenue to the program.
This proposal may have some flaws, and I present it only as a
potential option. However, by maintaining Iraq's production at a level
that bears some relation to market demand, we can eliminate the
downward pressure Iraqi increased production has on price.
In summary, if the United Nations wants to increase the amount of
oil revenue available to ease the suffering of the Iraqi population,
the policy focus should be shifted from increasing production, to
increasing price, in order to reach the revenue target.
(2) Seek to stabilize oil prices at reasonable levels.
Our second suggestion is to couple the restructuring of the oil-
for-food program with meaningful efforts to stabilize the price of oil
at levels that reflect its hidden environmental and military costs. The
United States can help achieve this through variable import fees, such
as fees on tankers that move oil in environmentally sensitive coastal
waters, fees designed to recoup some of our nation's enormous military
costs devoted to protecting Middle Eastern oil supplies, and/or fees
that offset the advantage that imported oil currently enjoys over
domestic production due to minimal environmental regulation of foreign
production practices.
I appreciate the opportunity to be with you today and would be
happy to try to answer any questions.
[GRAPHIC] [TIFF OMITTED] T5644.012
[GRAPHIC] [TIFF OMITTED] T5644.013
Appendix Three
Price and Production Scenarios Under Oil-for-Food
Total Revenues Derived from Iraqi Oil Sales
(Billions of Dollars Every 180 Days)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Dollars per barrel
MMB/D -----------------------------------------------------------------------------------------------
9.31 10 11 12 13 14 15 16 17 18 19 20
--------------------------------------------------------------------------------------------------------------------------------------------------------
5.0..................................................... 8.38 9.00 9.90 10.80 11.70 12.60 13.50 14.40 15.30 16.20 17.10 18.00
4.5..................................................... 7.54 8.10 8.91 9.72 10.53 11.34 12.15 12.96 13.77 14.58 15.39 16.20
4.0..................................................... 6.70 7.20 7.92 8.64 9.36 10.08 10.80 11.52 12.24 12.96 13.68 14.40
3.5..................................................... 5.87 6.30 6.93 7.56 8.19 8.82 9.45 10.08 10.71 11.34 11.97 12.60
3.1..................................................... \1\ 5. 5.63 6.20 6.76 7.32 7.89 8.45 9.01 9.58 10.14 10.70 11.27
25
2.5..................................................... 4.19 4.50 4.95 5.40 5.85 6.30 6.75 7.20 7.65 8.10 8.55 9.00
2.0..................................................... 3.35 3.60 3.96 4.32 4.68 5.04 5.40 5.76 6.12 6.48 6.84 7.20
1.9..................................................... \2\ 3. 3.42 3.76 4.10 4.45 4.79 5.13 5.47 5.81 6.16 6.50 6.84
18
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ According to the United Nations Office of the Iraq Programme Weekly Update for 13 to 19 March, since the beginning of Phase V, which runs from
November 26, 1998 to May 24, 1999, Iraq has exported an average of 1.9 mb/d at $9.31 a barrel. At this rate Iraq will raise $3.18 billion during Phase
V.
\2\ At the current average price, Iraq will need to export 3.13 million barrels of oil per day to raise 5.25 billion.
Appendix Four
Potential Iraq Production Quotas
(Million Barrels Per Day)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Dollars per barrel
Total Revenue ($billion per 180 days) -----------------------------------------------------------------------------------------------
9.31 10 11 12 13 14 15 16 17 18 19 20
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.25.................................................... 1.94 1.81 1.64 1.50 1.39 1.29 1.20 1.13 1.06 1.00 0.95 0.90
3.50.................................................... 2.09 1.94 1.77 1.62 1.50 1.39 1.30 1.22 1.14 1.08 1.02 0.97
3.75.................................................... 2.24 2.08 1.89 1.74 1.60 1.49 1.39 1.30 1.23 1.16 1.10 1.04
4.00.................................................... 2.39 2.22 2.02 1.85 1.71 1.59 1.48 1.39 1.31 1.23 1.17 1.11
4.25.................................................... 2.54 2.36 2.15 1.97 1.82 1.69 1.57 1.48 1.39 1.31 1.24 1.18
4.50.................................................... 2.69 2.50 2.27 2.08 1.92 1.79 1.67 1.56 1.47 1.39 1.32 1.25
4.75.................................................... 2.83 2.64 2.40 2.20 2.03 1.88 1.76 1.65 1.55 1.47 1.39 1.32
5.00.................................................... 2.98 2.78 2.53 2.31 2.14 1.98 1.85 1.74 1.63 1.54 1.46 1.39
5.25.................................................... 3.13 2.92 2.65 2.43 2.24 2.08 1.94 1.82 1.72 1.62 1.54 1.46
5.50.................................................... 3.28 3.06 2.78 2.55 2.35 2.18 2.04 1.91 1.80 1.70 1.61 1.53
5.75.................................................... 3.43 3.19 2.90 2.66 2.46 2.28 2.13 2.00 1.88 1.77 1.68 1.60
6.00.................................................... 3.58 3.33 3.03 2.78 2.56 2.38 2.22 2.08 1.96 1.85 1.75 1.67
6.25.................................................... 3.73 3.47 3.16 2.89 2.67 2.48 2.31 2.17 2.04 1.93 1.83 1.74
6.50.................................................... 3.88 3.61 3.28 3.01 2.78 2.58 2.41 2.26 2.12 2.01 1.90 1.81
--------------------------------------------------------------------------------------------------------------------------------------------------------
This chart reflects the number of barrels that Iraq would need to produce per day to reach a 180 day revenue target at a given price. As the price of
oil price or revenue target changes, the amount of oil Iraq would be allowed to produce in subsequent phases would change accordingly.
Mr. Barton. We want to thank you, Mr. Taylor, for your
testimony, and the appendices especially will be used as we
pursue this. Our friends in the State Department I don't think
have enough personnel to do some of the basic math that you
have done.
Mr. Taylor. Thank you, sir.
Mr. Barton. We appreciate that.
Mr. Brown, we appreciate you being here on behalf of
Congressman Largent. He recommended that you be asked to
testify and we appreciate you coming up. We will put your
statement in the record, and give you such time as you may
consume to elaborate on it. But try to do it within 5 to 7
minutes.
STATEMENT OF F.W. ``PETE'' BROWN
Mr. Brown. Thank you, Mr. Chairman. Mr. Chairman and
Representative Hall and members of the audience, I believe
myself to be a very typical independent oil and gas producer,
not only in Oklahoma, but throughout the entire Nation.
In 1998, 32 percent of the wells in which I own an interest
lost money due to low oil prices. In the month of December
alone, that same year, 57 percent of my wells were losing money
for the same reason. I accepted these losses in the hopes that
oil prices would rebound.
In the past 17 months, the price of oil has plummeted to
levels far below the lifting cost of independent producers
throughout the United States. To understand the reason for this
drop, we first must understand why exporting countries until
recently have not taken the initiative to curtail production.
First of all, it needs to be noted the world's so-called
oversupply of crude oil is based on the ability of a country to
produce oil versus worldwide consumption. In order to maintain
stability in the marketplace, those of us who import oil, like
the United States, should also want supply to exceed demand.
Excess production capacity is not actually produced. Aside from
above ground storage, there is very little ability to store
large quantities of oil once it is produced. Saudi Arabia, for
example, is estimated to have the capability of producing up to
10 million barrels of oil per day, and yet it actually produces
just a little over 8 million barrels of oil per day. This can
be misleading in that the ability to produce oil in the field
does not necessarily mean that it can be transported to
terminals and loaded into tankers at the same rate.
Actually, no one really knows how much surplus production
capacity exists in the world today. Some believe the world's
ability to produce oil exceeds demand by about 3.5 million
barrels a day, but that compares to estimates of 10 million
barrels a day of surplus capacity in 1981, the year in which
the price of oil reached $38 a barrel. Today we are actually
closer than ever before to a point where demand will exceed the
world's ability to produce. Part of the reason for this
reduction in surplus production capacity is increased demand,
but part of the reason is reduction of production.
Why, then, is the price of crude at such low levels? The
price of crude first started to drop when the Saudis began to
lose market share as a result of Venezuelan production.
Venezuela began increasing exports about the same time that
crude oil prices began their downward spiral. As production
increased in Venezuela, it began to capture market share from
Saudi Arabia. The Saudis had two choices. They could curtail
production even further, causing the price to rise, or they
could keep production levels the same, allowing the price to
drop below Venezuela's cost of production, which was
significantly higher than the Saudis.
This strategy discourages drilling in areas that have
associated high cost of drilling such as the North Sea,
Siberia, deep offshore drilling, the Caspian Sea, which is an
area estimated to contain reserves equivalent to the Persian
Gulf, and of course U.S. domestic onshore production. In
addition, it has had the side benefit to the Saudis, that is,
of shutting down much of the stripper production in the United
States. It is not the intention of the Saudis to maintain the
low prices; rather, they want to create market volatility,
which has the affect of discouraging high drilling in high-cost
regions.
Saudi Arabia, like many Middle Eastern countries, has
social costs associated with their crude production. Crude oil
funds social programs set up for the Saudi citizens such as
free medical care, no taxes, low-cost housing and many more
programs that once established cannot be easily discontinued.
In recent months, OPEC has dropped production levels that would
ordinarily be sufficient to bolster the price of crude oil to
1997 levels. This has failed to produce the desired results for
very important reasons. Iraq has been allowed to produce
additional volumes of oil to offset the drop in production,
even while men and women of our armed forces are in a shooting
war with Iraq. Allowing Iraq to produce this oil has had a
devastating effect on U.S. independent producers and threatens
to drop U.S. crude production as much as 1 to 2 million barrels
per day. The 4-week average of domestic crude oil production is
already down 416,000 barrels a day from 1 year ago, according
to figures published in the Oil and Gas Journal.
It is argued that it is necessary to allow the Iraqi
government to increase production so that they can have
sufficient revenue to feed their people. Yet, grain and food
purchased with these funds sits in warehouses undistributed. We
also might want to consider the fact that the Iraqi government
has never provided their citizens with free food, and probably
has no intention of doing so now.
By allowing the sale of crude oil for humanitarian reasons,
we have, in effect, taken the pressure off the Iraqi government
to provide for its own people. In doing so, we provide them the
means by which they can fund their continued production of
biological and chemical weapons. At the same time, we eliminate
a valuable natural resource in this country which will
ultimately give countries with surplus oil production such as
Iraq an enormous amount of power in the not too distant future.
If, in fact, we feel it necessary to reward Iraqi's
noncompliance for humanitarian reasons by allowing
overproduction of crude oil, steps should and must be taken to
protect our domestic producers.
The paramount tragedy here is allowing a viable, important
industry to be systematically dismantled, causing the loss of
thousands of jobs, as well as causing economic depression in
oil producing States. All the while, our government continues
to subsidize foreign governments and ignores its own domestic
oil and gas producers. By spending billions of dollars to
ensure the free flow of oil out of the Persian Gulf, my
government and yours, in effect, is subsidizing my foreign
competition.
Those of us in the oil and gas industry believe in a free
market economy. World crude oil production is far from a free
market. When foreign governments control the flow of oil, our
own government has not only the right, but the obligation to
protect its domestic industry. This can be accomplished by
allowing the defense equalization fee to be charged on crude
oil from the Middle East. Revenues from such a fee could be
used to offset the cost of subsidizing their production and
maintaining a military presence in the Persian Gulf.
Another disadvantage we face as domestic producers is our
environmental costs. The crude oil purchased from foreign
countries is subject to barely a fraction of our environmental
regulations protections and the associated environmental costs
in terms of dollars. Thus, an environmental equalization fee
would be appropriate to level the playing field for domestic
oil and gas producers. This fee should be put in place
regardless of price, as long as America continues to allow
foreign governments to have a competitive advantage.
At normal prices, the wells in which I own an interest that
are daily losing money still have thousands of barrels of
recoverable oil. But as anyone, I can only lose money for so
long. My wells that are losing money must now be plugged and
abandoned. I have no choice. Once these wells are plugged, they
will never be brought back on, as the remaining reserves would
not justify the additional substantial investment required to
do so.
If Congress fails to act, the United States of America
stands to lose a substantial portion of a precious national
asset, as well as turning over an even greater share of our
future energy requirements to foreign governments that don't
have America's best interests at heart.
Mr. Chairman, members of the subcommittee, we citizens of
the United States face a crisis that will have far-reaching
consequences if left unabated. I urge each of you on behalf of
our domestic oil and gas industry and our country to take
action to curb production from Iraq. The energy future of
America now and for generations to come is in your hands. It
has been my honor to address you and I thank you for the
opportunity to be heard on this issue, and I would be glad to
answer any questions.
[The prepared statement of F.W. ``Pete'' Brown follows:]
Prepared Statement of F.W. ``Pete'' Brown, Independent Oil and Gas
Producer
Mr. Chairman, members of the subcommittee and distinguished guests,
thank you for the opportunity to provide testimony on this vital issue.
I come before you, as a very typical and average independent oil & gas
producer, not only in Oklahoma but throughout the entire nation. In
1998 32% of the wells from which I receive production lost money due to
low crude oil prices. By the month of December in 1998, 57% of my wells
were losing money. I have continued to accept these losses in the hope
that crude oil prices would rebound.
In the past 17 months, the price of domestic crude oil has
plummeted to levels far below the average lifting cost for the majority
of independent producers in the United States. To understand the reason
for this drop, one must first understand why the oil exporting
countries have not taken the initiative to curtail production.
First of all it should be noted that the world's ``so-called
oversupply'' of crude oil is based on the ability of countries to
produce oil versus worldwide consumption. In order to maintain
stability in the market place, those of us who rely on imports should
always want supply to exceed demand. Excess production capacity is not
actually produced. Aside from above ground storage (782,955,000 bbls
crude and refined product or roughly a 42 day supply according to the
Oil & Gas Journal dated March 22, 1999), there is very little ability
to store large quantities of oil once it is produced. Saudi Arabia, for
example, is estimated to have the capability of producing up to 10
million barrels of oil per day and yet they actually produce a little
over 8 million barrels per day. This can be misleading in that the
ability to produce oil in the field does not necessarily mean that it
can be transported to terminals and loaded into tankers at the same
rate.
Actually, no one really knows how much surplus production capacity
exists in the world today. Some believe the world's ability to produce
& market oil exceeds demand by about 3.5 million barrels per day
compared to estimates of 10 million barrels per day of surplus
production capability in 1981, a year in which crude oil prices reached
$38.00 per barrel. Today we are actually coming closer to the point
where demand will exceed the world's ability to produce. Part of the
reason for this reduction in surplus production capacity is increased
demand.
Why then is the price of crude at such low levels? The price of
crude first started to drop when the Saudis began to lose market share
as a result of an increase in Venezuelan production. Venezuela began
increasing exports about the time that crude oil prices began their
downward spiral. As production increased in Venezuela, it began to
capture market share from Saudi Arabia. The Saudis had two choices;
they could curtail production even further, causing the price to rise,
or they could keep production levels the same, allowing the price to
drop below Venezuela's cost of production, which was significantly
higher than the Saudi's. This strategy discourages drilling in areas
that have associated high costs such as the North Sea, Siberia, the
Caspian Sea (an area estimated to contain reserves equivalent to the
Persian Gulf), deep offshore and U.S. domestic onshore. In addition, it
has the side benefit (to the Saudis) of shutting down much of the
stripper production in the U.S.
It is not the intention of the Saudis to maintain such low prices,
rather they want to create market volatility, which has the effect of
discouraging drilling in high cost regions. Saudi Arabia, like many
Middle East countries, has ``social'' cost associated with their crude
oil production. Crude oil funds these social programs, set up for Saudi
citizens, such as free medical care, no taxes, low cost housing and
many more programs that, once established, can not be easily
discontinued.
In recent months, OPEC has dropped production to levels that would
ordinarily be sufficient to bolster the price of crude oil to 1997
levels. This has failed to produce the desired results for one very
important reason. Iraq has been allowed to produce additional volumes
of oil to offset the drop in prices, even while men and women of our
Armed Forces are engaged in a shooting war with Iraq. Allowing Iraq to
produce this oil has had a devastating effect on U.S. independent
producers and threatens to drop U.S. crude production as much as 1 to 2
million barrels per day. The four-week average of domestic crude oil
production is already down 416,000 barrels per day from one year ago
according to figures published in the Oil & Gas Journal dated March 22,
1999. It is argued that it is necessary to allow the Iraqi government
to increase production so that they can have sufficient revenue to feed
their people. Yet grain purchased with these funds sits in warehouses
undistributed. We might want to consider the fact that the Iraqi
government has never provided its citizens with free food, and probably
has no intention of doing so now. By allowing the sale of crude oil for
humanitarian reasons, we in effect have taken the pressure off the
Iraqi government to provide for its own people. In doing so we provide
them the means by which they can fund their continued production of
biological and chemical weapons.
At the same time we eliminate a valuable natural resource in this
country which will ultimately give countries with surplus oil
production, such as Iraq, an enormous amount of power in the not too
distant future. If in fact we feel it necessary to reward Iraqs non-
compliance, for humanitarian reasons, by allowing overproduction of
crude oil, steps should and must be taken to protect our own domestic
producers.
The paramount tragedy here is allowing a viable and important
industry to be systematically dismantled causing the loss of thousands
of jobs, as well as causing an economic depression in oil producing
states. All the while our Government continues to subsidize foreign
governments and ignores its own domestic oil and gas producers. By
spending billions of dollars to insure the free flow of oil from the
Persian Gulf my government and yours, in effect, is subsidizing my
foreign competition. Those of us in the oil and gas industry believe in
a free market economy. World crude oil production is far from a free
market. When foreign governments control the flow of oil, our own
government has not only the right, but also the obligation, to protect
its domestic industry. This can be accomplished by allowing a defense
equalization fee to be charged on crude oil from the Middle East.
Revenues from such a fee would be used to offset the cost of
subsidizing their production by maintaining a military presence in the
Persian Gulf.
Another disadvantage we face as domestic producers is our
environmental cost. The crude oil we purchase from foreign countries is
subject to barely a fraction of our environmental regulations and
protections, and the associated environmental cost in terms of dollars.
Thus an environmental equalization fee would be appropriate to level
the playing field for domestic producers. This fee should be put in
place, regardless of price, as long as America continues to allow
foreign governments have a competitive advantage.
At normal prices the wells in which I own an interest, and that are
losing money today, still have thousands of barrels of recoverable oil.
But I, as anyone, can only lose money for so long. My wells that are
losing money must now be plugged and abandoned. I have no choice. Once
these wells are plugged they can never be brought back on production,
as the remaining reserves would not justify the substantial investment
required to do so. If Congress fails to act, the United States of
America stands to lose a substantial portion of a precious national
asset as well as turning over an even greater share of our future
energy requirements to foreign governments that don't have America's
best interest at heart.
Mr. Chairman and members of the sub-committee, we, as citizens of
the United States, face a crisis that will have far reaching
consequences if left unabated. I urge each of you, on behalf of our
domestic oil and gas industry and your country, to take action to curb
excess production from Iraq. The Energy future of America, now and for
generations to come, is in your hands.
It has been my honor to address you and I thank you for the
opportunity to be heard on this issue.
Mr. Barton. Thank you. We want to hear from Mr. Bole. Mr.
Hall has a plane at 1:45, so Ralph, do you want to ask a
question?
Mr. Hall. May I say something here? I am the loser by not
getting to stay here and talk to you for another hour, because
this is the group I would listen to more than all the others
put together, because you are my folks, and your testimony
means more to me than any that I have heard or will hear. I
think you can gather from the things that the chairman has said
and I have said--by the way, you are not just talking to the
two of us. This goes into the record and it is read by
certainly the committees and by the members. So I thank you for
your time. I will have some questions. I have questions built
around whether or not the State Department has consulted with
any of you or the domestic industry on this food program, and
you know, I am pretty sure they haven't listened to you, but I
would like to know if they have even made any effort, and that
will be part of my questions. But I do have to be on a plane in
34 minutes and I have to clear off my desk and put the fire out
and call the dogs and get out.
Mr. Barton. Actually, he is leaving a little early. I have
seen Ralph make it in less than 10 minutes.
Mr. Hall. Well, they close the door on you now. But I thank
you very much. And Joe, thank you for holding the hearing.
Mr. Barton. We appreciate you, Congressman Hall.
Congressman Hall has agreed to sign some of the letters that I
just talked to the Deputy Assistant Secretary of State about,
so we are going to be working on this in a bipartisan way.
Mr. Bole, we are delighted to have you up from Houston. We
will put your testimony in the record again in its entirety and
give you 5 to 7 minutes to elaborate on it.
STATEMENT OF DAVID L. BOLE
Mr. Bole. Thank you, Mr. Chairman, and also my thanks to
Mr. Hall. My name is David Bole. I am Vice President of
Corporate Research and Development for Randall and Dewey, Inc.,
a Houston-based company that facilitates transactions in the
upstream part of the petroleum industry for all segments of the
industry, major companies, large and small interests, both
public and private. In this business we have seen the
disruptive effects of the current price crisis not only on the
stability of this critical portion of the industry, but in the
direct loss of producers' equity value. Today, I am
representing the Independent Petroleum Association of America.
IPAA submits that the current problems facing domestic
producers are related in large part to the abuse of the U.N.
Oil-For-Food sanctions program by Saddam Hussein.
The industry has faced low oil prices for more than a year,
beginning with a combination of events: the collapse of Asian
economies, which we have heard a lot about this morning, a
warmer than normal winter in the Northern Hemisphere, and
OPEC's decision to increase production quotas. However, as 1998
progressed, key OPEC countries and other significant non-OPEC
countries curtailed production to try to diminish surplus
inventories around the world and stabilize oil prices at levels
that permit profitable operation. As other countries cut
production, the U.N. sanctions program created an opportunity
for Iraq's leaders to influence the price of oil in ways that
no one would have expected. The U.N. sanctions structure was
changed in two significant ways in early 1998. First, the Oil-
For-Food Program has always been based on a dollar amount
rather than a volume allowance, and we have heard a lot about
that this morning. The dollar amount has increased to $5.3
billion per 6 months, which we have talked about, an amount at
current prices that effectively allows Iraq to pump unlimited
volumes.
Second, the $400 million every 6 months allocated to
improve Iraq's oil production capacity allows them to increase
their production. Thus, as other countries were making economic
decisions to reduce production as prices fell, Iraq was given a
perverse incentive to increase production.
At the beginning of 1998, Iraq was exporting approximately
700,000 barrels of oil per day. By the beginning of 1999, it
was exporting as much as 2.5 million barrels per day. In 1998,
Iraq was the only country to increase its oil production. This
more than threefold increase, coupled with OPEC's decision to
curtail production, has allowed Iraq to become the world's
swing producer. That is, the producer that sells the last
barrels into the market and thereby defines the price for the
entire market.
Let me explain what allows Iraq to become the swing
producer. Currently, many industry analysts estimate that
worldwide oil productive capacity exceeds demand by only about
4 percent. As forecast demand increases at a rate of 1.5 to 2
percent per year, this excess capacity will rapidly disappear.
Current low oil prices have decimated upstream capital
development budgets by an estimated 40 percent. My good friend
Pete here knows that. There is just not enough money out there
to continue drilling.
Simply put, without the expenditure of enormous development
funds, current capacity will not be expanded to keep pace with
increasing demand. This is the situation we now face. As a
result, any country with exports matching the excess productive
capacity, has the ability to be the world's swing producer.
Iraq now supplies about 3 percent of the world's demand, and
has the ability to dramatically influence prices by either
cutting or increasing its production. As demand increases and
excess capacity drops, the export volume needed to drive prices
will decrease. In the not too distant future, if not already,
Saddam Hussein will be in the position to drive prices upward
and punish consumer countries, perhaps when sanctions are
lifted and all the money from Iraqi oil sales goes to him.
We submit that Iraq is using this position for its leader's
own political purposes. Saddam's objectives differ from other
oil producers. We have heard a lot about that this morning. He
wanted higher oil prices when he invaded Kuwait, money he
needed to build his military forces. Now, he can't spend money
to buy arms. But, he can, by keeping oil prices low, punish his
enemies, first by reducing the income to Saudi Arabia, Kuwait
and all the exporting countries; and second, to increase market
share by driving down prices and causing critical U.S.
production to be shut down and plugged forever, and that hurts
the guys sitting right here. Thus, while condemning the U.N.
sanctions and thwarting efforts to deliver to his people the
humanitarian aid the sanctions purchase, Saddam is effectively
manipulating the world oil markets for his own political
purposes. This is where we stand today, and that is why we are
here.
At issue, then, is what will happen next. Last week, the
Secretary of Energy argued that Iraq's ability to increase its
production is limited and is not expected to go up measurably
this year. As a result, EIA believes that whatever effect Iraqi
production has had on prices has already occurred, because Iraq
cannot increase oil production much more over the next year or
two.
While we agree with the Secretary that Iraqi production has
impacted prices, the statement that Iraq cannot increase
production is a costly assumption that must be proven. Given
that the current sanctions program continues to fund additional
improvements to the oil export capabilities of Iraq, there is
no certainty that exports will not increase further. Clearly,
today's crude market is forcing other major oil exporting
nations to develop elaborate plans to limit their production.
The success of these efforts is limited by the ability of Iraq
to add more oil to the market. If the current Oil-For-Food
Program results in further Iraqi oil production increases, it
will allow Iraq to continue to hurt the other oil producing
countries and the strategically essential domestic production
of the United States. If it does, the U.N. sanctions will
continue to be fatally flawed at two levels. First, they will
have failed in its primary mission to provide humanitarian aid
to the Iraqi people. Second, they will have handed Saddam
Hussein the victory he lost in the Gulf War.
For the United States these options reflect policies we
must change. They make no sense. The world fought a war to
prevent Saddam Hussein from controlling world oil prices. Now,
we have, however inadvertently, handed him this ability without
a fight, and we are handing him control of the future of our
domestic resources, an unbelievable policy choice. Current
national policy on Iraq is flawed. Today, domestic production
is at risk, while tomorrow the U.S. consumer may soon feel the
shock of higher energy prices brought on by the actions of a
rogue nation, a policy that hurts producers and consumers
alike.
Our domestic oil production resource is the true national
strategic petroleum reserve. We must value that resource. With
respect to Iraq, we must recognize that its role in oil pricing
may not have been planned, but it is now significant and it is
not benign. If we fail to act in the short term, precious
domestic resources will be lost forever. As we have heard this
morning, in the last year we have lost nearly 600,000 barrels
per day of domestic production, which has reduced the U.S.
crude production to a level that has not been seen since 1950.
Since 1986, when the last price free-fall crippled the
industry, domestic oil production has dropped 2 million barrels
per day. We need to act now to prevent a similar consequence
from the current price crisis.
We thank you for your interest, we thank you for your time
today, and God bless you for being on the side of the
producers.
[The prepared statement of David L. Bole follows:]
Prepared Statement of David L. Bole, Vice President, Corporate Research
and Development, Randall & Dewey, Inc.
Mr. Chairman, my name is David Bole. I am Vice President of
Corporate Research and Development for Randall & Dewey, Inc., a
Houston-based company that facilitates transactions in the upstream
part of the petroleum industry for all segments of the industry--major
companies, large and small independents, both public and private. In
this business, we have seen the disruptive effects of the current price
crisis not only on the stability of this critical portion of the
industry but in the direct loss of producers' equity value. Today, I am
representing the Independent Petroleum Association of America. IPAA
submits that the current problems facing domestic producers, and
potentially significant future problems, are related in large part to
the abuse of the UN ``oil for food'' sanctions program by Saddam
Hussein.
The industry has faced a low oil price crisis for more than a year,
but today's problems are very different. Just over a year ago, the
price crisis was started by a combination of events--the collapse of
Asian economies, a warmer than normal winter in the Northern
Hemisphere, and OPEC's decision to increase production quotas. The
production most at risk was marginal oil wells in the United States--
wells that produce about 20 percent of America's domestic production,
an amount equivalent to our imports from Saudi Arabia.
However, as 1998 progressed, key OPEC countries and other
significant non-OPEC countries curtailed production to try to diminish
surplus inventories around the world and stabilize oil prices at levels
that permit profitable operation. As other countries cut production,
the UN sanctions program created an opportunity for Iraq's leaders to
influence the price of oil in ways that no one would have expected. The
UN sanctions structure was changed in two significant ways in early
1998. First, the ``oil-for-food'' program has always been based on a
dollar amount rather than a volume allowance. The dollar amount was
increased to $5.265 billion per six months--an amount at current prices
that effectively allows Iraq to pump unlimited volumes. Second, $300
million every six months was allocated to improve Iraq's oil production
capacity. Thus, as other countries were making the economic decisions
to reduce production as prices fell, Iraq was given a perverse
incentive to increase production.
And, increase it did. At the beginning of 1998 Iraq was exporting
approximately 700,000 barrels of oil per day. By the beginning of 1999
it was exporting as much as 2.5 million barrels per day. In 1998 Iraq
was the only country to increase its production of oil. This increase
has allowed Iraq to become the world's swing producer--the producer
that sells the last barrels into the market and thereby defines the
price for the entire market.
Let me explain what allows Iraq to become the swing producer.
Currently, many industry analysts estimate that worldwide oil
productive capacity, that is production that could quickly be added to
the world market, exceeds demand by only about 4 percent. As demand
increases at a rate of 1.5 to 2 percent per year, this excess capacity
is rapidly disappearing. Current low oil prices have decimated upstream
capital development budgets by an estimated 40 percent. Simply put,
without the expenditure of enormous development funds current capacity
will not be expanded to keep pace with increasing demand. This is the
situation we now face. As a result any country with exports matching
the excess productive capacity, has the ability to be the world's swing
producer. Iraq now has about three percent of the world's demand and
has the ability to dramatically influence prices by either cutting or
increasing its production. As demand increases and excess capacity
drops, the export volume needed to drive prices will decrease. In the
not too distant future--if not already--Saddam Hussein will be in the
position to drive prices upward and punish consuming countries--perhaps
when sanctions are lifted and all the money from Iraqi oil sales goes
to him.
We submit that Iraq is using this position for its leader's own
political purposes. Saddam's objectives differ from other oil
producers. He wanted higher oil prices when he invaded Kuwait--money he
needed to build his military forces. Now, he can't spend money to buy
arms. But, he can--by keeping oil prices low--punish his enemies, first
by reducing the income to Saudi Arabia, Kuwait, UAE, Iran, and all the
exporting countries; second, to increase market share by driving down
prices and causing critical U.S. production to be shutdown and plugged
forever. Thus, while condemning the UN sanctions and thwarting efforts
to deliver to his people the humanitarian aid the sanctions purchase,
Saddam is effectively manipulating the world oil markets for his own
political purposes. This is where we stand today. And that is why we
are here.
At issue then is what will happen next. Last week, the Secretary of
Energy argued that ``Iraq's ability to increase its production is
limited and is not expected to go up measurably this year. As a result,
EIA believes that whatever effect Iraqi production has had on prices
has already occurred, because Iraq cannot increase oil production much
more over the next year or two.'' While we agree Iraqi production has
impacted prices, the statement that Iraq cannot increase production is
a costly assumption that must be proven. Given that the current
sanctions program continues to fund additional improvements to the oil
export capabilities of Iraq, there is no certainty that exports will
not increase further. In the middle of 1998 most experts believed that
Iraq could not reach the export levels it is currently sustaining.
Clearly, today's crude market is forcing other major oil exporting
nations to develop elaborate plans to manage their production, the
success of these efforts is limited by the ability of Iraq to add more
oil to the market. If the current ``oil-for-food'' program results in
further Iraqi oil production increases, it will allow Iraq to continue
to hurt the other oil producing countries--Saudi Arabia, Kuwait,
Venezuela, Russia, Indonesia, Mexico, and the strategically essential
domestic production of the United States. If it does, the UN sanctions
will continue to be fatally flawed at two levels. First, they will have
failed in its primary mission to provide humanitarian aid to the Iraqi
people. Second, they will have handed Saddam Hussein the victory he
lost in the Gulf War.
For the United States these options reflect policies we must
change. They make no sense. The world fought a war to prevent Saddam
Hussein from controlling world oil prices. Now, we have--however
inadvertently--handed him this ability. And, we are handing him control
of the future of our domestic resources--an unbelievable policy choice.
Current national policy on Iraq is faulty. Today, domestic production
is at risk, while tomorrow the U.S. consumer may soon feel the shock of
higher energy prices brought on by the actions of a rogue nation--a
policy that hurts producers and consumers alike.
Our domestic oil production resource is our true national strategic
petroleum reserve. We must value that resource. IPAA has presented an
array of options for Congress to address in response to the current
price crisis. With respect to Iraq we must recognize that its role in
oil pricing may not have been planned, but it is now significant and it
is not benign. If we fail to act in the short term, precious domestic
resources will be lost forever. Then, in the longer term when Saddam
shuts in production, we will not have the production needed to respond.
In the past year we have lost nearly 600,000 barrels per day of
domestic production, which has reduced the U.S. crude production to a
level that has not been seen since 1950. Since 1986, when the last
price crisis crippled the industry, domestic oil production has dropped
by 2 million barrels per day. We need to act now to prevent a similar
consequence from the current price crisis.
Mr. Barton. Thank you. Seeing no other member present, the
Chair is going to recognize himself for questions. And I am not
going to use the clock.
I am going to ask Mr. Hall's question since he had to
leave. Was anybody at TIPRO or IPAA or any other producer,
maybe the API, consulted before this Oil-For-Food Program was
put in place last year? Does anybody know?
Mr. Taylor. Not that I am aware of.
Mr. Brown. No.
Mr. Barton. Mr. Sieminski, do you remember?
Mr. Sieminski. Well, I do talk to people at the State
Department and elsewhere, but it seems to me that that program
was being driven mainly out of the United Nations and some of
the issues there I don't think that that domestic oil
consideration has gotten a lot of attention as part of that
program.
Mr. Barton. As far as anybody on this panel knows, there
was no formal attempt by the State Department or the Energy
Department or the United Nations directorate to contact the
production sector of the United States?
Mr. Bole. Not at all.
Mr. Barton. That is a fair statement.
Is there anybody on this panel that is opposed to providing
in some way food and medicine for the Iraqi people?
Mr. Bole. No.
Mr. Taylor. No.
Mr. Brown. No.
Mr. Sieminski. Not at all.
Mr. Barton. So we are not in opposition to at least the
publicized purpose of the program, which is to provide for
basic food, nutrition and medicine and humanitarian programs.
Is it in the national interest for us not only to allow
this production that is currently under way, but to give them
spare parts to increase production? Does anybody think that
makes sense from a national security standpoint, or even in the
interests of the United States standpoint?
Mr. Bole. Well, it makes absolutely no sense to allow Iraq
to increase production, while other OPEC nations are working in
concert to lower production so that we have a viable supply of
oil at a reasonable price to continue development.
Mr. Barton. Well, you all heard one of my final questions
to the gentleman from the State Department. Congressman Hall
and I are going to send a letter next week asking that they not
go forward with the spare parts program while we review it. I
would assume that you all would support that position that we,
at a minimum, while we review the larger program, we at least
stop the ability to increase production in Iraq.
Mr. Sieminski. Absolutely.
Mr. Taylor. Mr. Barton, I might even go a step further and
ask if you could somehow get through to them that a very
minuscule amount of that money would help restructure our own
industry here, and that they might consider the cost--it is bad
enough that Mr. Brown and I have to plug our wells. We lose the
production, and we have been taking a loss for quite a time on
these. When you decide to finally plug them on top of that, you
get a golden ring of about another $5,000 or $10,000 hit that
you have to pay to plug these wells in accordance with the
environmental regulations. So I would like for them to consider
our industry here that you know, maybe they would consider,
since they are encouraging them to dump all this oil on the
market over this, for the humanitarian reasons over there, that
they would consider the humanitarian reasons over here in the
United States and possibly give us some of that money for our
plugging costs. Maybe that will make them realize just how much
oil we are losing.
Mr. Barton. Interestingly enough, we didn't get--at least I
didn't understand the State Department's answer on how much
money had been collected, but I did understand that a large
portion that had been collected had not been spent for food.
Its label is oil for food, but in practical effect, they are
paying reparations to the Kuwaiti government and they are
paying for the cost of the U.N. bureaucracy, and they are
paying for the cost of the inspections which are not even going
on, and he upped his ante from $900 million I think to about
$2.5 billion for food, so I would guess about half the money so
far collected has gone for food. There are numerous ways to get
$2.5 billion worth of food to the Iraq people without allowing
the Iraqi government to produce oil.
Mr. Taylor. I have a tip from all the other oil producers.
We would like to get on that list of helping Kuwait and the
other oil countries that have gotten hurt.
Mr. Barton. We are going to give you an opportunity, I
think, to consult with the State Department, and if you want to
divert the spare parts to west Texas, that is fine with me. My
daughter is a teacher at South Elementary in Midland, Texas,
and she has seen the negative effects of what has happened, so
I don't think it would be a burden to reverse some of those
parts.
Yes, sir.
Mr. Sieminski. Mr. Barton, as bad as this Oil-For-Food
Program seems to you today, there are two ways that it could
get worse. The first one is if our policy of getting rid of
Saddam Hussein were to be successful and there were a new,
let's say, politically friendly regime in Iraq that somehow
changed the political course over there that would allow that
country to come out from under sanctions, and at that point
they would be like every other producer. They would produce
whatever they could economically want to do.
Mr. Barton. Well, they would be within the OPEC cartel.
Mr. Sieminski. Right.
Mr. Barton. Which although they are now, they are being
given a free ride apparently for political considerations
within the Arab world. The rest of the cartel is trying to
limit production, but they are not requesting even a
proportionate cut of Iraqi production.
Mr. Sieminski. I think the Iraqis are making the assumption
that their production was held down for so long that they have
a lot of catch-up to do before they are going to cooperate with
their other cartel members.
Mr. Barton. Well, they can assume whatever they want. That
doesn't mean the U.S. Congress----
Mr. Sieminski. Has to give it to them.
The second way that I think that again is worth more
questioning, that where things could get worse is there are
proposals that have been advanced on the Security Council to
allow foreign investment in the Iraqi industry, even as the
full sanctions are still on. There are a number of companies
and countries that are eagerly awaiting the opportunity to go
in and develop fields in Iraq, and one way perhaps to get at
the head of that line would be to assist the Iraqis in
rebuilding current facilities.
I think that you might want to look into the issue of how
the Oil-For-Food Program could be structured in such a way as
to delay that kind of activity, which I think would be
detrimental to U.S. foreign policy, certainly as long as that
regime in Iraq is in place, that there is a very definite
danger that the level of Iraqi production exports could rise
fairly dramatically and fairly quickly if companies were
allowed to go in and make investments in Iraq, and then again,
you would be back to, there wouldn't be any way--I mean if the
Oil-For-Food Program were to be revamped to allow for that, it
would be a considerably worse situation for domestic production
here in the United States than we are looking at now.
Mr. Barton. I understand that, and I don't advocate this,
but I don't buy the argument that you have to allow this
program to continue in order to keep sanctions being enforced.
Because--and again I am not an advocate of this, so I don't
want this to be the headline coming out of the hearing, but in
a worst-case situation, the United States Air Force could bomb
the oil terminals. We can enforce the ability not to let Iraq
export oil very easily. Again, that is not the purpose of this,
but there are ways to prevent the oil from being shipped, and
we have the military ability to do that. We don't choose to act
unilaterally, and I am not advocating that we should, but I
don't buy the argument that we are somehow helpless in the U.N.
and the world community while our domestic industry is
decimated. Because it was pointed out in a question that I
asked, there is no other nation that is losing permanently
domestic production because of this program except the United
States and perhaps to a smaller extent Canada.
If we can get the State Department's attention and the
Energy Department's attention and the United Nations' attention
to review this program, I assume that your trade associations
would be willing to participate in a dialog about how to revamp
it, is that correct?
Mr. Bole. Yes, sir.
Mr. Barton. There is not anybody that is opposed to that.
Mr. Bole. Mr. Chairman, I just have one comment. Tom made a
good point here a minute ago about a little financial help to
the producers as our stripper and marginal production is made
irrelevant by the sales of Iraq crude. A point of comparison is
Wes Watkins' marginal well tax credit bill is estimated to cost
only $600 million over 10 years, compared to billions of
dollars that we are funneling into Iraq. And I think there are
other measures that could benefit the plight of the domestic
producers when compared in dollar amounts to others are
insignificant, but significant to the producer.
Mr. Barton. Right. We know that, as a Nation, we are
importing more oil than we ever have. We know what the Iraqi
oil production is, and we know the number of barrels that they
are exporting. We didn't ask the prior panel how much of that
Iraqi oil is imported into the United States. Now, I have been
told that it is about 700,000 barrels a day of Iraqi oil into
the United States. Is that a number that anybody here is
familiar with, or if that is the wrong number, are any of you
gentlemen able to tell us approximately how much Iraqi oil is
coming into the United States?
Mr. Taylor. Maybe that is just a sheer coincidence of the 6
to 700,000 barrels we have lost as independent producers. That
would be a good number.
Mr. Barton. I am not putting that on the record that that
is a valid number, but I have been told that. Mr. Sieminski, do
you know how much Iraqi oil we are importing?
Mr. Sieminski. I don't have that number available right
now, but I think you would get that really quick.
Mr. Barton. Mr. Bole, do you----
Mr. Bole. Yes. Our staff says that that number has ranged
from 500, 600, 700,000 barrels and it varies on a month-to-
month basis.
Mr. Barton. So it is verifiable that not only are we
importing more oil than we ever have into this country, but
that between 500,000 and 700,000 barrels per day is coming from
Iraq.
Mr. Brown. Mr. Chairman, added to Mr. Smith's testimony are
some graphs indicating select imports to the United States
which indicates that in August Iraqi oil was in the range of
650,000 barrels, and that, from January, steadily increased
upward. If you will look at, I think it is this lower chart
here. It is in Mr. Smith's testimony.
Mr. Barton. I have it right here in front of me.
Mr. Brown. I will be glad to pass this up to you.
Mr. Barton. No. We have it. We appreciate your offer to
help the chairman do his job, but I think I have it right here
in front of me.
We are going to do a number of hearings on the domestic oil
and gas industry on this subcommittee this year. We are
obviously going to look at this issue very closely and very
skeptically based on what testimony we heard from the
administration representative today.
Are there any other items? Mr. Bole, you mentioned the
Watkins bill. Are there any other items that would be of
immediate benefit that we should address in our hearings that
you would like to put on the agenda today?
Mr. Bole. Yes, and it is not a specific item, it is more of
a question. In listening to the testimony today and the
interests of you and the committee members, I am impressed by
the agreement, the majority agreement here that we, as a
Nation, our oil and gas-producing States are in trouble, that
the Iraqi policies and other things are hurting us. But the
question that I would like to have answered, not today but
perhaps in the future, is if you are not from a producing oil
and gas State, why should you care?
Mr. Barton. Well, that is a dilemma that we have. If you
are from a producing State or a producing region, you see the
negative effect of low prices, and again, my daughter is a
sixth grade social studies teacher in Midland, Texas. She has
lived out there this year and she teaches in a lower-income
school, and she has firsthand knowledge of people who have lost
their jobs and who have been thrown out of work and children
who have had to go on food stamps because their parents do not
have a job. So it is a real problem. But the other side of
these low oil prices is gasoline, and in my part of Texas, just
south of Dallas, for 75 cents a gallon, and people get used to
that.
Mr. Bole. Yes, sir.
Mr. Barton. Gas prices have gone back up a little bit in
the last couple of weeks to about 89 cents a gallon or 85
cents, and people are complaining of price gouging. They get
used to 75 cents, and of course up here it is a little bit
higher. So we do have to have a very good answer to that.
The question why should Congressman Markey from
Massachusetts or Congressman Pallone from New Jersey care as
members of the subcommittee what is happening, and the long-
term answer is national security and the best interests long
term of the people of the United States of America. But we are
going to have to do some research to make sure that we give a
good short-term answer. I agree with that.
We have had a good hearing today. Most of our members who
stayed for the hearing come from regions of the country that
see the negative side of this issue. But it is not going to be
easy to convince a majority of the Congress and the Senate and
the President to make some of these changes that I think need
to be made.
Mr. Bole. Would it be appropriate to suggest a partial
answer to why they should care?
Mr. Barton. You can--my plane doesn't leave until 4:15. I
am going to have to take a personal convenience break at some
time, but I will listen as long as you want to talk.
Mr. Bole. You have a great constituency, and I will be
uncharacteristically brief.
The oil and gas industry is no longer an oil and gas
industry, it is an energy industry. As you know, Congress is
deregulating electricity.
Mr. Barton. We are trying to.
Mr. Bole. We are trying to.
Mr. Barton. This same subcommittee.
Mr. Bole. Absolutely. And so what we are looking at is a
domestic energy industry which is made up of electricity, oil,
gas and all the other fuels. The utility business, and I have a
background of working for the utility companies, estimates that
it is going to take Pete and others to invest $180 billion over
the next 10 years in domestic drilling to allow us to grow from
a 21.5 TCF market to a 30 TCF market. There are 1,300
independent power projects on the drawing boards; 1,150 are
supposed to be powered by natural gas, a 3-year backlog from
General Electric and General Electric's turbines to build the
cogen plants.
Mr. Barton. I am aware of them.
Mr. Bole. The utility industry only has to invest $40
billion to reconfigure the pipe to get this gas to the markets
to fuel the power plants. They are making 15 to 17 percent
return on their investment. These guys are making no money on
their investment. As an industry, the Oil and Gas Journal 200
gets 6 percent return on total capital.
Now, I don't think it is going to happen that our industry
is going to invest $180 billion for a 6 percent return to get
from 21 to 30 TCF.
The second thing that has happened in our business is we do
a lot of transactions. We sell to Mobil, Exxon, Amoco and BP.
We are seeing the major companies divest properties in the
United States.
Mr. Barton. Right.
Mr. Bole. We have seen the total amount of sales, property
sales in the 1990's go from an average of $7 billion a year, 2
years ago, $23 billion, last year, $82 billion. These
properties are being sold to the independents. Where are the
independents going to get the money to develop these properties
and continue to drill them to keep our production up to satisfy
the total energy demands of the U.S. if the price of oil is at
$12 to $14, and gas is, you know, under $2.
Mr. Barton. What is a reasonable price that brings some
stability, yet protects consumers against price spikes, if we
could somehow come up with a policy that kept oil prices within
a certain range, what would that range be, so that we would
have reasonable prices at the pump for our motorists, and yet
enough revenue so that we could do some of the things that Mr.
Bole just talked about?
Mr. Bole. Well, I would stick my neck out and let the other
guys comment, but the number that seems to be most prevalent is
oil staying in the range of say $18 to $22 a barrel and gas
closer to $3 than $2.
Mr. Barton. In MCF.
Mr. Bole. In MCF, yes, sir.
Mr. Barton. Do you agree with that, Mr. Brown?
Mr. Brown. My company just did a study on that to find out
what would it take for us to go back out and drill for oil
again. I mean right now all we do is drill for gas. But to
drill for oil it would take $22 a barrel plus in a stable
market. The problem is the volatility in the market. And you
have to understand that when oil prices are low, gas prices are
competitive with oil; in other words, home heating oil versus
natural gas. So gas gets pushed down at the same time, and it
just takes revenue out of our ability to go out and drill for
more oil. I am like a grocery store owner. I mean I have to
restock my shelves. I am going out of business if I don't drill
for oil.
Mr. Barton. Right. Mr. Taylor.
Mr. Taylor. I don't know about Mr. Brown, but in our area,
and I am taking in quite a bit of Texas, our lifting costs are
anywhere from $12 to $15 a barrel, and that is not taking into
consideration if you have to pull a down hole pump or your rods
part, your maintenance and repairs. One of the big fields in
Texas, the Kelly Snyder field, that thing produces a tremendous
amount of oil and lifting costs are at $15 per barrel.
Mr. Barton. So we need kind of a floor at the $15 range and
it would be nice to go to the $25, so kind of a $10 range.
Mr. Taylor. Of course we get nervous when the price gets
over $20 a barrel, because this is what happens. I mean all of
a sudden we realize that we are basically the stepchildren of
this booming economy. Mr. Brown and I, I have four little kids
I am trying to raise, and I am trying to make a living, and if
I can get $18 to $20 a barrel, you know, I think I can do it.
But if I am making less than $15 I am losing money.
Mr. Barton. Do any of you know what the OPEC model is for,
what is their optimal target price that they shoot for in their
5-year program?
Mr. Brown. I asked Dr. Mankin, who is in charge of the
Oklahoma Geological Survey, that very question and he said that
OPEC would probably shoot for something around $17 a barrel.
Mr. Barton. Okay.
Mr. Taylor. It would equate to us to be $21. I think there
is maybe $3 between tanker charges, et cetera.
Mr. Barton. How many wells, Mr. Taylor, that you have had
an interest in have had to be plugged in the last year? That
you had personal financial interest?
Mr. Taylor. Personal interest, I would say probably 28 to
32 percent, and then of the remaining wells that I have
interest in, we continue to lose money or we shut them in. But
as far as wells that have been plugged, I live on a small ranch
south of Abilene, and we had 12 wells out there and they all
made a barrel or two a day. And the company that was operating
those wells turned them over to the pumper. Because he couldn't
make any money, the pumper just recently turned them over to a
salvage company. So they pulled the pumping units off of them.
They haven't plugged them yet.
Mr. Barton. Now, if we hadn't had the collapse in prices,
how many more years would those wells have produced?
Mr. Taylor. They have been out there for approximately 18
years and they would produce for another 10 years. Once they
get down to a level of a barrel or 2 to 5 barrels a day, they
will maintain that level. You have a low-fluid entry, but when
you pump them for a few hours, you turn them off, you nurse
those wells, you can pump them for another 10 years.
Mr. Barton. There were substantial amounts of oil yet to be
obtained if, in fact, we could have kept the wells flowing and
the fact that, you know, at one time west Texas, the actual
price at the well had gotten down to about $6.50 a barrel.
Mr. Taylor. That is correct.
Mr. Barton. And nobody, I mean God couldn't keep those
wells going at $6.50 a barrel for very long.
Mr. Taylor. In the event you have a landowner such as
myself that was encouraging that operator to go ahead and
continue those wells, I gave them an extension on the lease,
they kept the wells shut in, but when you do that for an
extended amount of time, your down hole pumps start corroding,
your rods start corroding, so the equipment starts rotting and
you can't keep them shut in for so long.
Mr. Barton. Mr. Brown, you said you are principally looking
at gas now, but have you had to plug some oil wells that you
had an interest in in the last year?
Mr. Brown. In my testimony I talked about 57 percent of the
wells in December lost money, and one of my problems is getting
the operators to plug them. They don't want to give them up,
and they know they are losing money, but they just think well,
the price, it is just around the corner, it is going to go back
up and they are going to start making money again, but we keep
losing money every month. And as I say, you can only lose money
for so long.
So I think a lot of the wells that need to be plugged are
yet to be plugged. We have shut a lot of them in, but at some
point in time, like you said, your equipment starts to
deteriorate and when you try to start it back up, it means a
sizable investment, so you are better off plugging the well
than spending the money trying to put it back on production.
Mr. Barton. I am going to conclude the hearing.
I want to thank you all for coming. The issues that we are
going to look at, we are going to continue to look at the Iraqi
Oil-For-Food Program. We have a possibility to reauthorize the
Strategic Petroleum Reserve this year in this subcommittee, we
are going to look at that to use the petroleum stripper well
production. I have had one suggestion from an independent in
Texas that we might relax some of the antitrust rules that
would allow small producers to form co-ops in which they could
pool their oil for transportation at the refinery. That is not
allowed under current antitrust laws. If you have any other
suggestions, a number of the tax issues are not before this
subcommittee's jurisdiction. They go to the Ways and Means, but
Bill Archer of Texas and Wes Watkins of Oklahoma are very
interested.
Did you want to put something else in the record, Mr.
Chairman?
Mr. Smith. Thank you. Mike Smith again. One thing I forgot
to mention in my testimony----
Mr. Barton. We don't normally have witnesses want to come
back.
Mr. Smith. I know of at least one that doesn't want to come
back that was on my panel. But there has been a lot of
conversation about the cost to produce a barrel of oil, and the
Oklahoma Marginal Well Commission, which is a State agency in
Oklahoma that is in my cabinet jurisdiction, in concert with
Oklahoma State University, spent about a year making an
exhaustive study in Oklahoma on the true cost of producing a
barrel of oil. And the average well in Oklahoma costs about $14
a barrel simply in lifting costs. That is electric, pumper,
environmental costs. That does not include if you have rods
part, or you have a pump problem or any down hole problem. And
no rework. It is strictly day-to-day production.
Mr. Barton. Well, thank you. As I said at the top of the
hearing, this is the first, but it is not the last. We are
going to be working with the State Department on the specific
issue, but we are going to look at a wide range of issues in
the domestic oil and gas industry, and your input will be
appreciated as we continue these hearings.
This hearing is adjourned.
[Whereupon, at 1:50 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
United States Department of State
Washington, D.C. 20520
April 16, 1999
The Honorable Joe Barton, Chairman,
Subcommittee on Energy and Power,
House of Representatives.
Dear Mr. Chairman, thank you for your letter of April 2 concerning
the recent testimony before the Subcommittee on Energy and Power by
William B. Wood of the Bureau of International Organization Affairs.
Your letter requested information on revenues and disbursements
under the UN Oil-for-Food program in Iraq, which is included in the
attachments to this letter. As the Oil-for-Food program runs in six
month phases, some of the information is presented by program phase.
The material attached includes information on:
<bullet> actual Oil-for-Food sale revenues by phase;
<bullet> approved contracts from phases I-IV (12/96 to 11/98) and
projected allocations in phase V (11/98 to 5/99); and
<bullet> purchases of spare parts and equipment for the Iraqi oil
infrastructure from Phase IV, when the special set-aside of
funds for this purpose began, to date.
With respect to these figures, it is worth noting that only two-
thirds of the Iraqi oil revenue is available for humanitarian
purchases.
Of the remaining funds, thirty percent goes to the United Nations
Compensation Commission, which compensates those who suffered economic
losses--including U.S. citizens and corporations--as a result of the
Iraqi invasion and occupation of Kuwait, and the remainder goes to fund
UNSCOM disarmament activities in Iraq and UN Oil-for-Food management
expenses.
I hope you find this information useful. We appreciate the
Subcommittee's interest in the Oil-for-Food program, which is a
critical element of our Iraq policy. The program is crucial to
maintaining Security Council and wider international support, including
the support of other oil-producing nations, for the UN sanctions which
contain Iraq's ability to threaten its neighbors while we continue our
efforts for regime change. The Oil-for-Food program helps meet the
genuine humanitarian needs of the Iraqi people and our support for it
reinforces the message that the United States is not against the people
of Iraq-only the regime that is responsible for their plight.
Sincerely,
Barbara Larkin
Assistant Secretary, Legislative Affairs
Attachments:
Tab 1: Oil-for-Food revenues
Tab 2: Oil-for-Food Contracts by phase
Tab 3: Contracts for oil spare parts and equipment
Oil-for-Food Oil Sale Revenues By Phase
----------------------------------------------------------------------------------------------------------------
Approved Ave Price
Phase Oil Barrels $ Revenue per
Contracts (million) (million) Barrel
----------------------------------------------------------------------------------------------------------------
I (12/96-6/97).................................................. 51 121 $2150 $17.99
II (6/97-12/97)................................................. 34 127.3 $2125 $16.74
III (12/97-5/98)................................................ 52 183.9 $2092 $11.49
IV (5/98-11/98)................................................. 59 308.1 $3040 $9.36
V (11/98-5/99).................................................. 82 274.9 $983*
TOTAL......................................................... 278 1015 $10390**
----------------------------------------------------------------------------------------------------------------
*Sales through mid-April
**One third of this total is used for UNCC and UN Oil-for-Food management operations.
Oil-for-Food Contracts by Phase
[in millions of US dollars]
------------------------------------------------------------------------
Phases I-
IV Phase V
Sector Approved Projected
Contracts Allocations
------------------------------------------------------------------------
Food........................................... 3797.12 1,026
Medicine & Health.............................. 744 240
Water & Sanitation............................. 152.25 150
Electricity.................................... 351.54 409
Agriculture.................................... 273.70 180
Education...................................... 115.99 100
Settlement Rehabilitation...................... 41.10 40
Mines.......................................... 2.99 9
Nutrition...................................... 23.92 16
Infrastructure Support......................... * 126
Oil............................................ 114.31 300
Total........................................ 5616.92 2,596
------------------------------------------------------------------------
*The UN did not report funding for this category
United Nations Office of the Iraq Programme
All Oil Spare Parts Contracts Approved as at 16 April 1999 under the
terms of resolutions 1175 and 1210--funded under Phases IV and V of the
oil for food programme
------------------------------------------------------------------------
Country Nature of Spares Contract Value
------------------------------------------------------------------------
Denmark.......................... PIPELINE EQUIPMENT & $1,043,090
SPARES (OIL).
Spain............................ Pipeline Equip & $630,280
Spares.
Germany.......................... Pipeline Equip & $189,349
Spares.
Germany.......................... Pipeline Equip & $8,746,858
Spares.
Belgium.......................... Pipeline Equip & $287,508
Spares.
Denmark.......................... PIPELINE EQUIPMENT & $2,270,804
SPARES (OIL).
Denmark.......................... PIPELINE EQUIPMENT & $100,580
SPARES (OIL).
Denmark.......................... PIPELINE EQUIPMENT & $20,139
SPARES (OIL).
Russian Federation............... Pipeline Equip & $976,191
Spares.
Turkey........................... Pipeline Equip & $8,600,426
Spares.
France........................... Pipeline Equip & $1,140,000
Spares.
France........................... Pipeline Equip & $1,283,966
Spares.
France........................... PIPELINE EQUIPMENT & $5,000,000
SPARES (OIL).
France........................... Pipeline Equip & $177,793
Spares.
France........................... Pipeline Equip & $287,622
Spares.
France........................... Pipeline Equip & $158,930
Spares.
France........................... Pipeline Equip & $148,240
Spares.
France........................... Pipeline Equip & $98,478
Spares.
France........................... Pipeline Equip & $260,328
Spares.
France........................... Pipeline Equip & $276,606
Spares.
France........................... Pipeline Equip & $23,520
Spares.
France........................... Pipeline Equip & $72,176
Spares.
France........................... Pipeline Equip & $82,030
Spares.
China............................ Tug Boats........... $9,350,000
Italy............................ PIPELINE EQUIPMENT & $2,885,039
SPARES (OIL).
Italy............................ PIPELINE EQUIPMENT & $221,100
SPARES (OIL).
Italy............................ PIPELINE EQUIPMENT & $1,036,000
SPARES (OIL).
China............................ PIPELINE EQUIPMENT & $4,338,000
SPARES (OIL).
The Netherlands.................. Demulsifier......... $1,750,000
Turkey........................... Pipeline Equip & $580,000
Spares.
Turkey........................... N/A................. $226,500
China............................ Pipeline Equip & $456,000
Spares.
Jordan........................... Pipeline Equip & $914,924
Spares.
Jordan........................... Pipeline Equip & $914,924
Spares.
Russian Federation............... Pipeline Equip & $700,000
Spares.
Denmark.......................... OIL SPARE PARTS..... $92,298
Denmark.......................... OIL SPARE PARTS..... $84,370
Denmark.......................... N/A................. $193,349
Denmark.......................... N/A................. $374,115
Turkey........................... OIL SPARE PARTS..... $555,606
Turkey........................... N/A................. $919,260
France........................... Pipeline Equip & $32,960
Spares.
Belgium.......................... PIPELINE EQUIPMENT & $45,323
SPARES (OIL).
France........................... Pipeline Equip & $16,692,147
Spares.
France........................... Pipeline Equip & $132,288
Spares.
Russian Federation............... Pipeline Equip & $383,758
Spares.
Russian Federation............... PIPELINE EQUIPMENT & $454,800
SPARES (OIL).
Russian Federation............... PIPELINE EQUIPMENT & $1,367,800
SPARES (OIL).
Belgium.......................... OIL SPARE PARTS..... $277,500
Russian Federation............... STORAGE TANKS/SPARE $3,000,000
PARTS.
France........................... VALVE/PARTS......... $86,472
France........................... VALVE/PARTS......... $153,259
France........................... VALVE/PARTS......... $65,507
France........................... PIPELINE EQUIPMENT & $27,019
SPARES (OIL).
France........................... PIPELINE EQUIPMENT & $539,240
SPARES (OIL).
France........................... PIPELINE EQUIPMENT & $94,346
SPARES (OIL).
Russian Federation............... PIPELINE EQUIPMENT & $41,603
SPARES (OIL).
Russian Federation............... PIPELINE EQUIPMENT & $329,497
SPARES (OIL).
China............................ VALVE/PARTS......... $18,500
China............................ PIPELINE EQUIPMENT & $80,000
SPARES (OIL).
China............................ VALVE/PARTS......... $27,853
France........................... DEMULSIFIER......... $1,067,500
Singapore........................ PIPELINE EQUIPMENT & $3,270,000
SPARES (OIL).
Turkey........................... PIPELINE EQUIPMENT & $91,280
SPARES (OIL).
France........................... PIPELINE EQUIPMENT & $185,693
SPARES (OIL).
France........................... PIPELINE EQUIPMENT & $28,982
SPARES (OIL).
France........................... PIPELINE EQUIPMENT & $165,000
SPARES (OIL).
France........................... FIRE FIGHTING TRUCKS/ $954,600
SPARES.
France........................... VEHICLE............. $488,000
France........................... PIPELINE EQUIPMENT & $95,000
SPARES (OIL).
France........................... PIPELINE EQUIPMENT & $62,910
SPARES (OIL).
The Netherlands.................. PIPELINE EQUIPMENT & $50,357
SPARES (OIL).
Turkey........................... FIRE FIGHTING TRUCKS/ $218,000
SPARES.
Spain............................ BATTERIES........... $949,980
China............................ PIPELINE EQUIPMENT & $945,800
SPARES (OIL).
China............................ OIL SPARE PARTS..... $133,000
France........................... PIPELINE EQUIPMENT & $322,839
SPARES (OIL).
Belgium.......................... PIPELINE EQUIPMENT & $23,000
SPARES (OIL).
Belgium.......................... PIPELINE EQUIPMENT & $118,500
SPARES (OIL).
UAE.............................. DIESEL ENGINE MOTOR $7,496
SPARE PARTS.
UAE.............................. CABLE............... $26,500
UAE.............................. COMPRESSOR.......... $78,696
UAE.............................. COMPRESSOR.......... $62,511
Cyprus........................... BATTERY/ACCESSORIES. $191,440
UAE.............................. OIL SPARE PARTS..... $173,969
UAE.............................. OIL SPARE PARTS..... $119,670
UAE.............................. OIL SPARE PARTS..... $203,500
Belgium.......................... OIL SPARE PARTS..... $347,605
Jordan........................... OIL SPARE PARTS..... $1,450,000
Jordan........................... OIL SPARE PARTS..... $166,491
Turkey........................... PIPELINE EQUIPMENT & $160,000
SPARES (OIL).
Russian Federation............... PIPELINE EQUIPMENT & $117,765
SPARES (OIL).
Jordan........................... PIPELINE EQUIPMENT & $271,585
SPARES (OIL).
Turkey........................... ELECTRICAL SPARE $336,951
PARTS FOR OIL
SECTOR.
Egypt............................ PIPELINE EQUIPMENT & $97,834
SPARES (OIL).
Egypt............................ OIL SPARE PARTS..... $186,192
The United Kingdom............... PIPELINE EQUIPMENT & $413,991
SPARES (OIL).
Cyprus........................... BATTERY/ACCESSORIES. $270,686
Turkey........................... PIPELINE EQUIPMENT & $650,100
SPARES (OIL).
China............................ PIPELINE EQUIPMENT & $158,243
SPARES (OIL).
China............................ DRILL EQUIPMENT/ $189,872
SPARES.
Turkey........................... PIPELINE EQUIPMENT & $2,115,000
SPARES (OIL).
Turkey........................... PIPELINE EQUIPMENT & $173,000
SPARES (OIL).
Turkey........................... CESSPIT EQUIPMENT... $95,230
Belgium.......................... ROTATING MACHINE $261,902
SPARES.
Italy............................ PIPELINE EQUIPMENT & $890,000
SPARES (OIL).
Jordan........................... AIR COMPRESSOR PARTS $180,000
Russian Federation............... PIPELINE EQUIPMENT & $418,806
SPARES (OIL).
Russian Federation............... PIPELINE EQUIPMENT & $105,190
SPARES (OIL).
The United Kingdom............... AIR COMPRESSOR PARTS $176,940
The United Kingdom............... PIPELINE EQUIPMENT & $597,593
SPARES (OIL).
Jordan........................... PIPELINE EQUIPMENT & $58,148
SPARES (OIL).
France........................... OIL SPARES FOR WASTE $18,575
WATER TREATMENT.
France........................... PUMP/PARTS.......... $41,385
France........................... VALVES/PUMPS/PARTS $555,340
FOR UNDERGROUND
STORAGE.
China............................ PIPELINE EQUIPMENT & $226,477
SPARES (OIL).
China............................ PIPELINE EQUIPMENT & $12,024
SPARES (OIL).
China............................ PIPELINE EQUIPMENT & $44,480
SPARES (OIL).
China............................ PIPELINE EQUIPMENT & $1,441,686
SPARES (OIL).
China............................ FERROCHROME $25,024
LIGNOSULFONATE.
China............................ OIL SPARE PARTS..... $155,000
France........................... OIL SPARE PARTS..... $178,132
France........................... PIPELINE EQUIPMENT & $1,200,000
SPARES (OIL).
Denmark.......................... PUMP/PARTS.......... $676,000
The Netherlands.................. OIL SPARE PARTS..... $209,032
The Netherlands.................. PUMP/PARTS.......... $177,264
The Netherlands.................. PUMP/PARTS.......... $137,847
UAE.............................. OIL SPARE PARTS..... $73,752
Jordan........................... PIPELINE EQUIPMENT & $10,147
SPARES (OIL).
UAE.............................. WASTE WATER $74,952
EQUIPMENT PARTS.
Jordan........................... PIPELINE EQUIPMENT & $120,000
SPARES (OIL).
France........................... OIL SPARE PARTS..... $273,176
France........................... OIL SPARE PARTS..... $360,473
Turkey........................... PIPELINE EQUIPMENT & $75,558
SPARES (OIL).
Switzerland...................... PIPELINE EQUIPMENT & $230,192
SPARES (OIL).
China............................ OIL SPARE PARTS..... $195,093
China............................ FORKLIFT............ $188,000
China............................ CEMENT.............. $52,137
Russian Federation............... PIPELINE EQUIPMENT & $24,308
SPARES (OIL).
France........................... OIL SPARE PARTS..... $123,625
France........................... PIPELINE EQUIPMENT & $1,479,132
SPARES (OIL).
UAE.............................. AIR CONDITIONER..... $44,250
Russian Federation............... PASSENGER BOAT...... $2,650,000
France........................... PUMPS AND SPARE $77,254
PARTS.
France........................... OIL SPARE PARTS..... $85,758
France........................... OIL SPARE PARTS..... $119,760
France........................... OIL SPARE PARTS..... $135,468
France........................... OIL SPARE PARTS..... $50,159
China............................ OIL SPARE PARTS..... $25,130
China............................ PIPELINE EQUIPMENT & $80,779
SPARES (OIL).
China............................ OIL SPARE PARTS..... $23,272
China............................ PIPELINE EQUIPMENT & $106,000
SPARES (OIL).
China............................ PIPELINE EQUIPMENT & $68,000
SPARES (OIL).
Bahrain.......................... ZINC SULPHATE....... $69,000
UAE.............................. PIPELINE EQUIPMENT & $145,161
SPARES (OIL).
UAE.............................. PIPELINE EQUIPMENT & $118,000
SPARES (OIL).
UAE.............................. PIPELINE EQUIPMENT & $304,510
SPARES (OIL).
Jordan........................... OIL SPARE PARTS..... $103,765
Turkey........................... PIPELINE EQUIPMENT & $212,700
SPARES (OIL).
UAE.............................. PIPELINE EQUIPMENT & $39,880
SPARES (OIL).
Russian Federation............... OIL SPARE PARTS..... $162,723
The United Kingdom............... OIL SPARE PARTS..... $41,987
France........................... OIL SPARE PARTS..... $620,000
Italy............................ OIL SPARE PARTS..... $75,960
Finland.......................... OIL SPARE PARTS..... $123,643
France........................... MOTOR............... $130,937
Italy............................ MOTOR............... $376,100
Italy............................ OIL SPARE PARTS..... $71,731
Italy............................ OIL SPARE PARTS..... $61,436
Germany.......................... OIL SPARE PARTS..... $750,319
Jordan........................... OIL SPARE PARTS..... $32,634
Belgium.......................... FIRE FIGHTING $119,150
CHEMICALS.
Russian Federation............... TRANSFORMERS........ $195,400
UK............................... LABORATORY SUPPLIES. $18,658
Korea............................ FORKLIFTS........... $206,176
Finland.......................... INSTRUMENTATION $25,884
SPARES.
UAE.............................. GENERATOR SPARE $100,083
PARTS.
Cyprus........................... CABLE/SPARE PARTS... $110,000
Belgium.......................... FIRE FIGHTING $313,976
CHEMICALS.
Belgium.......................... SAFETY & FIRE $29,494
FIGHTING EQUIPMENT.
Belgium.......................... SAFETY & FIRE $11,332
FIGHTING EQUIPMENT.
Belgium.......................... SAFETY & FIRE $60,479
FIGHTING EQUIPMENT.
Belgium.......................... SAFETY & FIRE $45,593
FIGHTING EQUIPMENT.
Belgium.......................... SAFETY & FIRE $150,952
FIGHTING EQUIPMENT.
Belgium.......................... SAFETY & FIRE $90,082
FIGHTING EQUIPMENT.
Belgium.......................... FIRE EXTINGUISHER... $173,938
France........................... Seals............... $54,506
Sweden........................... GAS TURBINE SPARE $123,743
PARTS.
Ireland.......................... OIL SPARE PARTS..... $78,580
Ireland.......................... OIL SPARE PARTS..... $251,772
Ireland.......................... OIL SPARE PARTS..... $103,220
Ireland.......................... OIL SPARE PARTS..... $119,729
Ireland.......................... OIL SPARE PARTS..... $393,310
UAE.............................. COMPRESSOR.......... $161,000
UAE.............................. GENERATOR SPARE $50,142
PARTS.
China............................ ELECTRIC MOTORS..... $1,650
France........................... OIL SPARE PARTS..... $319,719
France........................... PUMP/PARTS.......... $343,640
France........................... OIL SPARE PARTS..... $71,115
France........................... OIL SPARE PARTS..... $1,150,382
France........................... WATER PUMPING $386,795
STATION PARTS.
France........................... PUMPS AND SPARE $412,079
PARTS.
France........................... OIL SPARE PARTS..... $54,768
France........................... OIL SPARE PARTS..... $105,324
France........................... INSTRUMENTATION $130,569
SPARES.
France........................... VALVE/PARTS......... $325,096
Jordan........................... OIL SPARE PARTS..... $526,649
Jordan........................... AIR COMPRESSOR PARTS $655,563
UAE.............................. VEHICLE/SPARE PARTS. $750,000
UAE.............................. VEHICLE............. $1,404,000
UAE.............................. AMBULANCE........... $54,000
UAE.............................. OIL SPARE PARTS..... $619,788
Jordan........................... OIL SPARE PARTS..... $91,855
Jordan........................... INSTRUMENTATION $56,949
SPARES.
Jordan........................... OIL SPARE PARTS..... $66,000
Italy............................ PUMPS AND SPARE $53,524
PARTS.
Italy............................ CENTRIFUGE/SPARE $115,989
PARTS.
Italy............................ ROTATING MACHINES... $123,343
Italy............................ INSTRUMENTATION $140,185
SPARES.
Russian Federation............... SEALS............... $41,210
Russian Federation............... GASKETS............. $281,129
UAE.............................. OIL SPARE PARTS..... $163,000
China............................ WORK VEHICLES....... $1,179,136
France........................... VALVE/PARTS......... $42,713
France........................... PUMPS AND SPARE $40,346
PARTS.
France........................... AIR COMPRESSOR PARTS $24,908
France........................... MOTOR............... $14,270
Austria.......................... PUMP/PARTS.......... $221,459
Italy............................ FIELD $163,242
INSTRUMENTATION/
SPARE PARTS.
China............................ FORKLIFT............ $140,250
France........................... OIL SPARE PARTS..... $31,206
Germany.......................... OIL SPARE PARTS..... $508,011
France........................... OIL SPARE PARTS..... $167,885
UAE.............................. VEHICLE/SPARE PARTS. $1,180,000
Belgium.......................... OIL SPARE PARTS..... $1,361,475
Cyprus........................... OIL SPARE PARTS..... $25,000
Italy............................ OIL SPARE PARTS..... $214,230
Belgium.......................... OIL SPARE PARTS..... $330,000
Belgium.......................... OIL SPARE PARTS..... $427,000
Egypt............................ BOILER TUBES........ $98,000
Switzerland...................... MOTOR............... $18,300
France*.......................... PIPELINE EQUIPMENT & $331,320
SPARES (OIL).
Turkey*.......................... OIL SPARE PARTS..... $7,260
China*........................... PIPELINE EQUIPMENT & $43,716
SPARES (OIL).
China*........................... PIPELINE EQUIPMENT & $25,115
SPARES (OIL).
Jordan*.......................... PIPELINE EQUIPMENT & $61,666
SPARES (OIL).
France*.......................... FORKLIFT/SPARES..... $2,000,000
Jordan*.......................... OIL SPARE PARTS..... $74,602
France*.......................... OIL SPARE PARTS..... $53,462
Jordan*.......................... OIL SPARE PARTS..... $664,213
Jordan*.......................... OIL SPARE PARTS..... $68,000
France*.......................... VALVE/PARTS......... $755,650
France*.......................... CHEMICALS........... $78,810
France*.......................... GENERATING SETS AND $79,000
PARTS.
France*.......................... SPARE PARTS FOR $138,252
COOLING TOWER.
Italy*........................... CHEMICALS........... $122,033
France*.......................... OIL SPARE PARTS..... $112,227
China............................ OIL SPARE PARTS..... $1,180,000
Jordan*.......................... CONTROL $99,363
INSTRUMENTATION.
UAE.............................. PUMP/PARTS.......... $41,152
Italy............................ OIL SPARE PARTS..... $297,035
UK............................... OIL SPARE PARTS..... $93,642
UK............................... OIL SPARE PARTS..... $8,387
UK............................... SPARE PARTS FOR $184,494
GLYCOL PUMPS.
Malaysia......................... PIPELINE EQUIPMENT & $10,299,000
SPARES (OIL.
Malaysia......................... OIL SPARE PARTS..... $5,406,000
France........................... ELECTRIC MOTORS..... $65,190
Russian Federation*.............. COMPRESSOR/PARTS.... $383,944
France*.......................... OIL SPARES/PARTS FOR $191,104
LPG FILLING PLANT.
Russian Federation*.............. OIL SPARE PARTS..... $298,000
Russian Federation*.............. PIPELINE EQUIPMENT & $596,000
SPARES (OIL).
France*.......................... PIPELINE EQUIPMENT & $245,911
SPARES (OIL).
UAE*............................. PIPELINE EQUIPMENT & $74,355
SPARES (OIL).
France*.......................... OIL SPARE PARTS..... $626,742
France*.......................... CENTRIFUGAL PUMPING $235,460
SYSTEM.
France*.......................... PIPELINE EQUIPMENT & $25,549
SPARES (OIL).
Jordan*.......................... PUMPS AND SPARE $605,010
PARTS.
Jordan*.......................... PUMPS AND SPARE $188,782
PARTS.
Jordan*.......................... COMPRESSOR/ $253,516
ACCESSORIES.
Egypt*........................... TRANSFORMERS........ $42,500
Jordan*.......................... OIL SPARE PARTS..... $212,105
Belgium*......................... BEARING UNITS....... $58,463
Italy*........................... OIL SPARE PARTS..... $8,845
France*.......................... PIPELINE EQUIPMENT & $284,200
SPARES (OIL).
France*.......................... PUMP/PARTS.......... $128,420
Italy*........................... OIL SPARE PARTS..... $312,500
Italy*........................... ROTATING MACHINES... $41,877
Belgium*......................... BEARINGS............ $56,633
France*.......................... PUMP/PARTS.......... $252,868
France*.......................... COMPRESSOR/PARTS; $1,295,895
TURBINE SPARE PARTS.
France*.......................... CENTRIFUGAL PUMPING $138,850
SYSTEM.
France*.......................... EXCAVATORS & SPARE $408,160
PARTS.
France*.......................... OIL SPARE PARTS..... $29,419
Turkey*.......................... OIL SPARE PARTS..... $223,150
Italy*........................... OIL SPARE PARTS..... $457,485
France*.......................... PIPELINE EQUIPMENT & $561,127
SPARES (OIL).
Turkey*.......................... PIPELINE EQUIPMENT & $110,640
SPARES (OIL).
Turkey*.......................... VEHICLE/SPARE PARTS. $65,983
UAE*............................. VALVE/PARTS......... $88,400
France*.......................... ROTATING MACHINE $69,345
SPARES.
France*.......................... PUMP/PARTS.......... $111,600
France........................... ELECTRIC MOTORS..... $65,190
Italy............................ PIPELINE EQUIPMENT & $49,792
SPARES (OIL).
France........................... OIL SPARE PARTS..... $146,560
France........................... OIL SPARE PARTS..... $228,760
France........................... ROTATING MACHINES... $109,431
France........................... VALVES & PIPE $65,087
FITTINGS.
France........................... VALVE/PARTS......... $357,138
Italy............................ CHEMICALS........... $656,370
France........................... FLOW CONTROL VALVES. $654,301
France........................... OIL SPARE PARTS..... $350,065
Italy............................ CHEMICALS........... $24,000
Russian Federation............... GAS TURBINE SPARE $2,909,000
PARTS.
France*.......................... CENTRIFUGAL PUMPING $1,454,600
SYSTEM.
Italy*........................... OIL SPARE PARTS..... $2,492,260
France*.......................... CABLE............... $18,000
Italy*........................... GAS TURBINE SPARE $165,932
PARTS.
Italy*........................... ROTATING MACHINES... $210,059
UAE*............................. VALVE/PARTS......... $31,580
Russian Federation*.............. OIL SPARE PARTS..... $1,368,712
Italy*........................... PUMP/PARTS.......... $304,500
Italy*........................... OIL SPARE PARTS..... $98,660
Korea*........................... EXCAVATORS & SPARE $294,000
PARTS.
France*.......................... OIL SPARE PARTS..... $568,578
UAE*............................. DRILL EQUIPMENT/ $867,082
SPARES.
France*.......................... OIL SPARE PARTS..... $284,372
UAE*............................. VEHICLE/SPARE PARTS$ $880,112
France*.......................... OIL SPARE PARTS..... $6,725,937
Turkey*.......................... REHABILITATION SPARE $2118,000
PARTS FOR IT.
China............................ CHEMICALS........... $16,618
Austria.......................... OIL SPARE PARTS..... $52,122
Austria.......................... OIL SPARE PARTS..... $53,510
Austria.......................... PUMP/PARTS.......... $11,562
Austria.......................... OIL SPARE PARTS..... $14,499
Jordan........................... BATTERY CHARGER..... $10,824
Jordan........................... UPS................. $42,509
Jordan........................... ELECTRICAL EQUIPMENT $223,968
Italy............................ ELECTRICAL EQUIPMENT $166,682
Lebanon.......................... TURBINE............. $1,353,767
Italy*........................... OIL SPARE PARTS..... $253,000
Italy*........................... PUMP/PARTS.......... $818,900
Italy*........................... OIL SPARE PARTS..... $238,298
Italy*........................... SWITCH GEAR......... $66,060
Italy*........................... OIL SPARE PARTS..... $38,770
Jordan*.......................... PIPELINE EQUIPMENT & $139,425
SPARES (OIL).
Turkey*.......................... REHABILITATION SPARE $5,880,656
PARTS FOR IT2.
Italy*........................... OIL SPARE PARTS..... $122,400
Italy*........................... SPARES FOR FUEL PUMP $21,155
DISPENSERS.
France*.......................... VEHICLE/SPARE PARTS. $576,278
France*.......................... VEHICLES/CREW-CAB... $257,244
France*.......................... PICK-UP TRUCKS & $153,915
PARTS.
France*.......................... PICK-UP TRUCKS & $407,518
PARTS.
China*........................... TRANSFORMERS........ $25,000
France*.......................... FORKLIFT/SPARES..... $227,748
Korea*........................... STREET LIGHTING $364,400
BULBS.
The Netherlands*................. PIPELINE EQUIPMENT & $55,126
SPARES (OIL).
The Netherlands*................. PIPELINE EQUIPMENT & $46,300
SPARES (OIL).
France*.......................... PIPELINE EQUIPMENT & $303,361
SPARES (OIL).
France........................... PIPELINE EQUIPMENT & $3,645,424
SPARES (OIL).
Italy*........................... PIPELINE EQUIPMENT & $3,800,999
SPARES (OIL).
Greece*.......................... OIL SPARES/NOZZLES $16,446
FOR FUEL DISPENSERS.
France*.......................... OIL SPARES/LIGHTING $12,315
FIXTURES.
Turkey*.......................... OIL SPARE PARTS..... $50,050
Italy*........................... OIL SPARE PARTS..... $694,300
France........................... PIPE FITTINGS....... $514,115
France........................... PARTS FOR LOADING $422,966
ARMS.
Germany.......................... OIL SPARE PARTS..... $309,393
France........................... VEHICLE/SPARE PARTS. $839,183
France........................... SAFETY RELIEF VALVES $58,761
Ireland.......................... OIL SPARE PARTS..... $362,981
Jordan........................... MAINTENANCE......... $130,119
France........................... CHEMICALS........... $437,210
France........................... PIPE, CARBON STEEL.. $521,693
Sweden........................... GAS TURBINE SPARE $25,163
PARTS.
France........................... COMPLETE PUMPS WITH $198,748
MOTORS.
Turkey*.......................... OIL SPARE PARTS..... $54,940
Russian Federation*.............. PIPELINE EQUIPMENT & $330,900
SPARES (OIL).
Belgium*......................... PIPELINE EQUIPMENT & $38,000
SPARES (OIL).
Jordan*.......................... SPARE PARTS FOR $737,671
DRILLING EQUIPMENT.
Austria*......................... SAFETY & FIRE $118,779
FIGHTING EQUIPMENT.
France*.......................... GAS TURBINE SPARE $15,083,472
PARTS.
France*.......................... PUMP/PARTS......... 230,511.52
UK............................... OIL SPARE PARTS..... $38,613
Germany.......................... GENERATING SETS AND $1,343,042
PARTS.
France*.......................... PIPELINE EQUIPMENT & $68,850
SPARES (OIL).
France*.......................... WATER TREATMENT/ $68,952
SPARE PARTS.
France........................... EQUIPMENT & $6,105,691
MATERIALS-WET CRUDE
PRODUCTION.
UK............................... PIPELINE EQUIPMENT & $45,961
SPARES (OIL).
UK............................... OIL SPARE PARTS..... $90,323
Italy............................ OIL SPARE PARTS..... $163,204
India*........................... CHEMICALS........... $119,017
Germany.......................... STEAM BOILER/PARTS.. $582,840
Jordan........................... SPARE PARTS FOR $198,054
ENGINES.
Italy............................ MEASURING & CONTROL $107,345
INSTALLATION &
SPARE PARTS.
UK............................... PUMPS AND SPARE $359,616
PARTS.
China*........................... PUMPS AND SPARE $83,678
PARTS.
Finland*......................... OIL SPARE PARTS..... $60,075
France........................... PUMP/PARTS.......... $277,575
Jordan........................... SPARE PARTS FOR AIR $22,422
COMPRESSOR.
France........................... ELECTRIC MOTOR...... $57,621
France........................... ELECTRIC MOTOR...... $33,508
Portugal......................... DESLUDING EQIPMENT.. $329,664
France........................... VALVE/PARTS......... $143,199
Russian Federation............... OIL SPARE PARTS..... $23,005
Jordan........................... CRANE............... $594,000
Russian Federation............... PIPE FITTINGS....... $125,173
Turkey*.......................... TRANSFORMERS........ $104,000
Turkey........................... FIRE FIGHTING TRUCKS/ $356,705
SPARES.
Belgium.......................... SOLAR GAS TURBINE... $926,852
Russian Federation*.............. SPARE PARTS FOR $500,020
EXCITER.
France........................... OIL SPARE PARTS..... $181,750
Cyprus........................... BATTERY CHARGER..... $47,000
Russian Federation............... INSTRUMENTATION..... $217,298
Russian Federation............... OIL SPARE PARTS..... $432,000
Jordan........................... PUMPS,COMPRESSORS $297,598
AND ROTARY MACHINES.
Turkey........................... AIR COMPRESSORS..... $301,148
China*........................... FILTERS............. $44,748
Turkey........................... OIL SPARE PARTS..... $27,075
France........................... COMPRESSOR/PARTS.... $559,386
Russian Federation............... FIRE FIGHTING $66,500
EQUIPMENT.
Italy............................ HEAT EXCHANGERS AND $2,270,780
PARTS.
Turkey........................... CABLE TERMINATIONS.. $195,000
Syria............................ CABLE............... $312,700
France........................... ELECTRIC MOTORS..... $15,803
Cyprus........................... OIL SPARE PARTS..... $383,825
France........................... PUMP/PARTS.......... $92,065
France........................... ELECTRICAL AND $62,821
CONTROL INSTRUMENTS.
France........................... ROTORK ACTUATORS & $215,323
SPARES.
France........................... OIL SPARE PARTS..... $293,280
Jordan........................... PUMPS AND SPARE $889,681
PARTS.
Cyprus........................... BATTERIES........... $302,475
Portugal......................... OIL................. $223,750
------------------------------------------------------------------------
*Released from hold