10

11

12

13

14

15

Note that in a recent Department of Interior Analysis, Nehring uses a total system cost of $5.3 billion in 1974 $, converting this to 1971 $ at a 10% discount rate makes his total cost estimate to Chicago $4.0 billion, and splitting this at 66% for the North Slope to Edmonton segment results in his comparable estimate being equal to $2.63 billion in 1971 $. Further, each capital cost case for TCP I and TCP IV is increased below by 10% and 20% for additional sensitivity.

Source: Atlantic-Richfield Company, memorandum re Trans Canada Alternative Route submission to U.S. Department of Interior, Sept. 10, 1971, Appendix B, entitled: "Transcontinental Pipeline Project, Transportation of Alaskan Crude Oil, Atlantic, BP, Humble, December 31, 1968. Prudhoe Bay to Chicago Pipeline."

See the Oil and Gas Journal, Oct. 18, 1971, "Interprovincial Adds a Quarter Million Horsepower."

See the Atlantic-Richfield memorandum re Trans Canada Alternate Route submitted to the Secretary of the Interior, Sept. 1971.

Note converting the estimate made by Nehring into 1971 $ in the manner described in footnote 15 shows his estimate to be slightly higher for this segment, namely $1.35 billion. Note, however, that while his total capital costs in 1971 $ are about $.25 billion greater ($3.98 billion minus $3.75 billion) than the high case shown in Table 3, it is well below the capital cost case of $4.5 billion, which is used below when the results in Table 5 are further tested for sensitivity and adjusted upward by 10% and 20%. See Nehring, R., "Future Developments of Arctic Oil and Gas: An Analysis of the Economic Implications of the Possibilities and Alternatives," Office of Economic Analysis, Department of Interior, May 10, 1972. He estimates the costs in 1974 to be $5.3 billion which equal $3.98 billion in 1971 dollars at a 10% discount rate.

Comparable is meant to mean, in this discussion and elsewhere in the text, high-cost cases are considered with each other, medium with medium and low with low. Note in Table 5 below, some of these cost comparisons are presented jointly.

In the analysis below the before corporate income tax calculations will be utilized, since the special tax provisions of the crude oil industry make it nearly impossible to estimate the after tax return. Furthermore, as recently as 1968, when the oil depletion analysis was set at 27.5 percent rather than the present 22 percent, the major oil-producing companies in the U.S. paid an average corporate income tax of only 7.1 percent.

For a more detailed discussion of approach, see: Steiner, Peter 0., "The Role of Alternative Cost in Project Design and Selection," Quarterly Journal of Economics, 79:421-2, 1965.

16

17

18

19

20

21

22

In a recent paper by Richard Nehring of the Office of Economic Analysis, U.S. Department of Interior, the possibility of increased imports from Ecuador, Peru and Indonesia, as well as from domestic sources is discussed. If locational savings from these foreign sources are used to increase the taxes collected by such countries, such alternatives would not affect the benefit-cost calculations, which I base upon a Persian Gulf alternative. However, if some real savings are possible then I have systematically biased my calculations in favor of the proposed pipeline development. See: Nehring, R., "Future Develop

ments of Arctic Oil and Gas," op. cit.

See Cicchetti, C.J., Alaskan Oil..., op. cit.

These weights slightly exceed the present regulatory limit of 1/8 of domestic crude production utilized to determine the amount of foreign crude imports in Districts I to IV. The 1/6 therefore biases the benefit estimate downwards slightly, given present institutional constraints.

For a discussion of the Gulf Coast basis of pricing east of the Rockies, see page C-14 of the U.S. Department of Interior, Economic and Security Analysis of the Trans Alaska Pipeline, vol. I (Washington, D.C., National Technical Information Service, December 1971). For an intérpretation of this basis as it relates to the present controversy, see public "Comments by Charles J. Cicchetti and John V. Krutilla on the Final Environmental Impact Statement for the Proposed Trans Alaska Pipeline" and the "Complementary Analysis of the Economic and Security Aspects of the Trans Alaska Pipeline," submitted to the Department of Interior May 5, 1972.

I owe a consideration of these differences to personal correspondence dated September 30, 1971, with Mr. E.L. Patton, President of Alyeska Service Company.

Platt's Oilgram Price Service, Crude Oil Supplement of August 25, 1971, vol. 49, No. 164-B.

Roselius, R. R. and Steffens, J.H., "North Slope Oils Score High with Hydroprocessing," Oil and Gas Journal, May 17, 1971.

23 Timenes, N., Appendix C, vol. I, "An Analysis of Transportation Alternatives," An Analysis of the Economic and Security..., op. cit.

24

25

Vogeley, W., "Comments on Trans Alaska Pipeline and Alternatives" submitted by the Environmental Defense Fund, and Cicchetti-Krutilla "memo to the Undersecretary," U.S. Department of Interior, May 8, 1972.

For a complete discussion of the prices used for reference purposes in each market by various analysts, see "Comments by Charles J. Cicchetti and John V. Krutilla on the Final Environmental Impact Statement for the Proposed Trans Alaska Pipeline...," submitted to the Department of Interior, May 5, 1972.

26

27

20

29

30

Parker, W., A Comparison of Prudhoe Oil Costs Via Valdez or via a
Mid-Canada Pipeline, op. cit.

These adjustments would amount to higher costs or taxes paid to the Canadian government of approximately $.10 to $.25 per barrel.

The $.18 per barrel adjustment for possible lighter North Slope crudes and sulfur content differences would have a small percentage effect on the wellhead prices and therefore the taxes and profits. However, since this adjustment is both uncertain and perhaps an overestimate of any adjustment of this kind, it will not be used.

This assumes that the full throughput of the TAP is oversupplied for 15 years and the discount rate is 10%, thus reducing the present value of benefits to approximately 24% of those which were utilized above. While this might be an outside estimate many of the cases considered in Table VII-1 would imply that the benefits which were used for TAP would fall to between 24% and 50% of those values, which were used previously for TAP.

See Corrigan, R., "Resources Report/Japan May Get Some Alaskan 011; Foreign Flag Shipping of Exports is Likely," The National Journal, July 31, 1971.

31 See United States Code 861 et seq. (1964), Common Name, "The Jones Act."

32

33

34

Mr. Eckis is an executive with Atlantic-Richfield Company and a former president of Richfield Oil before its merger with Atlantic Refining Company. He discussed the Japanese market in his paper, Alaska Oil in Domestic and World Markets, which appeared in Change in Alaska, ed. by George W. Rodgers, College, Alaska, University of Alaska Press, 1970.

Oil Import Controls, Hearings before the Subcommittee on Mines and Minerals, House Interior and Insular Affairs Committee, March-April 1970. It should be noted that, at the present time, Phillips is not a holder of major proved-up reserves on the North Slope. However, it does have reserves in Cook Inlet which is both closer to Japan and more likely to be backed out of District V by North Slope oil.

This interview, as well as others with U.S. and Japanese government officials is reported by Richard Corrigan, "Resources/Japan May Get Some Alaskan Oil; Foreign Flag Shipping of Exports is Likely," National Journal, July 31, 1971.

35 The $1.83 per barrel is based upon averages for the first quarter of 1970 found in the May 10, 1971, issue of Platt's Oilgram Price Service.

36

This is calculated by subtracting production costs ($.25), transportation costs for a pipeline ($.60) and tanker ($.20) from a price of $2.00 per barrel.

It should be noted further that, if the imported oil is produced by the same company that exports Alaskan oil, the royalties paid to the producing country may be credited against U.S. corporate income taxes. Such a tax advantage has not been included in the analysis of benefits and costs, since it is a transfer payment. However, it will affect profitability and must therefore be included when private decisions are analyzed. This is especially true when the company producing North Slope oil will also be the producer of foreign oil that will enter under an "import for export" program.

See Corrigan, R., "Resources Report...", op. cit.

Note the values shown above for transporting oil to Chicago must be increased by two factors to determine these costs: $.25 per barrel production costs and $.25 per barrel for transportation between Chicago and New York.

This is based upon an average total cost on the East Coast of a TCP alternative of $1.51 per barrel compared to $1.64 per barrel for a Central American system and $1.83 per barrel for a Cape Horn system. If the Midwest is the principal North Slope market, these extra costs would be approximately $.63 and $.82 respectively.

STATEMENT OF DR. A. MYRICK FREEMAN, VISITING PROFESSOR OF ECONOMICS, UNIVERSITY OF WISCONSIN

Mr. FREEMAN. I am Myrick Freeman. I am on the faculty in economics at Bowdoin College in Maine.

In my oral presentation I would like to summarize a few of the points in my testimony and ask that my prepared statement be submitted for the record.

Senator FANNIN. The complete statement will be made a part of the record.

Mr. FREEMAN. Also, Mr. Chairman, last year I prepared a rather lengthy evaluation of the environmental impact statement and the economic and national security analysis of the Department of the Interior which was submitted to the Department of the Interior as part of the record last May.

Several of the points I want to make are discussed in more detail there and I would also like to have that statement submitted as part of the record.

Senator FANNIN. It will be submitted as part of the record.

[The impact statement referred to is retained in the committee files.]

Mr. FREEMAN. I would like to discuss one or two points raised earlier in my oral presentation today.

The first point I would like to make concerns the value of NEPA and the impact statements introduced in accordance with NEPA in the public consideration of a major public policy decision such as the development of North Slope oil.

The final impact statements provided a large body of data and information for people who were concerned with this issue to look at and analyze.

It is important to remember, though, that different people reading this same data could reach conflicting conclusions and this possibility arises for two reasons:

One is that the people could use different methods of analysis in analyzing the data and logically trying to reach conclusions.

In this situation it is usually possible to show that one method of analysis is superior or correct on logical grounds in preference to the others, in fact, if the other is wrong. This has been the case in the Department of the Interior's conclusion and the analysis they used to reach these conclusions.

Some of these errors have been perpetuated in the more recent testimony. Several of the areas where faulty analysis has led to conclusions not supported by the data in the impact statement are outlined in the formal evaluation that I have asked to be submitted.

These include questions such as the cost of delay associated with delaying the pipeline, the national security question, the balance-ofpayments issues and the net economic benefit.

The second reason for reaching a different conclusion on the basis of the same data is that two people might apply different subjective evaluations or weights when they compare various kinds of environmental economic costs and benefits.

As an illustration I would refer to my evaluation that went into this particular problem at length. This is dealing with the environmental