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Mr. SPAHR. Yes, sir. There is also a graphic illustration of the cost of the two systems on page 13 of that report, that very quickly shows the total cost of the trans-Alaska system including the Valdez terminal as well as the cost of tankers added to the pipeline cost as compared with the cost of the trans-Canadian pipeline.

Senator McCLURE. I have to ask a couple of questions so I will know what data will be in the capital cost figures. One, is the assumption, I assume, that tankers are being constructed in U.S. yards? And is there then a direct subsidy to the construction of those tankers, under the Maritime Act?

Mr. REAM. No, sir, we have not received a subsidy of any sort. Mr. SPAHR. Nor have we. Mr. REAM. We have met the higher costs incurred in U.S. yards without subsidies.

My understanding is that one uses tankers after, if you built it for other than U.S. flag service, there is a subsidy.

Senator McCLURE. The Jones Act requirements are also considered in the operating costs, is that correct?

Mr. REAM. Yes. I might comment, Senator McClure, the figures I quoted did not include the ships. They did include the terminal in Valdez and that is part of the pipeline. The ships cost roughly an additional billion dollars, in round numbers. There would be no additional terminal costs in California, in my opinion, because if we do not bring in Alaska crude we will bring in foreign crude.

In our company the ships are considered to be a different type of investment. If you build a pipeline from here to there it has no alternate use, if you build a ship in the United States, our 70's for instance have alternative uses, our 120's, I admit at the moment have relatively limited use. I am not saying they should be excluded but they do carry a different connotation than a pipeline.

Mr. SPAHR. Mr. Ream has announced that his company is a fully integrated international oil company. Mine is a national company. We don't really have any alternate use for our U.S. flag tankers, as I pointed out. So, perhaps, the only solution for us if we couldn't use them on the runs we plan, is to see if we can work out a mutually satisfactory arrangement with Mr. Ream's company and sell them to him.

Senator McCLURE. You shouldn't have confessed you have no alternative use if you are trying to sell them to him.

Mr. SPAHR. I don't think it is a detriment to confess a problem that everyone in the industry knows anyway.

Senator McCLURE. As a result of the Jones Act and building in American yards, capital costs are higher. Consequently we can build some safeguards and operations in construction that there might not be in foreign shipyards.

Mr. Ream. The Coast Guard requirements are the most rigorous in the world, both in regards to navigational techniques, as well as with regard to technical equipment and all other onboard safety systems. This is not true to the same extent for a foreign flag operation, except those generally operated by the fleets of the major oil companies where, broadly speaking, we tend to follow U.S. flag requirements.

Senator McCLURE. In construction?
Mr. Ream. In construction and operation.

95-903 0 - 73 - pt. 4 - 18

Senator McCLURE. Are the wage scales for in-flag the same!

Mr. REAM. No, sir. The safety operations of the major oil company fleets are reasonably close, if not comparable to U.S. flag. The difficulty arises with so-called independent tanker operations, I don't condemn them, this is the way they are permitted to operate, and they operate fully within the law, so their standards are lower.

With regard to your comments on the cost of foreign flag, I believe it is safe to say there is a considerable body of divergent opinion here, world construction costs are increasing rapidly. The historic capital between United States and foreign flag costs have narrowed. It has narrowed as to our foreign flag operating costs.

Mr. SPAHR. Senator McClure, and Mr. Ream, I think we might add here that—so we don't overlook the point—we will be limited in the size and tonnage of ships that we can use in west coast service, compared to the maximum size in operation today and contemplated tomorrow from foreign flag service from Middle Eastern ports to ports of use other than those in the United States. I am referring to 300,000 tonners that have a substantial advantage in terms of economics over the smaller tankers. I just don't think we ought to let it go by without reminding our friends here this is the case.

As you know, Senator McClure, at the moment we have no deepwater ports in this country capable of taking the big ships.

Mr. REAM. With the exception of Puget Sound. They can take a ship of any size. San Francisco can take 60, and Los Angeles, about 110 or 120.

Senator McCLURE. Could you put a price per barrel differential between foreign-flag operation and U.S.-flag operation, between Valdez and the United States, if there are changes in the law which permitted that differential ?

Mr. REAM. For a 120,000-ton U.S. flag, current cost between Valdez and Los Angeles, 40 cents a barrel. I would hazard a guess that a foreign-flag ship of similar size might be up to 5 to 10 cents a barrel cheaper.

Mr. SPAHR. Mr. Ream really knows more about this than I do. However, as far as U.S.-flag costs are concerned, we would estimate, including a different average size vessel than Mr. Ream, that the average cost from Valdez to Los Angeles would be 47 cents a barrel, I am sure Mr. Ream will admit that is possible if you are using smaller ships.

Mr. REAM. If you would like, Senator, we could submit to the committee an estimate of costs, documented as to the basis of the cost difference.

Senator McCLURE. I would appreciate that information and I would like it made a part of the record. And I want it known that the estimates I made are strictly off the top of my head.

[Subsequent to the hearing the information referred to was received.]


Washington, D.C., May 15, 1973. Hon. JAMES A. MOCLURE, Committee on Interior and Insular Affairs, U.S. Senate, Washington, D.C.

DEAR SENATOR MCCLURE: During Mr. L. M. Ream's testimony before your Committee last week, you raised a question concerning the tariff differential in transporting North Slope crude oil from Valdez to the Lower 48 via U.S. Flag and foreign flag carriers. I now have that information.

We estimate the rate from Valdez to Los Angeles in a U.S. registry vessel of 120,000 dead weight tons to be approximately 44 cents per barrel. A comparable foreign flag tanker in the same service would require a rate of about 27 cents per barrel.

Several factors contribute to this difference. We estimate, for example, that the cost of construction in a foreign yard is around 40% lower than in a U.S. yard. Labor costs for operating a foreign flag vessel are about one-third of those incurred in operating a U.S. ship. Similar factors extract other cost penalties that account for the tariff differential.

I trust this is responsive to your question. If you require anything further, please let me know. Sincerely,


Washington Representative. Senator McCLURE. I understand you have some table that indicates west coast production and consumption. In appendix A you show the west coast supply and demand situation for 1980, production 1.4 million barrels per day and 8.1 million barrels per day.

Secretary Morton, this morning, presented figures for 1980 at production of 1.9 million barrels a day and imports of 1.2 million barrels a day.

What part of your 1.9 million figure is for imports from Canada ?

Mr. Ream. In this figure in the order of 200,000 to 300,000 barrels a day.

Senator MCCLURE. You are not considering that with Alaskan oil coming down there would be a diversion of Canadian oil to the Midwest?

Mr. REAM. My figures are the part that will be displaced by Alaskan oil.

Senator McCLURE. Would you explain the difference between your figure of 1.9 and Secretary Morton's figure of 1.2 million barrels ? Mr. REAM. I think you said his figure was 1.6. Senator McCLURE. His figure is 1.9.

Mr. REAM. We have included in our figure a figure which would represent the reduction of a 2 to 3 billion barrel discovery in the Santa Barbara Channel. We have put what may be a modest or an optimistic assumption that may represent the major difference, Santa Barbara.

Senator McCLURE. Your figures are 1.4, and his are 1.9. Mr. REAM. Yes. We think it is unlikely from this time frame they will be developed and certainly be developed in that potential, and that is the only basis on which I can come up with the number 1.9 million for west coast and Alaska. We have included by 1980, 200,000 a day from the Gulf of Alaska, which we again think is optimistic. We have

Senator McCLURE. On the other side of it, your figures show an import of 1.9. Secretary Morton's figures show imports of 1.2.

Mr. REAM. I would say he has a 3.1 total demand. He uses 1.9 and we are using 3.3. There are figures that come up with as high as 3.6. I believe the difference here is that the Interior has thought of figures lower than the 4.5 we are using. Our high figure is predicated on the decline of gas available in District 5, and believe me, sir, this demand is skyrocketing.

Mr. SPAHR. Senator, I would like to add something that I think might be helpful in the Senators' consideration of this problem. I think there is an inference here that if estimates are wrong, we will have excess crude on the west coast that will have to be shunted off

shore. I may be wrong, but I think that inference may worry some people.

If there were to be substantial discoveries in Santa Barbara and the Gulf of Alaska, I think that would be a wonderful thing because with the availability, refiners would be willing to expand and build refineries on the west coast. I think it is worth observing there is a pipeline network that originates in west Texas and New Mexico, and goes eastward. As those lines have extra capacity, it is available for other use. They have multiple line rights, so right-of-way would not be a problem. Also there is one line going from New Mexico westward to the Los Angeles area. That line-I am not sure of this—has multiple line rights, at least most of the way.

Mr. REAM. Yes. Supplementing what Mr. Spahr is saying, my submission indicates we are looking at these very alternatives.

Mr. SPAHR. I hadn't completed my point yet. I would think, in the eventuality of the development of surplus production in the western area of the country, the oil that has been flowing to the West and Four Corners Area could be turned around to those lines I have mentioned that already go eastward and I think the Four Corners line could be supplemented as well, so you can easily move excess oil to the East without substantial requirement of an investment of a totally new line.

In the beginning, sir, when we contemplated completion of the trans-Alaska facility in 1972 and 1973, it was apparent to me that we were going to have oil, Sohio would have oil that couldn't be marketed on the west coast immediately, and we turned our attention to the question, how are we going to get into the Midwest, through a new line out of Seattle, for example, or through another system? This is not a new thought. It is a matter that is of real interest.

Senator MCCLURE. I am sure both of you are aware of the legislation submitted by the administration to prohibit drilling in the Santa Barbara Channel. I am sure you are aware of the stated intent to renew that request with the passage of that legislation. If that is passed, then I understand both of your comments would be that the production estimated presented by the Interior or you individually for the west coast would be substantially less; is that correct?

Mr. REAM. Yes. Senator McCLURE. Then the imbalance between supply and demand, with a shortage of Alaskan oil, will be a larger shortage.

Mr. REAM. Yes. On the Santa Barbara Channel, I believe, there has been a holding off of drilling, and the President's message really continued that ban on drilling in the channel, pending a determination that further drilling will be environmentally safe. I don't anticipate whether it will be determined to be environmentally safe or not. We have assumed it might be, and therefore have taken from this point of view a caution

Mr. SPAHR. Secretary Morton included Alaskan production from the North Slope in his figures.

Mr. REAM. Our figures include South Alaska on a decline curvethat is existing south Alaska--and we have 2,000 barrels a day from the Gulf of Alaska.

Mr. MADAR. If my notes are correct, and I have not examined his testimony, I believe he commented 2.6 million in 1982, including 2 mil

lion barrels per day of North Slope production at that time, and the base numbers

Senator McCLURE. I was comparing the 1980 figure, rather than the 1982. I don't know whether that changes the situation or not.

Mr. MADAR. I am not sure it does. In looking at 1982, as a base, that would leave approximately 2,000 barrels a day for the internal California production, and that corresponds fairly well with the estimates submitted by the California State Resource Commission, and sort of looking back towards 1980 and, trying to fill in the missing numbers, the 1.9 million would be a very drastic step down to the 600 of 1982.

Senator McCLURE. Thank you very much.

Moving to another point, Mr. Ream, you said that your company has become convinced that the Mackenzie Report estimates being published were understated ?

Mr. REAM. Yes.
Senator McCLURE. What led you to that conclusion?

Mr. REAm. Detailed knowledge of the basis of the estimate. I would use two examples, and by no means am I implying other than that the Mackenzie group was in the same early stage as the Alyeska was. As one learns about the difficulties of building this type of line, under environmental constraints, the higher the price goes. The Mackenzie Valley line has been designed for a settlement of 3 feet and the Alyeska line was designed for 1-foot settlement. That is an example of the very nature of an assumption that has a signal impact on the stress ratio in the pipe and can affect the amount of pipe above and below ground, which adds considerably to cost. It is these types of assumptions here that led us to the conclusion that the figures were unrealistically low.

Senator MCCLURE. The Mackenzie group confessed that particular omission from their study, and estimated a $75 million addition to the cost. Would that sound reasonable or would you have any opinion on that?

Mr. REAM. I don't believe I have an opinion on that item.

Senator McClure. It has been charged that the companies involved in Alyeska completely ignored the 1920 Mineral Leasing Act with regard to the right-of-way. Do you have any comments on that?

Mr. REAM. Yes, speaking from a legal point of view—and I am not a lawyer—my understanding is that there has been an administrative practice over the years that said one could use construction rights-ofway that extended beyond the 25-foot limitation on either side and these were granted then as special land use permits on the basis they were not permanent parts of the pipeline, and our legal advisers had told us with considerable research and review that they believe there was this possibility of not running from a legal point of view, but they felt there was a legitimate risk, other pipelines had been built in the United States since 1920. Of course, it is this relief which was turned over by the Court of Appeals.

My answer then is we didn't think we were breaking the law, obviously.

Senator MOCLURE. Is there anything you would like to add to that, Mr. Spahr!

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