C. Competitiveness of Domestic Offshore Oil and 

 Gas 



Offshore oil and gas compete for the same 

 domestic markets as onshore production. Market 

 demand for petroleum is a fairly stable quantity 

 (except, of course, in times of national or inter- 

 national emergencies). Total refinery and petro- 

 chemical supphes from domestic sources are 

 reduced by the quantity of imported supply 

 allowable under the Federal Mandatory OO Import 

 Program. 



In areas where producing capabilities exceed 

 demand, production is prorated among the wells 

 according to various state regulatory authorities. 

 The west coast is deficient in petroleum resources 

 compared to demand; hence there is no proration- 

 ing of production in California. However, there is a 

 surplus of producing capability in the south- 

 central United States. Louisiana, and particularly 

 Texas, thus act to provide an overall balancing 

 mechanism between total demand and total do- 

 mestic supply. Such proration also serves the 

 important function of conserving these resources 

 in the most practical way, by conserving the 

 reservoir energy, so that the ultimate production 

 will be as high as possible. 



Offshore oil production (practically all off 

 Louisiana at the present time) from the Outer 

 Continental Shelf (OCS or Federally controlled 

 offshore areas) is made a part of the State 

 allowable framework by tacit consent of the 

 Federal Government. Offshore allowables are set 

 higher than onshore by a varying "equity ratio" in 

 recognition of the higher costs of marine opera- 

 tions. However, offshore petroleum prices are 

 directly comparable to onshore prices and must 

 compete with them on the market. The Federal 

 royalty offshore is normally 16-2/3 per cent, 

 where onshore it is usually 12-1/2 per cent. 



Offshore gas production is similarly competing 

 for the same markets as onshore gas. The largest 

 proportion of gas production, whether from on- 

 shore or offshore sources, is sold at the well-head 

 or at processing plants to gas transmission compa- 

 nies on the basis of long-term purchase contracts 

 which specify price and rate of withdrawal. Where 

 this gas production originates in Federal leases or 

 where it moves through interstate pipelines the 

 price is controlled directly by judgments of the 

 Federal Power Commission. 



If offshore producing capabilities were to rise 

 considerably faster than the growth in national 

 demand, this could of course produce some effects 

 on production onshore in those areas of proration. 

 However, with a tightly controlled import policy 

 and a rapidly expanding domestic demand any 

 such dislocation would probably be minor in the 

 long run. 



It is estimated that by 1978 domestic crude 

 production will be about 10 million barrels per 

 day and that by 1988 it will be less than 9 million. 

 These estimates allow a two-fold increase in 

 per cent demand supplied by foreign imports by 

 1988 (an actual increase of 2.7 to nearly 9 mUUon 

 barrels per day), and a supply of synthetic 

 hydrocarbons of greater than five per cent. Con- 

 ventional domestic production may supply only 

 half of our needs by that date. It is likely that by 

 the mid-1980's Texas and Louisiana will be pro- 

 ducing at the maximimi efficient rate (mer), and it 

 is questionable whether market proration will stiU 

 be in effect. 



Inevitably there will be increasing utilization of 

 existing producing capacity so that any major new 

 sources of production, such as offshore, should 

 be able to be absorbed into the existing admin- 

 istrative framework without undue difficulties. 

 Given the high cost and inherent time delay in 

 developing marine production it seems doubtful 

 that industry would be able to accelerate offshore 

 development to a point where it would have a 

 significant or lasting impact on onshore produc- 

 tion. The discovery of a new field offshore has no 

 more of an impact on allowables than does a new 

 discovery onshore, except for the offshore equity 

 allowable, which is only a small recognition of the 

 much greater investment cost required offshore. 



In summary, the petroleum industry so far has 

 successfully been able to discover, develop and 

 produce domestic marine petroleum resources 

 economically and in direct competition with other 

 available sources onshore. 



Domestic petroleum is not competitive on the 

 international market, largely because of the large 

 volumes and low cost of oil reserves in the Middle 

 East and the high cost of domestic reserves. 

 However, the historic policy of the United States 

 is that we cannot afford to become excessively 

 dependent on foreign oil imports and must main- 

 tain an excess producing capability to meet nation- 



VII-211 



