Hearings and Business Meetings

Jun 01 2006

09:30 AM

Full Committee Hearing- Oil Shale

250 North Street Grand Junction, CO Grand Junction City Hall Auditorium 09:30 AM

Mr. Mike McKee

Chairman of the County Commission, Uintah County

Testimony of Michael McKee, Chairman Uintah County Commission,
Vernal, Utah

Hearing, Senate Energy and Natural Resources Committee,   Grand Junction, CO June 1, 2006

Chairman Domenici, members of the Committee, thank you for holding this hearing and inviting me to testify.

With reservation, Uintah County finds itself thrust into the heart of national energy concerns.  The fact that the County contains tremendous energy reserves will forever change the County’s economy and the lifestyles of its residents.  One could argue the benefits or negative impacts of such changes, but the fact remains that the County’s resources are critical to national interest, that the development of these resources are inevitable, and the County’s infrastructure and ability to provide services will be greatly impacted.

Uintah County stands ready to assist the Nation in meeting its energy needs and will be willing partners with industry and government to do so.  We understand that oil shale development will improve our Nation’s energy and economic security and benefit the country as a whole. 

We believe that it is in the Nation’s interest to assist counties of origin with funding needs for planning infrastructure development, community impact assistance, and adequate services.  Local communities must provide for public infrastructure, education, community services, utilities and roads at levels that exceed its funding capabilities.

Our area has already been highly impacted because of the number of oil and gas wells being developed in the area.  Nationwide, the Vernal BLM Field Office has processed the second highest number of applications permit to drill (APDs) in the country.   In the past two years it processed approximately 1,400 APDs.  It is estimated that there will be approximately 1,200 applications this year and increasing to 1,500 next year.  In addition, the County has some of the richest tar sands in the United States.  We believe that commercial tar sands production may come on line before oil shale production, thus adding to an already overburdened system.

To meet these needs, there must be upfront funding assistance to the counties for planning, and mitigation of impacts.  Currently, no mechanism exists to provide this funding. 

Key issues

Mechanisms for obtaining funding are not automatic; local communities have to justify (beg) requests on a project-to-project basis.

Costs are being incurred now.  Receipts don’t arrive until after production.

The county is now facing the onset of oil shale and tar sands development.  Failure to fund such impacts will not only prevent the county from meeting the needs of this expanding development, but will also reduce funding and impact ongoing conventional oil and gas impact and production.

Businesses not directly involved in energy development cannot hire adequate workforce as they cannot compete with wages paid in energy development.  The current lack of housing, particularly low income, is a factor in this issue.  Thus energy development is negatively impacting other sectors of our economy.

Currently both the Forest Service and the BLM are in the midst of resource planning.  Management prescriptions proposed in these plans with respect to wild and scenic river management will prevent future water development to meet needs for domestic, agricultural and energy development.

Congressional oversight is needed to insure that field offices are adequately staffed and that their policies and procedures are supportive of the provisions of the Energy Policy Act. 

Currently PILT dollars are reduced proportionately to the amount of discretionary funding received from Mineral Lease Funds.  In effect, this penalizes counties when mineral impact funds are received.  Legislation should be enacted to resolve this discrepancy.

Local Participation in Planning

EPACT 2005 calls for the involvement of local communities in the federal oil shale program planning process and for formal participation on the Strategic Unconventional Fuels Task Force.  We are participating in the deliberations of the Task Force, and we commend the Committee, and in particular our own Senator Hatch, for the foresight to formally include the local communities in this process. We see this as the beginning of formal mechanisms by which local communities will have a strong voice in the planning and implementation process.  We encourage this Committee to continue engaging the local communities as we move forward.

Needs and Concerns

There are many issues that local communities face during periods of rapid and unrelenting growth. I could spend much of my time talking about such issues as insufficient and affordable housing, overstretched education and medical services, escalating public service costs, drug problems, inadequate jail space, and infrastructure demands.  For example, Uintah County has approximately 1400 miles of maintained roads.  We have another 4,589 miles of unmaintained roads.  But in the end, it all comes down to a fairly simple matter; where do the revenues come from to satisfy the public needs and when do they arrive?

The current lack of adequate mechanisms for providing revenues to meet the public obligations concerns me. Current mechanisms and formulas, revenue flows are insufficient to cope with impacts; and if nothing is done to remedy this problem lack of funds will overwhelm our local communities to cope in the future. 

Deficiencies in Current Mechanisms

Most of the processes by which rural communities receive funding depend on the state or federal governments to first receive tax or royalty revenues from production or other commerce.  The federal and state governments then return a portion of the revenues generated from this production or commerce to the counties.

In times of rapid growth, distribution of these funds comes too late to be of any use during the ramp-up period. Even in times of steady economies, the process does not work very well. Some funds come with restrictions on where the resources can be allocated, tying our hands to addressing pressing issues that may not have been anticipated. Even more problematic is that the portion of wealth that is returned is insufficient to fully mitigate the impacts.

We currently have limited mechanisms to receive up-front funds, ahead of the growth, that can be used for planning, infrastructure development and impact mitigation. If I could leave the Committee with one thought from this hearing, it would be that lack of early funds is at the root of the vast majority of socioeconomic impact issues. Solving this one issue will be the single biggest contribution this Committee could make to the socioeconomic well-being of these sparsely populated communities that find themselves squarely in the impact zone.

 Context of Solution is National in Scope

To put my suggestions in context, consider that we represent very small communities in a region that will experience unprecedented impacts.  By fate of nature the single largest concentration of hydrocarbons found on earth are found within a few hundred square miles of the Green River geologic formation. This area is sparsely populated wherein only about 3% of the US population lives in the tri-state area of Utah, Colorado and Wyoming.  The population in the direct impact area is less than 0.1% (one tenth of one percent) of the US population. As a consequence of this low population our states and local communities are highly limited in their capacity to financially absorb impacts from energy growth.

Because the benefits of oil shale development are National in scope, we believe that it is in the broader National interest to help with the extraordinary impact costs that will come with such development. Oil shale development will improve our Nation’s energy and economic security and will benefit the country as a whole. Most heavy equipment manufacturing and consumption of the energy will take place outside of the region.
There is some urgency to addressing the issue of domestic energy supply. But in responding to this pressing need our immediate concern is the up-front funding needed for planning and impact mitigation, as well as for major and minor infrastructure projects.
Guiding Principles for Cost Sharing Impacts and Infrastructure
1. Because the federal government owns much of the resource, pre-investment of funds that will directly lead to future federal revenues is consistent with good public policy. 
2. To truly share in the extraordinary costs, funds provided should not diminish future funds allocated to states and local communities.
3. States, and especially local communities, should not be asked to take financial risks for the potential failure of projects.  Indebtedness of all kinds needs to be avoided.
4. Care needs to be taken that incentives provided to the industry do not have the effect of diminishing revenues at the state and local community level.
5. Mechanisms should be established that give local communities a strong voice in the decision-making process, including program planning and recommendations for administrative and legislative action.
 Suggestions for Funding Sources

• For Counties to fulfill their responsibilities and more formally begin the local planning process Congress needs to provide an appropriation of funds to the Office of Petroleum Reserves (OPR), the lead DOE office in the implementation of the Strategic Unconventional Fuels Program.  OPR would use a portion of these funds as grants to facilitate the engagement of communities in the Program Planning process.  It is my understanding that such a recommendation is being considered by the Strategic Unconventional Fuels Task Force, and I am encouraging this Task Force to adopt this recommendation.
• We will soon be encountering the need for long-lead time infrastructure development. Water projects, new and improved road systems, upgraded airports, power utilities, and possibly a regional rail spur are examples of big ticket items that we must plan for. One possible source of funds for planning and early implementation, suggested by our colleagues from Colorado, would be to redirect royalty funds from NOSR 3, now totaling nearly $40 million, to the three states on a reasonable formula. These funds have accumulated from current production royalties on oil shale property, for the purpose of reimbursing DOE for property improvements enjoyed by the lessee.  These would be one-time funds, but would be substantial enough to fully engage the communities in the process and initiate some meaningful infrastructure development.

• In anticipation of the need for major infrastructure requirements, we suggest creating an ‘investment bank’ through the federal Mineral Lease Fund, whereby roads, dams, utilities, airports, possible financing for private railroads, and the like could be funded.  This approach would need to be properly structured, but with increasing commodity prices creating increased mineral lease royalties to the federal government, it seems like good policy to use some of these funds to promote development of additional royalty-bearing projects. This would be truly an investment to provide future income.
• We understand the desirability of reducing royalty costs in the early years of development to assist industry with early project payback.  However, we need to caution the Committee that passing those deductions to the States would impact the ability to provide adequate revenues for impact mitigation. If patterned after other such proposals the future federal royalties could be escalated to make up for early royalty forgiveness.  But these swings in revenues should apply only to the federal portion; States and local communities need to count on a steady flow of revenues, not less in early years, and not necessarily more in later years.

• Coordinate with the US DOE to develop and implement an integrated local and regional infrastructure plan that will support efficient natural resource development, support university and vocational training to provide a skilled workforce, realize synergies among infrastructure requirements for various conventional and unconventional fuels, and maximize state and local employment opportunities.
 PILT payments compensate Counties for the loss of taxing authority over surface acres and surface improvements.  PILT does not address the impacts of mineral development.  To compensate for mineral development, revenues from mineral lease funds are utilized.  However, PILT legislation provides that for every dollar of discretionary funding we receive from Mineral Lease funds we must forfeit a dollar of PILT monies.  It is our view that such an offset does not recognize the impacts of mineral development.  Legislation should be enacted to resolve this discrepancy.
 When sharing of Mineral Lease Funds with the States was set up, it was intent that all of the funds would go to the area directly impacted by the mineral development.  In Utah, it has been the policy that the entire State is an impact area, and much of the mineral lease funds are used for on-going expenses that bear little relationship to impacts from mineral lease development.
 We believe that the on-going impacts of energy development could be substantially mitigated if Congress were to clarify the intent of these Mineral lease funds, so that all, or a greater percentage of these funds would flow to the Counties of Origin.  Along with the removal of restrictions in the PILT legislation these two actions would go far to mitigating the long-term impacts of oil shale development. 
 There may be other legislative action needed at both the federal and state levels to mitigate the extraordinary public costs for oil shale development. I trust that as we move forward that we can offer our suggestions and that the Task Force and this Committee will be receptive to our suggested policy and legislative remedies.
 America’s unconventional fuels resources, if developed expeditiously and in a sustainable manner that respects our environment and protects the needs and interests of affected communities, can contribute substantially to improving the nation’s energy security, stimulate economic activity and growth, and assure adequate and affordable energy supplies for decades to come. 
In order to insure timely development of oil shale and tar sands, Congress must provide oversight to insure field offices are adequately staffed and their policies and procedures are supportive of the provisions of the Energy Policy Act.