Answer: Under the present license fee system for oil imports, the import fee for crude oil in 1975 will be 21¢/bbl and for products will be 63¢/bbl. However, as a phase-out of the old quota import system some imports will be exempt from license fees up until 1980. The estimated revenue that will go into general funds is $180 million.

Under the old quota system all oil imports paid duties of 514 to 52¢/bbl. However, if a petroleum product such as lube oil were exported there was a "draw-back" on import duties paid on the raw material to make the product. The loss of revenue due to the elimination of duties in the new import program is estimated at $330 million.

Thus, the net effect on Federal Revenues due to the change in the oil import program is a net loss of $150 million. However, by 1980, when the exemptions from the license fees ends, there will be an estimated increase in revenue to the Federal Government of an estimated $860 million.

5. With respect to other nations that impose cargo preference restrictions on their imports, how can you make a distinction between government controlled shipping and private shipping? Would not the result be the same in either case where a certain percentage of imports is reserved for national flag vessels?

Answer. In some countries such as France and Japan many of the oil companies are quasi-government companies. Thus the situation is quite different from the United States where oil is imported not only by major oil companies but by hundreds of independent refining companies, many independent oil jobbers, distributors, terminal operators, and in some cases by consumers. Thus, the overall implementation of a cargo preference law on hundreds or thousands of private companies would be very different.

DECEMBER 11, 1973.

DR. DUKE R. LIGON,

Director, Office of Oil and Gas,

Department of the Interior,

Washington, D.C.

DEAR DR. LIGON: Reference is made to your appearance before the Subcommittee on October 10, 1973, and my letter to you of October 24, 1973, with respect to the current hearings on H.R. 8193, et al.

As you know, the hearing record remains open so that a meaningful legislative history on this very important problem can be developed. In this regard, I would appreciate your response to the following questions for inclusion in the record:

1. What was the cost of producing a barrel of crude oil, over time-year by year, since 1970-in the following countries: Libya; Iran; Saudi Arabia; Other middle eastern countries; Nigeria; Venezuela; Indonesia; and Canada. 2. In these same countries, over the same periods of time, how much was and is being paid to the producing countries in: a. taxes? b. royalties?

3. What is meant by posted price of oil? How is it determined? Who sets it? Does it change over time? If so: a. What is the posted price in each of the countries for the years 1970 through 1973? b. What is the relationship between taxes and royalties and the posted price?

4. How much does it cost to transport a barrel of oil from each of the above countries to the U.S. by: a. long term charter? b. medium term charter? c. spot charter?

(Show rates for each of years 1970 through 1973.)

5. What was the proportion of crude oil coming into the U.S. by various types of charter for each of the years 1970 through 1973? Show figures separately for: a. The seven major international oil companies (Exxon, Standard of Cailfornia, Shell, BP, Texaco, Gulf, Mobil.) b. The other integrated oil companies. c. The independent refiners.

Has the independent refiner been seriously affected by rising spot charter rates?

6. What was the average cost of transporting a barrel of crude oil from each of the countries listed for each of the years 1970 through 1973?

7. What are the costs in the U.S. to refine a barrel of crude oil? Show figures by years 1970-1973.

8. Has the product mix of refining been changing? If so, what are the proportions of various refined products in each of the years 1970 through 1973? 9. What is the profit margin per barrel of oil? Show by stages of: a. producing? b. transporting (crude from producing countries to U.S.A.)? c. fining? d. distributing in U.S.A.?

re

10. What is the price of a foreign barrel of crude oil landed in the U.S.A. in each of the years 1970 through 1973?

Your prompt response to the above questions, and the information quested by my letter of October 24, 1973, will be appreciated.

Sincerely,

FRANK M. CLARK,

Chairman, Subcommittee on Merchant Marine.

re

Hon. FRANK M. Clark,

U.S. DEPARTMENT OF THE INTERIOR,

OFFICE OF OIL AND GAS, Washington, D.C., January 21, 1974.

Chairman, Subcommittee on Merchant Marine, House of Representatives, Longworth House Office Building, Washington, D.C.

DEAR MR. CLARK: This is in response to your letter of December 11, 1973 requesting response to a series of ten questions concerning foreign oil production costs and their impact on supplies being imported by the United States with emphasis on transportation costs.

Attached to this letter are the responses requested and set down in the same order as presented in your letter.

We trust that they will be helpful in understanding the foreign oil supply situation and the economic and political impacts involved. We submit them for the record.

Sincerely yours,

L. ROY GOODEARLE, Associate Director.

1. What was the cost of producing a barrel of crude oil, over time year by year, since 1970-in the following countries? Libya; Iran; Saudi Arabia; Other middle eastern countries; Nigeria; Venezuela; Indonesia; and Canada. Production costs are assigned to the lifting of oil and in most foreign areas include field treating, transportation and storage to the export terminal. Each company has its own method of accounting and vary depending on total investments and operating costs in the different countries. The following are estimates of average producing costs for the countries listed above.

1 Canadian average production costs available for a 5-year period 1967-71 are as follows: Exploration 30 bbl, development drilling 10 bbl, land acquisition and rentals 21¢/bbl, producing facilities 134/bbl, producing costs 27/bbl, royalties 314/bbl, taxes and other miscellaneous costs 164/bbl; total $1.48/bbl or about 30 percent less than comparable U.S. cost average for the same 5-year period.

2. In these same countries over the same periods of time, how much was and is being paid to the producing countries in: a. Taxes; b. Royalties.

1 Source of this information is Petroleum Information Foundation, New York. All revenues are lumped together including taxes, royalties, and participation and off-take marginal oil. Royalties amount to about 20 percent and taxes about 80 percent of the income. Indonesia and Canada have been estimated from other sources.

* 1973 and 1974 figures are estimates and projections from available data and sources in the literature.

* Other Mideast include, Qatar, Bahrain, Oman, and Dubai of which Qatar is the largest item.

• Figures are for Qatar only, other Mideast are not available.

• Canadian figures include rentals, royalties, land sales, taxes, and interest costs as government revenues.

3. What is meant by posted price of oil? How is it determined? Who sets it? Does it change over time? If so: a. What is the posted price in each of the countries for the years 1970 through 1973? b. What is the relationship between taxes and royalties and the posted prices?

The posted prices of foreign oil are "catalogue" prices and are most generally much higher than the marketed prices. The posted prices are used to determine the amount of taxes and royalties. In the past, they were determined by negotiation between the producing companies and the host country or countries. After the Organization of Petroleum Exporting Countries was formed, OPEC negotiated for a few or all of the members as the situation dictated. The postings were set to avoid certain forms of adjustment, thereby leaving only the market price open to adjustment. The purpose was to assure the host governments a consistent basis for calculating their royalties and income taxes in order to better forecast their income for budget purposes. Until late 1973, postings were fixed by a bilateral agreement between the producing companies and the host countries.

However, since October 1973, the posted prices have been unilaterally set by the countries either singularly or in a general agreement by some of the members of OPEC.

The concept of posting prices for tax purposes may be coming to an end, however, since the Shah of Iran has called on the oil industry to "forget" the indefensible ". . . superflous" postings system. The idea now is to fix the producing country government "take." This the six Persian Gulf OPEC members did effective January 1, 1974. They are using $7.00 per bbl. for Light Arabian Crude as the "marker" price and then make all other adjustments for quality (gravity and sulphur content) differences including freight differentials. As a result, posted prices were backed out of this basic $7.00 per bbl. government "take" figure.

The following table is a chronological record of key foreign oil postings. The Table appears weekly in the Petroleum Intelligence Weekly.

10 Sulfur premium included.

11 Nov. 23, 1970.

12 Aug. 26, 1973.

13 Dec. 20, 1973 posted prices for crudes subject to Government price controls; noncontrolled crudes (about 25 percent to 30 percent of output) are posted $4.20 a barrel higher.

14 June 16, 1971.

4. How much does it cost to transport a barrel of oil from each of the above countries to the U.S. by: a. Long term charter? b. Medium term charter? c. Spot charter?

There is little differentiation between a long term charter and a medium termi charter as far as prices are concerned for the size of tankers that can land in the U.S. The AFRA charter rates are based on the 4 size classifications of tankers and the size of the tanker determines its charter rate.

Attached is a chart showing the historical charter rates for all four classes of tankers and the single voyage or spot charter rates. Note that the spot rates are reflective of the market pressures for supplies. The charter rates rise or fall subsequent to the trends of spot rates, never as high or never as low but at any one time period the spot rates may be higher or lower than the charter rates. The average rates (AFRA average freight rate assessments) are calculated by the London Tanker Brokers' on the basis of rates prevailing during the month ending on the 15th and are used by oil companies for pricing purposes during the following month. Average weekly figures are published by Mullion Tankers (Shipbroking) Ltd. of charters and single voyage spot rate averages.

The method for determining the dollar per barrel charges for any given shipment are as follows:

a. Use the base dollar per ton rate specified for the port of export to the port or area of destination: For example, the base 1973 rate from Ras Tamura, Saudi Arabia to the U.S. East Coast was $10.11 per long ton.

b. Divide this value by the number of barrels per long ton conversion factor for the gravity of oil being shipped. For example 34° API gravity oil occupies 7.49 barrels per long ton.

e. This value is the cost per bbl. for transportation from Ras Tonura to New York Harbor. For example, $10.11 divided by 7.49 or $1.35 per bbl. at a world scale of 100.

d. If the WS is 150, multiply the above figure by 1.5. If WS is 75, multiply by 0.75. For example, the cost to ship oil of 34° gravity to New York at W150 is 1.5 X $1.35 or $2.03 per bbl. For W75, it would be 0.75 × $1.35 or $1.01 per bbl. The four tanker size classifications used in AFRA calculations are as follows: General Purpose (GP) 16500 to 24999 dwt.; Medium Range (MR) 25000 to 44999 dwt.; Large Range 1 (LR-1) 45000 to 79999 dwt.; and Large Range 2 (LR2) 80000 to 159,999 dwt.

Just recently, the brokers have added a new category of very large crude carriers (VLCC) and it is expected they will be some 30 or so world scale points lower than the LR-2 rates due to economies of scale and longer term charters. These are the super tankers. U.S. ports at present can only take tankers up to LR-1 and only on the West Coast and Gulf Coast. Medium Range are the largest that can be docked on the East Coast.

Details on transportation charges are answered in Question 6.

5. What was the proportion of crude oil coming into the U.S. by various types of charter for each of the years 1970 through 1973? Show figures separately for: a. The seven major international oil companies; b. The other integrated oil companies; and c. The independent refiners.

Has the independent refiner been seriously affected by the rising spot charter rates?

We cannot answer this question definitively. To do so would require inspecting the weekly Mullion reports and statistically putting each chartering agent into a judgment classification of where his charter was consigned.

As a matter of general knowledge, it has been reported that before participation agreements began springing up (prior to 1972) about 90% of world oil shipments was via chartered vessels and the spot market accounted for the remaining 10 percent. What it is now, however, is really unknown, but there must be a higher percentage in the spot market trade since many chartered tankers have been relet.

6. What was the average cost of transporting a barrel of crude oil from each of the countries listed for each of the years 1970 through 1973?

We can only make an estimate of what the yearly average transportation charges were for this span of year because the rates fluctuated significantly throughout each year as the foregoing chart describes. Therefore, the following table is our estimated charter rate transportation cost average for each of the years using an MR tanker from the various ports and using representative crudes to the U.S. East Coast.