stantially the form of prior law, and paragraph (5) contains a less detailed list of treatment processes which shall not be allowable "unless they are otherwise provided for in paragraph (4)" or are necessary or incidental to processes so provided for. Because the Gore amendment, which enacted the pertinent provisions of Section 613 (c), was a floor amendment added to the Tax-Rate Extension Bill, it was hastily enacted with that Bill, which was designed to avoid an impending lapse of certain tax rates. Senator Gore had introduced his amendment prior to the Supreme Court's decision in the Cannelton case, and had explained the purpose of his amendment in terms of the brick and tile depletion problem (the very dispute which was before the Supreme Court). He said specifically that the amendment was intended to prevent the computation of depletion allowances on finished industrial products. There was no report on the amendment by the Senate Finance Committee, and no hearings were held by the Senate Finance Committee on the text. Congressman Mills noted, in his discussion of the Conference Report on the floor of the House (Cong. Rec. p. 14546), that the Gore amendment contained some complicated new language which might produce unintended results, and that the language used in the Conference bill followed the language of the prior law in order to avoid such effects. Since hearings had not been held on the amended text by the House or Senate Committee there is not an extensive legislative history on this provision. There is little question, however, that oil shale falls within the provisions of subparagraph (D)." In commenting on subparagraph (D) in his explanation of the Conference Report (Cong. Rec. p. 14514), Senator Byrd stated that: "In the case of subparagraph (D) which deals with certain named minerals, as well as those not customarily sold in the form of crude mineral products, the named processes are substantially the same as under the Gore amendment and under present law." Senator Byrd's statement indicates that in the case of minerals "not customarily sold in the form of the crude mineral products" (and which were not specifically provided for in other subparagraphs), substantially the same processes as those allowable under the "commercially marketable" test of prior law were to be allowable: In the words of the Supreme Court, depletion allowances for these minerals would be cut off "at the point where the minerals first became suitable for industrial use or consumption." Accordingly, Senator Byrd's explanation of the Conference Report demonstrates that the retorting process for oil shale should be held to be an allowable treatment process, and that the Service's position is in error. Moreover, allowance of retorting as a mining process does not produce the vice at which the Gore amendment was aimed. It is clear that the intent of the Gore amendment is to prevent depletion from being computed on the finished manufactured product, or in other words, to eliminate from the depletion base manufacturing processes applied to mineral products which are marketable in a cruder form. The retorting process for oil shale is not a manufacturing process applied to a mineral which could be sold in a cruder form, since there is not, and in the foreseeable future cannot be, a market for oil shale rock. APPENDIX E-IMPORT QUOTAS-QUALIFIED INPUTS The oil import quota system is based upon Presidential Proclamation 3279 (March 10, 1959), as amended, and regulations issued by the Secretary of the Interior implementing the Proclamation. The Proclamation recited a Presidential finding that "crude oil and the principal crude oil derivatives and products are being imported in such quantities and under such circumstances as to threaten to impair the national security. . . ." The threat, as reported on February 27, 1959, in a Memorandum to the President by the Directors of the Office of Civil Defense and Mobilization, was that imports discouraged domestic exploration and development of petroleum reserves and, if unregulated, would impair the nation's productive capacity. To counter this danger, the Proclamation forbade importation of crude oil, unfinished oils, and oil products unless licensed by the 2 Since it is an ore or a mineral which is "not customarily sold in the form of the crude mineral product." & Riddell v. Monolith Portland Cement Co., 371 U.S. 537. Secretary of the Interior, and set forth a formula for determining the maximum level of imports that the Secretary would authorize. The Proclamation required that import licenses be issued only to domestic refiners, and gave the Secretary discretion to allocate allowable imports among refiners in a manner "fair and equitable" in relation to "refinery inputs", a term not defined by the Proclamation. The Secretary has implemented the Proclamation with Regulations (32A C.F.R., Ch. X) authorizing issuance of import licenses for specified percentages of "refinery inputs." The Regulations define "refinery inputs" as including only "crude oil" and "imported unfinished oil" used as refinery feedstocks. Because of the manner in which the Regulations define "crude oil", there is some uncertainty whether raw shale crude oil would qualify as a "crude oil" refinery input for purposes of computing the import quota of a refiner who used shale crude rather than conventionally produced crude. The Proclamation defined "crude oil" as follows: "Crude oil" means "crude petroleum as it is produced at the well-head." The Regulations adopted this definition of "crude oil" for purposes of determining refinery inputs, and thus of determining each refiner's import quota. If the phrase "as it is produced at the well-head" is construed to mean only crude oil actually produced by means of wells, shale crude oil produced by means of above-ground retorting would not qualify as a "refinery input", although shale crude oil produced from wells by in situ techniques would qualify. If shale crude does not qualify as a "refinery input", refiners who use it rather than conventional crude as a feedstock will suffer a reduction in their import quotas. Since the quotas have substantial value, the import quota system would then be operating to penalize the value of shale crude oil, and so to discourage domestic production of shale crude. Such a result would be anomalous, since the purpose of the import quota system as stated in the Proclamation itself is to encourage increases in domestic petroleum production and productive capacity. The preferable construction of the phrase appears to be that it simply desig nates the physical and chemical characteristics of "crude oil", as distinct from the characteristes of "unfinished oils and oil products". Under such a construction shale crude would apparently qualify as a "refinery input", a result consistent with the desire, embodied in the Proclamation, to foster domestic production. However, the matter ought not to be left clouded. Clarification can, of course, be achieved by amendment of the Regulations. The Secretary has in fact recently expanded the definition of "crude oil" to include certain liquids recovered from vaporous hydrocarbons. A further regulatory amendment would be the most expeditious way of making shale crude clearly eligible as a "refinery input". Senator HART. We will adjourn, to resume in the room in which we met this morning, 5302, at 10 o'clock. (Whereupon, at 4:30 p.m., the committee adjourned, to reconvene at 10 a.m., Thursday, April 27, 1967.) COMPETITIVE ASPECTS OF OIL SHALE DEVELOPMENT THURSDAY, APRIL 27, 1967 U.S. SENATE, SUBCOMMITTEE ON ANTITRUST AND MONOPOLY, The subcommittee met, pursuant to recess, at 10 a.m., in room 5302, New Senate Office Building, Senator Philip A. Hart (chairman) presiding. Present: Senator Hart (presiding). Also present: S. Jerry Cohen, staff director and chief counsel; Charles E. Bangert, assistant counsel; Peter N. Chumbris, chief counsel for the minority; James C. Schultz, counsel for the minority; Gladys Montier, clerk; Patricia Bario, editorial director; and David Dominick, legal assistant to Senator Hansen. Senator HART. The committee will be in order. With apologies for the intrusion this subcommittee makes on his schedule periodically, we welcome the Assistant Attorney General, Donald F. Turner. STATEMENT OF DONALD F. TURNER, ASSISTANT ATTORNEY GENERAL, ACCOMPANIED BY JOHN LAMONT, ATTORNEY, DEPARTMENT OF JUSTICE Mr. TURNER. Thank you, Mr. Chairman. You have asked me to testify on the development of the Government holdings of shale oil lands. Let me at the outset disclaim any intention--or competence to deal with the geological or technological problems raised, or the technical aspects of public land law and administration. I shall confine myself to some comments on the prospects of shale oil development and its relation to competition in the petroleum industry. Oil shale lands have long been a most tantalizing resource. They contain enough hydrocarbons to satisfy their country's needs for many decades. The theoretical value of the oil content at going prices represents an enormous potential wealth to the United States and the States in which the shale lands lie. Shale now can be processed by conventional mining and retorting methods to produce liquids virtually equivalent to crude oil, refinable into the usual range of petroleum products. But no method so far studied is sufficiently inexpensive to attract substantial investment to shale development. There are many other sources of crude oil or equivalent commodities which, for one reason or another, currently show greater promise of profit. 80-344-67-pt. 1-23 Moreover, even assuming cost-reducing innovation, the potential profitability of extracting oil from shale heavily depends on whether or not existing artificial props for crude oil prices are maintained in the future. If these props are withdrawn shale production may not be profitable. Current industry patterns in crude oil operations are influenced in large part by the fact that Government intervention in the economics of crude oil supply creates conditions which shelter crude oil markets from the full rigors of competition, and provides special incentives allowing attractive profits in crude oil production. The relevant Government market restrictions consist of a complex of State and Federal actions each controlling different segments of refinery supply. Some of the oil-producing States, controlling in total the preponderance of domestic oil supply, individually limit production within their States to an administratively determined "market demand." However, no one of these States actually controls such a significant share of total potential supply as to be the regulator of crude oil supply or to establish particular price levels; and collectively these States have not controlled the market since the early 1950's, when imported oil, natural gas liquids and the oil produced in States without market controls became a significant share of total potential supply. Imported oils are clearly important. Postwar development of the prolific fields in the Middle East, Venezuela and of late years, the Sahara regions, provided a source of crude with such significant cost advantages that it could be shipped to the United States at a landed cost significantly under domestic crude at the same point. Beginning as early as 1954, efforts were made to limit growing imports. These efforts culminated in a 1959 Presidential proclamation which, on a finding that increasing oil imports "threatened to impair the national security" by destroying the domestic production industry, imposed limits on the quantity which could be imported. This complex of Government policies has special significance to shale development. Oil refinery supply is not now an actively competitive market. If shale liquids arrived on this market at objective costs only marginally competitive with crude at present prices, it is doubtful that it would find signficant buyers in the oil industry. At the same time, investors in shale development must consider the possibility that, if Government oil policy should change, the level of crude oil prices. could also dramatically change. If, for example, it were determined that national security did not require maintenance of the present level of import controls, the price of domestic crude oil would come much closer to the going international oil price, possibly down to one-half the current domestic price. And shale liquids production, marginal by conventional processes at the present crude price, would be totally unattractive. In saying this, I do not mean to suggest that the Government should continue to keep crude oil prices high in order to stimulate shale oil production; indeed, the presumption should lie the other way. There is the possibility that a technology breakthrough might make shale liquids dramatically cheaper than grade oil or coal liquids. Not much is yet known of the possibilities of in situ retorting, either by application of experimental oil recovery techniques, or by use of atomic energy. As you may know, the latter, particularly, is only now in the preliminary phases of contracting for a feasibility study. I cannot of course usefully evaluate the optimistic predictions of liquids produced possibly as low as 30 cents a barrel. But should that be the case, or something close to it, the petroleum industry's preoccupation with crude oil profits would quickly change. The competitive potential within that industry would most probably compel a rapid change to this feedstock source, unless some new restraints on the competitiveness of shale were to appear. This brings me to the question of shale leases. It is most important. that great care be taken that any alienation of shale lands at this stage of development should not affect such a large proportion of them as to allow any company or any segment of the oil industry to establish effective control. From testimony already heard, there is an awareness of this problem, and a concern that leasing policy should provide presently only enough to stimulate private research, leaving the preponderance of this resource to await future development. What is "enough," at this point, I am not prepared to say. Similarly, care must be taken that control of supplementary components essential to shale development be made free from restraint. Here I refer to the doubts expressed in this hearing as to the availability of water rights, of which I know nothing, as well as to the availability of transport, most importantly pipelines. Even more important, however, leasing policy, particularly to the extent that it provides some subsidy for research, must display careful concern with maintaining conditions of research which exploit the competitive potential to the fullest degree. This entails two considerations: (1) that private research by the business entities involved be as competitive as possible, and (2) that any results of Government-sponsored research be widely available. At present, there are several independently operated research projects concerned with development of shale processes. The largest of the research projects is a joint venture among several of the integrated oil companies. This is the project using the Government-owned facilities at Anvil Points, near Rifle. Colo. In early 1964 these were leased to the Colorado School of Mines Foundation, Inc., under legislation passed in 1962 authorizing lease to private companies for experimental work in shale. The arrangements made included a lease to the Foundation of the facilities to be used in various research programs, including specifically one to be conducted under the management of Mobil Oil Co., to be jointly financed and participated in by Mobil and Humble Oil & Refinery Co., as well as such other companies as might choose to participate within 6 months after the basic agreement was effective. Within that time, four other companies, all large integrated companies, elected to participate. This research program was to involve two stages, as specified in the basic lease agreement. Stage I called for investment of some $2 million; actually, we are informed, some $2.7 million was expended. Stage II, now projected, is said to involve some $4.5 million. We always are concerned when joint arrangements are entered into among competing concerns whose size might be sufficient to carry out |