velopment activities under both a 25-cent and 80-cent reduction in price.

The sharp drop in expenditures for exploration and development would be followed by gradual but accelerating declines in production. By 1975 production by independents, with a 25-cent-per-barrel reduction, would be about 575,000 barrels per day less than under the base case, and about 1 million barrels per day less with an 80-centper-barrel reduction in price.

It should be noted, for reasons set forth in the detailed report, that the projections tend to be optimistic as to the position of independent producers under assumed conditions of price reductions. For example, acceleration of sellouts and abandonments by independents are not quantified by this economic model.

In general, it may be concluded that a policy of reducing U.S. crude oil prices would phase out independent producers; reduce significantly the funds and multiplicity of effort devoted to domestic exploration and development; foster economic concentration in the industry; and increase very substantially the Nation's dependence on foreign sources of both oil and natural gas.

The task force report reflects no concern that reduced prices would seriously impair competition and foster economic concentration. The probable end result would be the survival of a few large companies, with increasing pressures for Federal control of the petroleum industry. This would not be in the public interest.

The long record of performance of the domestic oil and gas industry, in our opinion, very persuasively leads to the conclusion that the most efficient, practical, realistic, and reliable means of protecting the national security and serving the consuming public with assured supplies of both oil and natural gas at reasonable prices is to adopt governmental policies aimed at encouraging domestic exploration and development and avoiding greater and greater dependency on imports year after year as recommended by the task force.

I would like to point out that we are extremely interested in the public, because if we did not have the consuming public, we would not have a market for our products.

It is recommended and urged, therefore, that the basic quota system of the present mandatory oil import program, and the overall limitations on the level of imports prescribed therein, be maintained and continued; that special or preferential treatments for purposes unrelated to national security to any company, territory, possession, area or State, be prohibited. It is further recommended and urged, in order to provide maximum stability and to avoid a continuation of the uncertainties of administration which have plagued the program for the past several years, that the basic guidelines of the present program be enacted into law.

Mr. EDMONDSON. Thank you very much, Mr. Mead, for a very fine

statement.

It is interesting to me that your conclusion about the majority recommendations fostering economic concentration in the industry appears to be substantially the same as one of the conclusions reached by one of the major critics of the present system, Dr. Blair, who is an expert over on the subcommittee on the other side, and who has been looking at this subject. As I recall press coverage on that subject, Dr. Blair

brought out in his examination of Secretary Shultz a conviction that this would be the result of this proposal.

You are familiar with that testimony?

Mr. MEAD. Yes, I am. I think the report itself states that it would force many people out of business.

(The study prepared by the IPAA follows:)

ECONOMIC MODEL OF THE INDEPENDENT SEGMENT OF THE DOMESTIC OIL AND GAS PRODUCING INDUSTRY

An economic model of the independent segment of the domestic oil and gas producing industry has been prepared as an analytical tool for evaluating the impact of changes in price and other economic factors on independent oil and gas producers. The basic concepts, assumptions, methodology, and input data for the economic model are set forth in subsequent sections of this report. The following brief review of changing conditions during the past twenty-five years provides a background for considering projections of future trends.

HISTORICAL BACKGROUND

During the decade immediately following World War II, domestic production of crude oil and natural gas of both major integrated companies and independent producers as a group, increased steadily and substantially. This period also witnessed increases in crude oil prices and rapidly rising demand for oil and natural gas. Total crude oil production by independents reached a peak in 1956-this was also the peak year for drilling activity in the United States.

Since 1956 the larger companies in the industry accounted for all the increase in U.S. crude oil production. This reflects the acquisition of properties by larger companies, sell-outs by independent producers, and increased activity in areas involving large capital requirements such as on the Continental Shelf and the new petroleum provinces in the State of Alaska.

The decade 1956-1965 witnessed a dampening in the growth of oil demand and a deterioration of crude oil and refined products prices, despite restrictions on imports of petroleum while natural gas prices came under control of the Federal Government even before the start of this period.

From 1956 to 1968 total exploration and development expenditures by the larger companies increased by 56 percent, while such expenditures by independent producers as a group declined 47 percent.

To sum up, the relative position of the smaller units, as a group, in U.S. exploration, development and production activities has declined steadily since the mid-50's. The multiplicity of effort needed in the search for new oil and gas deposits has therefore been substantially reduced and this has been reflected in a leveling off of oil and gas proved reserves.

Total proved U.S. reserves of crude oil and natural gas liquids increased from about 24 billion barrels at the end of 1946 to more than 36 billion barrels at the end of 1956. During this same period natural gas reserves increased from about 160 trillion cubic feet to about 236 trillion cubic feet. These represented increases of 51 and 48 percent respectively. Since 1956 the gains in reserves for oil and natural gas amounted to only 8 and 21 percent, respectively. Proved crude oil reserves have decreased for the last two consecutive years and in 1968 proved reserves of natural gas decreased for the third time.

BASIC ASSUMPTIONS

Against this backgroulnd of more than a decade of declining trends for independent producers, the economic model formulates projections under three basic assumptions:

1. Base Case: Essentially a projection of present trends.

2. Second Case: A reduction in crude oil price of 25 cents per barrel.

3. Third Case: A reduction in crude oil price of 80 cents per barrel.

These cases were selected because the Cabinet Task Force on Oil Import Control reportedly recommends a variable tariff system, to replace the existing import quota system, under which reductions in domestic crude oil prices range

SUMMARY AND CONCLUSIONS

Important elements in the economic model's projection of trends in the independent producer segment of the domestic petroleum industry may be summarized as follows:

It should be noted that, because of the inseparable nature of oil and gas operations in the producing branch of the industry, the above figures for expenditures and production, as well as other data in the detailed report, include crude oil, natural gas liquids and natural gas converted to crude oil equivalent barrels. The base case being essentially a projection of present trends, shows a continuing gradual decline in exploration and development expenditures and production by independent producers. Under these conditions, independents will be under the same adverse economic pressures they faced in the 1960's. Their relative position in the industry will continue to decline, but they will continue to make a meaningful contribution to the energy supplies of the United States.

Under the other two cases of reductions in price, independent producers would almost immediately start a divestment program by sharp reductions in new investments in the industry. By 1975 the independent would be eliminated, for all practical purposes, from domestic exploration and development activities under both a 25¢ and 80¢ reduction in price.

The sharp drop in expenditures for exploration and development would be followed by gradual but accelerating declines in production. By 1975 production by independents, with a 25¢ per barrel reduction, would be about 575,000 barrels per day less than under the base case, and about 1,000,000 barrels per day less with an 80¢ per barrel reduction in price.

It should be noted, for reasons set forth in the detailed report, that the projections tend to be optimistic as to the position of independent producers under assumed conditions of price reductions. For example, acceleration of sell-outs and abandonments by independents are not quantified by this economic model. In general, it may be concluded that a policy of reducing U.S. crude oil prices would phase out independent producers; reduce significantly the funds and multiplicity of effort devoted to domestic exploration and development; foster economic concentration in the industry; and increase very substantially the nation's dependence on foreign sources of both oil and natural gas.

GENERAL ASSUMPTIONS

INDEPENDENT PRODUCERS

The Independent oil producer is defined as the remainder of the U.S. industry aggregate after deducting the producing activities of the Companies tabulated by The Chase Manhattan Bank in their Annual Financial Analysis of a Group of

NET EQUIVALENT BARRELS

All production and reserve data have been reduced to net equivalent barrels. This includes crude oil, natural gas liquids and natural gas production (converted at an arbitrary rate of 25 MCF/bbl.). All data have been reduced to net production by using an assumed average royalty value of 15%.

INCOME TAXES

All analyses have been made on a before tax base. The effect of recent changes in Federal Income Taxes applying to oil and gas production has not been taken into account. However, the model can give some insight into the economic impact of increased taxes by imputing the tax cost as a reduction of revenue per barrel.

HISTORICAL DATA (1961-1968)

TOTAL INDUSTRY REVENUE

Information was taken directly from a report of the National Petroleum Council, 1967, entitled Factors Affecting U.S. Exploration Development and Production 1946–1965. Table XVI of this report contains the well-head value of oil and gas production by categories of the Chase Group and all others. The data was updated through 1968 by contacting personnel who had supplied the original information.

TOTAL INDUSTRY PRODUCTION

Information was taken from published data by the Bureau of Mines and converted to net equivalent barrels as indicated in general assumptions.

INDEPENDENT'S REVENUE PER EQUIVALENT BARREL

This value was obtained by simply dividing the yearly total industry revenue by the total industry's net production in the same year. This value is the industry's revenue per equivalent barrel which was discounted by 2% to give the independent's value. The estimated discount is based on recognition of the somewhat lower well-head value to this segment of the industry which has not participated in the higher valued areas such as Offshore Louisiana.

RELATIONSHIP OF REVENUE PER EQUIVALENT BARREL TO POSTED PRICE OF CRUDE OIL All reserve and production data in this report are in terms of equivalent barrels of hydrocarbon as explained in the general assumptions. However, we recognized the desirability of having some method of converting price changes of equivalent barrels to show the effect of changes in crude oil postings only. This would enable us to monitor only changes in crude prices with the assumption that other hydrocarbon production would be either constant or could vary at different rates.

Data were collected primarily from Twentieth Century Petroleum Statistics— 1966 by DeGolyer and MacNaughton. We obtain volumes and unit field values for crude, natural gas liquids, and natural gas for the period 1959 through 1965. This information is on the basis of the entire domestic industry and was converted to total equivalent barrels and total value for each year. We then reduced the revenue/equivalent barrel by various levels while keeping the revenue from natural gas and gas liquids constant. In this manner we were able to calculate the crude price reduction which would be attributable to the reduction in revenue per equivalent barrels.

We found that the ratio of reduction was essentially constant for all years studied and for reductions in revenue per equivalent barrel ranging up to $1. The constant found was 1.36, that is, if the revenue per equivalent barrel was reduced by 18.4¢ and this was all the result of reduced crude oil posting, then the crude oil revenue per barrel was reduced by 25¢ (18.4 x 1.36).

INDEPENDENT'S NET PRODUCTION

These data were calculated by dividing the independent's revenue per equiva

EXPLORATION AND DEVELOPMENT EXPENDITURES

Information was taken directly from the National Petroleum Council's 1967 study. Table XVI of this report contains the estimated exploration and development expenditures of both the Chase group and others. The data were updated in the same manner previously discussed.

INDEPENDENT'S NET REMAINING RESERVES

The total reserves for the U.S. was obtained from the API reports of 1967, and converted to net equivalent barrels. The annual reports of all companies in the Chase group were studied over a three-year period to arrive at the total net equivalent reserves of the group. The Independent's reserves were derived by subtraction and indicated in 1967 that they had 15.5% of the U.S. oil and NGL reserves and 19.2% of the natural gas, or approximately 16.3% of the equivalent reserves (7.1 billion bbls.).

The net remaining reserves for all other years were obtained by adding the new reserves found and subtracting the production during the year.

Another reserve figure was used which was obtained by inferring certain production rates (as a percent of remaining reserves) during the early 1960's, when the MDF factor was relatively stable.

The rates used were based on over-all U.S. averages and known industry experience. Furthermore, it was required to increase the reserves by almost an identical amount to balance depreciation rates with investment changes. The increase amounts to about one-third of the reserves mentioned above.

In addition, when actual cases were run with the model, those tests which included the higher reserves appeared to be more stable and rational. In all cases these showed considerably more gradualism than the smaller reserves.

We realize full well than an arbitrary addition of one-third to the reserve base is questionable and only intuitive. However, it should be noted that the trends are the same for various reserve figures and only the absolute numbers change. The changes are much smoother and more reasonable with the higher reserve number.

INDEPENDENT'S NET INVESTMENT

The net investment for the total U.S. industry (crude oil, natural gas and natural gasoline plants) was taken from the Chase publication Capital Investments of the World Petroleum Industry. The net investment for the U.S. portion of the Chase group was taken from Chase publication Annual Analysis of a Group of Petroleum Companies. The net investment of the independent's in any given year is assumed to be the difference between the above numbers.

INDEPENDENT'S INDUSTRY NET RESERVES DISCOVERED

Data were based on annual estimates for the total industry by the API, AGA and published in the June 1969 issue of Petroleum Outlook (John S. Herold, Inc.). The figures given here are in gross equivalent barrels, and a net factor of .85 was applied. The independent segment of the industry was given the same portion of the total industry net reserves discovered as was their percentage of the total industry's expenditures for exploration and development (shown in Table XV of the NPC study).

These new reserves are really the summation of the following distinct categories (based on API reserves studies):

(1) Revisions of previously reported reserve data

(2) Extensions of presently producing fields

(3) New discoveries made during the year and an estimate of their size Historically, these data are broken down in the API bulletin only for crude oil and consequently we simply found the percentage for each category in each year and applied to the equivalent barrel value to break down the total new reserve figure.

REVISION OF PREVIOUSLY REPORTED RESERVE DATA

This category is essentially re-statements of prior discoveries and reflect greater knowledge of the areas. The expenditures for these reserves have already been spent and consequently no new capital is attributable to these revisions.