Prepared Statement of
Carl Michael Smith
Assistant Secretary for Fossil Energy
U.S. Department of Energy
Before the
House Committee on Appropriations
Subcommittee on Interior and Related Agencies
Concerning the
FY 2003 DOE Fossil Energy Budget Request
February 28, 2002

Mr. Chairman and Members of the Subcommittee, it is a pleasure to appear before you for the first time to discuss the Department of Energy's FY 2003 Fossil Energy Budget request.

The Administration is requesting $816.0 million for Fossil Energy programs in FY 2003, a 5 percent reduction from FY 2002 but 10 percent above the FY 2002 requested level. Included in this budget are $548.2 million for Fossil Energy research and development; $40.0 million from previous appropriations for the original Clean Coal Technology program; $188.8 million for the Strategic Petroleum Reserve which includes $8.0 million for the Northeast Home Heating Oil Reserve; and $93 million for the Naval Petroleum Reserves which includes $72.0 million for the Elk Hills School Lands Fund ($36.0 million of which is an advance appropriation).

The President's Coal Research Initiative

The President's Coal Research Initiative accounts for $325.6 million of the request for Fossil Energy research and development. President Bush recognized the value of U.S. coal to the Nation's energy security when he proposed a new vision for clean coal technology and pledged an investment of $2 billion over the next 10 years to build on the significant technological progress made in recent years. The Department's FY 2003 budget proposal includes the second installment of funding for this initiative. It also focuses much of the undergirding coal research program on the President's longer-term clean coal technology goals.

Funding includes $150.0 million for the Clean Coal Power Initiative; $85.0 million for Central Systems; $54.0 million for Sequestration R&D; $5.0 million for Clean Fuels R&D; and $31.6 million for Advanced Research. These components are described below:

The Clean Coal Power Initiative. This will be the initial step in carrying out the President's commitment. The Department intends to combine the $150.0 million appropriated in FY 2002 with the $150.0 million requested for FY 2003 and approximately $30.0 million of available funding from the Power Plant Improvement Initiative into a $330.0 million solicitation for industry-proposed, cost-shared demonstration projects. Scheduled to be issued in February 2002, this first solicitation will focus on rapidly advancing technologies that can be accelerated into the power sector through government-industry partnership projects. Industry sponsors will be required to at least match the federal funding share, and there will be a requirement that royalties from commercially successful technologies be used to underwrite future clean coal research.

Central Systems R&D. Central station power plants remain the workhorses of America's power sector; currently, there are more than 375 coal-fired plants in the United States that generate 100 megawatts or more. Even though there is increasing interest in smaller, decentralized power systems, central station power generators will remain the dominant contributors to the Nation's power supply for well into the future. In total for FY 2003, $85.0 million is requested for Central Systems R&D. Components of this program include the following:

• Innovations for Existing Plants. In FY 2003, $21.2 million is requested for the continued development of a scientifically sound base of data and technology to understand and reduce air and water pollutants from existing plants.

  Mercury is likely to be one of the next major environmental challenges for the coal-fired power industry. To meet the 2008 deadline for mercury emission controls (EPA must publish a final rule by 2004), many of the Nation's coal-fired power plants will require new technology. Data collected by the Department in the late 1990s showed that no pollution control system on the market today reduces mercury emissions uniformly across the full range of power plant configurations. Emission controls can vary from 90% to virtually zero.

  To develop mercury controls that are more reliable, lower cost, and applicable to a wider range of plant types, the Department has put into place an aggressive technology development program. In 2000, the first near-term projects were selected with a goal of cutting mercury emissions by 50% to 70% by 2005 at one-half or less of today's costs.

  In FY 2003, advanced NOx control technologies will complete their pilot scale tests. If test results are successful, the technologies will be ready for full-scale demonstration, and important data will be generated for use in future multi-pollutant control strategies.

• Advanced Systems - the Power Plant of the Future. Just a few years ago, the idea that a coal plant could be pollution free, including even carbon emissions, seemed farfetched. Today that view has changed. It now appears likely that if the current pace of R&D can be sustained, a new type of fossil fueled energy plant can be introduced by 2015 that would have virtually no negative environmental effects. In FY 2003, we are requesting $63.8 million to develop the technological base for this power plant of the future.

  Core elements of this effort include research on advanced concepts for integrated gasification combined cycle ($40.65 million) and pressurized fluidized bed combustion ($9.10 million). In FY 2002, the pressurized fluidized bed combustion program was recast to focus on new concepts such as combustion hybrids that offer higher potential and reduced risks for future power plants. In FY 2003, another significant refocusing will be underway in the turbine technology development program ($14.0 million). With the successful completion of the Advanced Turbine Systems development effort - which produced two new revolutionary, ultra-high efficiency, low-polluting, utility-scale natural gas turbines - DOE's turbine research is being redirected toward the development of a new generation of zero-emission turbines, capable of being fired with coal gas and other gaseous feedstocks. Termed HEET - for "High Efficiency Engines and Turbines" - the new program is being defined this year by industry input and ongoing studies of market applications, public benefits, and technology needs.

• Sequestration R&D. Carbon sequestration - the capture and storage or recycling of carbon gases - is the fastest growing program in the Department's Fossil Energy budget, reflecting President Bush's emphasis on developing advanced technologies to reduce the buildup of greenhouse gases. In FY 2003, we are requesting $54.0 million.

  This year the first of these projects will move into early field tests, providing the first "real life" data on whether various proposals for storing carbon gases are, in fact, worth pursuing. For example, in FY 2002 the first full-scale project to sequester CO2 in unmineable coal seams will take place, along with the first full-scale monitoring and verification of CO2 injection into a depleting oil reservoir.

  The significant increase in proposed funding for FY 2003 (a 67% increase over the $32.2 million appropriated in FY 2002) reflects the necessary costs for moving additional, promising concepts from laboratory-scale research into the next stage of tests. New field experiments in terrestrial sequestration, along with additional field tests in geological storage of greenhouse gases, are supported in the budget request.

• Clean Fuels R&D. The Clean Fuels R&D program is in transition. Historically, the program focused largely on methods to convert coal to liquid fuels. Three years ago it was reoriented to include new efforts in reducing sulfur from petroleum and converting natural gas to liquid transportation fuels.

  The reduction in the FY 2003 budget request - to $5.0 million from $32.2 million in FY 2002 - reflects the Administration's view that much of the reoriented program was directed at research industry could do on its own. Rather than concentrating on ways to remove pollutant-forming impurities from gasoline and diesel fuels, the FY 2003 budget narrows the focus to exploratory research on novel concepts for chemically converting fossil fuel feedstocks into liquids and the development of a novel ceramic membrane that could significantly lower the costs of producing "syngas" for liquids production. If successful, this new membrane might also provide a lower-cost means for producing clean-burning hydrogen.

• Advanced Research. In FY 2003, we are requesting $31.7 million for two types of activities: (1) crosscutting and applied research that benefits the development of superclean, ultra-high-efficiency coal power systems and coal-based clean fuel systems with a particular emphasis on new materials, sensors and controls, and computational techniques for future power plants, and (2) analytical and assessment activities and international support that help guide planning and policy development for the Fossil Energy program.

Distributed Power Generation Systems

For Distributed Power Generation Systems, we are requesting $49.5 million in FY 2003. Funding includes $47.0 million for Fuel Cells and $2.5 million for Novel Distributed Power Generation Systems. Components of the programs are:

Fuel Cells. The Office of Fossil Energy's Fuel Cell program is on the verge of another success. Already, more than 220 "first generation" phosphoric acid fuel cell mini-power plants are operating or on commercial order throughout the world based on technology DOE helped develop in the 1980s. Now the more advanced fuel cells that DOE helped develop in the 1990s are being introduced into the market.

Orders for more than a dozen of the higher temperature molten carbonate fuel cells have been received by FuelCell Energy Inc., and the Connecticut company has broken ground on a 50-megawatt per year manufacturing facility. Siemens Westinghouse, DOE's partner in developing an even higher temperature, tubular solid oxide fuel cell system, has announced plans for its commercial manufacturing complex; an initial section of the plant is expected to begin fabricating commercial-scale solid oxide fuel cells in the spring of 2003. The Department's FY 2003 budget will complete the federal role in the development of these two classes of advanced fuel cell technology.

Research attention will turn increasingly to the next two major challenges confronting fuel cell technology: (1) significant cost reductions, and (2) the development of fuel cell-turbine hybrids that can push fuel-to-electricity efficiencies to "breakthrough" levels of 70 to 80%.

To help bring about dramatic cost reductions, the Department has helped create the Solid State Energy Conversion Alliance (SECA), a group of federal agencies, national laboratories, universities, and fuel cell developers. SECA's goal is to produce a core, solid-state fuel cell module that could be produced at a cost of no more than $400 per kilowatt.

Novel Distributed Generation Concepts. The Department seeks to encourage promising technologies in the power generation field. For example, in recent years, the Department has funded the development of a new ramjet engine system for electricity generation. The Department will issue a competitive solicitation open to technologies that don't fit neatly into the more conventional categories described above (such as fuel cells, turbines, etc.). In FY 2003, $2.5 million has been budgeted for the novel idea(s) that emerge from this solicitation.

Natural Gas Technologies

For Natural Gas Technologies we are requesting $22.6 million. Funding includes $15.5 million for Exploration and Production; $4.5 million for Gas Hydrates; and $2.6 million for Effective Environmental Protection.

Based on the Research and Development Investment Criteria being developed as part of the President's Management Agenda, DOE is reconsidering where its federal dollars for natural gas research should be directed to be most productive. Generally, the reduction in the Natural Gas Technologies budget request for FY 2003 reflects the decision to target funding to those areas where industry clearly is not funding major development efforts on its own, or where a small amount of federal support can complete high-payoff, multi-year development efforts, or where federal cost-sharing can lead to technologies that can keep gas flowing from domestic wells that otherwise would be shut in.

Exploration and Production. In exploration and production, this means that much of the FY 2003 budget ($15.5 million) will be directed at completing the final year of development for several advanced drilling and diagnostic tools. For example, in FY 2003, development of a new type of composite drill pipe will be completed. Made of carbon resins similar to those used in the shafts of golf clubs, the drill pipe will be less than half the weight of its steel counterpart, allowing producers to drill greater distances laterally from an offshore platform, or to drill in greater water depths. Similarly an ultra-lightweight cement will be readied for commercial introduction in FY 2003 with the first applications likely to be in deep water drilling and production.

Also in FY 2003, development of a high-pressure, jet-assisted coiled tubing drilling system will be completed, providing a new tool for industry to use to drill through dense gas-bearing formations faster and at less cost. A new diagnostic tool that can measure the growth of artificially-induced fractures in a gas field in real time will also be readied for industry use in FY 2003.

The Department will also use FY 2003 funding to complete its research into "secondary gas recovery." This research has provided new tools and methods that operators can use to locate and produce natural gas missed by conventional technologies. Federal involvement in this technology development effort has helped revitalize gas production in areas of south Texas and has led to additional commercial production in the Midcontinent and the Gulf of Mexico.

Gas Hydrates. In gas hydrates - a potentially huge, but still speculative future gas resource - funding is being scaled back. The proposed budget level, $4.5 million, is still sufficient to collect important data on safety and seafloor stability and the role of hydrates in global climate change. Several industry-led field activities are underway to drill into and collect samples of naturally-occurring hydrates from the Alaska permafrost and the Gulf of Mexico. With a limited amount of funding, the Department hopes to "piggyback" on several of these projects and collect data that can be useful in determining future research needs.

Gas Infrastructure. No funding is requested in the Fossil Energy R&D account in FY 2003 for gas infrastructure projects. To provide better integration of infrastructure research efforts and reduce unnecessary program duplication, the Administration proposes to transfer responsibilities for all gas infrastructure R&D to the Department of Transportation's Office of Pipeline Safety (OPS). Within the last two years, the Fossil Energy R&D program has initiated several projects with industry and national laboratories to develop new tools for detecting damage and improving the integrity and reliability of the nation's aging natural gas pipeline system. Similar projects are also conducted by OPS. Given the nature of OPS's safety regulatory mission and related performance goal needs, this critical activity is best situated in DOT.

Emerging Processing Technology. Also in FY 2003, no funding is requested for emerging processing technology. In prior years, this budget category has supported research on improved methods for extracting fuel-grade natural gas from coal mines. Industry now has the technological foundation to proceed on its own. Also DOE will conclude its financial support for an international center for information on natural gas technologies which also receives funding from the gas industry.

Effective Environment Protection. In FY 2003, $2.6 million is requested. Activities that can lead to more effective environmental protection in gas (and oil) fields are funded at essentially the same level as FY 2002. Within this activity, however, there is a proposed funding shift to support increased technology transfer of practices and processes that can address environmental issues that otherwise could limit gas production from domestic fields.

Oil Technology

In FY 2003, $35.4 million is requested for Oil Technology. Funding includes $16.4 million for Exploration and Production; $9.5 million for Reservoir Management Practices; and $9.5 million for Effective Environment Projection.

Similar to the Natural Gas Technologies program, funding in the Oil Technology program would be redirected in FY 2003 to those areas where industry is not focusing its research attention and where a small amount of federal support could return significant dividends in terms of increased domestic oil production. Components of the program include the following:

Exploration and Production. In FY 2003, we are requesting $16.4 million with much of the proposed program focusing on fundamental research that can be applied across the entire petroleum industry. PRIME - an initiative to support high-risk, fundamental research that could produce revolutionary advances in oil technology - will kick off in April 2002 with a call for proposals and will continue to be supported in FY 2003. General areas likely to covered under PRIME will be remote sensing and surveying, advanced tools for lower-cost slimhole drilling, remote downhole wireless monitoring, and advanced petroleum recovery technologies.

Reservoir Management Practices. In FY 2003, we are requesting $9.5 million to develop better reservoir management practices for domestic oil fields, especially those operated by smaller independent producers. Included is continued support for our PUMP initiative. PUMP - for "Preferred Upstream Management Practices" - is a major technology transfer effort, designed to disseminate new technologies, more effective production strategies, and other field management improvements to the Nation's smaller independent companies. In April 2001, the Department announced the first five PUMP projects; in September, it added four more projects. In FY 2002, a third round of projects will be selected. We also will continue our "Technology Development with Independents" program which provides cost-shared grants that small companies can use to apply new technologies to U.S. fields. Support for the Petroleum Technology Transfer Council and other technology transfer efforts will also be continued.

Effective Environmental Protection. As in the Natural Gas Technologies program, funding ($9.5 million) is being requested for effective environmental protection activities that relate to oil field operations. Work will be scaled back in risk assessment efforts for exploration and production activities in favor of increased cooperative efforts with state, tribal, and federal agencies to reduce permitting times for environmental regulations and regulatory processes. New technologies will also continue to be developed to provide more cost-effective environmental compliance options, with a particular emphasis on protecting sensitive environments on federal lands.

Other Fossil Energy R&D

In total for FY 2003, we are requesting $115.1 million for other Fossil Energy R&D such as:

Program Direction. In FY 2003, we are requesting $89.6 million for Program Direction. This amount includes $14.0 million transferred form balances available in the Clean Coal Technology Program for program direction. Program Direction includes funding for salaries and other expenses for federal and contract employees at Headquarters and at the Morgantown, Pittsburgh and Tulsa offices of the National Energy Technology Laboratory (NETL), including those previously funded in the Clean Coal Technology appropriation account.

Plant and Capital Equipment. The $2.0 million request provides for repairs, improvements and alterations to buildings at the NETL and the Albany Research Center (ARC).

Environmental Restoration. In FY 2003, $9.7 million is requested to continue remediation efforts at several former field test sites and to upgrade worker health and safety conditions at NETL and ARC. A series of lead and asbestos abatement actions will be completed at the sites, and a number of fixes will be made at the Pittsburgh and Morgantown facilities to improve indoor air quality.

Cooperative Research and Development. In FY 2003, $6.0 million is requested for projects at the University of North Dakota Energy and Environmental Research Center and the Western Research Institute. These projects receive at least 50% of their funding from private sector research organizations.

Advanced Metallurgical Research. Our budget also includes $5.3 million to support advanced metallurgical research at the Albany Research Center in Oregon. A major effort in FY 2003 will be to complete an analysis of the mechanisms that degrade refractory materials that line coal gasifiers. ARC has also emerged as a premier installation for research into mineral carbonation - a technique for converting CO2 into an environmentally-benign solid. In FY 2003, the Center will construct and operate a 5-pound-per-hour benchscale mineral carbonation test unit.

Import/Export Authorization. The budget request also includes $2.5 million to conduct regulatory functions associated with the import and export of electricity and natural gas. The Office of Fossil Energy is responsible for authorizing the export of electricity, the issuance of permits for electric transmission facilities at the nation's international borders, and for authorizing natural gas imports and exports under Section 3 of the Natural Gas Act of 1938.

Clean Coal Technology

The budget request transfers all of the projects in this category to the Fossil Energy R&D account. These projects are funded with monies appropriated in prior years. While the Department intends to honor all outstanding project commitments, if surplus funds become available, they will be allocated to President Bush's Clean Coal Power Initiative described earlier.

Seven projects remain in various stages of design, construction or operation (four others are in the final reporting phase), but only two projects - the Kentucky Pioneer coal gasification combined cycle project and the CPICOR advanced iron making/power generation project - will require new obligations from the existing pool of funding.

The Strategic Petroleum and Northeast Home Heating Oil Reserves

For FY 2003, we are requesting a total of $188.8 million. This includes $169.8 million for the Strategic Petroleum Reserve (SPR); $11.0 million for the SPR Petroleum Account; and $8.0 million for Northeast Home Heating Oil Reserve.

Strategic Petroleum Reserve. The National Energy Policy has identified both the Strategic Petroleum Reserve and the Northeast Home Heating Oil Reserve as key response tools for the President to use in protecting Americans from imminent or actual disruptions in energy supplies.

In November 2001, President Bush announced his intent to fill the Strategic Petroleum Reserve to its full 700 million barrel capacity. On January 22, 2002, the Department began the first stage of the President's plan, joining with the Minerals Management Service (MMS) to solicit offers from industry to exchange 22 million barrels of royalty oil produced from Federal leases in the Gulf of Mexico. Earlier this month, the Department announced a contract with Equiva Trading Company to add 18.6 million barrels to the Reserve (the difference in quantities reflects adjustments for the cost of transportation costs and for crude oil quality).

As a result of the President's action, the FY 2003 budget contains $11.0 million in the SPR Petroleum Account to pay the incremental costs of terminalling, transportation, power and third party inspections associated with the added fill.

The budget also includes $15 million in the Storage Facilities Development and Management account to continue treating SPR crude oil to reduce vapor pressure caused by the migration of gas from surrounding salt formations.

The Northeast Home Heating Oil Reserve. In FY 2003, $8 million is requested for the Northeast Home Heating Oil Reserve. The reserve is fully stocked and ready for emergency use. Commercial terminals in New Haven, CT, Woodbridge, NJ, and Providence, RI, are under federal lease and currently hold 2 million barrels of home heating oil that could be released to the market to counter a sudden fuel emergency. Although it now appears likely that the Reserve will not be called on during the 2001-02 heating season, the Department has in place a new web-based "real-time" auction system that prospective heating oil buyers would access in the event a drawdown is necessary. Development of this system was a key "e-government" initiative undertaken by the Office of Fossil Energy in response to the President's Management Agenda.

The Naval Petroleum Reserves

The FY 2003 budget request of $21.07 million continues to carry out the changes that have occurred within the Naval Petroleum and Oil Shale Reserves functions and organization since passage of the National Defense Authorization Act for FY 1996.

Funding is included for the three responsibilities that remain: (1) oversight of commercial leases at the Naval Petroleum Reserve #2 in California, (2) operation of the Naval Petroleum Reserve #3 stripper well field in Wyoming, and (3) management of the Rocky Mountain Oilfield Testing Center co-located on the NPR #3 property.

The FY 2003 budget also includes $72 million for payments to the Elk Hills School Lands Fund as a result of a Settlement Agreement reached with the State of California on October 11, 1996. Under this agreement, which resolved longstanding State claims to two parcels of land ("school lands") within the Elk Hills field, the federal government must pay (subject to appropriation) nine percent of the net proceeds from the Elk Hills sale to the State. The current estimate of the net sales proceeds is $324.0 million, of which $298.0 million has already been deposited into a contingent fund in the Treasury.

Through FY 2002, three installments of $36.0 million each will have been paid. A fourth installment was advance appropriated in FY 2002 to be payable in FY 2003. The FY 2003 budget request contains $36.0 million for the enacted advanced appropriations as well as $36 million for the fifth installment. Once all divestment related costs have been paid and the total payment to the State has been calculated, the final two installments will be paid in equal amounts in years six and seven.

This completes my prepared statement. I will be happy to answer any questions you may have at this time.