With respect to the conflict of interest problem, dealt with by the subcommittee's first eight questions, I wish first to assure this subcommittee that the cases involved apparent rather than actual conflict. It is true that for some years we plainly lacked an effective system for enforcing the provision in the Survey's organic act requiring that "the Director and members of the Geological Survey shall have no personal or private interests in the lands or mineral wealth of the region under survey," and the longstanding Survey regulations extending such restrictions to include ownership of stock in petroleum and mining companies. In fact, during the last several years until this year, reviews of the financial holdings of key employees considered only departmental criteria.

These criteria addressed the question of whether or not an employee had an actual or apparent conflict of interest in the performance of his duties. The more restrictive Survey regulations flowing from the Organic Act were overlooked and as a result holdings not permitted under the Survey's own regulations were approved year after year. I wish to say, Mr. Chairman, that I did not realize that Survey regulations were not being fully observed in the review process until this was reported to me last January 24, in conjunction with the information that the General Accounting Office was in the process of examining the question of possible conflict of interest.

At that time, the GAO had not concluded that any of our employees were in conflict, but when I learned that our own regulations were not being followed, I immediately requested that Survey employees holding financial interests in conflict with our regulations be ordered to divest them. As indicated in the subcommittee's questions and our answers to them, many follow-on steps have been taken since by the Department of the Interior and the Geological Survey to assure that none of our employees has even an apparent conflict of interest. Some have raised the question as to whether or not we are overreacting to the need to avoid any conflict in attempting also to eliminate any appearance of conflict of interest. I have been facing this problem directly, for by the new departmental regulations, I am now the Bureau Ethics Counselor, and I examine personally the situations in which a determination must be made as to whether a given holding is or is not acceptable. I can report, Mr. Chairman, that judgments are required in this process that would challenge Solomon. For example, with the growth and increasing diversity of conglomerates it often requires considerable research to tell whether a given company acquires substantial revenues from petroleum or mining activities. And for low-salaried employees in activities totally removed from petroleum or minerals problems and from any conceivable opportunity to influence welfare of a company to their own benefit, it seems ridiculous to require divestiture of a few shares of stock in an oil company, or an nth of an nth interest in a stripper well on their grandfather's farm, or a worthless mining claim inherited from their father.

As ridiculous and unfair as the prohibition against ownership of interests in oil and mining companies may seem in the case of some employees. I feel I have no choice but to see that the rules are fully observed. Even the examples I cited are not so ridiculous when one realizes that totally innocent exceptions can become misleading statistics, possibly supporting allegations that might be headlined as

"Geological Survey employees own stock in oil companies, oil wells, and mining claims," the rebuttal to which won't make the back page. In reflecting on this, I have concluded that it is exactly because apparent conflict of interest lends itself so readily to distortion and misinterpretation that it must be avoided like the plague. I am pleased to report that with rare exceptions our employees accept this view and the need for all of us to avoid even the appearance of a conflict, no matter how small.

The second problem area is that of changes in estimates of the Nation's undiscovered recoverable oil and gas resources, dealt with also by the subcommittee's question No. 32 asking how the oil and gas estimates published last June in Geological Survey Circular 725 were reached and why they are lower than previous estimates. As explained in our response, the Circular 725 estimates were made by a province-by-province analysis of the prospects for oil and gas, discoverable and recoverable using present technology, whereas the earlier estimates were based on the assumption that unexplored but generally favorable bodies of sedimentary rocks would contain 50 to 100 percent as much oil and gas as similar volumes of sediment already explored.

Many of the unexplored areas had obviously been considered less attractive for the occurrence of oil and gas than areas previously explored and the province-by-province analysis of actual prospects led the authors of Circular 725 to project lower relative values as more probable. The earlier estimates also assumed a higher recovery of oil in place than did those of Circular 725.

The response to the estimates of Circular 725 has been one of general approval among petroleum specialists, both with respect to the methodology adopted and the results themselves. Perhaps most significant is the fact that the data and calculations on which the estimates are based are on open file so that other specialists can examine the basis for the estimates, area by area. We believe that this process will lead to improvements in the data base and to better estimates in some areas where knowledge about the geology is presently sparse.

Although the estimates of Circular 725 represent a major step forward in the analysis of our petroleum resource potential, I wish to emphasize that they should not be taken as the final word on our petroleum resource potential. As the authors point out, they did not take account of higher price/cost ratios than those prevailing prior to 1974, mainly because there hasn't been time to analyze their efforts; nor did they take account of resources on the Outer Continental Shelves beyond water depths of 200 meters, nor of hydrocarbons in kinds of deposits which are not being produced much now, such as gas in tight formations, heavy crude oil, tar sands, oil shale, and other deposits that may become economically producible in the future at higher prices or with advances in technology.

The main reason for not regarding these estimates as final, however, stems from the very nature of the problem. In attempting to estimate the magnitude of undiscovered resources of petroleum, we are trying to appraise the unknown, for only by exploratory drilling can the presence and magnitude of oil and gas be established. Even when a discovery has been made, it commonly takes many years, much drilling, and considerable production experience to establish the magnitude

of recoverable oil and gas, and even then estimates of proved reserves commonly have an error of 10 to 25 percent. Estimates of undiscovered resources, then, can only be regarded as judgments related to the availability of information on unexplored areas, and they are bound to be revised either upward or downward as new information becomes available.

Recently I was asked why, if such estimates are so unreliable, should they be made at all. The answer is, of course, that we have to look ahead and try to anticipate problems in time to take appropriate actions, even though some of the problems involved are so difficult that we can't expect to solve them with much precision. Even though the public and some scientists have been concerned about the differences between various estimates of oil and gas resources, the high and low estimates are all conveying the same message on several basic points that are important to policymaking for the future.

One is that much oil and gas remain to be found in the United States if exploration is encouraged. Another is that production of oil from fields already discovered and yet to be found can be much extended if recovery can be increased over the present average of 32 percent of the oil in place. Another common message is that frontier areas, particularly on the Outer Continental Shelve and in Alaska, have an important potential, especially for the discovery of giant fields. Finally, even the high estimates tell us that oil and gas cannot continue for many more years to be the mainstay of our energy supply and that it is essential to expand efforts to develop alternate sources of

energy.

I was also asked recently if the changes in the estimates of undiscovered oil and gas resources had damaged the Survey's credibility. Credibility, like beauty, lies in the eye of the beholder, and it is difficult to judge the extent to which some may feel that changes in estimates of this sort weaken the credibility of a scientific organization. I believe they have not had that effect on professionals who understand the nature of the problem. For example, at a discussion of earth science problems at the White House on July 21, the president of the American Geological Institute, a federation of 18 geological and scientific societies, referred to the Survey as "a professional and scientific organization which we firmly believe has no peer anywhere in the world either in expertise or integrity."

I can't say whether we fully merit that fine compliment, but I can say that in seeking to develop answers to difficult problems, in permitting our scientists to report conflicting conclusions honestly obtained, in not hesitating to report changes in estimates when justified by improved methodology or information, and in making supporting data and methodology available for public inspection and review, I believe we are acting responsibly and in keeping with the scientific approach that an organization such as the Survey must have.

I come now to the third problem area, evaluation and management of mineral resources on public lands. Most of the subcommittee's advance questions are directed toward these activities, which are the responsibility of the Conservation Division. I hope our responses to your questions are clear but we will be glad to discuss any of them further and to supply any additional information the committee may wish. I may say categorically, Mr. Chairman, that we are doing our

very best to keep up with the expanding demands that are being made on us in leasable mineral evaluation and management, but I must admit that in some areas-particularly onshore-we are not yet prepared to do a fully adequate job. At the same time, I want to point out that much progress has been made in developing and improving our capabilities in these areas in recent years and I wish to thank the Congress for its support of the President's budgets in expanding this capability. As one illustration of this growth, I may mention that in 1969, the year of the Santa Barbara oil spill, the Conservation Division's budget was $5.7 million and its staff totaled 400, compared to our requested authorization in fiscal year 1976 of $45.2 million and 1,150 positions.

Senator METCALF. How are are you doing on that requested authorization?

Dr. MCKELVEY. That is a requested authorization and I understand the Senate committee is working on our appropriation now.

The Conservation Division thus is now a sizable organization, but large also is the extent and weight of its responsibilities. With respect to its lease management function, onshore there are are 125,957 oil and gas leases, of which 12,859 are producing, and there are 2,479 leases for other minerals, of which 750 are under production or exploration. Offshore leases number 1,756 for oil and gas, 6 for sulfur, and 2 for salt. Of this total of 1,764 offshore leases, 572 are producing, and 192 are in various stages of development.

The supervisory responsibilities with respect to these leases are extensive. Among the most critical are review of exploration, development, and mining plans, for crucial in seeing to it that the operation is conducted properly is to be sure that it is planned correctly at the outset. Along with this review of plans must be an assessment of the environmental impact of major actions possibly having a significant effect on the human environment for operations not already covered by an environmental impact statement, and preparation of an environmental impact statement where the action is considered to be major and significant. Once operations begin, inspection is essential to see that they are indeed carried out properly and, of course, this aspect of the supervisory task is necessarily increasing with expanding requirements.

Collection of royalties on production is also an important part of the lease management function and this involves not only verification of production but also determination of the value of the productboth of which can be difficult in certain instances.

The subcommittee has made reference in its questions to the NASAMartin Marietta study on onshore lease management and to the report of the Office of Audit and Investigation on royalty accounting. Both of these reports identified weaknesses and made remedial recommendations, which we are in the process of implementing. While we have been criticized because of the deficiencies identified in these studies, I wish to point out that each of the studies was made at our request as part of our own efforts to improve our capabilities in these areas. The workload in leasable mineral classification and evaluation has also been increasing dramatically, and very likely will continue to do so. Recall that it was only a few years ago that the Government decided to evaluate the bonus value of OCS tracts and that the acre

age offered for bid has increased markedly as a result of the administration's acceleration of offshore leasing. While we had to scramble hard to keep up with these developments, I am pleased to say that we have been able to acquire a competent staff and to develop the appraisal methodology and procedures necessary to do a competent job.

Increases in the evaluation problem are not restricted to the OCS. During the last few years, geothermal leasing has begun under the Geothermal Steam Act, and that has called 'both for the definition of known geothermal areas, in which there will be competitive bidding, and for the evaluation of individual tracts actually offered for competitive bids. Classification activities have also increased with respect to coal lands, again with the need to define known coal leasing areas. Depending on the outcome of leasing issues now under consideration by the Congress and the administration, we may face a further expansion in demand for coal lease evaluation in the near future.

The subcommittee's questions about the activities of the Conservation Division are comprehensive in their scope, but they did not address one problem that has been much in the news during the last 2 or 3 weeks; namely, the conclusion of Dr. Walter Measday, Chief Economist for the Senate Judiciary Subcommittee on Antitrust and Monopoly, that lease operators in the Gulf of Mexico could be producing twice as much oil and gas from existing leases as they are now doing. Perhaps it would be useful to the subcommittee for me to comment on that subject here.

Dr. Measday's conclusion was based on the observation, from data we made available to him, that actual production of crude oil in the Gulf of Mexico is only 50 percent of the sum of the maximum efficient rates (MER) of production established by the Geological Survey for producing reservoirs. This observation is essentially correct, but it is not correct to conclude from it that production could be doubled from existing facilities.

The maximum efficient rate (MER) is defined as the maximum sustainable daily oil or gas withdrawal rate from a reservoir which will permit economic development and depletion of that reservoir without detriment to ultimate recovery. Whereas MER applies to the entire reservoir, and is established annually, the maximum production rate (MPR) applies to individual completions and is defined as the approved maximum daily rate at which oil or gas may be produced from a specified well completion. MPR is based on actual production tests which are made quarterly and it is set at a rate 10 percent higher than the rate the well is considered capable of producing to allow for daily fluctuations in production.

Both MER and MPR are maximum rates established to protect the reservoir and the completion from damage through overproduction that might result in loss of ultimate production. Neither allows for loss of production from downtime due to mechanical difficulties, storms, or other problems that may put a well temporarily out of commission. Moreover, MER naturally declines as a reservoir is produced. Because MER is established only once a year, whereas MPR's are revised quarterly, the gap between MER and actual production inevitably widens during the year.

Actual crude oil production in the Gulf of Mexico OCS averages about 70 percent of the sum of the MPR's for all producing comple